REG - Lloyds Banking Group - Half-year results <Origin Href="QuoteRef">LLOY.L</Origin> - Part 5
06/09/2014 22:42
- Part 5: For the preceding part double click ID:nRSe8094Nd
£12,051 million, restated following a reassessment of the unimpaired
exposure breakdown) of total loans and advances were forborne of which £6,148 million (December 2013: £9,499 million) were
impaired. The coverage ratio for forborne loans increased from 32.2 per cent at 31 December 2013 to 48.4 per cent at 30
June 2014.
Unimpaired forborne loans and advances were £144 million at 30 June 2014 (December 2013: £2,552 million, restated). The
Group previously assumed that all lower quality unimpaired exposures under £5 million were forborne, as were a number of
non-material portfolios. As part of the Group's ongoing review and refinement of forbearance reporting, exposures below £5
million, and non-material portfolios, were subject to more granular review which led to a reduction in the level of
forbearance previously reported.
The reduction also related to unimpaired loans and advances over £5 million and reflects the curing of a limited number of
high value transactions where forbearance was granted some time ago and the obligor is no longer considered in financial
difficulty.
Run-off forbearance (continued)
The table below sets out the Group's largest unimpaired forborne loans and advances (exposures over £5 million) as at 30
June 2014 by type of forbearance, together with a breakdown on which exposures are classified as Direct Real Estate:
At 30 June 2014 Direct Real Estate Other industry sector Total
£m £m £m
Type of unimpaired forbearance
UK1 exposures > £5 million
Covenants 11 − 11
Extensions − 45 45
Multiple 24 58 82
35 103 138
Exposures < £5 million and other non-UK1 6
Total 144
1 Based on location of the office recording the transaction.
FUNDING AND LIQUIDITY MANAGEMENT
The Group has significantly transformed its balance sheet in recent years. The continued reduction of the Run-off portfolio
and the growth in customer deposits has strengthened the Group's funding position and reduced exposure to wholesale
funding. The Group has a stable deposit base which is diversified across product and customer type.
During the first half of 2014, the Group has continued to experience reducing term issuance costs, demonstrating a stable
operating environment. In addition, spreads on outstanding issuance have remained significantly narrower than in previous
years. Rating changes on a standalone basis have been positive for the Group however, concerns remain over the potential
loss of sovereign support and the wider economy. On 26 March 2014, Fitch affirmed the Lloyds Bank 'A' long-term rating,
with the rating outlook being revised from 'stable' to 'negative' due to Fitch's belief that the probability that sovereign
support would be provided is weakening. At the same time, Fitch upgraded the Lloyds Bank viability (standalone) rating from
'bbb+' to 'a-'. On 2 May 2014, Moody's upgraded Lloyds Bank's senior rating to A1 citing significant progress on achieving
strategic targets, improved asset quality and reduction of the Run-off portfolio.
The combination of a strong balance sheet and access to a wide range of funding markets, including government and central
bank schemes, provides the Group with a broad range of options with respect to funding the balance sheet in the future.
Group funding sources
Total funded assets reduced by £4.6 billion to £505.6 billion. The Group loan to deposit ratio has improved to 109 per cent
compared with 113 per cent at 31 December 2013, driven by strong deposit growth and a reduction in the Run-off portfolio.
Customer deposits increased by £6.8 billion and excluding reverse repos and repos, loans and advances to customers reduced
by £8.1 billion primarily driven by a continued reduction in the Run-off portfolio to £25.2 billion (31 December 2013:
£33.3 billion).
The increase in customer deposits along with the continued reduction in the Run-off portfolio has enabled the Group to make
changes in wholesale funding which reduced by £18.1 billion to £119.5 billion, with the volume with a residual maturity
less than one year reducing to £41.5 billion (£44.2 billion at 31 December 2013). The Group's term funding ratio (wholesale
funding with a remaining life of over one year as a percentage of total wholesale funding) reduced to 65 per cent (68 per
cent at 31 December 2013) as expected in line with maturities of wholesale term funding and limited term wholesale issuance
during the first half of 2014.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Group funding position
At 30 June 2014 At 31 Dec 2013 Change
£bn £bn %
Funding requirement
Loans and advances to customers1 487.1 495.2 (2)
Loans and advances to banks2 3.9 5.1 (24)
Debt securities 1.3 1.4 (7)
Reverse repurchase agreements 3.2 0.2
Available-for-sale financial assets - secondary3 6.7 4.4 52
Cash balances4 3.4 3.9 (13)
Funded assets 505.6 510.2 (1)
Other assets5 249.3 248.6 −
754.9 758.8 (1)
On balance sheet primary liquidity assets6
Reverse repurchase agreements 3.6 0.1
Balances at central banks - primary4 47.4 46.0 3
Available-for-sale financial assets - primary 43.6 39.6 10
Trading and fair value through profit and loss (5.6) 3.1
Repurchase agreements − (0.6)
89.0 88.2 1
Total Group assets 843.9 847.0 −
Less: other liabilities5 (232.3) (227.5) (2)
Funding requirement 611.6 619.5 (1)
Funded by
Customer deposits7 445.1 438.3 2
Wholesale funding8 119.5 137.6 (13)
564.6 575.9 (2)
Repurchase agreements 1.1 4.3 (74)
Total equity 45.9 39.3 17
Total funding 611.6 619.5 (1)
1 Excludes £4.2 billion (31 December 2013: £0.1 billion) of reverse repurchase agreements.
2 Excludes £15.1 billion (31 December 2013: £20.1 billion) of loans and advances to banks within the Insurance business and £2.6 billion (31 December 2013: £0.2 billion) of reverse repurchase agreements.
3 Secondary liquidity assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance).
4 Cash balances and balances at central banks - primary are combined in the Group's balance sheet.
5 Other assets and other liabilities primarily include balances in the Group's Insurance business and the fair value of derivative assets and liabilities.
6 Primary liquidity assets are PRA eligible liquid assets including UK Gilts, US Treasuries, Euro AAA government debt, designated multilateral development bank debt and unencumbered cash balances held at central banks.
7 Excluding repurchase agreements at 31 December 2013 of £3.0 billion. At 30 June 2014: £nil.
8 The Group's definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Reconciliation of Group funding figure to the balance sheet
At 30 June 2014 Included in Repos Fair value Balance
funding and other sheet
analysis accounting
(above) methods
£bn £bn £bn £bn
Deposits from banks 10.7 1.1 0.1 11.9
Debt securities in issue 82.2 − (4.5) 77.7
Subordinated liabilities 26.6 − (0.9) 25.7
Total wholesale funding 119.5 1.1
Customer deposits 445.1 − − 445.1
Total 564.6 1.1
At 31 December 2013 Included in Repos Fair value Balance
funding and other sheet
analysis accounting
(above) methods
£bn £bn £bn £bn
Deposits from banks 12.1 1.9 − 14.0
Debt securities in issue 91.6 − (4.5) 87.1
Subordinated liabilities 33.9 − (1.6) 32.3
Total wholesale funding 137.6 1.9
Customer deposits 438.3 3.0 − 441.3
Total 575.9 4.9
Analysis of 2014 total wholesale funding by residual maturity
Less One to Three Six to Nine One to Two to More Total Total
than three to six nine months two five than at at
one months months months to one years years five 30 Jun 31 Dec
month year years 2014 2013
£bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Deposit from banks 7.6 1.4 0.5 0.2 0.1 0.2 0.2 0.5 10.7 12.1
Debt securities in issue:
Certificates of deposit 2.1 1.6 1.3 0.9 0.9 − − − 6.8 9.0
Commercial paper 3.5 1.3 0.7 0.2 − − − − 5.7 4.8
Medium-term notes1 0.1 0.8 1.4 1.6 1.1 6.3 6.2 9.0 26.5 29.1
Covered bonds − 0.9 2.0 1.0 − 2.7 9.2 12.1 27.9 29.4
Securitisation 0.1 − 3.1 1.4 2.0 5.6 2.4 0.7 15.3 19.3
5.8 4.6 8.5 5.1 4.0 14.6 17.8 21.8 82.2 91.6
Subordinated liabilities 0.6 − 0.6 1.2 1.3 1.3 6.1 15.5 26.6 33.9
Total wholesale funding2 1 14.0 6.0 9.6 6.5 5.4 16.1 24.1 37.8 119.5 137.6
1 Medium-term notes include funding from the National Loan Guarantee Scheme (30 June 2014: £1.4 billion; 31 December 2013: £1.4 billion).
2 The Group's definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Analysis of 2014 term issuance
Sterling US Dollar Euro Other Total
currencies
£bn £bn £bn £bn £bn
Securitisation 0.7 − − − 0.7
Medium-term notes − − − − −
Covered bonds 1.0 − 0.8 − 1.8
Private placements1 0.3 0.5 0.4 0.2 1.4
Total issuance 2.0 0.5 1.2 0.2 3.9
1 Private placements include structured bonds and term repurchase agreements (repos).
Term issuance for the first half of 2014 totalled £3.9 billion split between securitisations, covered bonds and private
placements. Utilisation of the UK government's Funding for Lending Scheme (FLS) has further underlined the Group's support
to the UK economic recovery, and the Group remains committed to passing the benefits of this low cost funding on to its
customers. The Group drew down £3.0 billion under the 2012 scheme, £7.0 billion under the 2013 scheme and £4.0 billion year
to date under the 2014 scheme, giving total FLS drawings of £14.0 billion to date. In the 2013 Annual Report and Accounts
the Group included drawings from Sainsbury's Bank of £0.2 billion; as Sainsbury's Bank is no longer part of the Group this
amount is no longer included.
Encumbered assets
The Board monitors and manages total balance sheet encumbrance via a number of risk appetite metrics. During the first half
of 2014 the Group had term issuance of £0.7 billion from securitisations and £1.8 billion from covered bonds. Maturities
have led to a reduction in externally held notes from residential mortgage backed securitisation and covered bond issuance.
The table below summarises the assets encumbered through the Group's external issuance transactions.
Notes issued Assets encumbered
£bn £bn
At 30 June 2014
Securitisations1 14.6 26.7
Covered bonds2 29.4 42.5
Total 44.0 69.2
At 31 December 2013
Securitisations1 18.6 31.6
Covered bonds2 30.7 49.6
Total 49.3 81.2
1 In addition the Group retained internally £38.9 billion (31 December 2013: £38.3 billion) of notes secured with £50.4 billion (31 December 2013: £49.3 billion) of assets.
2 In addition the Group retained internally £7.0 billion (31 December 2013: £7.6 billion) of notes secured with £11.7 billion (31 December 2013: £12.5 billion) of assets.
Total notes issued externally from secured programmes (asset backed securities and covered bonds) have fallen from £49.3
billion (assets encumbered £81.2 billion, pro-rated by programme) at 31 December 2013 to £44.0 billion (assets encumbered
£69.2 billion, pro-rated by programme). A total of £45.9 billion (31 December 2013: £45.9 billion) of notes issued under
securitisation and covered bond programmes have been retained internally, most of which are held along with whole loans, as
eligible collateral at central banks. The Group has encumbered £21.2 billion of assets with the Bank of England within the
FLS, under which £14 billion of UK Treasury Bills has been drawn down.
FUNDING AND LIQUIDITY MANAGEMENT (continued)
Liquidity portfolio
At 30 June 2014, the Banking business had £92.3 billion (31 December 2013: £89.3 billion) of highly liquid unencumbered
assets in its primary liquidity portfolio which are available to meet cash and collateral outflows and PRA regulatory
requirements, as illustrated in the table below. A separate liquidity portfolio to mitigate any insurance liquidity risk is
managed within the Insurance business. Primary liquid assets of £92.3 billion represent 5.0 times (4.2 times at 31 December
2013) the Group's money market funding with less than one year maturity (excluding derivative collateral margins and
settlement accounts) and are 2.2 times (31 December 2013: 2.0 times) all wholesale funding less than one year maturity, and
thus provides a substantial buffer in the event of continued market dislocation.
Primary liquidity At 30 June 2014 At 31 Dec 2013 Average 2014 Average
2013
£bn £bn £bn £bn
Central bank cash deposits 47.4 46.0 64.7 69.4
Government/MDB bonds1 44.9 43.3 42.4 28.2
Total 92.3 89.3 107.1 97.6
Secondary liquidity At 30 June 2014 At 31 Dec 2013 Average 2014 Average
2013
£bn £bn £bn £bn
High-quality ABS/covered bonds2 7.0 1.4 2.8 2.0
Credit institution bonds2 1.1 0.4 1.4 1.2
Corporate bonds2 0.3 0.1 0.2 0.1
Own securities (retained issuance) 25.0 22.1 23.0 33.3
Other securities 6.5 4.3 5.0 4.8
Other3 79.3 77.1 76.2 75.2
Total 119.2 105.4 108.6 116.6
Total liquidity 211.5 194.7
1 Designated multilateral development bank (MDB).
2 Assets rated A- or above.
3 Includes other central bank eligible assets.
In addition the Banking business had £119.2 billion (31 December 2013: £105.4 billion) of unencumbered secondary assets
which are eligible for use in a range of central bank or similar facilities and the Group routinely makes use of as part of
its normal liquidity management practices. Future use of such facilities will be based on prudent liquidity management and
economic considerations, having regard for external market conditions. The Group considers diversification across
geography, currency, markets and tenor when assessing appropriate holdings of primary and secondary liquid assets. This
liquidity is managed as a single pool in the centre and is under the control of the function charged with managing the
liquidity of the Group. It is available for deployment at immediate notice, subject to complying with regulatory
requirements, and is a key component of the Group's liquidity management process.
The Group notes that the Liquidity Coverage Ratio (LCR) is expected to become the Pillar 1 standard for liquidity in the UK
in 2015, and that the PRA has the ability to impose firm specific liquidity requirements. The European Commission is
expected to adopt further legislation during 2014 to specify the definition, calibration, calculation and phase-in of the
LCR for implementation in 2015. The Group expects some existing secondary liquid assets holdings to be eligible under LCR
and to see further transition from primary to secondary LCR eligible assets over the course of 2014. The Group will
continue to monitor the new requirements and expects to meet them ahead of the implementation dates.
CAPITAL MANAGEMENT
The Group remains strongly capitalised with ratios growing in the first six months of 2014 through capital-efficient profit
generation, risk-weighted asset reductions and the successful delivery of management actions, in particular the exchange of
£5 billion of Enhanced Capital Notes (ECNs) for CRD IV compliant Additional Tier 1 (AT1) securities.
· Fully loaded Common Equity Tier 1 (CET1) ratio increased 0.8 percentage points from 10.3 per cent (pro forma) to 11.1
per cent.
· CET1 ratio, calculated using 2014 PRA transitional rules, increased 0.8 percentage points from 10.3 per cent (pro
forma) to 11.1 per cent.
· Fully loaded Basel III leverage ratio was 4.5 per cent, increasing 0.7 percentage points from 3.8 per cent (pro
forma).
· The leverage ratio exceeds the 3 per cent minimum requirement recommended by the Basel Committee, which is scheduled
for implementation in 2018.
Capital position at 30 June 2014
The Group's capital position as at 30 June 2014 is presented in the following section applying the 2014 CRD IV transitional
arrangements, as implemented in the UK by PRA policy statement PS7/13 (PRA transitional rules), and also on a fully loaded
CRD IV basis.
CAPITAL MANAGEMENT (continued)
PRA transitional Fully loaded position
Capital resources At 30 June 2014 At 31 Dec 20131,2 At 30 June 2014 At 31 Dec 20132
£m £m £m £m
Common equity tier 1
Shareholders' equity 39,601 39,191 39,601 39,191
Deconsolidation of insurance entities (1,511) (1,367) (1,511) (1,367)
Adjustment for own credit 165 185 165 185
Cash flow hedging reserve 705 1,055 705 1,055
Other adjustments 535 133 535 133
39,495 39,197 39,495 39,197
less: deductions from common equity tier 1
Goodwill and other intangible assets (1,966) (1,979) (1,966) (1,979)
Excess of expected losses over impairment provisions and value adjustments (714) (866) (714) (866)
Removal of defined benefit pension surplus (274) (78) (274) (78)
Securitisation deductions (148) (141) (148) (141)
Significant investments (2,787) (2,890) (2,959) (3,090)
Deferred tax assets (4,934) (5,025) (5,009) (5,118)
Common equity tier 1 capital 28,672 28,218 28,425 27,925
Additional tier 1
Additional tier 1 instruments 9,477 4,486 5,329 −
less: deductions from tier 1
Significant investments (677) (677) − −
Total tier 1 capital 37,472 32,027 33,754 27,925
Tier 2
Tier 2 instruments 13,639 19,870 10,623 15,636
Eligible provisions 522 349 522 349
less: deductions from tier 2
Significant investments (1,015) (1,015) (1,692) (1,692)
Total capital resources 50,618 51,231 43,207 42,218
Risk-weighted assets 257,370 272,641 256,752 271,908
Common equity tier 1 capital ratio 11.1% 10.3% 11.1% 10.3%
Tier 1 capital ratio 14.6% 11.7% 13.1% 10.3%
Total capital ratio 19.7% 18.8% 16.8% 15.5%
1 31 December 2013 comparatives reflect PRA transitional rules as at 1 January 2014.
2 31 December 2013 comparatives have been restated to include the pro forma benefit of the sales of Heidelberger Leben, Scottish Widows Investment Partnership and the Group's 50 per cent stake in Sainsbury's Bank. 31 December 2013 common equity tier 1 ratios excluding the benefit of these sales were 10.0 per cent fully loaded and 10.1 per cent on transitional rules, while RWAs on transitional rules were £272.1 billion.
CAPITAL MANAGEMENT (continued)
The key differences between the capital calculation as at 30 June 2014 and the fully loaded equivalent are as follows:
· In relation to CET1, there is a small difference due to the results of the calculation of the threshold, under which
deferred tax assets reliant on future profitability and arising from temporary differences and significant investments may
be risk weighted.
· Within AT1 and tier 2 (T2) in 2014 the Group is permitted to include 80 per cent of subordinated debt which does not
fully qualify under CRD IV. These instruments are phased out of the calculation at 10 per cent per year until 2022.
· The significant investment deduction from AT1 in 2014 will transition to T2 by 2018.
The movements in the CET1, AT1, T2 and total capital positions in the period are shown below. These focus on the
transitional capital position, however differences between this and the fully loaded movements are minimal, related to the
line items as outlined above.
Common Equity Tier 1 Additional Tier 1 Tier 2 Total capital
£m £m £m £m
At 31 December 20131 28,218 3,809 19,204 51,231
Profit attributable to ordinary shareholders 574 574
Adjustment to above re December 13 pro forma (202) (202)
Pension movements:
Deduction of pension asset (196) (196)
Movement through other comprehensive income (479) (479)
Available-for-sale reserve 423 423
Deferred tax asset 91 91
Goodwill and intangible assets deductions 13 13
Excess of expected losses over impairment provisions and value adjustments 152 152
Significant investment deduction 103 103
Eligible provisions 173 173
Subordinated debt movements:
Restructuring to ensure CRD IV compliance 5,329 (4,006) 1,323
Foreign exchange (116) (423) (539)
Repurchases, redemptions and other (222) (1,802) (2,024)
Other movements (25) (25)
At 30 June 2014 28,672 8,800 13,146 50,618
1 31 December 2013 comparatives reflect CRD IV rules as at 1 January 2014 and are pro forma including the benefit of the sales of Heidelberger Leben, Scottish Widows Investment Partnership and the Group's 50 per cent stake in Sainsbury's Bank.
CET1 capital resources have increased by £454 million in the period, mainly due to profit attributable to ordinary
shareholders, favourable movements in AFS reserves, reduction in excess of expected losses over impairment provisions and
reduction in deferred tax and significant investment deductions partially offset by an increase in the pensions asset
deducted from capital and unfavourable pension valuations through other comprehensive income.
AT1 capital resources have increased by £4,991 million in the period, mainly due to the ECN exchange offers which resulted
in the issuance of £5.3 billion of CRD IV compliant AT1 instruments. This has been partially offset by other movements in
grandfathered Tier 1 subordinated debt, including foreign exchange movements and fair value unwind.
CAPITAL MANAGEMENT (continued)
As a result of the offers launched in the first half of the year, the Group has met its AT1 requirement under the new
capital framework established under CRD IV. Under the exchange offers, the Group repurchased the equivalent of £5 billion
nominal (£4 billion regulatory value) of ECNs and issued £5.3 billion of new AT1 securities. In addition to delivering the
Group's AT1 requirement, the exchange offers also increased the Group's leverage ratios by approximately 50 basis points,
improved the Group's rating agency metrics, and are expected to benefit the Group's net interest margin in 2014 by
approximately 7 basis points. Coupon payments on the new AT1 securities will be accounted for as distributions from
reserves. The exchanges resulted in a net accounting charge of approximately £1.1 billion, which has reduced the Group's
first half fully loaded CET1 capital ratio by approximately 50 basis points.
T2 capital resources have decreased by £6,058 million in the period. This is again mainly due to the ECN exchange offers,
which resulted in £4.0 billion of existing Tier 2 ECN instruments being redeemed in exchange for the issuance of AT1
instruments as outlined above, together with a reduction in eligible provisions and other movements in T2 subordinated
debt, including foreign exchange, fair value unwind, amortisation of dated instruments and other calls/redemptions.
PRA transitional rules Prevailing rules
Risk-weighted assets At 30 June 2014 At 31 Dec 2013 At 31 Dec 2013
£m £m £m
Divisional analysis of risk-weighted assets:
Retail 70,800 72,948 73,063
Consumer Finance 21,524 20,136 20,136
Commercial Banking 114,023 123,951 120,843
Group Operations & Central Items 10,719 7,743 13,316
TSB1 4,806 5,591 5,800
Run-off 24,221 30,569 30,692
Underlying risk-weighted assets 246,093 260,938 263,850
Threshold risk-weighted assets 11,277 11,154 −
Total risk-weighted assets 257,370 272,092 263,850
Movement to fully loaded risk-weighted assets (618) (1,014) −
Fully loaded CRD IV risk-weighted assets 256,752 271,078 263,850
Risk type analysis of risk-weighted assets:
Foundation Internal Ratings Based (IRB) Approach 79,274 84,882 82,870
Retail IRB Approach 78,796 83,815 85,139
Other IRB Approach 11,590 9,526 9,221
IRB Approach 169,660 178,223 177,230
Standardised Approach 31,856 33,819 41,150
Credit risk 201,516 212,042 218,380
Counterparty credit risk 10,987 11,220 7,794
Operational risk 26,594 26,594 26,594
Market risk 6,996 11,082 11,082
Underlying risk-weighted assets 246,093 260,938 263,850
Threshold risk-weighted assets 11,277 11,154 −
Total risk-weighted assets 257,370 272,092 263,850
Movement to fully loaded risk-weighted assets (618) (1,014) −
Fully loaded CRD IV risk-weighted assets 256,752 271,078 263,850
Pro forma PRA transitional rules risk-weighted assets 272,641
Pro forma fully loaded risk-weighted assets 271,908
1 TSB risk-weighted assets are on a Lloyds Banking Group reporting basis and differ to those reported by TSB as a standalone regulated entity.
CAPITAL MANAGEMENT (continued)
Key differences between risk-weighted assets at December 2013 on the prevailing rules and CRD IV rules are as follows:
· Commercial Banking risk-weighted assets increased primarily due to the Credit Value Adjustment (CVA) capital charge
and the application of Financial Institution Interconnectedness (FII) rules, partially offset by reductions arising from
applying the SME scalar
· Group Operations and Central Items risk-weighted asset reduction is substantially due to replacing risk-weighted
assets arising from the Deferred Tax Asset with a deduction from Common Equity Tier 1
· Threshold risk-weighted assets reflect the element of Significant Investment and Deferred Tax Assets that are
permitted to be risk-weighted instead of deducted from Common Equity Tier 1 under CRD IV threshold rules
Key differences between risk-weighted assets at June 2014 and December 2013 under CRD IV rules are as follows:
· Retail division risk-weighted assets reduced by £2.1 billion in the year primarily due to improvements in credit
quality arising from the impact of positive macroeconomic factors, including favourable movements in UK house prices, and
the exit from its joint venture banking operations with Sainsbury's. These movements are partially offset by risk-weighted
asset increases arising from model changes, which also contribute to the risk-weighted assets increase in Consumer
Finance.
· Commercial Banking risk-weighted assets reduced by £10.0 billion mainly reflecting market risk reductions, credit
quality changes and active portfolio management. The market risk-weighted asset reduction of £4.1 billion is mainly due to
the removal of a temporary capital buffer applied to the Group's internal market risk models on completion of specific
market risk infrastructure projects.
· The increase in risk-weighted assets in Group Operations and Central Items of £3.0 billion is primarily due to equity
received in consideration for the disposal of Scottish Widows Investment Partnership (SWIP). This is also the main driver
of the increase in other IRB risk-type.
· TSB risk-weighted assets were classified from Retail IRB to Standardised approach in the period. This
reclassification led to a net reduction of £0.6 billion in TSB risk-weighted assets.
· The reduction in Run-off risk-weighted assets of £6.3 billion is mainly due to disposals and other asset reductions.
Risk-weighted assets movement Credit risk Counter party credit risk Market risk Operational risk Total
by key driver
£m £m £m £m £m
Risk-weighted assets at 212,042 11,220 11,082 26,594 260,938
31 December 20131
Management of the balance sheet (107) (534) − − (641)
Disposals (4,598) (106) − − (4,704)
External economic factors (6,381) (54) (867) − (7,302)
Model and methodology changes 421 461 (3,219) − (2,337)
Regulatory policy changes − − − − −
Other 139 − − − 139
Risk-weighted assets 201,516 10,987 6,996 26,594 246,093
Threshold risk-weighted assets 11,277
Total risk-weighted assets 257,370
Movement to fully loaded risk-weighted assets (618)
Fully loaded CRD IV risk-weighted assets at 30 June 2014 256,752
1 31 December 2013 comparatives reflect PRA transitional rules as at 1 January 2014.
CAPITAL MANAGEMENT (continued)
The risk-weighted asset movements table provides an analysis of the movement in risk-weighted assets in the first six
months of 2014 and an insight in to the key drivers of the movements in credit risk risk-weighted assets over the course of
the year. The analysis is compiled on a monthly basis through the identification and categorisation of risk-weighted asset
movements and is subject to management judgement.
Management of the balance sheet includes risk-weighted asset movements arising from new lending and asset run-off. During
the first six months of 2014 risk-weighted assets decreased slightly with increases due to new lending being more than
offset by reductions due to repayments.
Disposals include risk-weighted asset reductions arising from the sale of assets, portfolios and businesses. Disposals
reduced risk-weighted assets by £4.7 billion, the most significant being the exit from the joint venture banking operation
with Sainsbury's.
External economic factors captures movements driven by changes in the economic environment. The reduction in risk-weighted
assets of £7.3 billion is mainly due to changes in risk profile, favourable HPI movements and reductions arising from
re-rates and impairments in Commercial Banking and Run-off.
Model and methodology changes include the movement in risk-weighted assets arising from new model implementation, model
enhancement and changes in credit risk approach applied to certain portfolios. Model and methodology changes reduced
risk-weighted assets by £2.3 billion, primarily due to the previously noted Market Risk reduction. Partially offsetting
risk-weighted asset increases arise from model updates in the mortgage models and refinement of risk models for unsecured
products in Retail and Consumer Finance.
Within the IRB categories above, risk-weighted asset movements can arise as a result of counterparty default. In such
scenarios potential losses crystallise and become impairment provisions or adjustments to capital resources, through
expected losses, rather than being risk-weighted.
Leverage ratio
The Basel III reforms include the introduction of a leverage ratio framework designed to reinforce risk based capital
requirements with a simple, transparent, non-risk based 'backstop' measure. The leverage ratio is defined as tier 1 capital
divided by a defined measure of on- and off-balance sheet exposures. The Basel Committee will assess the appropriateness of
the proposed 3 per cent minimum requirement for the leverage ratio over the course of the next few years and have indicated
that final calibrations, and any further adjustments to the definition of the leverage ratio, will be completed by 2017,
with a view to migrating to a Pillar 1 (minimum capital requirement) treatment from 1 January 2018.
The Basel Committee issued a revised Basel III leverage ratio framework in January 2014. In comparison to current CRD IV
rules, the revised Basel III leverage ratio framework includes a number of amendments to the calculation of the measures
for on- and off-balance sheet exposures, in particular the methodologies applied in determining the exposure measures for
derivatives, securities financing transactions (SFTs) and off-balance sheet items. In addition the scope of consolidation
has been fully aligned to that applied to the risk-based capital framework, thereby requiring all exposures of the Group's
Insurance businesses to be excluded from the total exposure measure.
The European Commission is currently finalising a delegated act to amend existing CRD IV rules on the calculation of the
leverage ratio to align with its interpretation of the revised Basel III leverage ratio framework.
In the UK the Financial Policy Committee has initiated a review of the leverage ratio within the capital framework and is
currently consulting with the industry on its proposals.
The PRA has asked the Group to publish a leverage ratio on a fully loaded basis, applying the CRD IV definition of Tier 1
capital and calculating the exposure measure in accordance with the revised Basel III leverage ratio framework, as
interpreted through guidance released in March 2014. In addition to the calculation basis specified by the PRA, the Group's
leverage ratio at 30 June 2014 is disclosed in the table below on a fully loaded CRD IV rules basis.
CAPITAL MANAGEMENT (continued)
At 30 June 2014
Fully loaded
£m
Basel III rules for leverage ratio
Total tier 1 capital for leverage ratio1
Common equity tier 1 capital 28,425
Tier 1 subordinated debt 5,329
Total tier 1 capital 33,754
Exposure measure2
Total statutory balance sheet assets 843,940
Deconsolidation of assets related to Insurance entities (145,106)
Investment in Insurance entities 4,666
Removal of accounting value for derivatives and securities financing transactions (67,467)
Exposure measure for derivatives 24,135
Exposure measure for securities financing transactions 36,619
Off-balance sheet items 57,389
Other regulatory adjustments (9,890)
Total exposure 744,286
Leverage ratio 4.5%
Pro forma leverage ratio at 31 December 2013 3.8%
CRD IV rules for leverage ratio
Leverage ratio 4.2%
Pro forma leverage ratio at 31 December 2013 3.4%
1 Tier 1 capital is calculated in accordance with CRD IV rules.
2 As required by the PRA, the exposure measure has been estimated in accordance with the revised Basel III leverage ratio framework issued in January 2014, as interpreted through the March 2014 Basel III Quantitative Impact Study instructions and related guidance.
Under the revised Basel III leverage ratio framework, the assets of the Group's Insurance businesses are removed and only
the proportion of the investment in the Group's Insurance businesses not deducted from tier 1 capital is included in the
exposure measure.
Leverage ratio exposure measures for derivatives and securities financing transactions are calculated in accordance with
the methodologies prescribed by the revised Basel III leverage ratio framework.
Off-balance sheet items primarily consist of undrawn credit facilities, including facilities that may be cancelled
unconditionally at any time without notice. The leverage ratio exposure value for off-balance sheet items is determined by
applying set credit conversion factors to the nominal values of the items, based on the classification of the item. In
accordance with the requirements of the revised Basel III leverage ratio framework the credit conversion factors applied to
off-balance sheet items follow those prescribed by Standardised credit risk rules, subject to a floor of 10 per cent.
Other regulatory adjustments consist of other balance sheet assets that are required under CRD IV rules to be deducted from
tier 1 capital. The removal of these assets from the exposure measure ensures consistency is maintained between the capital
and exposure components of the ratio.
G-SIB requirements
Although the Group is not currently classified as a Global Systemically Important Bank (G-SIB), by virtue of the leverage
exposure exceeding E200 billion, the Group is required to report G-SIB metrics to the Prudential Regulation Authority. The
results of the 2013 Basel G-SIBs annual exercise are expected to be made available later this year and the Group's metrics
used within the annual exercise are disclosed on the Group's website.
STATUTORY INFORMATION
Page
Condensed consolidated half-year financial statements (unaudited)
Consolidated income statement 69
Consolidated statement of comprehensive income 70
Consolidated balance sheet 71
Consolidated statement of changes in equity 73
Consolidated cash flow statement 76
Notes
1 Accounting policies, presentation and estimates 77
2 Segmental analysis 78
3 Other income 84
4 Operating expenses 85
5 Impairment 86
6 Taxation 86
7 Earnings (loss) per share 87
8 Trading and
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