REG - Lloyds Banking Group - Half-year results <Origin Href="QuoteRef">LLOY.L</Origin> - Part 8
06/09/2014 22:42
- Part 8: For the preceding part double click ID:nRSe8094Ng
is partly offset by a charge of £21 million following changes to pension arrangements for staff
within the TSB business.
The principal assumptions used in the valuations of the defined benefit pension scheme were as follows:
At At
30 June 2014 31 Dec 2013
% %
Discount rate 4.32 4.60
Rate of inflation:
Retail Prices Index 3.23 3.30
Consumer Price Index 2.23 2.30
Rate of salary increases 0.00 2.00
Weighted-average rate of increase for pensions in payment 2.74 2.80
The application of the revised assumptions as at 30 June 2014 to the Group's principal post-retirement defined benefit
schemes has resulted in a remeasurement loss of £599 million which has been recognised in other comprehensive income, net
of deferred tax of £120 million.
19. Subordinated liabilities
The Group's subordinated liabilities are comprised as follows:
At At
30 June 2014 31 Dec 2013
£m £m
Preference shares 889 876
Preferred securities 3,654 4,301
Undated subordinated liabilities 1,776 1,916
Enhanced Capital Notes 3,656 8,938
Dated subordinated liabilities 15,700 16,281
Total subordinated liabilities 25,675 32,312
The movement in subordinated liabilities during the period was as follows:
Half-year to 30 June 2014 Half-year to 30 June 2013 Half-year to 31 Dec 2013
£m £m £m
Opening balance 32,312 34,092 34,235
New issues during the period − 1,500 −
Exchange offer in respect of Enhanced Capital Notes (4,961) − −
(notes 3 and 21)
Other repurchases and redemptions during the period (1,240) (1,821) (621)
Foreign exchange and other movements (436) 464 (1,302)
At end of period 25,675 34,235 32,312
20. Share capital
Movements in share capital during the period were as follows:
Number of shares
(million) £m
Ordinary shares of 10p each
At 1 January 2014 71,368 7,137
Issued in the period (see below) 6 1
At 30 June 2014 71,374 7,138
Limited voting ordinary shares of 10p each
At 1 January and 30 June 2014 81 8
Total share capital 7,146
The ordinary shares issued in the period were in respect of employee share schemes.
21. Other equity instruments
£m
At 1 January 2014 −
Additional Tier 1 securities issued in the period:
Sterling notes (£3,725 million nominal) 3,707
Euro notes (E750 million nominal) 619
US dollar notes ($1,675 million nominal) 1,003
At 30 June 2014 5,329
On 6 March 2014 the Group announced concurrent Sterling, Euro and Dollar exchange offers for holders of certain series of
its Enhanced Capital Notes (ECNs) to exchange them for new Additional Tier 1 (AT1) securities. The exchange offers
completed in April 2014 and resulted in a total of £5,329 million of AT1 securities being issued, after issue costs.
The AT1 securities are Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities with no fixed maturity
or redemption date.
The principal terms of the AT1 securities are described below:
· The securities rank behind the claims against Lloyds Banking Group plc of (a) unsubordinated creditors, (b) claims
which are, or are expressed to be, subordinated to the claims of unsubordinated creditors of Lloyds Banking Group plc but
not further or otherwise or (c) whose claims are, or are expressed to be, junior to the claims of other creditors of Lloyds
Banking Group, whether subordinated or unsubordinated, other than those whose claims rank, or are expressed to rank, pari
passu with, or junior to, the claims of the holders of the AT1 Securities in a winding-up occurring prior to the Conversion
Trigger.
· The securities bear a fixed rate of interest until the first call date. After the initial call date, in the event
that they are not redeemed, the AT1 securities will bear interest at rates fixed periodically in advance for five year
periods based on market rates.
· Interest on the securities will be due and payable only at the sole discretion of Lloyds Banking Group plc, and
Lloyds Banking Group plc may at any time elect to cancel any Interest Payment (or any part thereof) which would otherwise
be payable on any Interest Payment Date. There are also certain restrictions on the payment of interest as specified in the
terms.
· The securities are undated and are repayable, at the option of Lloyds Banking Group plc, in whole at the first call
date, or on any fifth anniversary after the first call date. In addition, the AT1 securities are repayable, at the option
of Lloyds Banking Group plc, in whole for certain regulatory or tax reasons. Any repayments require the prior consent of
the PRA.
· The securities convert into ordinary shares of Lloyds Banking Group plc, at a pre-determined price, should the fully
loaded Common Equity Tier 1 ratio of the Group fall below 7.0 per cent.
22. Reserves
Other reserves
Share premium Available- Cash flow Merger and other Total Retained
for-sale hedging profits
£m £m £m £m £m £m
At 1 January 2014 17,279 (615) (1,055) 12,147 10,477 4,088
Issue of ordinary shares 2 - - - - -
Profit for the period - - - - - 665
Distributions on other equity instruments, net of tax - - - - - (71)
Post-retirement defined benefit scheme remeasurements - - - - - (479)
(net of tax)
Movement in treasury shares - - - - - (263)
Value of employee
services:
Share option schemes - - - - - 21
Other employee award schemes - - - - - 99
Change in fair value of available-for-sale assets (net of tax) - 495 - - 495 -
Change in fair value of hedging derivatives - - 886 - 886 -
(net of tax)
Transfers to income statement (net of tax) - (72) (536) - (608) -
Adjustment on sale of non-controlling interest in TSB (note 27) - - - - - (135)
Exchange and other - - - (1) (1) -
At 30 June 2014 17,281 (192) (705) 12,146 11,249 3,925
23. Provisions for liabilities and charges
Payment protection insurance
Following the unsuccessful legal challenge by the BBA against the Financial Services Authority (FSA) and the Financial
Ombudsman Service (FOS), the Group made provisions totalling £9,825 million between 2011 and 2013 against the costs of
paying redress to customers in respect of past sales of PPI policies, including the related administrative expenses.
During 2014 quarterly customer initiated complaints have continued to fall, albeit slightly slower than expected.
Significant progress has also been made in the planned proactive mailings. There have been some adverse trends (as detailed
below), and a further £600 million has been added to the provision. This brings the total amount provided to £10,425
million, of which approximately £2,280 million relates to anticipated administrative expenses.
As at 30 June 2014, £2,268 million of the provision remained unutilised (22 per cent of total provision) relative to an
average monthly spend including administration costs in the last six months of £190 million. The main drivers of the
provision are as follows:
· Volumes of customer initiated complaints (after excluding complaints from customers where no PPI policy was held) -
at 31 December 2013, the provision assumed a total of 3.0 million complaints would be received. In the first six months of
2014, complaint volumes were approximately 30 per cent lower than the same period last year, but higher than expected. As a
result the Group is forecasting a slower decline in future volumes than previously expected. This has resulted in a further
provision of approximately £290 million. At 30 June 2014, approximately 2.8 million complaints have been received, with the
provision assuming approximately 410,000 in the future compared to an average run-rate of approximately 41,000 per month in
the last six months, and 39,000 per month in quarter two.
Average monthly complaint volumes - reactive
Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014
109,893 130,752 110,807 84,751 61,259 54,086 49,555 37,457 42,259 39,426
· Proactive mailing resulting from Past Business Reviews (PBR) - the Group is proactively mailing customers where it
has been identified that there was a risk of potential mis-sale. At 30 June 2014 over 95 per cent of all PBR customers have
been mailed, with some second mailings and case review continuing into the second half of the year. While the response
rates of most cohorts are in line with expectations, additional mailings to certain asset finance customers have resulted
in a higher response rate. In addition, the PBR mailings are leading to a higher number of policies per customer being
reviewed than originally expected. This has resulted in a further provision of approximately £160 million.
· Uphold rates per policy of 80 per cent are as expected in the first half of 2014. The uphold rate for customer
initiated complaints in the first half of 2014 was 75 per cent, in line with expectations.
· Average redress per policy has been marginally lower than expected in the first half of 2014 resulting in a benefit
to the provision of approximately £40 million.
· Re-review of previously handled cases - previously reviewed complaints are being assessed to ensure consistency with
the current complaint handling policy. Approximately 590,000 cases are expected to be re-reviewed, consistent with the
provision assumptions at December 2013, with this exercise due to commence in the second half of 2014 and running into the
first half of 2015.
· Expenses - the Group expects to maintain the operation on its current scale for longer than previously expected given
the update to volume related assumptions and the re-review of previously handled cases continuing in to 2015. The estimate
for administrative expenses, which comprise complaint handling costs and costs arising from cases subsequently referred to
the FOS, has increased by approximately £190 million.
23. Provisions for liabilities and charges (continued)
An Enforcement Team of the FCA is investigating the Group's governance of third party suppliers and potential failings in
the PPI complaint handling process. A provision of £50 million is held to cover the likely administration costs of
responding to the FCA's inquiries. It is not possible at this stage to make any assessment of what, if any, additional
liability may result from the investigation.
Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided
for approximately 40 per cent of the policies sold since 2000, covering both customer-initiated complaints and actual and
expected proactive mailings undertaken by the Group. The total amount provided for PPI represents the Group's best estimate
of the likely future costs, albeit a number of risks and uncertainties remain, in particular complaint volumes, uphold
rates, average redress paid, the scope and cost of proactive mailings and remediation, and the outcome of the FCA
Enforcement Team investigation. The cost of these factors could differ materially from the Group's estimates and the
assumptions underpinning them and could result in a further provision being required.
Key metrics and sensitivities are highlighted in the table below:
Sensitivities1 To date Future Sensitivity
unless noted
Customer initiated complaints since origination (m)2 2.8 0.4 0.1 = £200m
Proactive mailing: - number of policies (m)3 2.7 0.1 0.1 = £45m
- response rate4 35% 31% 1% = £15m
Average uphold rate per policy5 80% 82% 1% = £15m
Average redress per upheld policy6 £1,600 £1,550 £100 = £100m
Remediation cases (k) 26 564 1 case = £770
Administrative expenses (£m) 1,710 570 1 case = £500
FOS referral rate7 36% 36% 1% = £3m
FOS overturn rate8 57% 33% 1% = £2m
1 All sensitivities exclude claims where no PPI policy was held.
2 Sensitivity includes complaint handling costs.
3 To date volume includes customer initiated complaints.
4 Metric has been adjusted to include mature mailings only, and exclude expected customer initiated complaints. Future response rates are expected to be lower than experienced to date as mailings to higher risk customers have been prioritised.
5 The percentage of complaints where the Group finds in favour of the customer. This is a blend of proactive and customer initiated complaints. The 80 per cent uphold rate is based on the latest six months to June 2014.
6 The amount that is paid in redress in relation to a policy found to have been mis-sold, comprising, where applicable, the refund of premium, compound interest charged and interest at 8 per cent per annum. Actuals are based on six months to June 2014. The reduction in future average redress is due to the mix shifting away from more expensive cases.
7 The percentage of cases reviewed by the Group that are subsequently referred to the FOS by the customer. A complaint is considered mature when six months have elapsed since initial decision. Actuals are based on decisions made by the Group during July to December 2013 and subsequently referred to the FOS.
8 The percentage of complaints referred where the FOS arrive at a different decision to the Group. Actual to date is based on cases overturned in the six months to June 2014. The overturn rate to date is high as it continues to include a significant number of cases assessed prior to the implementation of changes to the case review process during 2013.
Other regulatory provisions
Litigation in relation to insurance branch business in Germany
Clerical Medical Investment Group Limited (CMIG) has received a number of claims in the German courts, relating to policies
issued by CMIG but sold by independent intermediaries in Germany, principally during the late 1990s and early 2000s.
Following decisions in July 2012 from the Federal Court of Justice (FCJ) in Germany the Group recognised a further
provision of £150 million in its accounts for the year ended 31 December 2012 bringing the total amount provided to £325
million. During the year ended 31 December 2013 the Group charged a further £75 million with respect to this litigation
increasing the total provision to £400 million; no additional charge has been made in the first half of 2014. The remaining
unutilised provision as at 30 June 2014 is £175 million.
23. Provisions for liabilities and charges (continued)
However, there are still a number of uncertainties as to the full impact of the FCJ's decisions, and the validity of any of
the claims facing CMIG will turn upon the facts and circumstances in respect of each claim. As a result the ultimate
financial effect, which could be significantly different from the current provision, will only be known once there is
further clarity with respect to a range of legal issues and factual determinations involved in these claims and/or all
relevant claims have been resolved.
LIBOR and other trading rates
On 28 July 2014, the Group announced that it had reached settlements totalling £217 million (at 30 June 2014 exchange
rates) to resolve with UK and US federal authorities legacy issues regarding the manipulation several years ago of Group
companies' submissions to the British Bankers' Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo
Rate.
On LIBOR, the Group has reached settlements with the Financial Conduct Authority (FCA) in the United Kingdom, the United
States Commodity Futures Trading Commission (CFTC) and the United States Department of Justice (DoJ) in relation to
investigations into submissions between May 2006 and 2009 and related systems and controls failings.
The settlements in relation to LIBOR are part of an industry-wide investigation into the setting of interbank offered rates
across a range of currencies. Under the settlement, the Group has agreed to pay £35 million, £62 million and £50 million to
the FCA, CFTC and DoJ respectively. As part of the settlement with the DoJ, the Group has also entered into a two-year
Deferred Prosecution Agreement in relation to one count of wire fraud relating to the setting of LIBOR.
In relation to the BBA Sterling Repo Rate, the Group has reached a settlement with the FCA regarding submissions made
between April 2008 and September 2009. This issue involved four individuals who the FCA has concluded manipulated BBA Repo
Rate submissions to reduce fees payable under the Special Liquidity Scheme (SLS). The issue was proactively brought to the
FCA's attention when it was identified by the Group as part of its internal investigation into the LIBOR issues.
The Group has agreed to pay £70 million to the FCA in connection with the resolution of the BBA Repo Rate issue and related
systems and controls failings. Both the CFTC and DoJ settlements are in respect of LIBOR only and neither agency has taken
action regarding the BBA Repo Rate.
The BBA Repo Rate was used by the Bank of England (BoE) to calculate the fees for the SLS. During the period that Lloyds
TSB and HBOS used the SLS they paid £1,278 million in fees, just under half of all the fees payable by the industry under
the Scheme. As a result of the actions of the four individuals involved, the Group has paid nearly £8 million to compensate
the BoE for amounts underpaid (by Lloyds TSB and HBOS and the other banks that used the SLS).
Interest rate hedging products
In June 2012, a number of banks, including the Group, reached agreement with the FSA (now FCA) to carry out a review of
sales made since 1 December 2001 of interest rate hedging products (IRHP) to certain small and medium-sized businesses. The
Group continues to review those cases within the scope of the agreement with the FCA.
During the first half of 2014, the Group has charged a further £50 million in respect of estimated redress costs,
increasing the total amount provided for redress and related administration costs to £580 million (31 December 2013: £530
million). As at 30 June 2014, the Group has utilised £419 million (31 December 2013: £162 million), with £161 million (31
December 2013: £368 million) of the provision remaining. No provision has been recognised in relation to claims from
customers which are not covered by the agreement with the FCA, or incremental claims from customers within the scope of the
review. These will be monitored and future provisions will be recognised to the extent that an obligation resulting in a
probable outflow is identified.
23. Provisions for liabilities and charges (continued)
Other regulatory matters
In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators
and governmental authorities in relation to a range of matters; a provision is held against the costs expected to be
incurred as a result of the conclusions reached. In the first half of 2014 the provision was increased by a further £225
million, in respect of a limited number of matters affecting the Retail division, including potential remediation in
relation to legacy sales of investment and protection products and historic systems and controls governing legacy incentive
schemes. This brings the total amount charged to £525 million of which £117 million had been utilised at 30 June 2014. This
increase reflected the Group's assessment of a limited number of matters under discussion, none of which currently is
individually considered financially material in the context of the Group.
24. Contingent liabilities and commitments
Interchange fees
On 24 May 2012, the General Court of the European Union (the General Court) upheld the European Commission's 2007 decision
that an infringement of EU competition law had arisen from arrangements whereby MasterCard issuers charged a uniform
fallback multilateral interchange fee (MIF) in respect of cross border transactions in relation to the use of a MasterCard
or Maestro branded payment card.
MasterCard has appealed the General Court's judgment to the Court of Justice of the European Union. MasterCard is supported
by several card issuers, including the Group. Judgment is not expected until September 2014.
In parallel:
- the European Commission has proposed legislation to regulate interchange fees which continues through the EU
legislative process. The legislation is expected to be adopted in the first quarter of 2015, and is expected to come in to
force in 2016;
- the European Commission has adopted commitments proposed by VISA to settle an investigation into whether arrangements
adopted by VISA for the levying of the MIF in respect of cross-border credit card payment transactions also infringe
European Union competition laws. VISA has agreed inter alia to reduce the level of interchange fees on cross-border credit
card transactions to the interim level (30 basis points). VISA has previously reached an agreement (which expires in 2014)
with the European Commission to reduce the level of interchange fees for cross-border debit card transactions to the
interim levels agreed by MasterCard;
- the new UK payments regulator may exercise its powers, when these come in to force (in April 2015), to regulate
domestic interchange fees. The Competition and Markets Authority may also seek to restart an investigation of domestic
MIFs. In addition, the FCA has announced that it will carry out a market study in relation to the UK credit cards market in
the third quarter of 2014.
The ultimate impact of the investigations and any regulatory or legislative developments on the Group can only be known at
the conclusion of these investigations and any relevant appeal proceedings and once regulatory or legislative proposals are
more certain.
24. Contingent liabilities and commitments (continued)
LIBOR and other trading rates
As set out in more detail in note 23, on 28 July 2014, the Group announced that it had reached settlements totalling £217
million (at 30 June 2014 exchange rates) to resolve with UK and US federal authorities legacy issues regarding the
manipulation several years ago of Group companies' submissions to the British Bankers' Association (BBA) London Interbank
Offered Rate (LIBOR) and Sterling Repo Rate. The settlements in relation to LIBOR are part of an industry-wide
investigation into the setting of interbank offered rates across a range of currencies.
The Group continues to cooperate with various other government and regulatory authorities, including the Serious Fraud
Office, the European and Swiss Competition Commissions, and a number of US State Attorneys General, in conjunction with
their investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank
offered rates.
Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including
purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US
Dollar and Japanese Yen LIBOR. The claims have been asserted by plaintiffs claiming to have had an interest in various
types of financial instruments linked to US Dollar and Japanese Yen LIBOR. The allegations in these cases, the majority of
which have been coordinated for pre-trial purposes in two sets of multi-district litigation proceedings (MDL) in the US
District Court for the Southern District of New York (the 'District Court'), are substantially similar to each other. The
lawsuits allege violations of the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act (RICO) and
the Commodity Exchange Act (CEA), as well as various state statutes and common law doctrines. Certain of the plaintiffs'
claims have been dismissed by the District Court, and many of these cases have been stayed by order of the District Court.
The Group is also reviewing its activities in relation to the setting of certain foreign exchange daily benchmark rates and
related matters, following the FCA's publicised initiation of an investigation into other financial institutions in
relation to this activity. The Group is co-operating with the FCA and other regulators and is providing information about
the Group's review to those regulators. In addition, the Group, together with a number of other banks, was named as a
defendant in several actions filed in the District Court between late 2013 and February 2014, in which the plaintiffs
alleged that the defendants manipulated WM/Reuters foreign exchange rates in violation of US antitrust laws. On 31 March
2014, plaintiffs effectively withdrew their claims against the Group (but not against all defendants) by filing a
superseding consolidated and amended pleading against a number of other defendants without naming any Group entity as a
defendant.
It is currently not possible to predict the scope and ultimate outcome on the Group of the various outstanding regulatory
investigations not encompassed by the settlements, any private lawsuits or any related challenges to the interpretation or
validity of any of the Group's contractual arrangements, including their timing and scale.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) is the UK's independent statutory compensation fund of last resort for
customers of authorised financial services firms and pays compensation if a firm is unable or likely to be unable to pay
claims against it. The FSCS is funded by levies on the authorised financial services industry. Each deposit-taking
institution contributes towards the FSCS levies in proportion to their share of total protected deposits on 31 December of
the year preceding the scheme year, which runs from 1 April to 31 March.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the
compensation costs for customers of those firms. Although the substantial majority of this loan will be repaid from funds
the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that
defaulted, any shortfall will be funded by deposit-taking participants of the FSCS. The amount of future levies payable by
the Group depends on a number of factors including the amounts recovered by the FSCS from asset sales, the Group's
participation in the deposit-taking market at 31 December, the level of protected deposits and the population of
deposit-taking participants.
24. Contingent liabilities and commitments (continued)
Investigation into Bank of Scotland and report on HBOS
The FSA's enforcement investigation into Bank of Scotland plc's Corporate division between 2006 and 2008 concluded with the
publication of a Final Notice on 9 March 2012. No financial penalty was imposed on the Group or Bank of Scotland plc. On 12
September 2012 the FSA confirmed it was starting work on a public interest report on HBOS. That report is currently
expected to be published in 2014.
US-Swiss tax programme
The US Department of Justice (the DoJ) and the Swiss Federal Department of Finance announced on 29 August 2013 a programme
(the Programme) for Swiss banks to obtain resolution concerning their status in connection with on-going investigations by
the DoJ into individuals and entities that use foreign (i.e. non-U.S.) bank accounts to evade U.S. taxes and reporting
requirements, and individuals and entities that facilitate or have facilitated the evasion of such taxes and reporting
requirements. Swiss banks that choose to participate notified the DoJ of their election to categorise their relevant
banking operations according to one of a number of defined categories under the Programme.
The Group, which carried out private banking operations in Switzerland prior to disposing of these operations in November
2013, has notified the DoJ of its elected categorisation on the basis that while it believes it has operated in full
compliance with all US federal tax laws, there remains the possibility that certain of its clients may not have declared
their assets in compliance with such laws. The Group is completing due diligence under the terms of the Programme. However,
at this time, it is not possible to predict the ultimate outcome of the Group's participation in the Programme, including
the timing and scale of any fine finally payable to the DoJ.
Tax authorities
The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax
authorities. This includes open matters where Her Majesty's Revenue and Customs (HMRC) adopt a different interpretation and
application of tax law which might lead to additional tax. The Group has an open matter in relation to a claim for group
relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In the second
half of 2013 HMRC informed the Group that their interpretation of the UK rules, permitting the offset of such losses,
denies the claim; if HMRC's position is found to be correct management estimate that this would result in an increase in
current tax liabilities of approximately £600 million and a reduction in the Group's deferred tax asset of approximately
£400 million. The Group does not agree with HMRC's position and, having taken appropriate advice, does not consider that
this is a case where additional tax will ultimately fall due.
Other legal actions and regulatory matters
In addition, during the ordinary course of business the Group is subject to other threatened and actual legal proceedings
(including class or group action claims brought on behalf of customers, shareholders or other third parties), and
regulatory challenges, investigations and enforcement actions, both in the UK and overseas. All such material matters are
periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the
likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not
that a payment will be made, a provision is established to management's best estimate of the amount required to settle the
obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the
facts are unclear or because further time is needed properly to assess the merits of the case and no provisions are held
against such matters. However the Group does not currently expect the final outcome of any such case to have a material
adverse effect on its financial position, operations or cash flows.
24. Contingent liabilities and commitments (continued)
Contingent liabilities and commitments arising from the banking business
At At
30 June 2014 31 Dec 2013
£m £m
Contingent liabilities
Acceptances and endorsements 48 204
Other:
Other items serving as direct credit substitutes 308 710
Performance bonds and other transaction-related contingencies 2,276 1,966
2,584 2,676
Total contingent liabilities 2,632 2,880
Commitments
Documentary credits and other short-term trade-related transactions 85 54
Forward asset purchases and forward deposits placed 454 440
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made 10,844 9,559
Other commitments 57,502 55,002
68,346 64,561
1 year or over original maturity 40,626 40,616
Total commitments 109,511 105,671
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend,
£52,393 million (31 December 2013: £56,292 million) was irrevocable.
25. Fair values of financial assets and liabilities
The valuations of financial instruments have been classified into three levels according to the quality and reliability of
information used to determine those fair values.
Level 1 portfolios
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or
liabilities. Products classified as level 1 predominantly comprise equity shares, treasury bills and other government
securities.
Level 2 portfolios
Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a
market that is not considered to be active or valuation techniques are used to determine fair value and where these
techniques use inputs that are based significantly on observable market data. Examples of such financial instruments
include most over-the-counter derivatives, financial institution issued securities, certificates of deposit and certain
asset-backed securities.
Level 3 portfolios
Level 3 portfolios are those where at least one input which could have a significant effect on the instrument's valuation
is not based on observable market data. Such instruments would include the Group's venture capital and unlisted equity
investments which are valued using various valuation techniques that require significant management judgement in
determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group's
asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also
classified as level 3.
25. Fair values of financial assets and liabilities (continued)
Valuation control framework
Key elements of the valuation control framework, which covers processes for all levels in the fair value hierarchy
including level 3 portfolios, include model validation (incorporating pre-trade and post-trade testing), product
implementation review and independent price verification. Formal committees meet quarterly to discuss and approve
valuations in more judgemental areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could have a significant impact on the instrument's valuation
become market observable; conversely, transfers into the portfolios arise when consistent sources of data cease to be
available.
Valuation methodology
For level 2 and level 3 portfolios, there is no significant change to what was disclosed in the Group's 2013 annual report
and accounts in respect of the valuation methodology (techniques and inputs) applied to such portfolios.
The table below summarises the carrying values of financial assets and liabilities presented on the Group's balance sheet.
The fair values presented in the table are at a specific date and may be significantly different from the amounts which
will actually be paid or received on the maturity or settlement date.
30 June 2014 31 December 2013
Carrying Fair Carrying Fair
value value value value
£m £m £m £m
Financial assets
Trading and other financial assets at fair value through profit or loss 147,187 147,187 142,683 142,683
Derivative financial instruments 27,241 27,241 33,125 33,125
Loans and receivables:
Loans and advances to banks 21,589 21,647 25,365 25,296
Loans and advances to customers 491,345 485,189 495,281 486,495
Debt securities 1,266 1,140 1,355 1,251
Available-for-sale financial instruments 50,348 50,348 43,976 43,976
Financial liabilities
Deposits from banks 11,851 11,901 13,982 14,101
Customer deposits 445,091 445,702 441,311 441,855
Trading and other financial liabilities at fair value through profit or loss 63,046 63,046 43,625 43,625
Derivative financial instruments 25,285 25,285 30,464 30,464
Debt securities in issue 77,729 82,111 87,102 90,803
Liabilities arising from non-participating investment contracts 27,322 27,322 27,590 27,590
Financial guarantees 48 48 50 50
Subordinated liabilities 25,675 29,282 32,312 34,449
The carrying amount of the following financial instruments is a reasonable approximation of fair value: cash and balances
at central banks, items in the course of collection from banks, items in course of transmission to banks and notes in
circulation.
The Group manages valuation adjustments for its derivative exposures on a net basis; the Group determines their fair values
on the basis of their net exposures. In all other cases, fair values of financial assets and liabilities measured at fair
value are determined on the basis of their gross exposures.
The following table provides an analysis of the financial assets and liabilities of the Group that are carried at fair
value in the Group's consolidated balance sheet, grouped into levels 1 to 3 based on the degree to which the fair value is
observable.
25. Fair values of financial assets and liabilities (continued)
Valuation hierarchy
Level 1 Level 2 Level 3 Total
£m £m £m £m
At 30 June 2014
Trading and other financial assets at fair value
through profit or loss:
Loans and advances to customers − 27,250 − 27,250
Loans and advances to banks − 6,996 − 6,996
Debt securities:
Government securities 20,013 712 − 20,725
Other public sector securities − 895 1,077 1,972
Bank and building society certificates of deposit − 2,339 − 2,339
Asset-backed securities:
Mortgage-backed securities 25 789 52 866
Other asset-backed securities − 833 − 833
Corporate and other debt securities 461 17,664 1,988 20,113
20,499 23,232 3,117 46,848
Equity shares 64,077 12 1,788 65,877
Treasury and other bills 216 − − 216
Total trading and other financial assets at fair value through profit or loss 84,792 57,490 4,905 147,187
Available-for-sale financial assets:
Debt securities:
Government securities 42,263 30 − 42,293
Bank and building society certificates of deposit − 264 − 264
Asset-backed securities:
Mortgage-backed securities − 1,168 − 1,168
Other asset-backed securities − 792 − 792
Corporate and other debt securities 729 3,087 − 3,816
42,992 5,341 − 48,333
Equity shares 50 772 329 1,151
Treasury and other bills 852 12 − 864
Total available-for-sale financial assets 43,894 6,125 329 50,348
Derivative financial instruments 46 25,002 2,193 27,241
Total financial assets carried at fair value 128,732 88,617 7,427 224,776
Trading and other financial liabilities at fair value
through profit or loss
Liabilities held at fair value through profit or loss − 5,562 12 5,574
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements − 51,699 − 51,699
Short positions in securities 3,255 258 − 3,513
Other − 2,260 − 2,260
3,255 54,217 − 57,472
Total trading and other financial liabilities at fair value through profit or loss 3,255 59,779 12 63,046
Derivative financial instruments 19 24,250 1,016 25,285
Financial guarantees − − 48 48
Total financial liabilities carried at fair value 3,274 84,029 1,076 88,379
There were no transfers between level 1 and level 2 during the period.
25. Fair values of financial assets and liabilities (continued)
Valuation hierarchy
Level 1 Level 2 Level 3 Total
£m £m £m £m
At 31 December 2013
Trading and other financial assets at fair value
through profit or loss:
Loans and advances to customers - 21,110 - 21,110
Loans and advances to banks - 8,333 - 8,333
Debt securities:
Government securities 20,191 498 - 20,689
Other public sector securities - 1,312 885 2,197
Bank and building society certificates of deposit - 1,491 - 1,491
Asset-backed securities:
Mortgage-backed securities 30 768 - 798
Other asset-backed securities 171 756 - 927
Corporate and other debt securities 244 18,689 1,687 20,620
20,636 23,514 2,572 46,722
Equity shares 64,690 53 1,660 66,403
Treasury and other bills 7 108 - 115
Total trading and other financial assets at fair value through profit or loss 85,333 53,118 4,232 142,683
Available-for-sale financial assets:
Debt securities:
Government securities 38,262 28 - 38,290
Bank and building society certificates of deposit - 208 - 208
Asset-backed securities:
Mortgage-backed securities - 1,263 - 1,263
Other asset-backed securities - 841 74 915
Corporate and other debt securities 56 1,799 - 1,855
38,318 4,139 74 42,531
Equity shares 48 147 375 570
Treasury and other bills 852 23 - 875
Total available-for-sale financial assets 39,218 4,309 449 43,976
Derivative financial instruments 235 29,871 3,019 33,125
Total financial assets carried at fair value 124,786 87,298 7,700 219,784
Trading and other financial liabilities at fair value
through profit or loss
Liabilities held at fair value through profit or loss - 5,267 39 5,306
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
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