REG - Lloyds Banking Group - Half-year results <Origin Href="QuoteRef">LLOY.L</Origin> - Part 9
06/09/2014 22:42
- Part 9: For the preceding part double click ID:nRSe8094Nh
- 28,902 - 28,902
Short positions in securities 6,473 417 - 6,890
Other - 2,527 - 2,527
6,473 31,846 - 38,319
Total trading and other financial liabilities at fair value through profit or loss 6,473 37,113 39 43,625
Derivative financial instruments 119 29,359 986 30,464
Financial guarantees - - 50 50
Total financial liabilities carried at fair value 6,592 66,472 1,075 74,139
25. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial assets portfolio.
Trading Available- Derivative Total
and other for-sale assets financial
financial assets at fair financial assets
value through assets carried at
profit or loss fair value
£m £m £m £m
At 1 January 2014 4,232 449 3,019 7,700
Exchange and other adjustments − (9) (10) (19)
Gains recognised in the income statement within other income 167 (78) 277 366
Gains recognised in other comprehensive income within the revaluation reserve in respect of available-for-sale financial assets − 15 − 15
Purchases 432 199 10 641
Sales (367) (173) (1,072) (1,612)
Transfers into the level 3 portfolio 441 − 22 463
Transfers out of the level 3 portfolio − (74) (53) (127)
At 30 June 2014 4,905 329 2,193 7,427
Gains recognised in the income statement within other income relating to those assets held at 30 June 2014 140 − 50 190
Trading Available- Derivative Total
and other for-sale assets financial
financial assets at fair financial assets
value through assets carried at
profit or loss fair value
£m £m £m £m
At 1 January 2013 3,306 567 2,358 6,231
Exchange and other adjustments 4 21 10 35
Gains (losses) recognised in the income statement within other income 173 (1) 55 227
Gains recognised in other comprehensive income within the revaluation reserve in respect of available-for-sale financial assets − 34 − 34
Purchases 301 27 200 528
Sales (159) (207) (9) (375)
Transfers into the level 3 portfolio 265 1 415 681
Transfers out of the level 3 portfolio − − (49) (49)
At 30 June 2013 3,890 442 2,980 7,312
Gains recognised in the income statement within other income relating to those assets held at 30 June 2013 152 − 52 204
25. Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial liabilities portfolio.
Trading and other financial liabilities at fair value through profit or loss Derivative Financial Total
liabilities guarantees financial
liabilities
carried at
fair value
£m £m £m £m
At 1 January 2014 39 986 50 1,075
Exchange and other adjustments − (5) − (5)
(Gains) losses recognised in the income statement (2) 78 (2) 74
within other income
Additions − 5 − 5
Redemptions (25) (53) − (78)
Transfers into the level 3 portfolio − 5 − 5
At 30 June 2014 12 1,016 48 1,076
Gains (losses) recognised in the income statement within other income relating to those liabilities held at 30 June 2014 − (78) − (78)
Derivative Financial Total
liabilities guarantees financial
liabilities
carried at
fair value
£m £m £m
At 1 January 2013 543 48 591
Exchange and other adjustments 3 − 3
(Gains) losses recognised in the income statement (44) 2 (42)
within other income
Additions 203 − 203
Redemptions (25) (1) (26)
Transfers into the level 3 portfolio 248 − 248
Transfers out of the level 3 portfolio (1) − (1)
At 30 June 2013 927 49 976
Gains (losses) recognised in the income 43 (2) 41
statement within other income relating to those
liabilities held at 30 June 2013
25. Fair values of financial assets and liabilities (continued)
At 30 June 2014
Effect of reasonably possible alternative assumptions2
Valuation technique(s) Significant unobservable inputs Range1 Carrying Favourable Unfavourable
value changes changes
£m £m £m
Trading and other financial assets at fair value through profit or loss
Debt securities Discounted cash flow Credit spreads (bps) n/a3 20 5 (5)
Asset-backed securities Lead manager or broker quote n/a n/a 68 − (2)
Equity and venture capital investments Market approach Earnings multiple 3.8/14.3 2,280 50 (52)
Underlying asset/net asset value (incl. property prices)4 n/a n/a 188 36 (18)
Unlisted equities Underlying asset/net asset value (incl. property prices)4 n/a n/a 2,349 − −
and property
partnerships in the life funds
4,905
Available-for-sale financial assets
Equity and venture capital investments Underlying asset/net asset value (incl. property prices)4 n/a n/a 329 21 (16)
329
Derivative financial assets
Embedded equity conversion feature Lead manager or broker quote Equity conversion feature spread (bps) 140/331 471 22 (23)
Interest rate Discounted cash flow Inflation swap rate - funding component (bps) 2/189 1,335 27 (15)
derivatives
Option pricing model Interest rate 3%/120% 387 9 (7)
volatility
2,193
Financial assets carried at fair value 7,427
Trading and other financial liabilities at fair value through profit or loss 12 − −
Derivative financial liabilities
Interest rate Discounted cash flow Inflation swap rate - funding component (bps) 2/189 752 − −
derivatives
Option pricing model Interest rate 3%/120% 264 − −
volatility
1,016
Financial guarantees 48
Financial liabilities carried at fair value 1,076
1 The range represents the highest and lowest inputs used in the level 3 valuations.
2 Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
3 A single pricing source is used.
4 Underlying asset/net asset values represent fair value.
25. Fair values of financial assets and liabilities (continued)
At 31 December 2013
Effect of reasonably possible alternative assumptions2
Valuation technique(s) Significant unobservable inputs Range1 Carrying Favourable Unfavourable
value changes changes
£m £m £m
Trading and other financial assets at fair value through profit or loss
Debt securities Discounted cash flow Credit spreads (bps) n/a3 18 5 (2)
Equity and venture capital investments Market approach Earnings multiple 0.2/14.6 2,132 70 (70)
Underlying asset/net asset value (incl. property prices)4 n/a n/a 130 - -
Unlisted equities Underlying asset/net asset value (incl. property prices)4 n/a n/a 1,952 - -
and property
partnerships in the life funds
4,232
Available-for-sale financial assets
Asset-backed Lead manager n/a n/a 74 - -
securities or broker quote/consensus pricing
Equity and venture capital investments Underlying asset/net asset value (incl. property prices)4 n/a n/a 375 28 (19)
449
Derivative financial assets
Embedded equity conversion feature Lead manager or broker quote Equity conversion feature spread (bps) 199/420 1,212 59 (58)
Interest rate Discounted cash flow Inflation swap rate - funding component (bps) 62/192 1,461 66 (39)
derivatives
Option pricing model Interest rate 3%/112% 346 6 (7)
volatility
3,019
Financial assets carried at fair value 7,700
Trading and other financial liabilities at fair value through profit or loss 39 1 (1)
Derivative financial liabilities
Interest rate Discounted cash flow Inflation swap rate - funding component (bps) 62/194 754 - -
derivatives
Option pricing model Interest rate 3%/112% 232 - -
volatility
986
Financial guarantees 50
Financial liabilities carried at fair value 1,075
1 The range represents the highest and lowest inputs used in the level 3 valuations.
2 Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
3 A single pricing source is used.
4 Underlying asset/net asset values represent fair value.
25. Fair values of financial assets and liabilities (continued)
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are
as follows:
- Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the
derivative receives depends on the behaviour of those underlying references through time.
- Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit
quality; higher spreads lead to a lower fair value.
- Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range
of possible outcomes.
- Earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a
higher fair value.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group's level 3 instruments often involve the use of two or more inputs whose
relationship is interdependent. The calculation of the effect of reasonably possible alternative assumptions included in
the table above reflects such relationships.
Debt securities
Reasonably possible alternative assumptions have been determined in respect of the Group's structured credit investment by
flexing credit spreads.
Derivatives
Reasonably possible alternative assumptions have been determined in respect of the Group's derivative portfolios as
follows:
(i) In respect of the embedded equity conversion feature of the Enhanced Capital Notes, the sensitivity was based on
the absolute difference between the actual price of the Enhanced Capital Note and the closest, alternative broker quote
available plus the impact of applying a 10 basis points increase/decrease in the market yield used to derive a market price
for similar bonds without the conversion feature. The effect of interdependency of the assumptions is not material to the
effect of applying reasonably possible alternative assumptions to the valuations of derivative financial instruments.
(ii) Uncollateralised inflation swaps are valued using appropriate discount spreads for such transactions. These
spreads are not generally observable for longer maturities. The reasonably possible alternative valuations reflect flexing
of the spreads for the differing maturities to alternative values.
(iii) Swaptions are priced using industry standard option pricing models. Such models require interest rate volatilities
which may be unobservable at longer maturities. To derive reasonably possible alternative valuations these volatilities
have been flexed within a range.
Unlisted equity, venture capital investments and investments in property partnerships
The valuation techniques used for unlisted equity and venture capital investments vary depending on the nature of the
investment. Reasonably possible alternative valuations for these investments have been calculated by reference to the
approach taken, as appropriate to the business sector and investment circumstances and as such the following inputs have
been considered:
- for valuations derived from earnings multiples, consideration is given to the risk attributes, growth prospects and
financial gearing of comparable businesses when selecting an appropriate multiple;
- the discount rates used in discounted cash flow valuations; and
- in line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in
fund investments portfolios.
26. Related party transactions
UK government
In January 2009, the UK government through HM Treasury became a related party of the Company following its subscription for
ordinary shares issued under a placing and open offer. As at 30 June 2014, HM Treasury held a 24.9 per cent interest in the
Company's ordinary share capital and consequently HM Treasury remained a related party of the Company during the half-year
to 30 June 2014; this percentage holding has reduced from 32.7 per cent at 31 December 2013 following the UK government's
sale of 5,555 million shares on 31 March 2014.
In accordance with IAS 24, UK government-controlled entities are related parties of the Group. The Group regards the Bank
of England and entities controlled by the UK government, including The Royal Bank of Scotland Group plc, Northern Rock
(Asset Management) plc and Bradford & Bingley plc, as related parties.
The Group has participated in a number of schemes operated by the UK government and central banks and made available to
eligible banks and building societies.
National Loan Guarantee Scheme
The Group has participated in the UK government's National Loan Guarantee Scheme, which was launched on 20 March 2012.
Through the scheme, the Group is providing eligible UK businesses with discounted funding, subject to continuation of the
scheme and its financial benefits, and based on the Group's existing lending criteria. Eligible businesses who have taken
up the funding benefit from a 1 per cent discount on their funding rate for a pre-agreed period of time.
Business Growth Fund
In May 2011 the Group agreed, together with The Royal Bank of Scotland plc (and three other non-related parties), to commit
up to £300 million of equity investment by subscribing for shares in the Business Growth Fund plc which is the company
created to fulfil the role of the Business Growth Fund as set out in the British Bankers' Association's Business Taskforce
Report of October 2010. At 30 June 2014, the Group had invested £95 million (31 December 2013: £64 million) in the Business
Growth Fund and carried the investment at a fair value of £83 million (31 December 2013: £52 million).
Big Society Capital
In January 2012 the Group agreed, together with The Royal Bank of Scotland plc (and two other non-related parties), to
commit up to £50 million each of equity investment into the Big Society Capital Fund. The Fund, which was created as part
of the Project Merlin arrangements, is a UK social investment fund. The Fund was officially launched on 3 April 2012 and
the Group had invested £23 million in the Fund by 31 December 2013 and invested a further £4 million during the half-year
to 30 June 2014.
Funding for Lending
In August 2012, the Group announced its support for the UK government's Funding for Lending Scheme and confirmed its
intention to participate in the scheme. The Funding for Lending Scheme represents a further source of cost effective
secured term funding available to the Group. The initiative supports a broad range of UK based customers, providing
householders with more affordable housing finance and businesses with cheaper finance to invest and grow. In November 2013,
the Group entered into extension letters with the Bank of England to take part in the extension of the Funding for Lending
Scheme until the end of January 2015. The extension of the Funding for Lending Scheme focuses on providing businesses with
cheaper finance to invest and grow. At 30 June 2014, the Group had drawn down £14 billion under the Funding for Lending
Scheme. £4 billion of this has been drawn under the extension, out of which £2 billion was drawn in June 2014.
26. Related party transactions (continued)
Enterprise Finance Guarantee
The Group participates in the Enterprise Finance Guarantee Scheme which was launched in January 2009 as a replacement for
the Small Firms Loan Guarantee Scheme. The scheme is a UK government-backed loan guarantee, which supports viable
businesses with access to lending where they would otherwise be refused a loan due to a lack of lending security. The
Department for Business Innovation and Skills provides the lender with a guarantee of up to 75 per cent of the capital of
each loan subject to the eligibility of the customer within the rules of the scheme. As at 30 June 2014, the Group had
offered 6,212 loans to customers, worth a total of £508 million. The Group entities, Lloyds Bank plc, TSB Bank plc, Lloyds
TSB Commercial Finance Limited and Bank of Scotland plc contracted with The Secretary of State for Business, Innovation and
Skills (formerly the Secretary of State for Business, Enterprise and Regulatory Reform).
On 1 April 2014, the Group committed to the sixth tranche of the scheme, and amended and restated agreements, which have
the purpose of expanding the scope of situations in which lenders will be able to use the Enterprise Finance Guarantee
Scheme to facilitate lending to SME customers, including overdrafts. The annual base lending limit allocated to the Group
for the financial year 1 April 2014 to 31 March 2015 is £80 million.
Help to Buy
On 7 October 2013, Bank of Scotland plc entered into an agreement with The Commissioners of Her Majesty's Treasury by which
it agreed that the Halifax Division of Bank of Scotland plc would participate in the Help to Buy Scheme with effect from 11
October 2013 and that Lloyds Bank plc would participate from 3 January 2014. The Help to Buy Scheme is a scheme promoted by
the government and is aimed to encourage participating lenders to make mortgage loans available to customers who require
higher loan-to-value mortgages. Halifax and Lloyds are currently participating in the Scheme whereby customers borrow
between 90 per cent and 95 per cent of the purchase price.
In return for the payment of a commercial fee, HM Treasury has agreed to provide a guarantee to the lender to cover a
proportion of any loss made by the lender arising from a higher loan-to-value loan being made. By 30 June 2014, £969
million had been advanced under this scheme.
Central bank facilities
In the ordinary course of business, the Group may from time to time access market-wide facilities provided by central
banks.
Other government-related entities
There were no significant transactions with other UK government-controlled entities (including UK government-controlled
banks) during the year that were not made in the ordinary course of business or that were unusual in their nature or
conditions.
Other related party transactions
Other related party transactions for the half-year to 30 June 2014 are similar in nature to those for the year ended 31
December 2013.
27. Disposal of a non-controlling interest in TSB Banking Group plc
In June 2014, the Group disposed of a 35 per cent interest in TSB Banking Group plc (TSB) for a consideration of £430
million, after directly attributable costs of £25 million. As the Group has retained a 65 per cent interest, TSB continues
to be consolidated by the Group. Accordingly, the gross assets and liabilities of TSB are recognised on the Group's balance
sheet and a non-controlling interest of £565 million, representing the minorities' share of TSB's net assets, is
recognised. The shortfall of £135 million between the consideration received and share of net assets sold has been deducted
from shareholders' equity.
In addition to the sale of up to 35 per cent of TSB, the prospectus permitted the Group to sell 3.5 per cent of TSB through
an over-allotment option. This option was exercised by the underwriters on 18 July 2014 and, as a result, a further
reserves transfer of approximately £10 million will be recognised in the third quarter of 2014.
28. Future accounting developments
The following pronouncements may have a significant effect on the Group's financial statements but are not applicable for
the year ending 31 December 2014 and have not been applied in preparing these financial statements. Save as disclosed
below, the full impact of these accounting changes is being assessed by the Group.
Pronouncement Nature of change IASB effective date
IFRS 9 Financial Instruments1 Replaces IAS 39 Financial Instruments: Recognition and Measurement.IFRS 9 requires financial assets to be classified into three measurement categories, fair value through Annual periods beginning on or after 1 January 2018
profit and loss, fair value through other comprehensive income and amortised cost, on the basis of the objectives of the entity's business model for managing its
financial assets and the contractual cash flow characteristics of the instruments. The requirements for derecognition are broadly unchanged from IAS 39. The standard also
retains most of the IAS 39 requirements for financial liabilities except for those designated at fair value through profit or loss whereby that part of the fair value
change attributable to the entity's own credit risk is recorded in other comprehensive income. The classification and measurement change is not expected to have a
significant impact on the Group.IFRS 9 also replaces the existing IAS 39 'incurred loss' impairment approach with an expected credit loss approach. Loan commitments and
financial guarantees not measured at fair value through profit or loss are also in scope. Those changes may result in an increase in the Group's balance sheet provisions
for credit losses at the initial application date (1 January 2018) depending upon the composition of the Group's amortised cost financial assets, as well as the general
economic conditions and the future outlook. The hedge accounting requirements of IFRS 9 are more closely aligned with risk management practices and follow a more
principle-based approach than IAS 39. The general hedging change is not expected to have a significant impact on the Group.
IFRS 15 Revenue from Contracts with Customers1 Replaces IAS 18 Revenue and IAS 11 Construction Contracts. IFRS 15 establishes principles for reporting useful information about the nature, amount, timing and Annual periods beginning on or after 1 January 2017
uncertainty of revenue and cash flows arising from an entity's contracts with customers. Revenue is recognised at an amount that reflects the consideration to which the
entity expects to be entitled in exchange for goods and services. Financial instruments, leases and insurance contracts are out of scope and so this standard is not
expected to have a significant impact on the Group.
1 As at 30 July 2014, these pronouncements are awaiting EU endorsement.
29. Other information
The financial information in these condensed consolidated half-year financial statements does not constitute statutory
accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December
2013 have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified, did not
include an emphasis of matter paragraph and did not include a statement under section 498 of the Companies Act 2006.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors listed below (being all the directors of Lloyds Banking Group plc) confirm that to the best of their
knowledge these condensed consolidated half-year financial statements have been prepared in accordance with International
Accounting Standard 34, Interim Financial Reporting, as adopted by the European Union, and that the half-year management
report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
· an indication of important events that have occurred during the six months ended 30 June 2014 and their impact on the
condensed consolidated half-year financial statements, and a description of the principal risks and uncertainties for the
remaining six months of the financial year; and
· material related party transactions in the six months ended 30 June 2014 and any material changes in the related
party transactions described in the last annual report.
Signed on behalf of the board by
António Horta-Osório
Group Chief Executive
30 July 2014
Lloyds Banking Group plc board of directors:
Executive directors:
António Horta-Osório (Group Chief Executive)
George Culmer (Chief Financial Officer)
Juan Colombás (Chief Risk Officer)
Non-executive directors:
Lord Blackwell(Chairman)
Anita Frew (Deputy Chairman)
Carolyn Fairbairn
Simon Henry
Dyfrig John CBE
Nicholas Luff
Nicholas Prettejohn
Anthony Watson CBE
Sara Weller
INDEPENDENT REVIEW REPORT TO LLOYDS BANKING GROUP PLC
Report on the condensed consolidated half-year financial statements
Our conclusion
We have reviewed the condensed consolidated half-year financial statements, defined below, in the 2014 half-year results of
Lloyds Banking Group plc for the six months ended 30 June 2014. Based on our review, nothing has come to our attention that
causes us to believe that the condensed consolidated half-year financial statements are not prepared, in all material
respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and
Transparency Rules of the United Kingdom's Financial Conduct Authority.
This conclusion is to be read in the context of what we say in the remainder of this report.
What we have reviewed
The condensed consolidated half-year financial statements, which are prepared by Lloyds Banking Group plc, comprise:
· the consolidated income statement for the six months ended 30 June 2014;
· the consolidated statement of comprehensive income for the six months ended 30 June 2014;
· the consolidated balance sheet as at 30 June 2014;
· the consolidated statement of changes in equity for the six months ended 30 June 2014;
· the consolidated cash flow statement for the six months ended 30 June 2014; and
· the explanatory notes to the condensed consolidated half-year financial statements.
As disclosed in note 1, the financial reporting framework that has been applied in the preparation of the full annual
financial statements of the group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by
the European Union.
The condensed consolidated half-year financial statements included in the 2014 half-year results have been prepared in
accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and
the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
What a review of condensed consolidated financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of
Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board
for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons
responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK
and Ireland) and, consequently, does not enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the 2014 half-year results and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the condensed consolidated half-year financial
statements.
INDEPENDENT REVIEW REPORT TO LLOYDS BANKING GROUP PLC (continued)
Responsibilities for the condensed consolidated half-year financial statements and the review
Our responsibilities and those of the directors
The 2014 half-year results, including the condensed consolidated half-year financial statements, are the responsibility of,
and have been approved by, the directors. The directors are responsible for preparing the 2014 half-year results in
accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express to the
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