2019 Half-Year Results - News Release part 2 of 2

STATUTORY INFORMATION

                                                                                   

		Page
Condensed consolidated half-year financial statements
Consolidated income statement		58
Consolidated statement of comprehensive income		60
Consolidated balance sheet		61
Consolidated statement of changes in equity		63
Consolidated cash flow statement		66
Notes
1	Accounting policies, presentation and estimates	67
2	Segmental analysis	70
3	Net fee and commission income	72
4	Operating expenses	73
5	Impairment	74
6	Taxation	75
7	Earnings per share	75
8	Financial assets at fair value through profit or loss	76
9	Derivative financial instruments	76
10	Financial assets at amortised cost	77
11	Allowance for impairment losses	80
12	Debt securities in issue	83
13	Post-retirement defined benefit schemes	84
14	Subordinated liabilities	85
15	Share capital	85
16	Other equity instruments	86
17	Provisions for liabilities and charges	87
18	Contingent liabilities and commitments	89
19	Fair values of financial assets and liabilities	92
20	Credit quality of loans and advances to banks and customers	99
21	Dividends on ordinary shares	107
22	Implementation of IFRS 16	107
23	Future accounting developments	108
24	Other information	108

 

 

CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT (UNAUDITED)

 

				Half-year to		Half-year to		Half-year to
				30 June		30 June		31 Dec
				2019		20181		20181
		Note		£m		£m		£m
Interest and similar income				8,399		8,032		8,317
Interest and similar expense				(3,760)		(2,025)		(928)
Net interest income				4,639		6,007		7,389
Fee and commission income				1,428		1,372		1,476
Fee and commission expense				(694)		(674)		(712)
Net fee and commission income		3		734		698		764
Net trading income				11,789		1,522		(5,398)
Insurance premium income				4,431		4,815		4,374
Other operating income				1,547		1,238		682
Other income				18,501		8,273		422
Total income				23,140		14,280		7,811
Insurance claims				(14,009)		(4,709)		1,244
Total income, net of insurance claims				9,131		9,571		9,055
Regulatory provisions				(793)		(807)		(543)
Other operating expenses				(4,862)		(5,191)		(5,188)
Total operating expenses		4		(5,655)		(5,998)		(5,731)
Trading surplus				3,476		3,573		3,324
Impairment		5		(579)		(456)		(481)
Profit before tax				2,897		3,117		2,843
Tax expense		6		(672)		(800)		(654)
Profit for the period				2,225		2,317		2,189
Profit attributable to ordinary shareholders				1,942		2,075		1,900
Profit attributable to other equity holders				251		205		228
Profit attributable to equity holders				2,193		2,280		2,128
Profit attributable to non-controlling interests				32		37		61
Profit for the period				2,225		2,317		2,189
Basic earnings per share		7		2.7p		2.9p		2.6p
Diluted earnings per share		7		2.7p		2.9p		2.6p

 

1	Restated, see note 1.

 

 

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		20181		20181
		£m		£m		£m
Profit for the period		2,225		2,317		2,189
Other comprehensive income
Items that will not subsequently be reclassified to profit or loss:
Post-retirement defined benefit scheme remeasurements:
Remeasurements before tax		(173)		908		(741)
Tax		44		(206)		159
		(129)		702		(582)
Movements in revaluation reserve in respect of equity shares held at fair value through other comprehensive income:
Change in fair value		1		(97)		-
Tax		12		22		-
		13		(75)		-
Gains and losses attributable to own credit risk:
Gains (losses) before tax		(303)		167		366
Tax		82		(45)		(99)
		(221)		122		267
Share of other comprehensive income of associates and joint ventures		-		-		8
Items that may subsequently be reclassified to profit or loss:
Movements in revaluation reserve in respect of debt securities held at fair value through other comprehensive income:
Change in fair value		(50)		110		(147)
Income statement transfers in respect of disposals		(177)		(203)		(72)
Tax		68		46		73
		(159)		(47)		(146)
Movements in cash flow hedging reserve:
Effective portion of changes in fair value taken to other comprehensive income		1,179		(223)		457
Net income statement transfers		(242)		(423)		(278)
Tax		(250)		182		(69)
		687		(464)		110
Currency translation differences (tax: nil)		1		5		(13)
Other comprehensive income for the period, net of tax		192		243		(356)
Total comprehensive income for the period		2,417		2,560		1,833
Total comprehensive income attributable to ordinary shareholders		2,134		2,318		1,544
Total comprehensive income attributable to other equity holders		251		205		228
Total comprehensive income attributable to equity holders		2,385		2,523		1,772
Total comprehensive income attributable to non-controlling interests		32		37		61
Total comprehensive income for the period		2,417		2,560		1,833

 

1	Restated, see note 1.

 

 

CONSOLIDATED BALANCE SHEET

 

	Note	At 30 June		At 31 Dec
		20191		2018
		(unaudited)		(audited)
		£m		£m
Assets
Cash and balances at central banks		57,290		54,663
Items in the course of collection from banks		693		647
Financial assets at fair value through profit or loss	8	155,108		158,529
Derivative financial instruments	9	26,148		23,595
Loans and advances to banks		8,374		6,283
Loans and advances to customers		495,138		484,858
Debt securities		5,434		5,238
Financial assets at amortised cost	10	508,946		496,379
Financial assets at fair value through other comprehensive income		27,078		24,815
Goodwill		2,314		2,310
Value of in-force business		5,326		4,762
Other intangible assets		3,615		3,347
Property, plant and equipment		13,646		12,300
Current tax recoverable		6		5
Deferred tax assets		2,401		2,453
Retirement benefit assets	13	1,509		1,267
Other assets		18,168		12,526
Total assets		822,248		797,598

 

1	Reflects the implementation of IFRS 16, see note 1.

 

 

CONSOLIDATED BALANCE SHEET (continued)

 

	Note	At 30 June		At 31 Dec
		20191		2018
		(unaudited)		(audited)
Equity and liabilities		£m		£m
Liabilities
Deposits from banks		34,777		30,320
Customer deposits		421,692		418,066
Items in course of transmission to banks		499		636
Financial liabilities at fair value through profit or loss		24,754		30,547
Derivative financial instruments	9	23,026		21,373
Notes in circulation		1,042		1,104
Debt securities in issue	12	97,815		91,168
Liabilities arising from insurance contracts and participating investment contracts		107,409		98,874
Liabilities arising from non-participating investment contracts		14,706		13,853
Other liabilities		26,124		19,633
Retirement benefit obligations	13	250		245
Current tax liabilities		383		377
Deferred tax liabilities		49		-
Other provisions	17	2,858		3,547
Subordinated liabilities	14	17,809		17,656
Total liabilities		773,193		747,399
Equity and liabilities
Equity
Share capital	15	7,076		7,116
Share premium account		17,739		17,719
Other reserves		13,864		13,210
Retained profits		4,769		5,389
Shareholders' equity		43,448		43,434
Other equity instruments	16	5,406		6,491
Total equity excluding non-controlling interests		48,854		49,925
Non-controlling interests		201		274
Total equity		49,055		50,199
Total equity and liabilities		822,248		797,598

 

1	Reflects the implementation of IFRS 16, see note 1.

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

 

		Attributable to equity shareholders
		Share
		capital								Other		Non -
		and		Other		Retained				equity		controlling
		premium		reserves		profits		Total		instruments		interests		Total
		£m		£m		£m		£m		£m		£m		£m
Balance at 1 January 2019		24,835		13,210		5,389		43,434		6,491		274		50,199
Comprehensive income
Profit for the period		-		-		2,193		2,193		-		32		2,225
Other comprehensive income
Post-retirement defined benefit scheme remeasurements, net of tax		-		-		(129)		(129)		-		-		(129)
Movements in revaluation reserve in  respect of financial assets held at fair value through other comprehensive income, net of tax:
Debt securities		-		(159)		-		(159)		-		-		(159)
Equity shares		-		13		-		13		-		-		13
Gains and losses attributable to own credit risk, net of tax		-		-		(221)		(221)		-		-		(221)
Movements in cash flow hedging reserve, net of tax		-		687		-		687		-		-		687
Currency translation differences (tax: £nil)		-		1		-		1		-		-		1
Total other comprehensive income		-		542		(350)		192		-		-		192
Total comprehensive income		-		542		1,843		2,385		-		32		2,417
Transactions with owners
Dividends		-		-		(1,523)		(1,523)		-		(91)		(1,614)
Distributions on other equity instruments		-		-		(251)		(251)		-		-		(251)
Issue of ordinary shares		90		-		-		90		-		-		90
Share buyback		(113)		113		(879)		(879)		-		-		(879)
Redemption of preference shares		3		(3)		-		-		-		-		-
Issue of other equity instruments		-		-		(1)		(1)		396		-		395
Redemption of other equity instruments		-		-		-		-		(1,481)		-		(1,481)
Movement in treasury shares		-		-		71		71		-		-		71
Value of employee services:
Share option schemes		-		-		34		34		-		-		34
Other employee award schemes		-		-		88		88		-		-		88
Changes in non-controlling interests		-		-		-		-		-		(14)		(14)
Total transactions with owners		(20)		110		(2,461)		(2,371)		(1,085)		(105)		(3,561)
Realised gains and losses on equity shares held at fair value through other comprehensive income		-		2		(2)		-		-		-		-
Balance at 30 June 2019		24,815		13,864		4,769		43,448		5,406		201		49,055

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

 

		Attributable to equity shareholders
		Share
		capital								Other		Non-
		and		Other		Retained				equity		controlling
		premium		reserves		profits		Total		instruments		interests		Total
		£m		£m		£m		£m		£m		£m		£m
Balance at 1 January 2018		24,831		13,553		3,976		42,360		5,355		237		47,952
Comprehensive income
Profit for the period1		-		-		2,280		2,280		-		37		2,317
Other comprehensive income
Post-retirement defined benefit scheme remeasurements, net of tax		-		-		702		702		-		-		702
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:
Debt securities		-		(47)		-		(47)		-		-		(47)
Equity shares		-		(75)		-		(75)		-		-		(75)
Gains and losses attributable to own credit risk, net of tax		-		-		122		122		-		-		122
Movements in cash flow hedging reserve, net of tax		-		(464)		-		(464)		-		-		(464)
Currency translation differences (tax: £nil)		-		5		-		5		-		-		5
Total other comprehensive income		-		(581)		824		243		-		-		243
Total comprehensive income		-		(581)		3,104		2,523		-		37		2,560
Transactions with owners
Dividends		-		-		(1,475)		(1,475)		-		(26)		(1,501)
Distributions on other equity instruments1		-		-		(205)		(205)		-		-		(205)
Issue of ordinary shares		142		-		-		142		-		-		142
Share buyback		(72)		72		(565)		(565)		-		-		(565)
Movement in treasury shares		-		-		35		35		-		-		35
Value of employee services:
Share option schemes		-		-		21		21		-		-		21
Other employee award schemes		-		-		104		104		-		-		104
Total transactions with owners		70		72		(2,085)		(1,943)		-		(26)		(1,969)
Realised gains and losses on equity shares held at fair value through other comprehensive income		-		141		(141)		-		-		-		-
Balance at 30 June 2018		24,901		13,185		4,854		42,940		5,355		248		48,543

 

1	Restated, see note 1.

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED) (continued)

 

		Attributable to equity shareholders
		Share
		capital								Other		Non-
		and		Other		Retained				equity		controlling
		premium		reserves		profits		Total		instruments		interests		Total
		£m		£m		£m		£m		£m		£m		£m
Balance at 1 July 2018		24,901		13,185		4,854		42,940		5,355		248		48,543
Comprehensive income
Profit for the period1		-		-		2,128		2,128		-		61		2,189
Other comprehensive income
Post-retirement defined benefit scheme remeasurements, net of tax		-		-		(582)		(582)		-		-		(582)
Share of other comprehensive income of associates and joint ventures		-		-		8		8		-		-		8
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:
Debt securities		-		(146)		-		(146)		-		-		(146)
Equity shares		-		-		-		-		-		-		-
Gains and losses attributable to own credit risk, net of tax		-		-		267		267		-		-		267
Movements in cash flow hedging reserve, net of tax		-		110		-		110		-		-		110
Currency translation differences (tax: £nil)		-		(13)		-		(13)		-		-		(13)
Total other comprehensive income		-		(49)		(307)		(356)		-		-		(356)
Total comprehensive income		-		(49)		1,821		1,772		-		61		1,833
Transactions with owners
Dividends		-		-		(765)		(765)		-		(35)		(800)
Distributions on other equity instruments1		-		-		(228)		(228)		-		-		(228)
Issue of ordinary shares		20		-		-		20		-		-		20
Share buyback		(86)		86		(440)		(440)		-		-		(440)
Issue of other equity instruments		-		-		(5)		(5)		1,136		-		1,131
Movement in treasury shares		-		-		5		5		-		-		5
Value of employee services:
Share option schemes		-		-		32		32		-		-		32
Other employee award schemes		-		-		103		103		-		-		103
Total transactions with owners		(66)		86		(1,298)		(1,278)		1,136		(35)		(177)
Realised gains and losses on equity shares held at fair value through other comprehensive income		-		(12)		12		-		-		-		-
Balance at 31 December 2018		24,835		13,210		5,389		43,434		6,491		274		50,199

 

1	Restated, see note 1.

 

 

 

CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		2018		2018
		£m		£m		£m
Profit before tax		2,897		3,117		2,843
Adjustments for:
Change in operating assets		(16,318)		(19,056)		14,584
Change in operating liabilities		15,630		19,461		(28,134)
Non-cash and other items		10,060		1,204		(4,096)
Tax paid		(557)		(527)		(503)
Net cash provided by (used in) operating activities		11,712		4,199		(15,306)
Cash flows from investing activities
Purchase of financial assets		(8,618)		(6,050)		(6,607)
Proceeds from sale and maturity of financial assets		6,574		14,856		11,950
Purchase of fixed assets		(1,866)		(1,807)		(1,707)
Proceeds from sale of fixed assets		676		643		691
Acquisition of businesses, net of cash acquired		(6)		(37)		(12)
Disposal of businesses, net of cash disposed		-		1		-
Net cash provided by investing activities		(3,240)		7,606		4,315
Cash flows from financing activities
Dividends paid to ordinary shareholders		(1,523)		(1,475)		(765)
Distributions on other equity instruments		(251)		(205)		(228)
Dividends paid to non-controlling interests		(91)		(26)		(35)
Interest paid on subordinated liabilities		(666)		(780)		(488)
Proceeds from issue of subordinated liabilities		-		1,729		-
Proceeds from issue of other equity instruments		395		-		1,131
Proceeds from issue of ordinary shares		20		85		17
Share buyback		(694)		(470)		(535)
Repayment of subordinated liabilities		(515)		(1,612)		(644)
Redemption of other equity instruments		(1,481)		-		-
Net cash used in financing activities		(4,806)		(2,754)		(1,547)
Effects of exchange rate changes on cash and cash equivalents		-		1		2
Change in cash and cash equivalents		3,666		9,052		(12,536)
Cash and cash equivalents at beginning of period		55,224		58,708		67,760
Cash and cash equivalents at end of period		58,890		67,760		55,224

 

Cash and cash equivalents comprise cash and balances at central banks (excluding mandatory deposits) and amounts due from banks with a maturity of less than three months. Included within cash and cash equivalents at 30 June 2019 is £29 million (30 June 2018: £89 million; 31 December 2018: £40 million) held within the Group's life funds, which is not immediately available for use in the business.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.         Accounting policies, presentation and estimates

 

These condensed consolidated interim financial statements as at and for the period to 30 June 2019 have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority (FCA) and with International Accounting Standard 34 (IAS 34), Interim Financial Reporting as adopted by the European Union and comprise the results of Lloyds Banking Group plc (the Company) together with its subsidiaries (the Group). They do not include all of the information required for full annual financial statements and should be read in conjunction with the Group's consolidated financial statements as at and for the year ended 31 December 2018 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Copies of the 2018 Annual Report and Accounts are available on the Group's website and are available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN.

 

The UK Finance Code for Financial Reporting Disclosure (the Disclosure Code) sets out disclosure principles together with supporting guidance in respect of the financial statements of UK banks. The Group has adopted the Disclosure Code and these condensed consolidated half-year financial statements have been prepared in compliance with the Disclosure Code's principles. Terminology used in these condensed consolidated half-year financial statements is consistent with that used in the Group's 2018 Annual Report and Accounts.

 

The directors consider that it is appropriate to continue to adopt the going concern basis in preparing the condensed consolidated interim financial statements. In reaching this assessment, the directors have considered projections for the Group's capital and funding position and have had regard to the factors set out in Risk management: Principal risks and uncertainties on page 27.

 

Except as noted below, the accounting policies are consistent with those applied by the Group in its 2018 Annual Report and Accounts.

 

Changes in accounting policy

The Group adopted IFRS 16 Leases from 1 January 2019. IFRS 16 replaces IAS 17 Leases and addresses the classification and measurement of all leases. The Group's accounting as a lessor under IFRS 16 is substantially unchanged from its approach under IAS 17; however for lessee accounting there is no longer a distinction between finance and operating leases.

 

As lessee, under IFRS 16, in respect of leased properties previously accounted for as operating leases the Group now recognises a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the Group's incremental borrowing rate. Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Payments associated with leases with a lease term of 12 months or less and leases of low-value assets are recognised as an expense in profit or loss on a straight-line basis.

 

Details of the impact of adoption of IFRS 16 are provided in note 22.

 

The Group has also implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on other equity instruments, previously taken directly to retained profits, is now reported within tax expense in the income statement. Comparatives have been restated. Adoption of these amendments to IAS 12 has resulted in a reduction in tax expense and an increase in profit for the period in the half-year to 30 June 2019 of £60 million (half-year to 30 June 2018: £50 million). There is no impact on total shareholders' equity or on earnings per share.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

Future accounting developments

Details of those IFRS pronouncements which will be relevant to the Group but which will not be effective at 31 December 2019 and which have not been applied in preparing these financial statements are set out in note 23.

 

Related party transactions

The Group has had no material or unusual related party transactions during the six months to 30 June 2019. Related party transactions for the six months to 30 June 2019 are similar in nature to those for the year ended 31 December 2018. Full details of the Group's related party transactions for the year to 31 December 2018 can be found in the Group's 2018 Annual Report and Accounts.

 

Critical accounting estimates and judgements

The preparation of the Group's financial statements requires management to make judgements, estimates and assumptions that impact the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may include amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group's significant judgements, estimates and assumptions are unchanged compared to those applied at 31 December 2018, except as detailed below.

 

Allowance for impairment losses

At 30 June 2019 the Group's allowance for expected credit losses (ECL) was £3,511 million (31 December 2018: £3,362 million), of which £3,338 million (31 December 2018: £3,169 million) was in respect of drawn balances.

 

The measurement of expected credit losses is required to reflect an unbiased probability-weighted range of possible future outcomes. The approach to generating the economic scenarios used in the calculation of the Group's ECL allowances is little changed since 31 December 2018. The central scenario reflects the Group's updated base case assumptions used for medium-term planning purposes. Additional model-generated upside, downside and severe downside scenarios are identified to represent a typical scenario from specified points along an estimated loss distribution, with the scenario weightings unchanged since 31 December 2018. The key UK economic assumptions made by the Group as at 30 June 2019 averaged over a five year period are shown below.

 

Economic assumptions

		Base case		Upside		Downside		Severe downside
		%		%		%		%
Scenario weighting		30		30		30		10
At 30 June 2019
Bank of England base rate		1.25		2.05		0.49		0.11
Unemployment rate		4.3		3.8		5.7		7.0
House price growth		1.5		5.2		(2.3)		(7.4)
Commercial real estate price growth		(0.2)		1.6		(4.9)		(9.5)
At 31 December 2018
Bank of England base rate		1.25		2.34		1.30		0.71
Unemployment rate		4.5		3.9		5.3		6.9
House price growth		2.5		6.1		(4.8)		(7.5)
Commercial real estate price growth		0.4		5.3		(4.7)		(6.4)

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

Economic assumptions - start to peak

		Base case		Upside		Downside		Severe downside
		%		%		%		%
At 30 June 2019
Bank of England base rate		1.75		2.70		0.75		0.75
Unemployment rate		4.7		4.5		7.0		8.1
House price growth		7.3		28.8		(1.6)		(2.2)
Commercial real estate price growth		(0.6)		8.4		(1.0)		(1.6)
At 31 December 2018
Bank of England base rate		1.75		4.00		1.75		1.25
Unemployment rate		4.8		4.3		6.3		8.6
House price growth		13.7		34.9		0.6		(1.6)
Commercial real estate price growth		0.1		26.9		(0.5)		(0.5)

 

Economic assumptions - start to trough

		Base case		Upside		Downside		Severe downside
		%		%		%		%
At 30 June 2019
Bank of England base rate		0.75		0.75		0.31		0.01
Unemployment rate		3.8		3.4		3.8		3.9
House price growth		(1.1)		(0.5)		(12.0)		(33.2)
Commercial real estate price growth		(1.5)		0.0		(23.8)		(40.7)
At 31 December 2018
Bank of England base rate		0.75		0.75		0.75		0.25
Unemployment rate		4.1		3.5		4.3		4.2
House price growth		0.4		2.3		(26.5)		(33.5)
Commercial real estate price growth		(0.1)		0.0		(23.8)		(33.8)

 

The Group's base-case economic scenario has changed little over the year and reflects a broadly stable outlook for the economy. Although there remains considerable uncertainty about the economic consequences of the UK's planned exit from the European Union, the Group considers that at this stage the range of possible outcomes is adequately reflected in its choice and weighting of scenarios. The effect of the revised economic assumptions has been to increase the ECL allowance by £50 million.

 

Impact of forward looking information

As a result of applying the assumptions set out above, the extent to which a higher ECL allowance has been recognised is shown below:

 

										Probability
						Base case				-weighted				Difference
						£m				£m				£m
UK mortgages						501				619				118
Other Retail						1,365				1,386				21
Commercial						1,376				1,433				57
Other						73				73				-
At 30 June 2019						3,315				3,511				196
At 31 December 2018						3,100				3,362				262

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2.         Segmental analysis

 

Lloyds Banking Group provides a wide range of banking and financial services in the UK and in certain locations overseas. The Group Executive Committee (GEC) remains the chief operating decision maker for the Group.

 

The segmental results and comparatives are presented on an underlying basis, the basis reviewed by the chief operating decision maker. The effects of certain asset sales, volatile items, the insurance grossing adjustment, liability management, restructuring, payment protection insurance provisions, the amortisation of purchased intangible assets and the unwind of acquisition-related fair value adjustments are excluded in arriving at underlying profit.

 

During the half-year to 30 June 2019, the Group transferred Cardnet, its card payment acceptance service, from Retail into Commercial Banking and also transferred certain equity business from Commercial Banking into Central items. Comparatives have been restated accordingly.

 

The Group's activities are organised into three financial reporting segments: Retail; Commercial Banking; and Insurance and Wealth. There has been no change to the descriptions of these segments as provided in note 4 to the Group's financial statements for the year ended 31 December 2018, neither has there been any change to the Group's segmental accounting for internal segment services or derivatives entered into by units for risk management purposes since 31 December 2018.

 

				Other		Total
				income,		income,
		Net		net of		net of		Profit				Inter-
		interest		insurance		insurance		(loss)		External		segment
		income		claims		claims		before tax		revenue		revenue
Half-year to 30 June 2019		£m		£m		£m		£m		£m		£m
Underlying basis
Retail		4,366		1,007		5,373		1,983		6,501		(1,128)
Commercial Banking		1,460		733		2,193		992		1,770		423
Insurance and Wealth		58		1,183		1,241		677		939		302
Other		261		227		488		542		85		403
Group		6,145		3,150		9,295		4,194		9,295		-
Reconciling items:
Insurance grossing adjustment		(1,303)		1,418		115		-
Market volatility and asset sales		(87)		(22)		(109)		(296)
Amortisation of purchased intangibles		-		-		-		(34)
Restructuring costs		-		(48)		(48)		(182)
Fair value unwind and other items		(116)		(6)		(122)		(135)
Payment protection insurance provision		-		-		-		(650)
Group - statutory		4,639		4,492		9,131		2,897

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2.         Segmental analysis (continued)

 

 

				Other		Total
				income,		income,
		Net		net of		net of		Profit				Inter-
		interest		insurance		insurance		(loss)		External		segment
		income		claims		claims		before tax		revenue		revenue
Half-year to 30 June 20181		£m		£m		£m		£m		£m		£m
Underlying basis
Retail		4,511		1,052		5,563		2,134		6,399		(836)
Commercial Banking		1,501		842		2,343		1,181		1,818		525
Insurance and Wealth		60		979		1,039		480		1,202		(163)
Other		272		251		523		439		49		474
Group		6,344		3,124		9,468		4,234		9,468		-
Reconciling items:
Insurance grossing adjustment		(244)		321		77		-
Market volatility and asset sales		54		128		182		34
Amortisation of purchased intangibles		-		-		-		(53)
Restructuring costs		-		-		-		(377)
Fair value unwind and other items		(147)		(9)		(156)		(171)
Payment protection insurance provision		-		-		-		(550)
Group - statutory		6,007		3,564		9,571		3,117

 

1	Restated, see page 70.

 

				Other		Total
				income,		income,
		Net		net of		net of		Profit				Inter-
		interest		insurance		insurance		(loss)		External		segment
		income		claims		claims		before tax		revenue		revenue
Half-year to 31 December 20181		£m		£m		£m		£m		£m		£m
Underlying basis
Retail		4,549		1,045		5,594		2,077		6,623		(1,029)
Commercial Banking		1,512		828		2,340		1,002		3,071		(731)
Insurance and Wealth		63		886		949		447		693		256
Other		246		127		373		306		(1,130)		1,504
Group		6,370		2,886		9,256		3,832		9,257		-
Reconciling items:
Insurance grossing adjustment		1,078		(994)		84		-
Market volatility and asset sales		73		(171)		(98)		(84)
Amortisation of purchased intangibles		-		-		-		(55)
Restructuring costs		-		(54)		(54)		(502)
Fair value unwind and other items		(132)		(1)		(133)		(148)
Payment protection insurance provision		-		-		-		(200)
Group - statutory		7,389		1,666		9,055		2,843

 

1	Restated, see page 70.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2.         Segmental analysis (continued)

 

		Segment external				Segment customer				Segment external
		assets				deposits				liabilities
		At 30 June		At 31 Dec		At 30 June		At 31 Dec		At 30 June		At 31 Dec
		2019		2018		2019		2018		2019		2018
		£m		£m		£m		£m		£m		£m
Retail		346,979		349,412		252,400		252,808		259,372		259,778
Commercial Banking		158,234		165,030		150,553		148,635		191,275		191,687
Insurance and Wealth		151,165		140,487		13,832		14,063		158,272		147,673
Other		165,870		142,669		4,907		2,560		164,274		148,261
Total Group		822,248		797,598		421,692		418,066		773,193		747,399

 

 

3.         Net fee and commission income

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		2018		2018
		£m		£m		£m
Fee and commission income:
Current accounts		325		315		335
Credit and debit card fees		469		487		506
Commercial banking and treasury fees		138		152		153
Unit trust and insurance broking		114		105		116
Private banking and asset management		46		49		48
Factoring		53		39		44
Other		283		225		274
Total fee and commission income		1,428		1,372		1,476
Fee and commission expense		(694)		(674)		(712)
Net fee and commission income		734		698		764

 

Current account and credit and debit card fees principally arise in Retail; commercial banking, treasury and factoring fees arise in Commercial Banking; and private banking, unit trust, insurance broking and asset management fees arise in Insurance and Wealth.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

4.         Operating expenses

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		2018		2018
		£m		£m		£m
Administrative expenses
Salaries and social security costs		1,627		1,663		1,671
Pensions and other post-retirement benefit schemes  (note 13)		280		405		300
Restructuring and other staff costs		250		444		279
		2,157		2,512		2,250
Premises and equipment		242		367		362
Other expenses:
IT, data processing and communications		535		563		558
UK bank levy		-		-		225
Operations, marketing and other		626		534		603
		1,161		1,097		1,386
		3,560		3,976		3,998
Depreciation and amortisation		1,302		1,215		1,190
Total operating expenses, excluding regulatory provisions		4,862		5,191		5,188
Regulatory provisions (note 17):
Payment protection insurance provision		650		550		200
Other regulatory provisions		143		257		343
		793		807		543
Total operating expenses		5,655		5,998		5,731

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

5.         Impairment

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		2018		2018
		£m		£m		£m
Impact of transfers between stages		379		352		133
Other changes in credit quality		223		242		283
Additions (repayments)		(64)		(70)		(20)
Methodology changes		16		(61)		41
Model changes		27		-		-
Other items		(2)		(7)		44
		200		104		348
Total impairment charge		579		456		481
In respect of:
Loans and advances to banks		1		-		1
Loans and advances to customers		598		470		552
Debt securities		-		-		-
Financial assets at amortised cost		599		470		553
Other assets		-		-		1
Impairment charge on drawn balances		599		470		554
Loan commitments and financial guarantees		(19)		(15)		(58)
Financial assets at fair value through other comprehensive income		(1)		1		(15)
Total impairment charge		579		456		481

 

The Group's impairment charge comprises the following:

 

Transfers between stages

The net impact on the impairment charge of transfers between stages.

 

Other changes in credit quality

Changes in loss allowance as a result of movements in risk parameters that reflect changes in customer credit quality, but which have not resulted in a transfer to a different stage. This also contains the impact on the impairment charge of write-offs and recoveries, where the related loss allowances are reassessed to reflect ultimate realisable or recoverable value.

 

Additions (repayments)

Expected loss allowances are recognised on origination of new loans or further drawdowns of existing facilities. Repayments relate to the reduction of allowances as a result of repayments of outstanding balances.

 

Methodology changes

Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; either as changes to the model inputs (risk parameters) or to the underlying assumptions.

 

Model changes

The impact on the impairment charge of changing the models used to calculate expected credit losses.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6.         Taxation

 

In accordance with IAS 34, the Group's income tax expense for the half-year to 30 June 2019 is based on the best estimate of the weighted-average annual income tax rate expected for the full financial year. The tax effects of one-off items are not included in the weighted-average annual income tax rate, but are recognised in the relevant period.

 

An explanation of the relationship between tax expense and accounting profit is set out below:

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		20181		20181
		£m		£m		£m
Profit before tax		2,897		3,117		2,843
UK corporation tax thereon at 19 per cent (2018:19 per cent)		(550)		(592)		(540)
Impact of surcharge on banking profits		(221)		(175)		(234)
Non-deductible costs: conduct charges		(103)		(92)		(9)
Non-deductible costs: bank levy		-		-		(43)
Other non-deductible costs		(39)		(44)		(46)
Non-taxable income		45		51		36
Tax relief on coupons on other equity instruments		47		39		44
Tax-exempt gains on disposals		10		38		86
(Derecognition) recognition of losses that arose in prior years		12		(10)		1
Remeasurement of deferred tax due to rate changes		14		10		22
Differences in overseas tax rates		(15)		3		3
Policyholder tax		(38)		(36)		(26)
Policyholder deferred tax asset in respect of life assurance expenses		-		-		73
Adjustments in respect of prior years		166		8		(21)
Tax expense		(672)		(800)		(654)

 

1	Restated, see note 1.

 

7.         Earnings per share

 

		Half-year to		Half-year to		Half-year to
		30 June		30 June		31 Dec
		2019		20181		20181
Profit attributable to ordinary shareholders - basic and diluted (£m)		1,942		2,075		1,900

 

1	Restated, see note 1.

 

Weighted average number of ordinary shares in issue - basic (m)		71,053		72,025		71,257
Adjustment for share options and awards (m)		663		670		612
Weighted average number of ordinary shares in issue - diluted (m)		71,716		72,695		71,869
Basic earnings per share		2.7p		2.9p		2.6p
Diluted earnings per share		2.7p		2.9p		2.6p

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

8.         Financial assets at fair value through profit or loss

 

		At 30 June		At 31 Dec
		2019		2018
		£m		£m
Trading assets		23,867		35,246
Other financial assets at fair value through profit or loss:
Treasury and other bills		20		20
Loans and advances to customers		10,787		10,964
Loans and advances to banks		2,033		2,178
Debt securities		33,512		32,636
Equity shares		84,889		77,485
		131,241		123,283
Financial assets at fair value through profit or loss		155,108		158,529

 

Included in the above is £125,272 million (31 December 2018: £116,903 million) of assets relating to the insurance businesses.

 

9.         Derivative financial instruments

 

		30 June 2019				31 December 2018
		Fair value		Fair value		Fair value		Fair value
		of assets		of liabilities		of assets		of liabilities
		£m		£m		£m		£m
Hedging
Derivatives designated as fair value hedges		949		223		950		216
Derivatives designated as cash flow hedges		598		965		613		892
		1,547		1,188		1,563		1,108
Trading
Exchange rate contracts		5,718		4,324		5,797		4,753
Interest rate contracts		18,560		16,653		15,747		14,632
Credit derivatives		64		137		99		181
Equity and other contracts		259		724		389		699
		24,601		21,838		22,032		20,265
Total recognised derivative assets/liabilities		26,148		23,026		23,595		21,373

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

10.       Financial assets at amortised cost

 

Half-year to 30 June 2019

 

(A) Loans and advances to customers

 

										Purchased
										or  originated
										credit-
				Stage 1		Stage 2		Stage 3		impaired		Total
				£m		£m		£m		£m		£m
At 1 January 2019				441,531		25,345		5,741		15,391		488,008
Exchange and other adjustments				24		(114)		160		194		264
Additions (repayments)				14,982		(2,815)		(149)		(999)		11,019
Transfers to Stage 1				5,432		(5,417)		(15)				-
Transfers to Stage 2				(12,982)		13,241		(259)				-
Transfers to Stage 3				(741)		(1,069)		1,810				-
				(8,291)		6,755		1,536				-
Recoveries								201		28		229
Financial assets that have been written off								(1,069)		-		(1,069)
At 30 June 2019				448,246		29,171		6,420		14,614		498,451
Allowance for impairment losses				(621)		(953)		(1,558)		(181)		(3,313)
Total loans and advances to customers				447,625		28,218		4,862		14,433		495,138

 

(B) Loans and advances to banks

 

At 1 January 2019				6,282		3		-		-		6,285
Exchange and other adjustments				(23)		2		-		-		(21)
Transfers to Stage 2				(10)		10		-		-		-
Additions (repayments)				2,113		-		-		-		2,113
At 30 June 2019				8,362		15		-		-		8,377
Allowance for impairment losses				(3)		-		-		-		(3)
Total loans and advances to banks				8,359		15		-		-		8,374

 

(C) Debt securities

 

At 1 January 2019				5,238		-		6		-		5,244
Exchange and other adjustments				(6)		-		-		-		(6)
Additions (repayments)				202		-		-		-		202
Assets which have been derecognised				-		-		(2)		-		(2)
Financial assets that have been written off								(1)		-		(1)
At 30 June 2019				5,434		-		3		-		5,437
Allowance for impairment losses				-		-		(3)		-		(3)
Total debt securities				5,434		-		-		-		5,434
Total financial assets at amortised cost				461,418		28,233		4,862		14,433		508,946

 

Exchange and other adjustments includes certain adjustments, prescribed by IFRS 9, in respect of purchased or originated credit-impaired financial assets

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

10.       Financial assets at amortised cost (continued)

 

Year ended 31 December 2018

 

(A) Loans and advances to customers

 

										Purchased
										or  originated
										credit-
				Stage 1		Stage 2		Stage 3		impaired		Total
				£m		£m		£m		£m		£m
At 1 January 2018				403,881		37,245		5,140		17,973		464,239
Exchange and other adjustments				958		32		-		-		990
Additions (repayments)				34,942		(2,187)		(2,074)		(2,609)		28,072
Transfers to Stage 1				19,524		(19,501)		(23)				-
Transfers to Stage 2				(15,743)		15,996		(253)				-
Transfers to Stage 3				(2,031)		(2,220)		4,251				-
				1,750		(5,725)		3,975				-
Recoveries				-		-		553		27		580
Disposal of businesses				-		(4,020)		(277)		-		(4,297)
Financial assets that have been written off								(1,576)		-		(1,576)
At 31 December 2018				441,531		25,345		5,741		15,391		488,008
Allowance for impairment losses				(525)		(994)		(1,553)		(78)		(3,150)
Total loans and advances to customers				441,006		24,351		4,188		15,313		484,858

 

(B) Loans and advances to banks

 

At 1 January 2018				4,245		2		-		-		4,247
Exchange and other adjustments				(29)		1		-		-		(28)
Additions (repayments)				2,066		-		-		-		2,066
At 31 December 2018				6,282		3		-		-		6,285
Allowance for impairment losses				(2)		-		-		-		(2)
Total loans and advances to banks				6,280		3		-		-		6,283

 

(C) Debt securities

 

At 1 January 2018				3,291		-		49		-		3,340
Exchange and other adjustments				77		-		(14)		-		63
Additions (repayments)				1,870		-		-		-		1,870
Financial assets that have been written off								(29)		-		(29)
At 31 December 2018				5,238		-		6		-		5,244
Allowance for impairment losses				-		-		(6)		-		(6)
Total debt securities				5,238		-		-		-		5,238
Total financial assets at amortised cost				452,524		24,354		4,188		15,313		496,379

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

10.       Financial assets at amortised cost (continued)

 

Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the asset is held at 30 June 2019, with the exception of those held within Purchased or originated credit-impaired, which are not transferrable. Net increase and decrease in balances comprise new loans originated and repayments of outstanding balances throughout the reporting period. Loans which are written off in the period are first transferred to Stage 3 before write-off.

 

Loans and advances to customers include advances securitised under the Group's securitisation and covered bond programmes (see note 12).

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

11.       Allowance for impairment losses

 

Half-year to 30 June 2019

 

																	Purchased
																	or  originated
																	credit-
					Stage 1				Stage 2				Stage 3				impaired				Total
					£m				£m				£m				£m				£m
In respect of drawn balances
At 1 January 2019						527				994				1,570				78				3,169
Exchange and other adjustments						5				(86)				324				195				438
Transfers to Stage 1						329				(323)				(6)								-
Transfers to Stage 2						(50)				86				(36)								-
Transfers to Stage 3						(7)				(36)				43								-
Impact of transfers between stages						(280)				373				276								369
						(8)				100				277								369
Other items charged to the income statement						100				(55)				305				(120)				230
Charge to the income statement (note 5)						92				45				582				(120)				599
Advances written off														(1,069)				-				(1,069)
Recoveries of advances written off in previous years														201				28				229
Discount unwind														(28)				-				(28)
At 30 June 2019						624				953				1,580				181				3,338
In respect of undrawn balances
At 1 January 2019						123				64				6				-				193
Exchange and other adjustments						-				(1)				-				-				(1)
Transfers to Stage 1						17				(17)				-								-
Transfers to Stage 2						(5)				5				-								-
Transfers to Stage 3						-				(2)				2								-
Impact of transfers between stages						(14)				25				(1)								10
						(2)				11				1								10
Other items charged to the income statement						(32)				5				(2)				-				(29)
Charge to the income statement						(34)				16				(1)				-				(19)
At 30 June 2019						89				79				5				-				173
Total allowance for impairment losses						713				1,032				1,585				181				3,511
In respect of:
Loans and advances to banks						3				-				-				-				3
Loans and advances to customers						621				953				1,558				181				3,313
Debt securities						-				-				3				-				3
Other assets						-				-				19				-				19
Drawn balances						624				953				1,580				181				3,338
Provisions in relation  to loan commitments and financial guarantees						89				79				5				-				173
Total allowance for impairment losses						713				1,032				1,585				181				3,511
Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item)						1				-				-				-				1

 

Exchange and other adjustments includes certain adjustments, prescribed by IFRS 9, in respect of purchased or originated credit-impaired financial assets.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

11.       Allowance for impairment losses (continued)

 

Year ended 31 December 2018

 

																	Purchased
																	or   originated
																	credit-
					Stage 1				Stage 2				Stage 3				Impaired				Total
					£m				£m				£m				£m				£m
In respect of drawn balances
At 1 January 2018						590				1,147				1,491				32				3,260
Exchange and other adjustments						2				-				133				-				135
Transfers to Stage 1						304				(299)				(5)								-
Transfers to Stage 2						(46)				85				(39)								-
Transfers to Stage 3						(32)				(131)				163								-
Impact of transfers between stages						(233)				401				325								493
						(7)				56				444								493
Other items charged to the income statement						(58)				(107)				696				-				531
Charge to the income statement (note 5)						(65)				(51)				1,140				-				1,024
Advances written off														(1,605)				-				(1,605)
Disposal of businesses						-				(102)				(79)				-				(181)
Recoveries of advances written off in previous years														553				27				580
Discount unwind														(63)				19				(44)
At 31 December 2018						527				994				1,570				78				3,169
In respect of undrawn balances
At 1 January 2018						147				126				-				-				273
Exchange and other adjustments						(5)				(14)				12				-				(7)
Transfers to Stage 1						28				(28)				-								-
Transfers to Stage 2						(6)				6				-								-
Transfers to Stage 3						(2)				(5)				7								-
Impact of transfers between stages						(25)				22				(5)								(8)
						(5)				(5)				2								(8)
Other items charged to the income statement						(14)				(43)				(8)				-				(65)
Charge to the income statement						(19)				(48)				(6)				-				(73)
At 31 December 2018						123				64				6				-				193
Total allowance for impairment losses						650				1,058				1,576				78				3,362
In respect of:
Loans and advances to banks						2				-				-				-				2
Loans and advances to customers						525				994				1,553				78				3,150
Debt securities						-				-				6				-				6
Other assets						-				-				11				-				11
Drawn balances						527				994				1,570				78				3,169
Provisions in relation  to loan commitments and financial guarantees						123				64				6				-				193
Total allowance for impairment losses						650				1,058				1,576				78				3,362
Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item)						1				-				-				-				1

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

11.       Allowance for impairment losses (continued)

 

The Group's income statement charge comprises:

		Half-year		Year ended
		to 30 June		31 Dec
		2019		2018
		£m		£m
Drawn balances		599		1,024
Undrawn balances		(19)		(73)
Financial assets at fair value through other comprehensive income		(1)		(14)
Total		579		937

 

Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the asset is held at 30 June 2019, with the exception of those held within purchased or originated credit-impaired, which are not transferable. As assets are transferred between stages, the resulting change in expected credit loss of £369 million for drawn balances, and £10 million for undrawn balances, is presented separately, in the stage in which the allowance is recognised at the end of the reporting period.

 

Net increase and decrease in balances comprise the movements in the expected credit loss as a result of new loans originated and repayments of outstanding balances throughout the reporting period. Loans which are written off in the period are first transferred to Stage 3 before write-off. Consequently, recoveries on assets previously written-off will also occur in Stage 3 only.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

12.       Debt securities in issue

 

		30 June 2019						31 December 2018
		At fair						At fair
		value						value
		through		At				through		At
		profit or		amortised				profit or		amortised
		loss		cost		Total		loss		cost		Total
		£m		£m		£m		£m		£m		£m
Medium-term notes issued		7,930		39,404		47,334		7,032		37,490		44,522
Covered bonds		-		30,479		30,479		-		28,194		28,194
Certificates of deposit		-		12,167		12,167		-		12,020		12,020
Securitisation notes		52		5,261		5,313		53		5,426		5,479
Commercial paper		-		10,504		10,504		-		8,038		8,038
		7,982		97,815		105,797		7,085		91,168		98,253

 

The notes issued by the Group's securitisation and covered bond programmes are held by external parties and by subsidiaries of the Group.

 

Securitisation programmes

At 30 June 2019, external parties held £5,313 million (31 December 2018: £5,479 million) and the Group's subsidiaries held £30,139 million (31 December 2018: £31,701 million) of total securitisation notes in issue of £35,452 million (31 December 2018: £37,180 million). The notes are secured on loans and advances to customers and debt securities held at amortised cost amounting to £38,604 million (31 December 2018: £41,674 million), the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. The structured entities are consolidated fully and all of these loans are retained on the Group's balance sheet.

 

Covered bond programmes

At 30 June 2019, external parties held £30,479 million (31 December 2018: £28,194 million) and the Group's subsidiaries held £700 million (31 December 2018: £700 million) of total covered bonds in issue of £31,179 million (31 December 2018: £28,894 million). The bonds are secured on certain loans and advances to customers amounting to £41,049 million (31 December 2018: £36,802 million) that have been assigned to bankruptcy remote limited liability partnerships. These loans are retained on the Group's balance sheet.

 

Cash deposits of £4,049 million (31 December 2018: £4,102 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations are held by the Group.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

13.       Post-retirement defined benefit schemes

 

The Group's post-retirement defined benefit scheme obligations are comprised as follows:

 

		At 30 June		At 31 Dec
		2019		2018
		£m		£m
Defined benefit pension schemes:
Fair value of scheme assets		45,763		42,238
Present value of funded obligations		(44,375)		(41,092)
Net pension scheme asset		1,388		1,146
Other post-retirement schemes		(129)		(124)
Net retirement benefit asset		1,259		1,022
Recognised on the balance sheet as:
Retirement benefit assets		1,509		1,267
Retirement benefit obligations		(250)		(245)
Net retirement benefit asset		1,259		1,022

 

The movement in the Group's net post-retirement defined benefit scheme asset during the period was as follows:

 

			£m
Asset at 1 January 2019			1,022
Exchange and other adjustments			11
Income statement charge			(139)
Employer contributions			538
Remeasurement			(173)
Asset at 30 June 2019			1,259

 

The charge to the income statement in respect of pensions and other post-retirement benefit schemes is comprised as follows:

 

9
			Half-year to				Half-year to				Half-year to
			30 June				30 June				31 Dec
			2019				2018				2018
			£m				£m				£m
Defined benefit pension schemes			139				271				134
Defined contribution schemes			141				134				166
Total charge to the income statement (note 4)			280				405				300

 

The principal assumptions used in the valuations of the defined benefit pension schemes were as follows:

 

		At 30 June		At 31 Dec
		2019		2018
		%		%
Discount rate		2.33		2.90
Rate of inflation:
Retail Prices Index		3.19		3.20
Consumer Price Index		2.14		2.15
Rate of salary increases		0.00		0.00
Weighted-average rate of increase for pensions in payment		2.73		2.73

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

14.       Subordinated liabilities

 

The Group's subordinated liabilities are comprised as follows:

 

9
		At 30 June		At 31 Dec
		2019		2018
		£m		£m
Preference shares		919		803
Preferred securities		3,314		3,205
Undated subordinated liabilities		587		588
Dated subordinated liabilities		12,989		13,060
Total subordinated liabilities		17,809		17,656

 

15.       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 2019		71,164		7,116
Issued in the period1		725		73
Share buybacks		(1,125)		(113)
At period end		70,764		7,076

 

1	The ordinary shares issued in the period were in respect of employee share schemes.

 

On 20 February 2019 the Group announced the launch of a share buyback programme to repurchase up to £1.75 billion of its outstanding ordinary shares; the programme commenced on 1 March 2019. The Group entered into an agreement with Morgan Stanley & Co. International plc and UBS AG, London Branch (the joint brokers) to conduct the share buyback programme on its behalf and to make trading decisions under the programme independently of the Group. The joint brokers are purchasing the Group's ordinary shares as principal and selling them to the Group in accordance with the terms of their engagement. The Group cancels the shares that it purchases through the programme. By 30 June 2019, the Group had bought back and cancelled 1,125 million shares under the programme, for a total cost of £694 million.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

16.       Other equity instruments

 

									£m
At 1 January 2019									6,491
Redemption of Additional Tier 1 securities									(1,481)
Additional Tier 1 securities issued in the period:
US dollar notes ($500 million nominal)									396
At 30 June 2019									5,406

 

On 27 June 2019 the Group redeemed, at par, £1,481 million of Additional Tier 1 securities at their first call date.

 

During the half-year to 30 June 2019 the Group issued £396 million (US$500 million) of Additional Tier 1 (AT1) securities; issue costs of £1 million, net of tax, have been charged to retained profits.

 

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 a conversion event being triggered.

·    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.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

17.       Provisions for liabilities and charges

 

					Provisions				Payment				Other
					for				Protection				regulatory
					commitments				Insurance				provisions				Other				Total
					£m				£m				£m				£m				£m
Balance at 31 December 2018					193				1,524				861				969				3,547
Adjustment on implementation of IFRS 16					-				-				-				(97)				(97)
Exchange and other adjustments					(1)				32				-				1				32
Provisions applied					-				(992)				(412)				(204)				(1,608)
Charge for the period					(19)				650				143				210				984
At 30 June 2019					173				1,214				592				879				2,858

 

Payment protection insurance (excluding MBNA)

The Group increased the provision for PPI costs by a further £650 million in the half-year to 30 June 2019, of which £550 million was in the second quarter, bringing the total amount provided to £20,075 million.

 

The charge in the second quarter is largely driven by the significant increase in PPI information requests (PIRs) which is likely to lead to higher total complaints and associated administration costs. The Group has historically received around 70,000 PIRs per week, of which around 9,000 converted into a complaint. Through the second quarter, the number of PIRs received increased to around 150,000 per week and in recent weeks around 190,000 per week and the Group has assumed that PIRs remain at this elevated level until the industry deadline at the end of August 2019. At the same time, the quality of PIRs has deteriorated and the Group expects this to continue. While PIR and complaint volumes remain uncertain, the impact of these additional volumes is expected to generate around 200,000 extra complaints, increasing the total expected complaint volumes from 5.6 million to 5.8 million.

 

At 30 June 2019, a provision of £1,083 million remained unutilised relating to complaints and associated administration costs. Total cash payments were £896 million during the six months to 30 June 2019.

 

Sensitivities

The Group estimates that it has sold approximately 16 million PPI policies since 2000. These include policies that were not mis-sold and those that have been successfully claimed upon. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided for approximately 54 per cent of the policies sold since 2000.

 

The total amount provided for PPI represents the Group's best estimate of the likely future cost. A number of risks and uncertainties remain including with respect to future complaint volumes, however the potential impact of these risks has reduced due to the proximity of the industry deadline. The cost could differ from the Group's estimates and the assumptions underpinning them, and could result in a further provision being required. These may also be impacted by any further regulatory changes, the final stage of the Financial Conduct Authority (FCA) media campaign and Claims Management Company and customer activity, and potential additional remediation arising from the continuous improvement of the Group's operational practices.

 

Deloitte LLP has been appointed to assist the Official Receiver with the submission of PPI queries to providers to establish whether any mis-sold PPI redress is due to creditors of bankrupts' estates. The Group has not made any provision in relation to this matter, which will remain under review.

 

For every additional 1,000 reactive complaints per week from July 2019 through to the industry deadline of the end of August 2019, the Group would expect an additional charge of approximately £20 million.
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

17.       Provisions for liabilities and charges (continued)

 

Payment protection insurance (MBNA)

As announced in December 2016, the Group's exposure is capped at £240 million, which is already provided for, through an indemnity received from Bank of America. MBNA increased its PPI provision by £32 million in the half-year to 30 June 2019 but the Group's exposure continues to remain capped at £240 million under the arrangement with Bank of America, notwithstanding this increase by MBNA.

 

Other provisions for legal actions and 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 other governmental authorities on a range of matters. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of current and former employees, customers, investors and other third parties and is subject to legal proceedings and other legal actions. Where significant, provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the six months to 30 June 2019 the Group charged a further £143 million in respect of legal actions and other regulatory matters, and the unutilised balance at 30 June 2019 was £592 million (31 December 2018: £861 million). The most significant items are as follows.

 

Arrears handling related activities

The Group has provided an additional £55 million in the half-year to 30 June 2019 for the costs of identifying and rectifying certain arrears management fees and activities, taking the total provided to date to £848 million. The Group has put in place a number of actions to improve its handling of customers in these areas and has made good progress in reimbursing arrears fees to impacted customers.

 

Packaged bank accounts

The Group had provided a total of £795 million up to 31 December 2018 in respect of complaints relating to alleged mis-selling of packaged bank accounts, with no further amounts provided during the six months to 30 June 2019. A number of risks and uncertainties remain particularly with respect to future volumes.

 

Customer claims in relation to insurance branch business in Germany

The Group continues to receive claims in Germany from customers relating to policies issued by Clerical Medical Investment Group Limited (subsequently renamed Scottish Widows Limited), with smaller numbers received from customers in Austria and Italy. The industry-wide issue regarding notification of contractual 'cooling off' periods continued to lead to an increasing number of claims in 2016 and 2017 levelling out in 2018 and into 2019. Up to 31 December 2018 the Group had provided a total of £639 million, with no further amounts provided in 2019. The validity of the claims facing the Group depends 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 be known only once all relevant claims have been resolved.

 

HBOS Reading - customer review

The Group has now completed its compensation assessment for all 71 business customers within the customer review, with more than 98 per cent of these offers to individuals accepted. In total, more than £98 million has been offered of which £84 million has so far been accepted, in addition to £9 million for ex-gratia payments and £6 million for the re-imbursements of legal fees.

 

The review follows the conclusion of a criminal trial in which a number of individuals, including two former HBOS employees, were convicted of conspiracy to corrupt, fraudulent trading and associated money laundering offences which occurred prior to the acquisition of HBOS by the Group in 2009. The Group provided a further £15 million in the year ended 31 December 2018 for customer settlements, raising the total amount provided to £115 million and is now nearing the end of the process of paying compensation to the victims of the fraud, including ex-gratia payments and re-imbursements of legal fees.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

18.       Contingent liabilities and commitments

 

Interchange fees

With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the ongoing litigation (as described below) which involve card schemes such as Visa and Mastercard. However, the Group is a member / licensee of Visa and Mastercard and other card schemes:

·    Litigation brought by retailers continues in the English Courts against both Visa and Mastercard

·    Litigation brought on behalf of UK consumers is also proceeding in the English Courts against Mastercard

·    Any ultimate impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time

 

Visa Inc completed its acquisition of Visa Europe on 21 June 2016. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement (LSA) with Visa Inc, which clarifies the allocation of liabilities between the parties should the litigation referred to above result in Visa Inc being liable for damages payable by Visa Europe. The maximum amount of liability to which the Group may be subject under the LSA is capped at the cash consideration which was received by the Group at completion. Visa Inc may also have recourse to a general indemnity, previously in place under Visa Europe's Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.

 

LIBOR and other trading rates

In 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 Swiss Competition Commission concluded its investigation against Lloyds in June 2019. The Group continues to cooperate with various other government and regulatory authorities, including 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, Japanese Yen and Sterling LIBOR and the Australian BBSW Reference Rate. Certain of the plaintiffs' claims, have been dismissed by the US Federal Court for Southern District of New York (subject to appeals).

 

Certain Group companies are also named as defendants in (i) UK based claims; and (ii) two Dutch class actions, raising LIBOR manipulation allegations. A number of the claims against the Group in relation to the alleged mis-sale of interest rate hedging products also include allegations of LIBOR manipulation.

 

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.

 

UK shareholder litigation

In August 2014, the Group and a number of former directors were named as defendants in a claim by a number of claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of duties in relation to information provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. The defendants refute all claims made. A trial commenced in the English High Court on 18 October 2017 and concluded on 5 March 2018 with judgment to follow. It is currently not possible to determine the ultimate impact on the Group (if any).

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

18.       Contingent liabilities and commitments (continued)

 

Tax authorities

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 2013 HMRC informed the Group that their interpretation of the UK rules which allow 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 £770 million (including interest) and a reduction in the Group's deferred tax asset of approximately £250 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. There are a number of other open matters on which the Group is in discussion with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc), none of which is expected to have a material impact on the financial position of the Group.

 

Mortgage arrears handling activities

On 26 May 2016, the Group was informed that an enforcement team at the FCA had commenced an investigation in connection with the Group's mortgage arrears handling activities. This investigation is ongoing and the Group continues to cooperate with the FCA. It is not currently possible to make a reliable assessment of any liability that may result from the investigation including any financial penalty or public censure.

 

HBOS Reading - FCA investigation

The FCA's investigation into the events surrounding the discovery of misconduct within the Reading-based Impaired Assets team of HBOS has concluded. The FCA issued a final notice on 21 June 2019 announcing that the Group had agreed to settle the matter and pay a fine of £45.5 million.

 

Other legal actions and regulatory matters

In addition, during the ordinary course of business the Group is subject to other complaints and threatened or actual legal proceedings (including class or group action claims) brought by or on behalf of current or former employees, customers, investors or other third parties, as well as legal and regulatory reviews, 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 at the relevant balance sheet date. In some cases it will not be possible to form a view, for example because the facts are unclear or because further time is needed properly to assess the merits of the case, and no provisions are held in relation to such matters. In these circumstances, specific disclosure in relation to a contingent liability will be made where material. 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.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

18.       Contingent liabilities and commitments (continued)

 

Contingent liabilities and commitments arising from the banking business

		At 30 June		At 31 Dec
		2019		2018
		£m		£m
Contingent liabilities
Acceptances and endorsements		74		194
Other:
Other items serving as direct credit substitutes		1,042		632
Performance bonds and other transaction-related contingencies		2,462		2,425
		3,504		3,057
Total contingent liabilities		3,578		3,251
Commitments and guarantees
Documentary credits and other short-term trade-related transactions		1		1
Forward asset purchases and forward deposits placed		171		731
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made		15,011		11,594
Other commitments and guarantees		84,322		85,060
		99,333		96,654
1 year or over original maturity		37,599		37,712
Total commitments and guarantees		137,104		135,098

 

Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £67,814 million (31 December 2018: £64,884 million) was irrevocable.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       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. Note 49 to the Group's 2018 financial statements describes the definitions of the three levels in the fair value hierarchy.

 

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 sources of data cease to be observable.

 

Valuation methodology

For level 2 and level 3 portfolios, there is no significant change to the valuation methodology (techniques and inputs) disclosed in the Group's 2018 Annual Report and Accounts applied to these 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 2019				31 December 2018
		Carrying		Fair		Carrying		Fair
		value		value		value		value
		£m		£m		£m		£m
Financial assets
Financial assets at fair value through profit or loss		155,108		155,108		158,529		158,529
Derivative financial instruments		26,148		26,148		23,595		23,595
Loans and advances to banks		8,374		8,363		6,283		6,286
Loans and advances to customers		495,138		496,768		484,858		484,660
Debt securities		5,434		5,427		5,238		5,244
Financial assets at amortised cost		508,946		510,558		496,379		496,190
Financial assets at fair value through other comprehensive income		27,078		27,078		24,815		24,815
Financial liabilities
Deposits from banks		34,777		34,761		30,320		30,322
Customer deposits		421,692		422,277		418,066		418,450
Financial liabilities at fair value through profit or loss		24,754		24,754		30,547		30,547
Derivative financial instruments		23,026		23,026		21,373		21,373
Debt securities in issue		97,815		100,102		91,168		93,233
Liabilities arising from non-participating investment contracts		14,706		14,706		13,853		13,853
Subordinated liabilities		17,809		20,200		17,656		19,564

 

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.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       Fair values of financial assets and liabilities (continued)

 

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 tables provide 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.

 

Financial assets

			Level 1		Level 2		Level 3		Total
			£m		£m		£m		£m
At 30 June 2019
Financial assets at fair value through profit or loss:
Loans and advances to customers			-		14,907		11,042		25,949
Loans and advances to banks			-		3,082		-		3,082
Debt securities			17,931		21,459		1,778		41,168
Equity shares			82,833		13		2,043		84,889
Treasury and other bills			20		-		-		20
Total financial assets at fair value through profit or loss			100,784		39,461		14,863		155,108
Financial assets at fair value through other comprehensive income:
Debt securities			15,252		11,083		171		26,506
Equity shares			-		-		25		25
Treasury and other bills			547		-		-		547
Total financial assets at fair value through other comprehensive income			15,799		11,083		196		27,078
Derivative financial instruments			83		24,881		1,184		26,148
Total financial assets carried at fair value			116,666		75,425		16,243		208,334
At 31 December 2018
Financial assets at fair value through profit or loss:
Loans and advances to customers			-		27,285		10,565		37,850
Loans and advances to banks			-		3,026		-		3,026
Debt securities			18,010		20,544		1,594		40,148
Equity shares			75,701		26		1,758		77,485
Treasury and other bills			20		-		-		20
Total financial assets at fair value through profit or loss			93,731		50,881		13,917		158,529
Financial assets at fair value through other comprehensive income:
Debt securities			18,879		5,366		246		24,491
Treasury and other bills			303		-		-		303
Equity shares			-		-		21		21
Total financial assets at fair value through other comprehensive income			19,182		5,366		267		24,815
Derivative financial instruments			93		22,575		927		23,595
Total financial assets carried at fair value			113,006		78,822		15,111		206,939

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       Fair values of financial assets and liabilities (continued)

 

Financial liabilities

		Level 1		Level 2		Level 3		Total
		£m		£m		£m		£m
At 30 June 2019
Financial liabilities at fair value through profit or loss:
Liabilities held at fair value through profit or loss		-		7,930		52		7,982
Trading liabilities		2,672		14,100		-		16,772
Total financial liabilities at fair value through profit or loss		2,672		22,030		52		24,754
Derivative financial instruments		274		21,479		1,273		23,026
Total financial liabilities carried at fair value		2,946		43,509		1,325		47,780
At 31 December 2018
Financial liabilities at fair value through profit or loss:
Liabilities held at fair value through profit or loss		-		7,085		11		7,096
Trading liabilities		1,464		21,987		-		23,451
Total financial liabilities at fair value through profit or loss		1,464		29,072		11		30,547
Derivative financial instruments		132		20,525		716		21,373
Total financial liabilities carried at fair value		1,596		49,597		727		51,920

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       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.

 

				Financial
		Financial		assets at				Total
		assets at		fair value				financial
		fair value		through other				assets
		through profit		comprehensive		Derivative		carried at
		or loss		income		assets		fair value
		£m		£m		£m		£m
At 1 January 2019		13,917		267		927		15,111
Exchange and other adjustments		3		1		-		4
Gains recognised in the income statement within other income		489		-		251		740
Gains (losses) recognised in other comprehensive income within the revaluation reserve in respect of financial assets carried at fair value through other comprehensive income		-		8		-		8
Purchases/ increases to customer loans		1,511		-		2		1,513
Sales/ repayments		(1,522)		(80)		(16)		(1,618)
Transfers into the level 3 portfolio		563		-		22		585
Transfers out of the level 3 portfolio		(98)		-		(2)		(100)
At 30 June 2019		14,863		196		1,184		16,243
Gains (losses) recognised in the income statement within other income relating to those assets held at 30 June 2019		189		-		285		474

 

				Financial
		Financial		assets held				Total
		assets at		at fair value				financial
		fair value		through other				assets
		through profit		comprehensive		Derivative		carried at
		or loss		income		assets		fair value
		£m		£m		£m		£m
At 1 January 2018		14,152		302		1,056		15,510
Exchange and other adjustments		3		(1)		-		2
Gains recognised in the income statement within other income		111		-		2		113
Gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets held at fair value through other comprehensive income		-		1		-		1
Purchases/ increases to customer loans		206		-		-		206
Sales/ repayments		(491)		(91)		(90)		(672)
Transfers into the level 3 portfolio		532		334		-		866
Transfers out of the level 3 portfolio		(320)		(193)		-		(513)
At 30 June 2018		14,193		352		968		15,513
Gains (losses) recognised in the income statement within other income relating to those assets held at 30 June 2018		160		-		2		162

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       Fair values of financial assets and liabilities (continued)

 

The tables below analyse movements in the level 3 financial liabilities portfolio.

 

		Financial				Total
		liabilities at				financial
		fair value				liabilities
		through		Derivative		carried at
		profit or loss		liabilities		fair value
		£m		£m		£m
At 1 January 2019		11		716		727
Exchange and other adjustments		-		-		-
Losses recognised in the income statement within other income		-		204		204
Additions		-		1		1
Redemptions		(1)		(12)		(13)
Transfers into the level 3 portfolio		53		364		417
Transfers out of the level 3 portfolio		(11)		-		(11)
At 30 June 2019		52		1,273		1,325
Losses recognised in the income statement within other income relating to those liabilities held at 30 June 2019		-		249		249

 

		Financial				Total
		liabilities at				financial
		fair value				liabilities
		through		Derivative		carried at
		profit or loss		liabilities		fair value
		£m		£m		£m
At 1 January 2018		-		804		804
Exchange and other adjustments		-		-		-
Gains recognised in the income statement within other income		-		(30)		(30)
Additions		-		-		-
Redemptions		-		(2)		(2)
Transfers into the level 3 portfolio		10		-		10
Transfers out of the level 3 portfolio		-		-		-
At 30 June 2018		10		772		782
Gains recognised in the income statement within other income relating to those liabilities held at 30 June 2018		-		(30)		(30)

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       Fair values of financial assets and liabilities (continued)

 

The tables below set out the effects of reasonably possible alternative assumptions for categories of level 3 financial assets and financial liabilities which have an aggregated carrying value greater than £500 million.

 

						At 30 June 2019
								Effect of reasonably
								possible alternative
								assumptions1
		Significant
	Valuation	unobservable				Carrying		Favourable		Unfavourable
	technique(s)	inputs		Range2		value		changes		changes
						£m		£m		£m
Financial assets at fair value through profit or loss
Loans and advances to customers	Discounted  cash flows	Gross interest rates, inferred spreads (bps)		76 bps / 208 bps		11,042		347		(406)
Equity and venture capital investments	Market approach	Earnings multiple		0.9 / 14.6		1,786		102		(96)
Equity and venture capital investments	Underlying asset/net asset value (incl. property prices)³	n/a				524		51		(74)
Unlisted equities and debt securities, property partnerships in the life funds	Underlying asset/net asset value (incl. property prices)³	n/a				1,153		16		(40)
Other						358		47		(47)
						14,863
Financial assets at fair value through other comprehensive income						196
Derivative financial assets
Interest rate derivatives	Option pricing model	Interest rate volatility		7% / 121%		1,184
						1,184		8		(4)
Financial assets carried at fair value						16,243
Financial liabilities at fair value through profit or loss						52
Derivative financial liabilities
Interest rate derivatives	Option pricing model	Interest rate volatility		7% / 121%		1,273		−		−
Financial liabilities carried at fair value						1,325

 

1	Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
2	The range represents the highest and lowest inputs used in the level 3 valuations.
3	Underlying asset/net asset values represent fair value.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

19.       Fair values of financial assets and liabilities (continued)

 

						At 31 December 2018
								Effect of reasonably
								possible alternative
								assumptions1
		Significant
	Valuation	unobservable				Carrying		Favourable		Unfavourable
	technique(s)	inputs		Range2		value		changes		changes
						£m		£m		£m
Financial assets at fair value through profit or loss:
Loans and advances to customers	Discounted cash flows	Gross interest rates, inferred spreads (bps)		97bps / 208bps		10,565		380		(371)
Equity and venture capital investments	Market approach	Earnings multiple		0.9 / 14.6		1,657		54		(55)
	Underlying assets/net asset value (incl. property prices)³					523		48		(57)
Unlisted equities and debt securities, property partnerships in the life funds	Underlying asset/net asset value (incl. property prices, broker quotes or discounted cash flows)3	n/a		n/a		898		2		(45)
Other						274		92		(21)
						13,917
Financial assets at fair value through other comprehensive income						267
Derivative financial assets:
Interest rate derivatives	Option pricing model	Interest rate volatility		19% /  80%		927		7		(5)
						927
Financial assets carried at fair value						15,111
Financial liabilities at fair value through profit or loss						11
Derivative financial liabilities:
Interest rate derivatives	Option pricing model	Interest rate volatility		19% / 80%		716		−		−
						716
Financial liabilities carried at fair value						727

 

1	Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
2	The range represents the highest and lowest inputs used in the level 3 valuations.
3	Underlying asset/net asset values represent fair value.

 

Unobservable inputs

Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are unchanged from those described in the Group's 2018 financial statements.

 

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 and are unchanged from those described in note 49 to the Group's 2018 financial statements.
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers

 

Gross drawn exposures

 

At 30 June 2019										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Loans and advances to banks:
CMS 1-10		0.00-0.50%		8,170		15		-		-		8,185
CMS 11-14		0.51-3.00%		192		-		-		-		192
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		-		-		-
				8,362		15		-		-		8,377
Loans and advances to customers:
Retail - mortgages
RMS 1-6		0.00-4.50%		252,238		13,585		-		-		265,823
RMS 7-9		4.51-14.00%		22		1,842		-		-		1,864
RMS 10		14.01-20.00%		-		421		-		-		421
RMS 11-13		20.01-99.99%		-		1,028		-		-		1,028
RMS 14		100.00%		-		-		1,543		14,614		16,157
				252,260		16,876		1,543		14,614		285,293
Retail - unsecured
RMS 1-6		0.00-4.50%		22,749		1,213		-		-		23,962
RMS 7-9		4.51-14.00%		1,782		738		-		-		2,520
RMS 10		14.01-20.00%		36		143		-		-		179
RMS 11-13		20.01-99.99%		11		545		-		-		556
RMS 14		100.00%		-		-		678		-		678
				24,578		2,639		678		-		27,895
Retail - UK Motor Finance
RMS 1-6		0.00-4.50%		14,013		881		-		-		14,894
RMS 7-9		4.51-14.00%		327		236		-		-		563
RMS 10		14.01-20.00%		-		93		-		-		93
RMS 11-13		20.01-99.99%		3		192		-		-		195
RMS 14		100.00%		-		-		137		-		137
				14,343		1,402		137		-		15,882
Retail - other
RMS 1-6		0.00-4.50%		8,252		370		-		-		8,622
RMS 7-9		4.51-14.00%		-		107		-		-		107
RMS 10		14.01-20.00%		-		10		-		-		10
RMS 11-13		20.01-99.99%		167		28		-		-		195
RMS 14		100.00%		-		-		132		-		132
				8,419		515		132		-		9,066
CMS 1-10		0.00-0.50%		1,538		275		-		-		1,813
CMS 11-14		0.51-3.00%		-		-		-		-		-
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		29		-		29
				1,538		275		29		-		1,842
Total Retail				301,138		21,707		2,519		14,614		339,978

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Gross drawn exposures (continued)

 

At 30 June 2019										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Commercial
CMS 1-10		0.00-0.50%		68,151		344		-		-		68,495
CMS 11-14		0.51-3.00%		21,584		4,661		-		-		26,245
CMS 15-18		3.01-20.00%		598		2,334		-		-		2,932
CMS 19		20.01-99.99%		-		74		-		-		74
CMS 20-23		100%		-		-		3,777		-		3,777
				90,333		7,413		3,777		-		101,523
Other
RMS 1-6		0.00-4.50%		789		50		-		-		839
RMS 7-9		4.51-14.00%		-		-		-		-		-
RMS 10		14.01-20.00%		-		-		-		-		-
RMS 11-13		20.01-99.99%		-		-		-		-		-
RMS 14		100.00%		-		-		56		-		56
				789		50		56		-		895
CMS 1-10		0.00-0.50%		55,986		1		-		-		55,987
CMS 11-14		0.51-3.00%		-		-		-		-		-
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		68		-		68
				55,986		1		68		-		56,055
Total loans and advances to customers				448,246		29,171		6,420		14,614		498,451
In respect of:
Retail				301,138		21,707		2,519		14,614		339,978
Commercial				90,333		7,413		3,777		-		101,523
Other				56,775		51		124		-		56,950
Total loans and advances to customers				448,246		29,171		6,420		14,614		498,451

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Expected credit losses

 

At 30 June 2019										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Loans and advances to banks:
CMS 1-10		0.00-0.50%		2		-		-		-		2
CMS 11-14		0.51-3.00%		1		-		-		-		1
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		-		-		-
				3		-		-		-		3
Loans and advances to customers:
Retail - mortgages
RMS 1-6		0.00-4.50%		37		168		-		-		205
RMS 7-9		4.51-14.00%		-		36		-		-		36
RMS 10		14.01-20.00%		-		15		-		-		15
RMS 11-13		20.01-99.99%		-		47		-		-		47
RMS 14		100.00%		-		-		134		181		315
				37		266		134		181		618
Retail - unsecured
RMS 1-6		0.00-4.50%		184		48		-		-		232
RMS 7-9		4.51-14.00%		70		76		-		-		146
RMS 10		14.01-20.00%		4		26		-		-		30
RMS 11-13		20.01-99.99%		3		180		-		-		183
RMS 14		100.00%		-		-		215		-		215
				261		330		215		-		806
Retail - UK Motor Finance
RMS 1-6		0.00-4.50%		187		19		-		-		206
RMS 7-9		4.51-14.00%		13		11		-		-		24
RMS 10		14.01-20.00%		-		9		-		-		9
RMS 11-13		20.01-99.99%		-		31		-		-		31
RMS 14		100.00%		-		-		77		-		77
				200		70		77		-		347
Retail - other
RMS 1-6		0.00-4.50%		6		8		-		-		14
RMS 7-9		4.51-14.00%		-		3		-		-		3
RMS 10		14.01-20.00%		-		-		-		-		-
RMS 11-13		20.01-99.99%		-		1		-		-		1
RMS 14		100.00%		-		-		46		-		46
				6		12		46		-		64
CMS 1-10		0.00-0.50%		20		19		-		-		39
CMS 11-14		0.51-3.00%		-		-		-		-		-
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		6		-		6
				20		19		6		-		45
Total Retail				524		697		478		181		1,880

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Expected credit losses (continued)

 

At 30 June 2019										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Commercial
CMS 1-10		0.00-0.50%		35		1		-		-		36
CMS 11-14		0.51-3.00%		46		110		-		-		156
CMS 15-18		3.01-20.00%		3		135		-		-		138
CMS 19		20.01-99.99%		-		8		-		-		8
CMS 20-23		100%		-		-		1,046		-		1,046
				84		254		1,046		-		1,384
Other
RMS 1-6		0.00-4.50%		4		1		-		-		5
RMS 7-9		4.51-14.00%		-		-		-		-		-
RMS 10		14.01-20.00%		-		-		-		-		-
RMS 11-13		20.01-99.99%		-		-		-		-		-
RMS 14		100.00%		-		-		11		-		11
				4		1		11		-		16
CMS 1-10		0.00-0.50%		9		1		-		-		10
CMS 11-14		0.51-3.00%		-		-		-		-		-
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		23		-		23
				9		1		23		-		33
Total loans and advances to customers				621		953		1,558		181		3,313
In respect of:
Retail				524		697		478		181		1,880
Commercial				84		254		1,046		-		1,384
Other				13		2		34		-		49
Total loans and advances to customers				621		953		1,558		181		3,313

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Gross drawn exposures

 

At 31 December 2018										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Loans and advances to banks:
CMS 1-10		0.00-0.50%		6,177		3		-		-		6,180
CMS 11-14		0.51-3.00%		105		-		-		-		105
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		-		-		-
				6,282		3		-		-		6,285
Loans and advances to customers:
Retail - mortgages
RMS 1-6		0.00-4.50%		257,740		10,784		-		-		268,524
RMS 7-9		4.51-14.00%		57		1,709		-		-		1,766
RMS 10		14.01-20.00%		-		262		-		-		262
RMS 11-13		20.01-99.99%		-		899		-		-		899
RMS 14		100.00%		-		-		1,393		15,391		16,784
				257,797		13,654		1,393		15,391		288,235
Retail - unsecured
RMS 1-6		0.00-4.50%		22,363		1,079		-		-		23,442
RMS 7-9		4.51-14.00%		2,071		774		-		-		2,845
RMS 10		14.01-20.00%		72		167		-		-		239
RMS 11-13		20.01-99.99%		199		687		-		-		886
RMS 14		100.00%		-		-		703		-		703
				24,705		2,707		703		-		28,115
Retail - UK Motor Finance
RMS 1-6		0.00-4.50%		12,918		954		-		-		13,872
RMS 7-9		4.51-14.00%		301		318		-		-		619
RMS 10		14.01-20.00%		-		111		-		-		111
RMS 11-13		20.01-99.99%		5		197		-		-		202
RMS 14		100.00%		-		-		129		-		129
				13,224		1,580		129		-		14,933
Retail - other
RMS 1-6		0.00-4.50%		7,428		473		-		-		7,901
RMS 7-9		4.51-14.00%		190		60		-		-		250
RMS 10		14.01-20.00%		-		7		-		-		7
RMS 11-13		20.01-99.99%		211		23		-		-		234
RMS 14		100.00%		-		-		136		-		136
				7,829		563		136		-		8,528
CMS 1-10		0.00-0.50%		1,605		231		-		-		1,836
CMS 11-14		0.51-3.00%		-		6		-		-		6
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		29		-		29
				1,605		237		29		-		1,871
Total Retail				305,160		18,741		2,390		15,391		341,682

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Gross drawn exposures (continued)

 

At 31 December 2018										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Commercial
CMS 1-10		0.00-0.50%		65,089		100		-		-		65,189
CMS 11-14		0.51-3.00%		25,472		3,450		-		-		28,922
CMS 15-18		3.01-20.00%		1,441		2,988		-		-		4,429
CMS 19		20.01-99.99%		-		54		-		-		54
CMS 20-23		100%		-		-		3,230		-		3,230
				92,002		6,592		3,230		-		101,824
Other
RMS 1-6		0.00-4.50%		804		6		-		-		810
RMS 7-9		4.51-14.00%		-		-		-		-		-
RMS 10		14.01-20.00%		-		-		-		-		-
RMS 11-13		20.01-99.99%		-		-		-		-		-
RMS 14		100.00%		-		-		55		-		55
				804		6		55		-		865
CMS 1-10		0.00-0.50%		43,565		-		-		-		43,565
CMS 11-14		0.51-3.00%		-		6		-		-		6
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		66		-		66
				43,565		6		66		-		43,637
Total loans and advances to customers				441,531		25,345		5,741		15,391		488,008
In respect of:
Retail				305,160		18,741		2,390		15,391		341,682
Commercial				92,002		6,592		3,230		-		101,824
Other				44,369		12		121		-		44,502
Total loans and advances to customers				441,531		25,345		5,741		15,391		488,008

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Expected credit losses

 

At 31 December 2018										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Loans and advances to banks:
CMS 1-10		0.00-0.50%		2		-		-		-		2
CMS 11-14		0.51-3.00%		-		-		-		-		-
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		-		-		-
				2		-		-		-		2
Loans and advances to customers:
Retail - mortgages
RMS 1-6		0.00-4.50%		37		141		-		-		178
RMS 7-9		4.51-14.00%		-		34		-		-		34
RMS 10		14.01-20.00%		-		9		-		-		9
RMS 11-13		20.01-99.99%		-		42		-		-		42
RMS 14		100.00%		-		-		118		78		196
				37		226		118		78		459
Retail - unsecured
RMS 1-6		0.00-4.50%		135		45		-		-		180
RMS 7-9		4.51-14.00%		57		83		-		-		140
RMS 10		14.01-20.00%		4		29		-		-		33
RMS 11-13		20.01-99.99%		3		172		-		-		175
RMS 14		100.00%		-		-		228		-		228
				199		329		228		-		756
Retail - UK Motor Finance
RMS 1-6		0.00-4.50%		114		19		-		-		133
RMS 7-9		4.51-14.00%		6		15		-		-		21
RMS 10		14.01-20.00%		-		11		-		-		11
RMS 11-13		20.01-99.99%		1		34		-		-		35
RMS 14		100.00%		-		-		78		-		78
				121		79		78		-		278
Retail - other
RMS 1-6		0.00-4.50%		10		8		-		-		18
RMS 7-9		4.51-14.00%		2		2		-		-		4
RMS 10		14.01-20.00%		-		-		-		-		-
RMS 11-13		20.01-99.99%		-		1		-		-		1
RMS 14		100.00%		-		-		53		-		53
				12		11		53		-		76
CMS 1-10		0.00-0.50%		20		17		-		-		37
CMS 11-14		0.51-3.00%		-		-		-		-		-
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		7		-		7
				20		17		7		-		44
Total Retail				389		662		484		78		1,613

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

20.       Credit quality of loans and advances to banks and customers (continued)

 

Expected credit losses (continued)

 

At 31 December 2018										Purchased
										or
										originated
										credit-
		PD		Stage 1		Stage 2		Stage 3		impaired		Total
		range		£m		£m		£m		£m		£m
Commercial
CMS 1-10		0.00-0.50%		32		1		-		-		33
CMS 11-14		0.51-3.00%		50		86		-		-		136
CMS 15-18		3.01-20.00%		11		231		-		-		242
CMS 19		20.01-99.99%		-		7		-		-		7
CMS 20-23		100%		-		-		1,031		-		1,031
				93		325		1,031		-		1,449
Other
RMS 1-6		0.00-4.50%		43		1		-		-		44
RMS 7-9		4.51-14.00%		-		-		-		-		-
RMS 10		14.01-20.00%		-		-		-		-		-
RMS 11-13		20.01-99.99%		-		-		-		-		-
RMS 14		100.00%				-		11		-		11
				43		1		11		-		55
CMS 1-10		0.00-0.50%		-		-		-		-		-
CMS 11-14		0.51-3.00%		-		6		-		-		6
CMS 15-18		3.01-20.00%		-		-		-		-		-
CMS 19		20.01-99.99%		-		-		-		-		-
CMS 20-23		100%		-		-		27		-		27
				-		6		27		-		33
Total loans and advances to customers				525		994		1,553		78		3,150
In respect of:
Retail				389		662		484		78		1,613
Commercial				93		325		1,031		-		1,449
Other				43		7		38		-		88
Total loans and advances to customers				525		994		1,553		78		3,150

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

21.       Dividends on ordinary shares

 

On 21 May 2019, a final dividend in respect of 2018 of 2.14 pence per share, totalling £1,523 million was paid to shareholders. An interim dividend for 2019 of 1.12 pence per ordinary share (half-year to 30 June 2018: 1.07 pence) will be paid on 13 September 2019. The total amount of this dividend is £789 million (half-year to 30 June 2018: £765 million).

 

22.       Implementation of IFRS 16

 

The Group adopted IFRS 16 Leases from 1 January 2019 and elected to apply the standard retrospectively with the cumulative effect of initial application being recognised at that date; comparative information has therefore not been restated.

 

Lease liabilities amounting to £1,813 million in respect of leased properties previously accounted for as operating leases were recognised at 1 January 2019. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as at that date, adjusted to exclude short-term leases and leases of low-value assets. The weighted-average borrowing rate applied to these lease liabilities was 2.43 per cent in the UK, where the majority of the obligations arise, and 5.10 per cent in the US. The corresponding right-of-use asset of £1,716 million was measured at an amount equal to the lease liabilities, adjusted for lease liabilities recognised at 31 December 2018 of £97 million. The right-of-use asset and lease liabilities are included within Property, plant and equipment and Other liabilities respectively. There was no impact on shareholders' equity.

 

In applying IFRS 16 for the first time, the Group has used a number of practical expedients permitted by the standard; the most significant of which were the use of a single discount rate to a portfolio of leases with reasonably similar characteristics; reliance on previous assessments of whether a lease is onerous; and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to apply IFRS 16 to contracts that were not identified as containing a lease under IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

 

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

23.       Future accounting developments

 

The following pronouncements are not applicable for the year ending 31 December 2019 and have not been applied in preparing these interim financial statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be made at this stage.

 

IFRS 17 Insurance Contracts and certain minor amendments to other accounting standards have not been endorsed by the EU as at 30 July 2019.

 

IFRS 17 Insurance Contracts

IFRS 17 replaces IFRS 4 Insurance Contracts and is currently effective for annual periods beginning on or after 1 January 2021 although the International Accounting Standards Board has proposed delaying implementation until 1 January 2022.

 

IFRS 17 requires insurance contracts and participating investment contracts to be measured on the balance sheet as the total of the fulfilment cash flows and the contractual service margin. Changes to estimates of future cash flows from one reporting date to another are recognised either as an amount in profit or loss or as an adjustment to the expected profit for providing insurance coverage, depending on the type of change and the reason for it. The effects of some changes in discount rates can either be recognised in profit or loss or in other comprehensive income as an accounting policy choice. The risk adjustment is released to profit and loss as an insurer's risk reduces. Profits which are currently recognised through a value-in-force asset will no longer be recognised at inception of an insurance contract. Instead, the expected profit for providing insurance coverage is recognised in profit or loss over time as the insurance coverage is provided.

 

The Group's IFRS 17 project is progressing to plan.  Work has focused on interpreting the requirements of the standard to support the development of future accounting policy and methodology, and to help understand the financial and reporting impacts of IFRS 17. Further, build of the Group's data warehousing and actuarial liability calculation processes has progressed to enable readiness for reporting to required pace and granularity when IFRS 17 is implemented. The updated IFRS 17 Exposure Draft was published by the IASB on 26 June 2019, and the Group is currently assessing the implications of changes proposed.

 

Minor amendments to other accounting standards

The IASB has issued a number of minor amendments to IFRSs effective 1 January 2020 (including IFRS 3 Business Combinations and IAS 1 Presentation of Financial Statements). These amendments are not expected to have a significant impact on the Group.

 

24.          Other information

 

The financial information included in these condensed consolidated 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 2018 were approved by the directors on 19 February 2019 and were delivered to the Registrar of Companies on 31 May 2019. The auditors' report on those accounts was unqualified and did not include a statement under sections 498(2) (accounting records or returns inadequate or accounts not agreeing with records and returns) or 498(3) (failure to obtain necessary information and explanations) 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 2019 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 2019 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 2019

 

Lloyds Banking Group plc Board of directors:

 

Executive directors:

António Horta-Osório (Group Chief Executive)

George Culmer (Chief Financial Officer)

Juan Colombás (Chief Operating Officer)

 

Non-executive directors:

Lord Blackwell (Chairman)

Anita Frew (Deputy Chairman and Senior Independent Director)

Alan Dickinson

Simon Henry

Lord Lupton CBE

Amanda Mackenzie OBE

Nicholas Prettejohn

Stuart Sinclair

Sara Weller CBE

 

 

INDEPENDENT REVIEW REPORT TO LLOYDS BANKING GROUP PLC

 

Report on the condensed consolidated half-year financial statements

 

Our conclusion

We have reviewed Lloyds Banking Group plc's condensed consolidated half-year financial statements (the 'interim financial statements') in the 2019 Half-Year Results of Lloyds Banking Group plc (the 'Company') for the six month period ended 30 June 2019. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

What we have reviewed

The interim financial statements comprise:

·    the consolidated balance sheet as at 30 June 2019;

·    the consolidated income statement and consolidated statement of comprehensive income for the period then ended;

·    the consolidated cash flow statement for the period then ended;

·    the consolidated statement of changes in equity for the period then ended; and

·    the explanatory notes to the interim financial statements

 

The interim financial statements included in the 2019 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 Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 1 to the interim financial statements, 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.

 

Responsibilities for the interim financial statements and the review

 

Our responsibilities and those of the directors

The 2019 Half-Year Results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the 2019 Half-Year Results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

 

Our responsibility is to express a conclusion on the interim financial statements in the 2019 Half-Year Results based on our review. This report, including the conclusion, has been prepared for and only for the Company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose.  We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

 

 

 

INDEPENDENT REVIEW REPORT TO LLOYDS BANKING GROUP PLC (continued)

 

What a review of interim 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, 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 2019 Half-Year Results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

 

 

 

 

 

PricewaterhouseCoopers LLP

Chartered Accountants

London

30 July 2019

 

 

 

 

Summary of alternative performance measures

 

The Group calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis. A description of these measures and their calculation is set out below.

 

Asset quality ratio	The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers after releases and write-backs, expressed as a percentage of average gross loans and advances to customers for the period
Banking net interest margin	Banking net interest income on customer and product balances in the banking businesses as a percentage of average gross banking interest-earning assets for the period
Business as usual costs	Operating costs, less investment expensed and depreciation
Cost:income ratio	Total costs as a percentage of net income calculated on an underlying basis
Gross asset quality ratio	The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers before releases and write-backs, expressed as a percentage of average gross loans and advances to customers for the period
Loan to deposit ratio	Loans and advances to customers net of allowance for impairment losses and excluding reverse repurchase agreements divided by customer deposits excluding repurchase agreements
Jaws	The difference between the period on period percentage change in net income and the period on period change in total costs calculated on an underlying basis
Present value of new business premium	The total single premium sales received in the period (on an annualised basis) plus the discounted value of premiums expected to be received over the term of the new regular premium contracts
Return on risk-weighted assets	Underlying profit before tax divided by average risk-weighted assets
Return on tangible equity	Statutory profit after tax adjusted to add back amortisation of intangible assets, and to deduct profit attributable to non-controlling interests and other equity holders, divided by average tangible net assets
Tangible net assets per share	Net assets excluding intangible assets such as goodwill and acquisition-related intangibles divided by the weighted average number of ordinary shares in issue
Underlying, 'or above the line' profit	Statutory profit adjusted for certain items as detailed in the Basis of Presentation
Underlying return on tangible equity	Underlying profit after tax at the standard UK corporation tax rate adjusted to add back amortisation of intangible assets, and to deduct profit attributable to non-controlling interests and other equity holders, divided by average tangible net assets

 

 

KEY DATES FOR THE PAYMENT OF THE DIVIDENDS

 

Shares quoted ex-dividend	8 August 2019
Record date	9 August 2019
Final date for joining or leaving the dividend reinvestment plan	23 August 2019
Interim dividend paid	13 September 2019

 

 

 

 

CONTACTS

 

 

For further information please contact:

 

INVESTORS AND ANALYSTS

Douglas Radcliffe

Group Investor Relations Director

020 7356 1571

[email protected]

 

Edward Sands

Director of Investor Relations

020 7356 1585

[email protected]

 

Nora Thoden

Director of Investor Relations

020 7356 2334

[email protected]

 

 

CORPORATE AFFAIRS

Grant Ringshaw

Director of Media Relations

020 7356 2362

[email protected]

 

Matt Smith

Head of Corporate Media

020 7356 3522

[email protected]

 

 

 

 

 

 

 

Copies of this news release may be obtained from:

Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN

The statement can also be found on the Group's website - www.lloydsbankinggroup.com

 

Registered office: Lloyds Banking Group plc, The Mound, Edinburgh, EH1 1YZ

Registered in Scotland No. 95000