FINANCIAL REVIEW

 

Lloyds Bank Corporate Markets plc (the Bank) together with its subsidiaries (the Group) carries out the non-ring fenced banking operations of Lloyds Banking Group (LBG) and provide a wide range of banking and financial services in the UK and overseas.  The Group operates as an integrated business across the UK, the Crown Dependencies, USA, Singapore and Germany and contributes to the financial results of the Commercial Banking Division of LBG.

 

Our strategic purpose as part of LBG is to Help Britain Prosper through operating a responsible business that focuses on delighting our customers and delivering long-term sustainable success.

 

Principal activities

Lloyds Bank Corporate Markets plc (LBCM) supports a diverse range of customers and provides a broad range of banking products to help them achieve their financial goals and delighting them through a focused proposition and dedicated service.  The Group's revenues are earned through the provision of financing and risk management solutions to commercial customers; and current accounts, savings accounts, mortgages, car finance and personal loans in the retail market in our Crown Dependencies businesses.

 

The target market for these products and services in the UK and internationally is made up of large corporates, financial institutions and retail and commercial customers in the Crown Dependencies, and includes the following product propositions

-       Commercial lending (including fixed rate loans, revolving credit facilities, variable loans and business mortgages)

-       Trade and working capital management (including trade services, trade finance, supply chain finance and asset finance)

-       Bonds and structured finance (including bonds, structured lending and asset securitisation)

-       Risk management (including FX, rates, credit, commodities and liabilities management)

-       Retail banking services (including mortgages, personal current accounts, personal loans and motor finance) in the Crown Dependencies

 

Review of results

During the half-year to 30 June 2020, the Group recorded a profit before tax of £7 million compared to £157 million during the half-year to 30 June 2019, an overall reduction of £150 million.

 

2020 has seen significant disruption and impact to the market, our customers and our ways of working as a result of the COVID-19 pandemic.  Despite this disruption, the Group has continued to support customers and provided financial assistance to the UK economy and the economies in which our customers operate.  Income has remained resilient being £388 million for the first half of 2020 which is broadly consistent with that of the first six months of 2019 of £393 million, pre fair value write downs on derivatives that are recognised through net trading income (six months to 30 June 2020 £97 million charge versus six months to 30 June 2019 £nil).

 

The Group's expected credit loss (ECL) on loans and commitments, calculated under IFRS 9, requires the use of a range of possible future outcomes and more details are contained in Note 1.  The projected economic impacts on the markets in which we operate has resulted in material increases in ECL charges recognised through the Impairment line of the Income Statement.  This along with fair value write downs on derivatives recognised through net trading income, has significantly impacted profitability, despite diligent management of costs and capital.

 

Regulatory capital adequacy remains strong, with a CET1 ratio of 13.7%; reflecting the stability of the business, and the strength of the client franchise served by the Group.

 

Total income (after the fair value write down on derivatives referenced above) was £291 million compared to £393 million in the first half of 2019, comprising net interest income of £1 million (£78 million in the half-year to 30 June 2019), net fee and commission income of £96 million (£114 million in the half-year to 30 June 2019) and net trading income of £194 million, noting this is after the fair value write down on derivatives of £97million referred to above, (£201 million in the half-year to 30 June 2019) reflecting a strong performance in our Markets business. The COVID-19 pandemic has had an effect on the global economy and financial markets with net interest income being adversely impacted through increased costs of funding and a continued low interest rate environment. 

 

 

 

Financial review (continued)

 

The other key impact of the economic implications of COVID-19 has been an increase in ECL with £77 million charged in the first half of the year (six months to 30 June 2019 £nil).  Contained within this ECL charge is £90 million which is driven by the forward looking nature of IFRS9 (stage 1 and 2 impairment) and the expected deterioration of the economic outlook. This is partially offset by a net write-back of £13 million on credit impaired assets.  Additionally, the Group has reflected a fair value write down of £97 million on derivative positions through net trading income (as noted above), driven by a single counterparty that has only derivative exposure with the Group and has entered administration in the wake of the COVID-19 pandemic.

 

Operating expenses were £207 million down from £236 million in the half-year to 30 June 2019, a reduction of £29 million as a result of management action and specific cost control initiatives.  Costs consist predominantly of management charges relating to the Intra Group agreement paid to Lloyds Bank plc, staff costs and other operating expenses.  The taxation credit in the period was £27 million (six months to 30 June 2019 £35 million charge) reflecting lower profitability in 2020 and specific rules in the computation (refer Note 4).

 

Total assets were £18,880 million higher at £98,541 million at 30 June 2020 compared to £79,661 million at 31 December 2019.  The largest movement is in cash and balances at central banks which increased by £10,914 million from £16,250 million at 31 December 2019 to £27,164 million at 30 June 2020 reflecting prudent management action to increase liquidity should the impact of COVID-19 cause further market distress.  Financial assets at fair value through profit or loss were £19,015 million at 30 June 2020 compared to £18,146 million at 31 December 2019 and predominantly consist of reverse repurchase agreements.  Derivative financial instruments of £22,397 million at 30 June 2020 increased by £3,561 million compared to £18,836 million at 31 December 2019.  Financial assets at amortised cost increased by £967 million from £25,899 million at 31 December 2019 to £26,866 million at 30 June 2020 and consists mainly of loans and advances to customers and banks.  

 

Total liabilities of the Group were £94,892 million at 30 June 2020 compared to £75,385 million at 31 December 2019, an increase of £19,507 million.  Deposits from banks were £6,627 million at 30 June 2020 which is £2,657 million higher than £3,970 million at 31 December 2019.  Customer deposits increased by £1,374 million from £24,479 million at 31 December 2019 to £25,853 million at 30 June 2020.  Financial liabilities at fair value through profit or loss at 30 June 2020 of £13,601 million consists predominantly of repurchase agreements and is consistent with the 31 December 2019 balance of £13,784 million.  Derivative financial instruments of £22,377 million has increased by £4,615 million compared to the 31 December 2019 balance of £17,762 million.  Debt securities in issue of £20,008 million has increased by £7,579 million compared to £12,429 million at 31 December 2019.  The increase in deposits and debt securities reflects increased funding liquidity, as referenced above, in addition to improving the liability maturity profile, as evidenced by the £2,514 million raised through the LBCM European Medium-Term Note (EMTN) programme.  Total equity at 30 June 2020 was £3,649 million which is a reduction of £627 million compared to £4,276 million at 31 December 2019 largely reflecting the dividend paid to LBG in the period of £700 million.

 

In June 2020, the Group agreed the sale of its Jersey based investment management business to Brooks MacDonald enabling the Group to focus on core service propositions.  A subsidiary of the Group, Lloyds Investment Fund Managers Ltd is being sold along with the customers and assets under management from Lloyds Bank International Ltd.  The deal is planned to conclude pre year end and going forward the Group will no longer operate in this particular market.

 

Capital position at 30 June 2020

 

Following a change in approach the capital position of Lloyds Bank Corporate Markets plc is now presented on the basis of the Bank where previously this was presented on the basis of the Group. Prior year comparatives reflect the position of the Bank at 31 December 2019. The Bank's capital position as at 30 June 2020, applying current IFRS 9 transitional arrangements, is set out in the following section.

 

 

 

 

Financial review (continued)

 

Capital ratios (Bank)

 

	Capital resources (transitional)				At 30 June 2020				At 31 Dec 2019
				£m				£m
Common equity tier 1
Shareholders' equity per Bank balance sheet				2,934				3,593
Adjustment to retained earnings for foreseeable dividends				-				(700)
Cash flow hedging reserve				(114)				(56)
Debit valuation adjustment				(40)				(25)
Other adjustments				45				3
				2,825				2,815
Less: deductions from common equity tier 1
Prudent valuation adjustment				(154)				(179)
Excess of expected losses over impairment provisions and value adjustments				-				(16)
Securitisation deductions				(182)				(185)
Deferred tax assets				(3)				(2)
Significant investments				-				(52)
Common equity tier 1 capital				2,486				2,381
Additional tier 1
Additional tier 1 instruments				757				757
Total tier 1 capital				3,243				3,138
Tier 2
Tier 2 instruments				693				645
Other adjustments				(121)				(98)
Total tier 2 capital				572				547
Total capital resources				3,815				3,685
Risk-weighted assets				18,144				17,021
Common equity tier 1 capital ratio1				13.7%				14.0%
Tier 1 capital ratio1				17.9%				18.4%
Total capital ratio1				21.0%				21.6%

 

1	Reflecting the full impact of IFRS 9 at 30 June 2020, without the application of transitional arrangements, the Bank's common equity tier 1 capital ratio would be 13.4 per cent, the tier 1 capital ratio would be 17.6 per cent and the total capital ratio would be 21.1 per cent.

 

 

 

Financial review (continued)

 

		At 30 June 2020		At 31 Dec 2019
		£m		£m
Risk-weighted assets (Bank)
Foundation Internal Ratings Based (IRB) Approach		7,937		7,270
Other IRB Approach		348		433
IRB Approach		8,285		7,703
Standardised (STA) Approach		2,291		2,262
Credit risk		10,576		9,965
Counterparty credit risk		3,875		3,477
Credit valuation adjustment risk		350		313
Operational risk		1,044		1,062
Market risk		1,671		1,588
Underlying risk-weighted assets		17,516		16,405
Threshold risk-weighted assets		628		616
Total risk-weighted assets		18,144		17,021

 

 

 

 

Principal risks and uncertainties

 

The most significant risks that could impact the Group's ability to deliver long-term strategic objectives are outlined below. These principal risks and uncertainties are reviewed and reported to the Board Risk Committee regularly.

 

There is a high-degree of uncertainty surrounding both UK and global political and macroeconomic developments. The potential impacts of these external factors have been considered in all principal risks to ensure they are monitored and appropriately mitigated where possible.

 

The Group continues to assess the risks associated with the global COVID-19 pandemic and the impacts on its customers, colleagues and the communities in which they operate. The pandemic has had, and continues to have, a material impact on businesses around the world and the economic environments in which they operate. All jurisdictions in which the LBCM Group operates have implemented various degrees of restrictions on the movement of their respective populations causing a significant impact on economic activity. Whilst these restrictions are beginning to be lifted in some jurisdictions, the long term impact of the crisis remains unclear as does the shape of any economic recovery. COVID-19 could have a material adverse effect on the profitability, credit risk, capital, liquidity, operational resilience and employees of financial institutions such as the Group. 

 

As part of our ongoing assessment of the potential implications of the UK leaving the European Union, the Group continues to assess the impact of trade negotiations on its customers, colleagues and products. Trade negotiations remain highly uncertain and the final outcome could have legal, regulatory, tax, financial and capital implications for the Group.

 

The transition from Interbank Offered Rates (IBOR) to Alternative 'Risk Free' Reference Rates continues as widely used historical benchmark rates, such as the London Interbank Offered Rate (LIBOR), remain under regulatory scrutiny. Regulators have signalled the need to expedite the switch to alternative benchmark rates including the transition to Sterling Overnight Index Average (SONIA) in the UK by the end of 2021. As a result, existing benchmark rates are being discontinued or the basis on which they are calculated is being changed. Uncertainty as to the nature of such potential changes across jurisdictions may adversely affect the value of a broad array of financial products, including any LIBOR-based securities, loans and derivatives. The availability and cost of hedging IBOR instruments and borrowings may also change unexpectedly. These changes could have important implications for our customers and necessitate amendments to existing documents and contracts that would have a detrimental impact on the Group's financial performance. The Group is working closely with Lloyds Banking Group on the transition away from IBORs.

 

Credit risk - The risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off balance sheet). Observed or anticipated changes in the economic environment could impact profitability due to an increase in delinquency, defaults, write-downs and/or expected credit losses.

 

Regulatory and legal risk - The risk arising from the failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements, leading to customer detriment, financial penalties, regulatory censure, criminal or civil enforcement action.

 

Conduct risk - The risk of detriment across the customer lifecycle including: failures in product management, distribution and servicing activities, from other risks materialising, or other activities which could undermine the integrity of the market or distort competition, leading to unfair customer outcomes, regulatory censure, reputational damage or financial loss.

 

Operational risk: overall - The risk of inadequate or failed internal processes, people, systems or from external events leading to loss.

 

 

 

Principal risks and uncertainties (continued)

 

Operational risk: shared services model (SSM) - Lloyds Banking Group's chosen Ring-fencing Operating Model introduces residual risk for the LBCM Group in the execution of that model as a Shared Service Recipient. This includes: Internal Service Provision Risk, Business Process Risk (i.e. non-adherence to key processes), Information Security & Cyber Risk, Fraud and Financial Crime Risk and Operational Risk around business resilience, change activity and sourcing.

Key Risks include

-               Key reliance on the SSM increases the prominence of Internal Service Provision Risk

-               Business Process Risk (i.e. non-adherence to key processes, including those relating to Market, Operational, Capital, Credit and Funding & Liquidity Risk)

-               Information Security & Cyber Risk including access management, records, data protection and cyber

-               IT Systems Risk due to reliance on Shared Service from Group IT

-               Reliance on the SSM to operate key controls designed to detect and prevent fraud and financial crime

-               Operational Risk around business resilience, change activity and sourcing

 

People risk - The risk that LBCM fails to provide an appropriate colleague and customer centric culture supported by robust reward and well-being policies and processes, effective leadership to manage colleague resources, effective talent and succession management and robust controls to ensure all colleague-related requirements are met.

 

Capital risk - The risk that we have a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.

 

Funding and liquidity risk - The risk that we do not have sufficiently stable and diverse sources of funding or financial resources are insufficient to meet commitments as they fall due.

 

Governance risk - The risk that our organisational infrastructure fails to provide robust oversight of decision making and the control mechanisms to ensure strategies and management instructions are implemented effectively.

 

Market risk - The risk that our capital or earnings profile is affected by adverse market rates, in particular changes in interest and foreign exchange rates (and their volatilities), inflation rates, commodity prices and credit spreads through activity in the banking and markets businesses.

 

Model risk - The risk of financial loss, regulatory censure, reputational damage or customer detriment from deficiencies in developing, applying and operating models and rating systems.

 

Climate change risk - The key risks associated with climate change are physical risks arising from climate and weather-related events, and transition risks, which are the financial risks resulting from the process of adjustment towards a lower carbon economy. Climate change therefore manifests itself across multiple risk types e.g. credit, market, conduct and operational. For example, physical and transition risk, the impairment of asset values, may impact the creditworthiness of our clients, and in currently profitable business deteriorating over the term of agreed facilities. The focus on these risks by key stakeholders including businesses, clients and investors, governments and regulators is aligned to the evolving societal, regulatory and political landscape.

 

There also remains a risk that campaign groups or other bodies could seek to take legal action (including indirect action) against LBCM, Lloyds Banking Group and/or the financial services industry for investing in or lending to organisations that they deem to be responsible for, or contributing to, climate change.

 

Data risk - The risk of LBCM failing to effectively govern, manage, and control its data (including data processed by Third Party Suppliers) leading to unethical decisions, poor customer outcomes, loss of value to LBCM and mistrust.

 

 

 

Principal risks and uncertainties (continued)

 

Operational resilience risk - The risk that LBCM fails to design resilience into business operations, underlying infrastructure and controls (people, process, technical) to withstand external or internal events that could impact the continuity of operations or alternatively the failure to respond to events in a way which meets stakeholder expectations and needs when the continuity of operations is compromised.

 

Change/execution risk - The risk that, in delivering its change agenda, LBCM fails to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operate within LBCM's risk appetite.

 

Strategic risk - The risk which results from incorrect assumptions about internal or external factors, inappropriate business plans, ineffective business strategy execution, or failure to respond in a timely manner to changes in the regulatory, macroeconomic or competitive environments.
 

CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED INCOME STATEMENT

 

			Half-year  to 30 June  2020		Half-year  to 30 June  20191
	Note		£m		£m
Interest and similar income			278		407
Interest and similar expense			(277)		(329)
Net interest income			1		78
Fee and commission income			112		129
Fee and commission expense			(16)		(15)
Net fee and commission income			96		114
Net trading income			194		201
Other income			290		315
Total income			291		393
Total operating expenses	2		(207)		(236)
Trading surplus			84		157
Impairment	3		(77)		-
Profit before tax			7		157
Tax credit/(expense)	4		27		(35)
Profit for the period			34		122
Profit attributable to ordinary shareholders			11		97
Profit attributable to other equity shareholders			23		25
Profit for the period			34		122

 

 

¹ Restated - Comparative other operating income has been reallocated to net trading income in line with the treatment of the underlying transactions for the year end 31 December 2019.
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

 

		Half-year  to 30 June  2020		Half-year  to 30 June  2019
		£m		£m
Profit for the period		34		122
Other comprehensive income:
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		(6)		5
Tax		2		(1)
		(4)		4
Movement in cash flow hedging reserve:
Effective portion of changes in fair value		84		76
Net income statement transfers		(3)		(4)
Tax		(23)		(18)
		58		54
Currency translation differences (tax: nil)		7		(2)
Other comprehensive income for the period, net of tax		61		56
Total comprehensive income for the period		95		178
Total comprehensive income attributable to ordinary shareholders		72		153
Total comprehensive income attributable to other equity holders		23		25
Total comprehensive income for the period		95		178

 

 

 

CONSOLIDATED BALANCE SHEETS

 

			At  30 June  2020 (unaudited)		At  31 Dec  2019  (audited)
	Note		£m		£m
Assets
Cash and balances at central banks			27,164		16,250
Items in course of collection from banks			10		21
Financial assets at fair value through profit or loss	5		19,015		18,146
Derivative financial instruments			22,397		18,836
Loans and advances to banks			4,624		4,813
Loans and advances to customers			20,137		20,264
Debt securities			380		112
Due from fellow Lloyds Banking Group undertakings			1,725		710
Financial assets at amortised cost	6		26,866		25,899
Financial assets at fair value through other comprehensive income			196		314
Property, plant and equipment			84		72
Current tax recoverable			36		2
Deferred tax assets			27		6
Other assets			2,746		115
Total assets			98,541		79,661

                                                                                                                             

Equity and liabilities
Liabilities
Deposits from banks			6,627		3,970
Customer deposits			25,853		24,479
Due to fellow Lloyds Banking Group undertakings			3,199		1,638
Financial liabilities at fair value through profit or loss			13,601		13,784
Derivative financial instruments			22,377		17,762
Debt securities in issue	8		20,008		12,429
Other liabilities			2,433		577
Current tax liabilities			9		30
Deferred tax liabilities			40		18
Subordinated liabilities			745		698
Total liabilities			94,892		75,385
Equity
Share capital			120		120
Other reserves			93		32
Retained profits			2,654		3,342
Shareholders' equity			2,867		3,494
Other equity instruments			782		782
Total equity			3,649		4,276
Total equity and liabilities			98,541		79,661

 

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

 

		Attributable to ordinary shareholders
		Share  capital		Other  reserves		Retained  profits		Total		Other  equity  instruments		Total
		£m		£m		£m		£m		£m		£m
Balance at 1 January 2020		120		32		3,342		3,494		782		4,276
Comprehensive income
Profit for the period		−		−		11		11		23		34
Other comprehensive income
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:
Debt securities		−		(4)		−		(4)		−		(4)
Movements in cash flow hedging reserve, net of tax		−		58		−		58		−		58
Currency translation differences (tax: nil)		−		7		−		7		−		7
Total other comprehensive income		−		61		−		61		−		61
Total comprehensive income		−		61		11		72		23		95
Transactions with owners
Dividends		−		−		(700)		(700)		−		(700)
Distributions on other equity instruments		−		−		−		−		(23)		(23)
Other adjustments		−		−		1		1		−		1
Total transactions with owners		−		−		(699)		(699)		(23)		(722)
Balance at 30 June 2020		120		93		2,654		2,867		782		3,649

 

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

 

		Attributable to ordinary shareholders
		Share  capital		Other  reserves		Retained  profits		Total		Other  equity  instruments		Total
		£m		£m		£m		£m		£m		£m
Balance at 1 January 2019		120		(15)		3,105		3,210		782		3,992
Comprehensive income
Profit for the period		−		−		97		97		25		122
Other comprehensive income
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:
Debt securities		−		4		−		4		−		4
Movements in cash flow hedging reserve, net of tax		−		54		−		54		−		54
Currency translation differences (tax: nil)		−		(2)		−		(2)		−		(2)
Total other comprehensive income		−		56		−		56		−		56
Total comprehensive income		−		56		97		153		25		178
Transactions with owners
Distributions on other equity instruments		−		−		−		−		(25)		(25)
Other adjustments		−		−		5		5		−		5
Total transactions with owners		−		−		5		5		(25)		(20)
Balance at 30 June 2019		120		41		3,207		3,368		782		4,150

 

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

 

		Attributable to ordinary shareholders
		Share  capital		Other  reserves		Retained  profits		Total		Other  equity  instruments		Total
		£m		£m		£m		£m		£m		£m
Balance at 1 July 2019		120		41		3,207		3,368		782		4,150
Comprehensive income
Profit for the period		−		−		137		137		24		161
Other comprehensive income
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax:
Debt securities		−		(6)		−		(6)		−		(6)
Movements in cash flow hedging reserve, net of tax		−		(3)		−		(3)		−		(3)
Currency translation differences (tax: nil)		−		-		−		−		−		-
Total other comprehensive income		−		(9)		−		(9)		−		(9)
Total comprehensive income		−		(9)		137		128		24		152
Transactions with owners
Distributions on other equity instruments		−		−		−		−		(24)		(24)
Other adjustments		−		−		(2)		(2)		−		(2)
Total transactions with owners		−		−		(2)		(2)		(24)		(26)
Balance at 31 December 2019		120		32		3,342		3,494		782		4,276

 

 

CONSOLIDATED CASH FLOW STATEMENT (UNAUDITED)

 

		Half-year  to 30 June  2020		Half-year  to 30 June  2019
		£m		£m
Profit before tax		7		157
Adjustments for:
Change in operating assets		(7,883)		(7,082)
Change in operating liabilities		19,459		8,394
Non-cash and other items		69		107
Tax paid		(49)		(28)
Net cash provided by operating activities		11,603		1,548
Cash flows from investing activities
Purchase of fixed assets		(16)		(3)
Proceeds from sale of fixed assets		-		-
Net cash used in investing activities		(16)		(3)
Cash flows from financing activities
Dividends paid to ordinary shareholders		(700)		−
Distributions on other equity instruments		(23)		(25)
Interest paid on subordinated liabilities		(14)		(16)
Net cash used in financing activities		(737)		(41)
Effects of exchange rate changes on cash and cash equivalents		2		1
Change in cash and cash equivalents		10,852		1,505
Cash and cash equivalents at beginning of period		19,094		15,478
Cash and cash equivalents at end of period		29,946		16,983

 

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.

 

 

NOTES

 

		Page
1	Accounting policies, presentation and estimates	16
2	Operating expenses	22
3	Impairment	22
4	Taxation	23
5	Financial assets at fair value through profit or loss	23
6	Financial assets at amortised cost	24
7	Allowance for impairment losses	26
8	Debt securities in issue	28
9	Contingent liabilities, commitments and guarantees	29
10	Fair values of financial assets and liabilities	30
11	Related party transactions	36
12	Ultimate parent undertaking	36
13	Other information	36

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.         Accounting policies, presentation and estimates

 

These condensed consolidated half-year financial statements as at and for the 6 month period to 30 June 2020 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 Bank Corporate Markets plc (the Bank) 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 2019 which were prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Copies of the 2019 Annual Report and Accounts are available on the Lloyds Banking Group's website and are available upon request from Investor Relations, Lloyds Banking Group plc, 25 Gresham Street, London EC2V 7HN.

 

The directors consider that it is appropriate to continue to adopt the going concern basis in preparing the condensed consolidated half-year financial statements. In reaching this assessment, the directors have considered the implications of the COVID-19 pandemic upon the Group's operational and financial performance and projected funding and capital position and also taken into account the impact of further stress scenarios. On this basis, the directors are satisfied that the Group will maintain adequate levels of funding and capital for the foreseeable future. Further details of the Group's capital position are set out on pages 3 to 4.

 

The accounting policies are consistent with those applied by the Group in its 2019 Annual Report and Accounts.

 

Future accounting developments

The IASB has issued a number of minor amendments to IFRSs effective 1 January 2021 and 1 January 2022 (including IFRS 9 Financial Instruments and IAS 37 Provisions, Contingent Liabilities and Contingent Assets). These amendments are not expected to have a significant impact on the Group.

 

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 2019, except as detailed below.

 

Allowance for impairment losses

At 30 June 2020 the Group's expected credit loss allowance (ECL) was £163 million (31 December 2019: £91 million), of which £125 million (31 December 2019: £87 million) was in respect of drawn balances.

 

 

 

 

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

The calculation of the Group's ECL allowances and its provisions against loan commitments and guarantees under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. In particular, the measurement of expected credit losses is required to reflect an unbiased probability-weighted range of possible future outcomes. In order to do this, the Group has developed an economic model to project a wide range of key impairment drivers using information derived mainly from external sources. These drivers include factors such as the unemployment rate, commercial property prices and corporate credit spreads. The model-generated economic scenarios for the six years beyond 2020 are mapped to industry-wide historical loss data by portfolio. Combined losses across portfolios are used to rank the scenarios by severity of loss.

 

Alongside a defined central scenario three further scenarios are generated by averaging a group of individual scenarios around specified points along the loss distribution to reflect the range of outcomes. The central scenario reflects the Group's base case assumptions used for medium-term planning purposes, an upside and a downside scenario are also produced together with a severe downside scenario. Rare occurrences of adverse economic events can lead to relatively large credit losses which means that typically the most likely outcome is less than the probability-weighted outcome of the range of possible future events. To allow for this a relatively unlikely severe downside scenario is therefore included. At 31 December 2019 and 30 June 2020, the base case, upside and downside scenarios each carry a 30 per cent weighting; the severe downside scenario is weighted at 10 per cent. A committee under the chairmanship of the LBG Chief Economist meets quarterly, to review and, if appropriate, recommend changes to the economic scenarios to the LBCM Chief Financial Officer and LBCM Chief Risk Officer. Findings dealing with all aspects of the expected credit loss calculation are presented to the LBCM Audit Committee.

 

The key economic assumptions made by the Group as at 30 June 2020 averaged over a five-year period are shown below, note compounded growth rates have been calculated on a geometric average basis, they were previously calculated on an arithmetic average basis. The geometric average basis is a more appropriate measure for rates of change that compound over time:

 

Economic assumptions - 5 year Average

		Base case		Upside		Downside		Severe downside
		%		%		%		%
At 30 June 2020
UK GDP		0.4		0.8		0.3		(0.4)
UK Interest rate		0.15		1.06		0.16		0.03
UK Unemployment rate		6.0		5.5		7.1		8.1
UK Commercial real estate price growth		(0.6)		2.7		(3.5)		(8.0)
US GDP		1.3		1.7		0.8		0.3
US Unemployment rate		8.0		6.8		9.0		10.6
At 31 December 2019
UK GDP		1.4		1.7		1.2		0.5
UK Interest rate		1.25		2.04		0.49		0.11
UK Unemployment rate		4.3		3.9		5.8		7.2
UK Commercial real estate price growth		(0.2)		1.8		(3.8)		(7.1)
US GDP		1.8		1.9		1.3		0.8
US Unemployment rate		4.0		3.4		5.3		6.8

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

The five year averages shown do not fully reveal the extent of peak and trough changes in the stated assumptions over the period. The tables below illustrate the variability of the assumptions from the start of the period to the peak and trough.

 

Economic assumptions - start to peak

				Base case				Upside				Downside				Severe downside
				%				%				%				%
At 30 June 2020
UK GDP				1.9				4.0				1.7				(1.8)
UK Interest rate				0.25				1.50				0.21				0.10
UK Unemployment rate				9.0				8.6				9.2				9.7
UK Commercial real estate price growth				(2.7)				14.8				(2.7)				(2.7)
US GDP				6.4				8.8				4.3				1.4
US Unemployment rate				13.0				12.9				13.0				13.0
At 31 December 2019
UK GDP				7.0				8.6				6.2				2.7
UK Interest rate				1.75				2.56				0.75				0.75
UK Unemployment rate				4.6				4.6				6.9				8.3
UK Commercial real estate price growth				0.1				10.4				(0.6)				(1.1)
US GDP				9.1				9.9				6.8				4.0
US Unemployment rate				4.1				3.8				6.1				8.3

 

 

Economic assumptions - start to trough                                                                                            

				Base case				Upside				Downside				Severe downside
				%				%				%				%
At 30 June 2020
UK GDP				(19.7)				(19.5)				(19.8)				(20.2)
UK Interest rate				0.10				0.10				0.08				0.01
UK Unemployment rate				3.9				3.9				3.9				3.9
UK Commercial real estate price growth				(20.0)				(11.5)				(27.2)				(42.3)
US GDP				(11.7)				(11.6)				(11.7)				(11.8)
US Unemployment rate				3.8				3.8				3.8				3.8
At 31 December 2019
UK GDP				0.4				0.7				0.2				(2.7)
UK Interest rate				0.75				0.75				0.35				0.01
UK Unemployment rate				3.8				3.4				3.9				3.9
UK Commercial real estate price growth				(0.9)				0.3				(17.5)				(30.9)
US GDP				0.4				0.5				0.3				(2.6)
US Unemployment rate				3.6				3.2				3.7				3.7

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

The Group's base case economic scenario has been materially revised in light of the impact of the COVID-19 pandemic in the UK and globally. The estimated impacts reflect judgments on the net effect of restrictions on economic activity unprecedented in peacetime, large-scale and previously untried government interventions, and lasting behavioural changes by households and businesses.

 

Although economies globally have begun to recover as restrictions are eased, there is considerable uncertainty about the pace and eventual extent of the recovery. The Group's base case assumptions reflect an expectation of some enduring scarring as economies work through the sharp contraction in economic activity in 2020. Consistent with this, and despite the support provided by the government's Coronavirus Job Retention Scheme and other income assistance, the UK base case outlook entails a rise in the unemployment rate and weakness in residential and commercial property prices. US base case assumptions also reflect a higher unemployment rate. The Group considers that risks to its base case economic view lie in both directions, reflecting both epidemiological and other developments. For the UK, this includes risks around the transition to new trading arrangements with the European Union.

 

Scenarios by year

		2020		2021		2022		2020-22
		%		%		%		%
Base Case
GDP		(10.0)		6.0		3.0		(1.8)
Interest rate		0.10		0.10		0.10		0.10
Unemployment rate		7.2		7.0		5.7		6.7
Commercial real estate price growth		(20.0)		10.0		4.0		(8.5)
US GDP		(5.9)		4.3		4.3		2.3
US Unemployment rate		9.8		9.3		7.7		8.9
Upside
GDP		(9.5)		7.5		3.1		0.3
Interest rate		0.21		1.15		1.42		0.92
Unemployment rate		7.1		6.2		4.9		6.1
Commercial real estate price growth		(8.4)		18.6		3.4		12.4
US GDP		(5.7)		5.7		5.7		5.4
US Unemployment rate		9.7		8.4		6.0		8.0
Downside
GDP		(10.2)		5.8		3.1		(2.0)
Interest rate		0.09		0.12		0.19		0.13
Unemployment rate		7.3		7.7		6.8		7.3
Commercial real estate price growth		(27.2)		4.0		2.9		(22.1)
US GDP		(6.1)		3.1		3.0		(0.2)
US Unemployment rate		9.9		10.0		9.2		9.7
Severe downside
GDP		(10.9)		3.0		2.2		(6.2)
Interest rate		0.06		0.01		0.02		0.03
Unemployment rate		7.5		8.9		8.4		8.3
Commercial real estate price growth		(36.2)		(7.8)		(1.4)		(41.9)
US GDP		(6.3)		1.4		1.3		(3.8)
US Unemployment rate		10.0		11.2		11.4		10.8

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

Impact of multiple economic scenarios

The table below shows the extent to which a higher ECL allowance has been recognised to take account of forward looking information from the weighted multiple economic scenarios and the Group's ECL for the upside, downside and severe downside scenarios using a 100 per cent weighting compared to the base case scenario. The table is presented on the basis that, for each scenario presented, the staging is that of the probability weighted outcome. The majority of post-model adjustments and all individually assessed provisions, although assessed on a range of multiple case specific outcomes, are reported flat under each economic scenario. At 30 June 2020 the impact of MES was an increase of £4 million to the base case (31 December 2019: £1 million).

		Probability-								Severe
		weighted		Upside		Base case		Downside		Downside
		£m		£m		£m		£m		£m
At 30 June 2020		163		137		159		171		223
At 31 December 2019		91		87		90		94		101

 

 

Post-model adjustments

Limitations in the Group's impairment models or input data may be identified through the on-going assessment and validation of the output of the models. In these circumstances, management make appropriate adjustments to the Group's allowance for impairment losses to ensure the overall provision adequately reflects all material risks. All post-model adjustments are reviewed half-yearly and are subject to strict internal governance and controls. The reported ECL includes two material adjustments at 30 June 2020 relating to reductions to modelled ECL. These are to reflect the recovery in the US economic outlook not being adequately captured by PD models, £20 million, and the impact of using more granular facility level LGDs of £12 million which has been assessed outside the model. There were no material adjustments made at 31 December 2019.

 

Significant increase in credit risk

An assessment of whether credit risk has increased significantly since initial recognition considers the change in the risk of default occurring over the remaining expected life of the financial instrument. In determining whether there has been a significant increase in credit risk, the Group uses quantitative tests based on relative and absolute probability of default movements linked to internal credit ratings together with qualitative indicators such as watch lists and other indicators of historical delinquency, credit weakness or financial difficulty. These quantitative tests are carried out on both observed and forward-looking probabilities of default (PDs) to determine whether a customer has triggered the required deterioration appropriate for their PD at origination. For each major product grouping, models have been developed which utilise historical credit loss data to produce probabilities of default for each scenario; and it is the overall weighted-average forward-looking PD that is used to assist in determining the staging of financial assets.

 

There have been no changes to the quantitative or qualitative triggers used at 30 June 2020. The Group considers these to continue to perform adequately under the current economic conditions.

 

Definition of default

The probability of default (PD) of an exposure, both over a 12 month period and over its lifetime, is a key input to the measurement of the ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. A 90 days past due backstop is applied.

 

Loss given default

The loss given default (LGD) is based on underlying collateral values, market recovery rates and internal credit assessments.

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

1.         Accounting policies, presentation and estimates (continued)

 

Other matters

The Group categorises financial instruments carried on the balance sheet at fair value using a three level hierarchy. Financial instruments categorised as level 1 are valued using quoted market prices and therefore minimal estimates are made in determining fair value. The fair value of financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation techniques which involve management judgement and estimates the extent of which depends on the complexity of the instrument and the availability of market observable information. The pandemic has had a significant impact on the fair values of the financial assets and financial liabilities, particularly those that are valued with reference to unobservable interest rate spreads and interest rate volatility, including the funding valuation adjustment on its uncollateralised derivatives. Further details on the valuation of level 3 assets and liabilities, including significant unobservable inputs used in the valuation models, together with the effects of reasonably possible alternative assumptions, are given in note 10.

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

2.         Operating expenses

 

					Half-year  to 30 June  2020				Half-year  to 30 June  2019
					£m				£m
	Staff costs:
	Salaries				76				68
	Social security costs				7				5
	Pensions and other post-retirement benefit schemes				6				5
	Restructuring costs				5				−
	Other staff costs				2				7
					96				85
Management charges				86				105
Depreciation and amortisation				8				10
Premises and equipment				1				4
Communications and data processing				5				5
Professional fees				3				2
Start up costs for Lloyds Bank Corporate Markets Wertpapierhandelsbank GmbH				−				14
	Other operating expenses				8				11
	Total operating expenses				207				236

 

 

3.         Impairment

 

				Half-year to		Half-year to
				30 June		30 June
				2020		2019
				£m		£m
Loans and advances to banks				7		1
Loans and advances to customers				36		(1)
Impairment charge on drawn balances				43		−
Loan commitments and financial guarantees				34		−
Total impairment charge				77		−

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

4.         Taxation

 

In accordance with IAS 34, the Group's income tax expense for the half-year to 30 June 2020 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 credit/(expense) and accounting profit is set out below:

 

		Half-year  to 30 June  2020		Half-year  to 30 June  2019
		£m		£m
Profit before tax		7		157
Tax thereon at UK corporation tax rate of 19 per cent (2019: 19 per cent)		(1)		(30)
Impact of surcharge on banking profits		4		(8)
Non-deductible costs		−		(2)
Non-taxable income		10		−
Tax relief on coupons on other equity instruments		4		5
(De)recognition of losses or other tax assets that arose in prior years		8		(2)
Differences in overseas tax rates		2		3
Adjustments in respect of prior years		−		(1)
Tax credit (charge)		27		(35)

 

 

5.         Financial assets at fair value through profit or loss

 

		At  30 June  2020		At  31 Dec  2019
		£m		£m
Trading assets		18,698		17,732
Other financial assets at fair value through profit or loss:
Loans and advances to customers		224		326
Debt securities		73		69
Treasury bills and other bills		20		19
		317		414
Total financial assets at fair value through profit or loss		19,015		18,146

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6.         Financial assets at amortised cost

 

Half-year to 30 June 2020

								Stage 1								Stage 2								Stage 3							Total
								£m								£m								£m							£m
Loans and advances to banks
At 1 January 2020									4,814						−								−									4,814
Exchange and other adjustments									131						−								−									131
Transfers to Stage 2									(43)						43								−									−
Advances (repayments)									(314)						1								−									(313)
At 30 June 2020									4,588						44								−									4,632
Allowance for impairment losses									(7)						(1)								−									(8)
Total loans and advances to banks									4,581						43								−									4,624

 

Loans and advances to customers

At 1 January 2020				20,028		29		293		20,350
Exchange and other adjustments				874		8		-		882
Advances (repayments)				(1,273)		296		-		(977)
Transfers to Stage 1				2		(2)		-		-
Transfers to Stage 2				(1,450)		1,450		-		-
Transfers to Stage 3				(2)		(1)		3		-
				(1,450)		1,447		3		-
Financial assets that have been written off								(1)		(1)
At 30 June 2020				18,179		1,780		295		20,254
Allowance for impairment losses				(32)		(26)		(59)		(117)
Total loans and advances to customers				18,147		1,754		236		20,137

 

Debt securities

At 1 January 2020						112				−				−						112
Exchange and other adjustments						9				−				−						9
Advances						259				−				−						259
At 30 June 2020						380				−				−						380
Allowance for impairment losses						-				−				−						-
Total debt securities						380				−				−						380

 

Due from fellow Lloyds Banking Group Undertakings

1,725

-

-

1,725

 

Total financial assets at amortised cost

24,833

1,797

236

26,866

 

 

                                                                                                                                               

 

                                                                                                                                               

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

6.         Financial assets at amortised cost (continued)

 

Year ended 31 December 2019

 

								Stage 1									Stage 2								Stage 3									Total
								£m									£m								£m									£m
Loans and advances to banks
At 1 January 2019									2,584							-								-										2,584
Exchange and other adjustments									(95)							-								-										(95)
Advances (repayments)									2,325							-								-										2,325
At 31 December 2019									4,814							-								-										4,814
Allowance for impairment losses									(1)							-								-										(1)
Total loans and advances to banks									4,813							-								-										4,813

 

Loans and advances to customers

At 1 January 2019				20,459		23				303				20,785
Exchange and other adjustments				(154)		-				(1)				(155)
Advances (repayments)				(245)		(22)				(12)				(279)
Transfers to Stage 1				-		-				-				-
Transfers to Stage 2				(32)		32				-				-
Transfers to Stage 3				-		(4)				4				-
				(32)		28				4				-
Financial assets that have been written off										(1)			(1)
At 31 December 2019				20,028		29			293				20,350
Allowance for impairment losses				(7)		(2)			(77)				(86)
Total loans and advances to customers				20,021		27			216				20,264

 

Debt securities

At 1 January 2019						132				-				-					132
Exchange and other adjustments						(4)				-				-					(4)
Advances (repayments)						(16)				-				-					(16)
At 31 December 2019						112				-				-					112
Allowance for impairment losses						-				-				-					-
Total debt securities						112				-				-					112

 

Due from fellow Lloyds Banking Group undertakings

710

-

-

710

 

Total financial assets at amortised cost

25,656

27

216

25,899

 

The movement tables are compiled by comparing the position at the reporting date to that at the beginning of the year.

 

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 the period end.

 

Advances (repayments) 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 acquiring a full allowance and subsequent write-off.

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7.         Allowance for impairment losses

 

Half-year to 30 June 2020
					Stage 1				Stage 2				Stage 3			Total
					£m				£m				£m			£m
In respect of drawn balances:
Balance at 1 January 2020						8				2				77				87
Exchange and other adjustments						-				-				(3)				(3)
Transfers to Stage 1						-				-				-				-
Transfers to Stage 2						(1)				1				-				-
Transfers to Stage 3						-				-				-				-
Impact of transfers between stages						-				4				-				4
						(1)				5				-				4
Other items charged to the income statement						32				20				(13)				39
Charge/(write-back) to the income statement (note 3)						31				25				(13)				43
Advances written off						-				-				(1)				(1)
Discount unwind						-				-				(1)				(1)
At 30 June 2020						39				27				59				125
In respect of undrawn balances:
Balance at 1 January 2020						4				-				-				4
Exchange and other adjustments						-				-				-				-
Transfers to Stage 1						-				-				-				-
Transfers to Stage 2						(2)				2				-				-
Transfers to Stage 3						-				-				-				-
Impact of transfers between stages						-				21				-				21
						(2)				23				-				21
Other items charged to the income statement						13				-				-				13
Charge to the income statement (note 3)						11				23				-				34
At 30 June 2020						15				23				-				38
Total allowance for impairment losses						54				50				59				163
In respect of:
Loans and advances to banks						7				1				-				8
Loans and advances to customers						32				26				59				117
Debt securities						-				-				-				-
Financial assets at amortised cost						39				27				59				125
Provisions in relation  to loan commitments and financial guarantees						15				23				-				38
Total allowance for impairment losses						54				50				59				163

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7.         Allowance for impairment losses (continued)

 

Year ended 31 December 2019

 

					Stage 1				Stage 2				Stage 3			Total
					£m				£m				£m			£m
In respect of drawn balances:
Balance at 1 January 2019						8				2				92				102
Exchange and other adjustments						1				-				(3)				(2)
Impact of transfers between stages						-				-				-				-
Other items charged to the income statement						(1)				-				(11)				(12)
Charge to the income statement						(1)				-				(11)				(12)
Advances written of						-				-				(1)				(1)
Recoveries of advances written off in previous years						-				-				1				1
Discount unwind						-				-				(1)				(1)
At 31 December 2019						8				2				77				87
In respect of undrawn balances:
Balance at 1 January 2019						3				-				-				3
Exchange and other adjustments						-				-				-				-
Impact of transfers between stages						-				-				-				-
Other items charged to the income statement						1				-				-				1
Charge to the income statement						1				-				-				1
At 31 December 2019						4				-				-				4
Total allowance for impairment losses						12				2				77				91
In respect of:
Loans and advances to banks						1				-				-				1
Loans and advances to customers						7				2				77				86
Debt securities						-				-				-				-
Financial assets at amortised cost						8				2				77				87
Provisions in relation  to loan commitments and financial guarantees						4				-				-				4
Total allowance for impairment losses						12				2				77				91

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

7.         Allowance for impairment losses (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 the period end. As assets are transferred between stages, the resulting change in expected credit loss of £4 million for drawn balances, and £21 million for undrawn balances, is presented separately as Impacts of transfers between stages, in the stage in which the expected credit loss is recognised at the end of the reporting period.

 

Other items charged to the income statement include 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 acquiring a full allowance and subsequent write-off. Consequently, recoveries on assets previously written-off also occur in Stage 3 only.

 

8.         Debt securities in issue

 

 

							At 30 June 2020 £m	At 31 Dec 2019 £m
Medium-term notes issued							4,857		2,208
Certificates of deposit							8,820		5,674
Commercial paper							1,646		957
Amounts due to fellow Lloyds Banking Group undertakings							4,685		3,590
Total debt securities in issue							20,008		12,429

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

9.         Contingent liabilities, commitments and guarantees

 

Legal actions and regulatory matters

During the ordinary course of business the Group is subject to 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.

 

 

Contingent liabilities, commitments and guarantees arising from the banking business

 

		At  30 June  2020		At  31 Dec  2019
		£m		£m
Contingent liabilities
Acceptances and endorsements		23		57
Other:
Other items serving as direct credit substitutes		124		86
Performance bonds and other transaction-related contingencies		41		180
		165		266
Total contingent liabilities		188		323

 

		At  30 June  2020		At  31 Dec  2019
		£m		£m
Commitments and guarantees
Forward asset purchases and forward deposits placed		-		19
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made		68		37
Other commitments and guarantees		7,995		7,319
		8,063		7,356
1 year or over original maturity		8,812		9,347
Total commitments and guarantees		16,875		16,722

 

Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £16,728 million (31 December 2019: £16,589 million) was irrevocable.

 

                                                                                                                                                                   

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

10.       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 32 to the Group's 2019 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 are considered to have become unobservable.

 

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 2019 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 2020				31 December 2019
		Carrying  value		Fair  value		Carrying  value		Fair  value
		£m		£m		£m		£m
Financial assets
Financial assets at fair value through profit or loss		19,015		19,015		18,146		18,146
Derivative financial instruments		22,397		22,397		18,836		18,836
Loans and advances to banks		4,624		4,628		4,813		4,815
Loans and advances to customers		20,137		20,175		20,264		20,418
Debt securities		380		380		112		112
Due from fellow Lloyds Banking Group undertakings		1,725		1,725		710		710
Financial assets at amortised cost		26,866		26,908		25,899		26,055
Financial assets at fair value through other comprehensive income		196		196		314		314
Financial liabilities
Deposits from banks		6,627		6,642		3,970		3,965
Customer deposits		25,853		25,966		24,479		24,504
Due to fellow Lloyds Banking Group undertakings		3,199		3,199		1,638		1,638
Financial liabilities at fair value through profit or loss		13,601		13,601		13,784		13,784
Derivative financial instruments		22,377		22,377		17,762		17,762
Debt securities in issue		20,008		20,026		12,429		12,329
Subordinated liabilities		745		745		698		698

 

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

 

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 and items in course of transmission to banks.

 

Fair values of financial assets and liabilities measured at fair value are determined on the basis of their gross exposures. The Group manages and determines fair value for its derivative exposures on a net basis.

 

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 2020
Financial assets at fair value through profit or loss:
Loans and advances to customers		-		11,506		213		11,719
Loans and advances to banks		-		141		-		141
Debt securities		6,801		334		-		7,135
Treasury and other bills		20		-		-		20
Total financial assets at fair value through profit or loss		6,821		11,981		213		19,015
Financial assets at fair value through other comprehensive income:
Debt securities		-		-		116		116
Treasury and other bills		80		-		-		80
Total financial assets at fair value through other comprehensive income		80		-		116		196
Derivative financial instruments		1		21,540		856		22,397
Total financial assets carried at fair value		6,902		33,521		1,185		41,608
At 31 December 2019
Financial assets at fair value through profit or loss:
Loans and advances to customers		-		10,422		326		10,748
Loans and advances to banks		-		513		-		513
Debt securities		6,501		365		-		6,866
Treasury and other bills		19		-		-		19
Total financial assets at fair value through profit or loss		6,520		11,300		326		18,146
Financial assets at fair value through other comprehensive income:
Debt securities		-		97		121		218
Treasury and other bills		96		-		-		96
Total financial assets at fair value through other comprehensive income		96		97		121		314
Derivative financial instruments		5		18,046		785		18,836
Total financial assets carried at fair value		6,621		29,443		1,232		37,296

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

 

Financial liabilities

 

		Level 1		Level 2		Level 3		Total
		£m		£m		£m		£m
At 30 June 2020
Financial liabilities at fair value through profit or loss:
Trading liabilities		1,873		11,728		-		13,601
Total financial liabilities at fair value through profit or loss		1,873		11,728		-		13,601
Derivative financial instruments		4		21,187		1,186		22,377
Total financial liabilities carried at fair value		1,877		32,915		1,186		35,978
At 31 December 2019
Financial liabilities at fair value through profit or loss:
Trading liabilities		2,708		11,076		-		13,784
Total financial liabilities at fair value through profit or loss		2,708		11,076		-		13,784
Derivative financial instruments		18		16,674		1,070		17,762
Total financial liabilities carried at fair value		2,726		27,750		1,070		31,546

 

Movements in level 3 portfolio

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

 

	Financial  assets at fair  value through  profit or loss			Financial  assets at fair  value through  other  comprehensive   income		Derivative  assets		Total  financial  assets  carried at  fair value
		£m		£m		£m		£m
At 1 January 2020		326		121		785		1,232
Exchange and other adjustments		-		6		19		25
Gains recognised in the income statement within other income		(1)		-		127		126
Gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income		-		(5)		-		(5)
Purchases		-		-		2		2
Sales		(112)		(6)		(81)		(199)
Transfers into the level 3 portfolio		-		-		88		88
Transfers out of the level 3 portfolio		-		-		(84)		(84)
At 30 June 2020		213		116		856		1,185
Gains recognised in the income statement within other income relating to those assets held at 30 June 2020		-		3		132		135

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

 

	Financial  assets at fair  value through  profit or loss			Financial  assets  at fair value   through other  comprehensive  income		Derivative  assets		Total  financial  assets  carried at  fair value
		£m		£m		£m		£m
At 1 January 2019		3		194		922		1,119
Exchange and other adjustments		1		-		(2)		(1)
Gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income		-		-		251		251
Purchases		486		-		2		488
Sales		(287)		(79)		(16)		(382)
Transfers into the level 3 portfolio		-		-		28		28
Transfers out of the level 3 portfolio		-		-		(2)		(2)
At 30 June 2019		203		115		1,183		1,501
Gains recognised in the income statement within other income relating to those assets held at 30 June 2019		-		-		285		285

 

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 2020		-		1,070		1,070
Exchange and other adjustments		-		20		20
Losses recognised in the income statement within other income		-		187		187
Additions		-		2		2
Transfers into the level 3 portfolio		-		65		65
Transfers out of the level 3 portfolio		-		(158)		(158)
At 30 June 2020		-		1,186		1,186
Losses recognised in the income statement within other income relating to those liabilities held at 30 June 2020		-		(195)		(195)

 

 

 

Or

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

 

		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		-		707		707
Losses recognised in the income statement within other income		-		197		197
Additions		-		1		1
Transfers into the level 3 portfolio		-		20		20
At 30 June 2019		-		925		925
Losses recognised in the income statement within other income relating to those liabilities held at 30 June 2019		-		(241)		(241)

 

The tables below set out the effects of reasonably possible alternative assumptions for categories of level 3 financial assets and financial liabilities.

 

						At 30 June 2020
								Effect of reasonably possible alternative assumptions1
	Valuation technique(s)	Significant unobservable inputs				Carrying  value		Favourable  changes	Unfavourable  changes
						£m		£m		£m
Financial assets at fair value through profit or loss:
Loans and advances to customers	Comparable pricing	Spread				213		2		(2)
						213		2		(2)
Financial assets at fair value through other comprehensive income:
Asset-backed securities	Comparable pricing	Price				116		2		(2)
						116		2		(2)
Derivative financial assets:
Interest rate derivatives	Option pricing model	Inflation volatility				312		4		(3)
	Option pricing model	Interest rate volatility				544		-		(2)
						856		4		(5)
Financial assets carried at fair value						1,185		8		(9)
Financial liabilities at fair value through profit or loss
Derivative financial liabilities:
Interest rate derivatives	Option pricing model	Inflation volatility				(939)		2		(1)
	Option pricing model	Interest rate volatility				(247)		2		(2)
						(1,186)		4		(3)
Financial liabilities carried at fair value						(1,186)

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

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

 

						At 31 December 2019
								Effect of reasonably possible alternative assumptions1
	Valuation technique(s)	Significant unobservable inputs				Carrying  value		Favourable  changes	Unfavourable  changes
						£m		£m		£m
Financial assets at fair value through profit or loss:
Loans and advances to customers	Comparable pricing	Spread				326		3		(3)
						326		3		(3)
Financial assets at fair value through other comprehensive income:
Asset-backed securities	Comparable pricing	Price				103		2		(2)
Asset-backed securities	Comparable pricing	Discount margin				18		-		-
						121		2		(2)
Derivative financial assets:
Interest rate derivatives	Option pricing model	Inflation volatility				330		3		(3)
	Option pricing model	Interest rate volatility				455		-		(1)
						785		3		(4)
Financial assets carried at fair value						1,232		8		(9)
Financial liabilities at fair value through profit or loss
Derivative financial liabilities:
Interest rate derivatives	Option pricing model	Inflation volatility				(260)		-		-
Interest rate derivatives	Option pricing model	Interest rate volatility				(810)		-		-
						(1,070)		-		-
Financial liabilities carried at fair value						(1,070)		-		-

 

1	Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.

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 2019 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 the Group's 2019 financial statements.

 

Fair value write downs on derivatives

The Group has reflected a fair value write down of £97 million on derivative positions through net trading income, driven by a single counterparty that has only derivative exposure with the Group and has entered administration in the wake of the COVID-19 pandemic.
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (continued)

 

11.       Related party transactions

 

Balances and transactions with fellow Lloyds Banking Group undertakings

The Bank and its subsidiaries have balances due to and from the Bank's parent company, Lloyds Banking Group plc, and fellow LBG undertakings. These are included on the balance sheet as follows:

 

		At  30 June  2020		At  31 Dec  2019
		£m		£m
Assets
Due from fellow Lloyds Banking Group undertakings		1,725		710
Derivative financial instruments		2,597		2,734
Financial assets at fair value through profit or loss		10		40
Liabilities
Due to fellow Lloyds Banking Group undertakings		3,199		1,638
Derivative financial instruments		4,855		2,254
Debt securities in issue		4,685		3,590
Subordinated liabilities		745		698

 

Other equity instruments
Additional tier 1 instruments		782		782

 

 

During the half-year to 30 June 2020 the Group earned £7 million (half-year to 30 June 2019: £23 million) of interest income and incurred £80 million (half-year to 30 June 2019: £111 million) of interest expense on balances and transactions with Lloyds Banking Group plc and fellow Group undertakings.

 

Other related party transactions

Other related party transactions for the half-year to 30 June 2020 are primarily shared service costs and management fees similar in nature to those for the year ended 31 December 2019.

 

12.       Ultimate parent undertaking

 

The Bank's ultimate parent undertaking and controlling party is Lloyds Banking Group plc which is incorporated in Scotland. Lloyds Banking Group plc has published consolidated accounts for the year to 31 December 2019 and copies may be obtained from Investor Relations, Lloyds Banking Group, 25 Gresham Street, London EC2V 7HN and available for download from www.lloydsbankinggroup.com.

 

13.       Other information

 

The financial information in these condensed consolidated half-year financial statements does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 31 December 2019 have been delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified, did not include an emphasis of matter paragraph and did not include a statement under section 498 of the Companies Act 2006.
 

STATEMENT OF DIRECTORS' RESPONSIBILITIES

 

The directors listed below (being all the directors of Lloyds Bank Corporate Markets 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 results 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 2020 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 2020 and any material changes in the related party transactions described in the last annual report.

 

Signed on behalf of the board by

 

 

 

 

 

Eduardo J Stock da Cunha

Chief Executive Officer

30 July 2020

 

Lloyds Bank Corporate Markets plc board of directors:

John J Cummins (Non-executive director)

Eduardo J Stock da Cunha               (Chief Executive Officer)

Christopher J K Edis (Chief Financial Officer)

Lord Lupton CBE (Non-executive director and Chairman)

Andrew J McIntyre (Non-executive director)

John S W Owen (Non-executive director)

Carla A S Antunes da Silva (Non-executive director)

 

 

Changes to the composition of the Board since 1 January 2020 up to the date of this report are shown below:

·      Jennifer L Tippin (resigned 24 April 2020)

·      The Board has approved the appointment of Letitia Smith as a Non-executive Director subject to and with effect from Regulatory approval and the appointment of Eve Henrikson as a Non-executive Director from 1 September 2020

 

 

 

INDEPENDENT REVIEW REPORT TO LLOYDS BANK CORPORATE MARKETS PLC

 

Report on the condensed consolidated half-year financial statements

 

Our conclusion

We have reviewed Lloyds Bank Corporate Markets plc's condensed consolidated half-year financial statements (the "interim financial statements") in the 2020 Half-Year Results of Lloyds Bank Corporate Markets plc for the six month period ended 30 June 2020. 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 2020;

·    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 2020 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 2020 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 2020 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 2020 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 BANK CORPORATE MARKETS 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 2020 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 2020