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Banks
www.fitchratings.com 17 January 2012
UK
Lloyds Banking Group plc Full Rating Report
Key Rating Drivers
Support-Driven IDRs: The IDRs of Lloyds Banking Group plc and its banking subsidiaries are
at their Support Rating Floor (SRF). Fitch Ratings believes there is an extremely high
probability of support from the UK authorities, which hold a 40.2% stake in the bank.
UK Franchise Supports VR: Lloyds‟ Viability Rating is underpinned by its extremely strong UK
retail and commercial banking franchises, high liquidity buffer and solid capitalisation, but also
considers its reliance on wholesale funding and the risks in its real estate loan book.
Sustainable Profitability Delayed: Following the rapid integration of HBOS plc and progress
in deleveraging, the group reported an operating profit for 2010. However, a return to more
sustainable profits has been delayed by the muted UK economic recovery, higher funding costs
and continuing asset quality concerns. Lloyds made a small operating loss in 9M11. In addition,
a GBP3.2bn exceptional provision in respect of UK payment protection insurance (PPI) redress
was taken in Q111 and Lloyds expected GBP260m costs in 2011 for the UK bank levy.
Deleveraging Continues: Asset reductions and disposals (largely 600 branches) required by
EU state aid approval should not materially harm the group‟s strong franchises, pricing power,
economies of scale or savings. Non-core assets fell by 22% in 9M11, to GBP151bn.
Strategic Momentum Waning: Since end-Q111, Lloyds has accelerated several initiatives
including the repayment of government funding, sale of branches and cost cutting. However,
difficult market conditions could delay the implementation of the strategic plan.
Asset Quality Stabilising: Asset quality appears to have stabilised (impaired loans were
10.3% at end‐Q311 and end‐2010) despite reducing loan book. The quality of the prime
mortgage loans is satisfactory, but higher loan-to-value (LTV) mortgages and UK and Irish
commercial real estate (CRE) exposures remain a risk.
Funding Profile Improving: Despite being the UK‟s largest retail deposit taker, Lloyds has
substantial reliance on wholesale funding. Wholesale funding with maturities of over a year has
been maintained at 50% at end‐Q311. Government and central bank facilities have reduced
significantly YTD (end-Q311: GBP36.8bn; end-2010: GBP96.6bn) and all mature by end‐2012.
Refinancing requirements and the loans/deposits ratio will fall as the group de‐leverages.
Lloyds‟ extensive franchise and large stock of liquid assets (which exceed the amount of short-
term wholesale funding) place it in a solid position.
Capital Adequate: In time, retained earnings and de‐leveraging should strengthen Lloyds‟
Fitch core capital, which mitigates the likely impact of Basel III implementation through
deductions of deferred tax assets and equity in insurance operations.
What Could Trigger a Rating Action
VR on Upward Path: Stronger capital and further progress towards normalised funding,
profitability and credit quality could lead to an upgrade of the VR.
Downward Pressure on SRF: Downward pressure on SRF and IDRs could increase over time
as a result of growing political will as well as regulatory and legislative developments to
minimise future support to large banking groups by making them more resolvable.
Ratings
Lloyds Banking Group plc
Long-Term Foreign-Currency IDR A Short-Term Foreign-Currency IDR F1 Viability Rating bbb Support Rating 1 Support Rating Floor A
Sovereign Risk Long-Term Foreign-Currency IDR AAA Long-Term Local-Currency IDR AAA Short-Term Foreign-Currency IDR F1+
Lloyds TSB Bank plc Long-Term Foreign-Currency IDR A Short-Term Foreign-Currency IDR F1 Viability Rating bbb Support Rating 1 Support Rating Floor A
HBOS plc
Long-Term Foreign-Currency IDR A Short-Term Foreign-Currency IDR F1 Support Rating 1
Bank of Scotland Plc
Foreign-Currency Long-Term IDR A Foreign-Currency Short-Term IDR F1 Support Rating 1 Support Rating Floor A
Outlooks
All Long-Term IDRs Stable
Financial Data
Lloyds Banking Group plc
30 Jun 11
31 Dec 10
Total assets (USDm) 1,567,074 1,552,244 Total assets (GBPm) 978,951 991,574 Equity (GBPm) 45,546 46,902 Operating profit (GBPm)
-65 734
Published net income (GBPm)
-2,278 -258
Comprehensive income (GBPm)
-1,492 20
Operating ROAA (%) -0.01 0.07 Operating ROAE (%) -0.29 1.59 Fitch core capital ratio (%)
8.19 8.24
Analysts
Svetlana Petrischeva, London +44 20 3530 1182 [email protected] James Longsdon, London +44 20 3530 1076 [email protected]
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Banks
Lloyds Banking Group plc
January 2012 2
Profile
Lloyds was formed in January 2009 when Lloyds TSB acquired HBOS and its subsidiaries. The
group is now one of the UK‟s largest providers of retail financial services, including insurance.
Lloyds had market shares of 22% of gross new residential mortgages in 2010 and 20% in
customer deposits, making it the largest bank by market share in the UK.
Recent History
HBOS had a large exposure to CRE and a dependency on wholesale funding. In September
2008, as concerns over wholesale funding were magnified after the default of Lehman Brothers
and the prospects for CRE looked bleak, Lloyds agreed to acquire HBOS. In January 2009,
Lloyds received GBP17bn of capital from the UK authorities, of which GBP11.5bn of capital
was made available to HBOS on condition that the acquisition completed.
In view of the size of the potential losses at HBOS, in March 2009 Lloyds agreed to discuss
participation in the UK government‟s asset protection scheme (GAPS), designed to insure
Lloyds against losses on GBP260bn of identified assets. Legal and operational complexities
meant that the scheme had not been introduced by September 2009, when the threat of
crippling losses had receded and equity and debt investors were more confident about the
prospects for Lloyds. As a result, Lloyds withdrew from the planned scheme.
In December 2009, Lloyds successfully raised GBP13.5bn of equity and, in a debt exchange,
raised GBP9bn of enhanced capital notes, which would convert into equity if the bank‟s core
Tier 1 capital ratio fell below 5%.
On 1 January 2010, Lloyds adjusted its structure so that HBOS and its subsidiaries are held by
Lloyds TSB, the operating entity, rather than Lloyds Banking Group plc, the ultimate holding
company. Lloyds operates by means of several subsidiaries and brands, including Lloyds TSB,
Halifax, Bank of Scotland, Cheltenham & Gloucester, Scottish Widows and Clerical Medical.
Strategy
Lloyds is active in retail and commercial lending in the UK, financed mainly by customer
deposits and long-term wholesale funding. Historically, Lloyds has operated with good levels of
cost efficiency, low risks and resilient profitability. Lloyds is restructuring HBOS‟s operations by
applying its own risk appetite, lending and provisioning policies.
With the arrival of a new chief executive in 2011, the strategy was reinvigorated to continue the
de-risking and deleveraging, simplify the group structure and increase efficiency, consolidate its
already strong retail and commercial banking franchises and strengthen the balance sheet and
liquidity position. The plans include the annual investment of up to GBP500m to 2014 to
invigorate the Halifax brand, deepen relationships with clients and develop the bancassurance
proposition. The plan also aims to generate sustainable annual cost savings of GBP1.7bn in
2014 on top of the GBP2bn integration synergies by end-2011.
Lloyds targets a loans/deposits ratio below 130% (120% for core business) by end-2014, a
ROE between 12.5% - 14.5% and a core Tier 1 capital ratio above 10% in 2013 when Basel III
transition commences.
Disposals
As part of its review of state aid received by Lloyds in 2009, the European Commission
required Lloyds to dispose of a standalone UK banking business by end-November 2013. The
business for disposal consists of a retail banking business with over 600 branches, a 4.6%
share of the personal current accounts market in the UK and approximately 19% of the group‟s
mortgage assets. The business would consist of the TSB brand, the branches, savings
accounts and branch-based mortgages of Cheltenham & Gloucester, the branches and branch-
based customers of Lloyds TSB Scotland and a related banking licence, additional Lloyds TSB
Figure 1
Retail
29%
Wealth
and Int'l
15%
RWAs by DivisionAs at H111
Source: Fitch
Group operations
and central Items
4%
Wholesale
45%
Commercial
7%
Related Criteria
Global Financial Institutions Ratings Criteria (August 2011)
Leading market shares in UK retail
and commercial banking.
Integration of HBOS almost
complete.
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Lloyds Banking Group plc
January 2012 3
branches and branch-based customers in England and Wales and Intelligent Finance. In
December 2011 Lloyds announced The Co-operative Group to be a preferred bidder for the
transaction, Lloyds aims to agree heads of terms by end-Q112.
Lloyds expects to identify a disposal option (preferred buyer or IPO) by end-2011 allowing
sufficient time for the lengthy separation process. The Independent Commission on Banking
did not recommend additional branch disposals. Based on 2008 data, the bank calculates that
these disposals would cause its pre-tax profit to decline by around GBP500m.
Other state aid requirements included an asset reduction programme, agreement from Lloyds
to not make certain acquisitions and not to make discretionary payments of coupons or to
exercise voluntary call options on hybrid securities from 31 January 2010 until 31 January 2012.
The non-payment of coupons on hybrid securities prevents Lloyds from paying dividends on
ordinary shares in the same period.
Presentation of Accounts
Lloyds TSB and HBOS presented end-2008 accounts separately and the new holding company,
Lloyds, presented interim accounts for the first time at end-June 2009. Although some
comparative figures are available, statutory 2008 accounts are not comparable with 2009 data.
Performance
The improvements in performance in 2010 enabled Lloyds to report a small operating profit for
the period but performance have been under more pressure in 2011. Net interest margins
(NIM) widened in 2010, thanks to many mortgage borrowers reverting to higher standard
variable rates and the re-pricing of wholesale loans. However, NIM narrowed slightly in 9M11
as these benefits were more than offset by higher funding costs. Combined with a reduction in
loan balances through continued deleveraging, net interest revenue was lower. The subdued
UK economy also resulted in lower other income. Revenue growth is likely to be lacklustre in
light of these challenges.
In 2010, Lloyds‟ performance benefitted from a diminishing flow of impaired loans and hence a
significant reduction in loan impairment charges (LICs). Although the reduction in LIC continued
in 9M11, the pace of improvement is slowing. LICs are likely to remain moderately elevated
considering the economic outlook. Costs (excluding one-offs, see below) are well controlled.
On a combined business basis (ie, excluding amortisation of intangibles arising from HBOS
acquisition, insurance business volatility, integration costs and other one-offs), operating costs
were down 3% yoy in 9M11. With HBOS integration almost complete, Lloyds is starting to
benefit from the cost synergies (GBP2bn annually by end-2011).
On a statutory basis, Lloyds made an operating loss in 9M11, as improvements in LIC and
operating costs were not sufficient to offset the revenue pressures. In addition, there were
some one-off provisions/costs, the largest being GBP3.2bn for PPI redress (included as a non-
recurring expense in the attached Income Statement). Other one-offs included a GBP175m
provision in relation to German insurance litigation and GBP976m integration and simplification
costs. Lloyds expected to take a GBP260m charge in Q411 for the 2011 UK bank levy.
The table below (Figure 2) shows the contribution of each of the main operating divisions to
pre-tax profit in H111. These figures are not prepared on the same basis as the statutory
accounts.
NIM under pressure from higher
funding costs.
2011 results affected by GBP3.2bn
PPI redress provisions.
Fair value unwind, the insurance
operations and integration and
disposal costs add volatility to
statutory results.
One-off costs likely to remain a
feature in the near-term from
evolving regulation and as the
strategic review is implemented.
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Lloyds Banking Group plc
January 2012 4
Prospects
A return to more sustainable profitability is likely to be delayed by the muted UK economic
recovery, prolonged low interest rate environment, higher funding costs and continuing asset
quality concerns. In the near term, Lloyds‟ performance will continue to suffer from still
meaningful, but slowly decreasing, LICs. There are also likely to be further charges relating to
the simplification of the group under the new strategic initiatives.
Management has recently noted that the attainment of some of Lloyds‟ medium-term financial
targets, principally the income related metrics, may be delayed to beyond 2014 if weak
economic conditions persist. However, in the medium term, the underlying picture should be
one of reductions in costs and a return to increasing efficiency and profitability as the group
develops its deep franchise, multiple brands, economies of scale and pricing power. Lloyds has
the capacity to extract more value from its leading UK franchise. However, the limited exposure
to international and investment banking business means that returns are not as geographically
or operationally diversified as some national and international peers.
Risk Management
Lloyds‟ approach to risk is in line with legacy Lloyds TSB, which was more conservative,
relationship focused and with risk managed through the cycle. As part of the integration with
HBOS, risk appetite, monitoring and controls have been aligned and further developed where
required by the larger and more specialised nature of the combined group. Lloyds uses stress
tests and other possible outcomes to calculate potential levels of LICs and to manage risk
exposures.
Although some portfolios are being run down, given the nature of some of the non-core assets,
it will be some time before the group‟s exposure has been fully adjusted to this more
conservative approach. New management has reviewed higher risk loans in the wholesale
portfolio to identify and improve management of problematic assets. Lloyds has expanded a
business support unit (BSU) to manage distressed assets, maximise recovery and minimise
impairments.
Credit Risk
Fitch believes credit risk to be the largest risk in the bank. Lloyds incurred large LICs, mainly
against legacy HBOS assets in H109. Since then, LICs have fallen each half year as the UK
economy has improved. Given the current uncertain economic outlook, LICs are likely to
remain high, in Fitch‟s view.
Retail
Unsecured loans, mainly personal loans and credit cards, form a small part of the book but
generate larger LICs and are more susceptible to rise in employment than the residential
mortgages which dominate the book. Management expects improvements in the asset quality
following tighter underwriting, portfolio management actions and write-downs taken.
Figure 2 Lloyds Combined Businesses Profitability by Division (H111)
(GBPm) Retail Wholesale Commercial Insurance Wealth &
international
Group operations and
central items Total
Pre-impairment operating profit 2,826 1,426 396 564 348 -714 4,846 Loan impairment charges -1,173 -1,557 -160 0 -2,532 0 -5,422 Share of results of joint ventures and associates 3 9 0 0 0 0 12 Operating profit 1,656 -122 236 564 -2,184 -714 -564 Fair value unwind 544 1,551 26 -21 104 -536 1,668 Profit before tax 2,200 1,429 262 543 -2,080 -1,250 1,104 Memo: Gross loans (GBPbn) 358 130 29 n.a. 51 1 568
Source: Lloyds 2011 interim results news release
Figure 3
02468
1012
YE07 YE08 YE09 YE10 Q211
0
2
4
6
Impaired loans (LHS)
Impairment charge (RHS)
Reserves for impaired loans (RHS)
Credit Quality (As % of
Gross Loans)
(%)
Source: Fitch
(%)
Major credit risk reduction
programme.
Still significant credit risks but
emergence of impaired loans
slowing.
Market risks small and controlled.
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Lloyds Banking Group plc
January 2012 5
Figure 4 Lloyds Retail Loans at End-June 2011
(GBPbn) Loans Impaired loans Impaired
loans/loans (%) Impairment allowances
Impairment allowances/loans (%)
Secured 336,446 6,695 2.0 1,697 25.3 Unsecured 25,995 2,695 10.4 1,306 48.5 Total 362,441 9,390 2.6 3,003 32.0
Source: Lloyds 2011 interim results news release
HBOS contributed a large UK residential mortgage exposure to the existing significant
exposure of Lloyds TSB. This has resulted in around 22% of Lloyds‟ mortgage portfolio being
riskier buy-to-let and self-certified loans and contributed to the higher LTVs (25% of mortgages
have greater than 90% LTV). However, only 0.9% of all mortgages in negative equity at end-
Q311 were more than three months in arrears.
House prices fell on average to almost 20% below their peak values, but have since recovered
to about 10% below, which has contained losses on a decreasing flow of repossessions.
Recent data suggest a stabilisation of prices, with a risk of a fall as mortgage finance remains
tight, while the supply of properties for sale rises. Losses on residential mortgages in the UK so
far have been smaller than many expected, thanks to the low interest rates, forbearance and
unemployment hitting non-mortgage borrowers (the young and those close to retirement)
hardest. However, impairments may increase if the economic situation deteriorates.
Figure 6 Lloyds Residential Mortgage Loans at End-June 2011
(GBPbn) Loans 3+ months in arrears
Mortgage balances (%)
Loans with loan to value in excess of 100%
Mainstream 260,805 6,056 2.3 10.6 Buy to let 47,272 1,163 2.5 16.4 Specialist 28,369 2,416 8.5 19.4 Total 336,446 9,635 2.9 12.2
Source: Lloyds 2011 interim results news release
Wholesale and Commercial
The largest contributor to LICs is the wholesale book. Within this, the largest credit losses were
from legacy HBOS‟s CRE activities, where exposures involve the whole spectrum of financing
from capital to debt, a risky form of activity not undertaken by legacy Lloyds TSB. The HBOS
acquisition also introduced single-name concentrations as well as increasing the property bias
of the group‟s portfolio.
Figure 7 Lloyds Wholesale Loans at End-June 2011
(GBPbn) Loans Impaired
loans
Impaired loans/loans
(%) Impairment allowances
Impairment allowances/loans
(%)
Corporate 73,760 5,750 7.8 3,252 56.6 Commercial real estate BSU 23,673 16,212 68.5 6,263 38.6 Wholesale equity 140 114 81.4 110 96.5 Wholesale markets 36,843 5,561 15.1 2,177 39.1 Treasury and trading 1,021 0 0 0 0 Asset finance 8,546 1,612 18.9 1,009 62.6 Total 143,983 29,249 20.3 17,777 43.8
Source: Lloyds 2011 interim results news release
The UK CRE market remains sluggish and refinancing options are limited. Increased tenant
defaults, more likely in a prolonged economic downturn, could also exacerbate problems.
Development loans formed a small minority of lending. Overall, Fitch considers that while the
volume of CRE loans is likely to remain meaningful, the level of impairment allowances should
prove adequate. Lloyds has been able to sell some properties close to or slightly above the
Figure 5 Loan Book (End-H111) (GBPm) (%)
Retail 362,441 58.4 Wholesale 143,983 23.2 Commercial 29,694 4.8 Wealth & int‟l 64,119 10.3 Hedging & other 20,176 3.3 Gross loans 620,413 100.0 Provisions -29,571- FV adjustments -2,999 Net loans 587,843
Source: Lloyds, Fitch
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Lloyds Banking Group plc
January 2012 6
marked-down value, although these have mostly been in primary locations. Prospects are
linked broadly to the recovery of the UK economy.
Lloyds‟ other wholesale loans present fewer risks, although the risks may materialise later than
those in CRE. These risks may be highest in the legacy HBOS mid-sized corporate book,
which was characterised by individual concentrations and higher risk borrowers. Wholesale
equity comprises corporate equity, while wholesale markets comprise acquisition finance and
project finance loans. Many transactions have been restructured and Lloyds expects to exit
from all but project finance and development finance, allowing the portfolio to decline. The
current fragile recovery means that a portion of the exposures remain vulnerable.
The commercial loan book focuses on SME lending. At end-H111, 10.1% of the book was
impaired and provision reserve coverage was 31.2%. Given the subdued UK economic
environment, LICs are likely to remain high for this book.
Wealth and International
Figure 8 Lloyds Wealth and International Loans at End-June 2011
(GBPbn) Loans Impaired
loans Impaired
loans/loans (%) Impairment allowances
Impairment allowances/loans (%)
Wealth 9,226 434 4.7 125 28.8 Ireland 27,574 17,672 64.1 9,858 55.8 Australia 12,915 4,540 35.2 2,295 50.6 Wholesale Europe 6,956 952 13.7 429 45.1 Other 7,448 238 3.2 117 49.2 Total 64,119 23,836 37.2 12,824 53.8
Source: Lloyds 2011 interim results news release
Lloyds‟ wealth and international portfolio consists mainly of loans to Irish and Australian
borrowers. The group‟s Irish portfolio is heavily exposed to commercial real estate where large
price falls have led to significant losses. There is little liquidity in the market and economic
uncertainty has led to worsening problems. Impaired loans and impairment allowances
continue to increase. Lloyds has also made large impairment charges against its Australian
portfolio. Australia has suffered less from the economic downturn, but concentrated property
investment loans and loans to other sectors at risk resulted in a high level of impaired loans.
Other Earning Assets
At end-Q3111, Lloyds reported GBP144bn of trading and other assets at fair value through
profit or loss (down from GBP155bn at end-H111), GBP66bn of derivative assets and
GBP36bn of available for sale (AFS) assets. The asset at fair value through profit and loss
relate primarily to the insurance business (GBP130bn at end-H111) where most of the
investment risk is borne by policyholders. There is some residual risk in Lloyds‟ treasury
securities portfolio, but earlier write-downs and fair valuations, make further large devaluations
more limited.
Lloyds has significantly reduced its credit market exposures (largely inherited from HBOS) to
GBP20bn (end-2010: GBP35bn; end-2009: GBP43bn, see Figure 9). This included GBP15bn
accounted for as loans in the wholesale portfolio and GBP5bn trading and AFS assets. Just
under 90% of debt securities are rated „A‟ or better. Lloyds wrote down to fair value many of
these securities on acquisition of HBOS, which continues to provide protection against potential
losses. Lloyds‟ policy is to reduce the size of the portfolio, selling especially where there is risk
of loss.
With the exception of retail and corporate lending in Ireland, the group has minimal exposure to
Belgium, Greece, Ireland, Italy, Portugal and Spain (see Figure 10). Over 40% of banking
group exposures are covered bonds and the remainder is largely short-term exposures. For
ABS exposures, just less than half are AFS securities, with the remainder held as loans.
Figure 9 Credit Market Exposures at End-June 2011
(GBPm) Net
exposure
US residential 4,125 Non-US residential 5,194 Commercial 2,254 Total mortgage-backed securities
11,573
Collateralised debt obligations
2316
Federal family education loan programme student loans (FFELP)
4,176
Personal sector 1117 Other asset-backed securities
680
Total uncovered asset-backed securities
19,862
Negative basisa 205
Total wholesale asset-backed securities (ABS)
20,067
a Negative basis means bonds held with
separate matching credit default swap (CDS) protection. Source: Lloyds 2011 interim results news release
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January 2012 7
Market Risk
Lloyds is primarily a commercial bank and as such takes limited market risk. Most of Lloyds‟
market risk arises from structural rather than trading risks. Market risk is managed with
scenarios and stress tests, value at risk and potential impact on profit before tax. Management
has limited appetite for market risk, has good controls and is progressively reducing the credit
market exposures.
The group‟s large (GBP91bn at end-H111) exposure to equities is composed largely of policy
holders‟ direct holdings and the balance is chiefly the insurance company‟s own equities‟
exposure. This balance nevertheless contributes a material portion of potential losses in a
stress scenario and management is exploring ways of reducing it. The largest other market
risks generated by the balance sheet include basis risk, interest rate risk and credit spread risk,
for which Lloyds has a conservative appetite.
Operational Risk
The simplification programme as part of the strategic review initiatives increases the risk of
operational losses. However, the experience of the HBOS integration should decrease the
likelihood of material loss. As retail banking tends to have frequent but small operational losses,
Lloyds may be less exposed to the risk of large operational losses than investment banks
where losses tend to be rarer and larger.
Funding, Liquidity and Capital
Funding
Lloyds has the largest customer deposit base in the UK (GBP397bn excluding repos at end-
Q311). However, its GBP557bn loan book (excluding reverse repos) requires substantial
wholesale funding. The group reduces this gap through deleveraging and deposits growth; it
targets a loans/deposits ratio below 130% by end-2014 (end-Q311: 140%, end-2010: 154%;
end-2009: 169%). In 9M11, the group grew customer deposits by 4% and reduced customer
loans by 5%, achieving a GBP16bn reduction in wholesale funding to GBP282bn at end-Q311.
Lloyds‟ wholesale funding is relatively well diversified by source (see Figure 11). The
repayment of government and central-bank facilities was accelerated since March 2011 and
usage has decreased significantly (end-Q311: GBP36.8bn; end-2010: GBP96.6bn; end-2009:
GBP157.2bn, including UK Special Liquidity Facility accounted off-balance sheet). The
remainder mature by end-2012.
Lloyds has been issuing in excess of its funding plans (around GBP20bn-25bn of long-term
debt a year) to help accelerate the repayment of government and central bank facilities. In
2010, the group issued GBP50bn term funding. Despite the challenging market during parts of
2011, Lloyds had issued GBP33.6bn of term funding in 10M11, including GBP3bn in October.
Consistent with market trends secured funding accounted for a relatively high 64% of this
issuance (GBP21.4bn). Private placement accounted for 28% (GBP9.5bn) of issuance in
10M11.
Figure 10 Exposures to Selected Eurozone Countries (End-Q311) (GBPm) Belgium Greece Ireland Italy Portugal Spain Total
Direct sovereign 87 - - 52 - 40 179 Central bank deposits 5 - - - - 31 36 Banking groups 309 - 346 1,226 185 2,063 4,129 ABS - 61 329 44 369 408 1,211 Financial assets held for trading 1 - 1 295 16 106 419 Assets held by insurance business 270 - 81 99 - 81 531 Corporate exposures 451 557 8,646 65 104 1,816 11,639 Retail exposures - - 6,453 - 9 1,692 8,154 Total 1,123 618 15,856 1,781 683 6,237 26,298
Source: Lloyds, Fitch
Government and central bank
funding significantly reduced.
Moderate reliance on wholesale
funding.
Contingent funding supported by
large volumes of high quality liquid
assets.
Capital acceptable and likely to
strengthen through deleveraging.
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Lloyds Banking Group plc
January 2012 8
Liquidity
Half of wholesale funding at end-Q311 (ie, GBP141bn) had maturities less than 12 months,
including GBP80bn of money market funding (commercial paper (CP), certificates of deposit
(CDs), asset-backed commercial paper (ABCP) and interbank deposits). In addition, GBP28bn
of wholesale funding had maturities between one and two years.
Lloyds‟ substantial short-term wholesale funding requirements in volatile funding markets
remain a point to watch. However, the bank‟s extensive franchise and large stock of liquid
assets (which exceed the amount of short-term wholesale funding) place it in a solid position.
Lloyds had GBP220bn of unencumbered liquid assets at end-Q311 including GBP97bn of FSA
eligible assets (cash, gilts, US treasuries and Euro AAA government securities) and GBP123bn
of secondary liquidity (highly rated securities including self-issuance).
Lloyds regularly runs various stress tests, including idiosyncratic and system-wide scenarios.
Management‟s projections show the group will achieve the proposed Basel III liquidity and
funding metrics in advance of expected implementation dates.
Capital
Lloyds exchanged some hybrid instruments for ordinary shares in 2010 which was a major
reason for a GBP1.6bn increase in its core Tier 1 (CT1) capital during the period. At the same
time, risk weighted assets (RWAs) fell by 18% reflecting deleveraging efforts and the change in
the methodology. Hence, Lloyds‟ CT1 ratio strengthened materially to 10.2% at end-2010 from
8.1% at end-2009. A further 9% reduction in RWAs in 9M11 offset the effect of the statutory
loss reported for the period with the CT1 ratio remaining broadly stable (10.3% at end-Q311).
Lloyds announced a tender offer for its lower tier 2 (LT2) securities on 1 December 2011
(offering to exchange them at a discount for more attractively priced LT2 securities) which is
likely to have a positive effect on its CT1 capital position due to accounting effect.
Lloyds targets a CT1 capital ratio greater than 10% after the start of Basel III transition period in
2013. Lloyds‟ focus on retail and commercial banking should mean that it faces less serious
challenges than its peers with sizable investment banking operations in adapting to Basel III‟s
challenging capital requirements. Tougher capital requirements for ownership of insurance
operations are likely, however, to weigh on the CT1 ratio. Management expects the
implementation of CRD 2/3 to have a negative effect of about 0.8% on Lloyds‟ CT1 ratio by
end-2013 (before insurance deduction is applied from 2014). Lloyds repatriated GBP1.5bn of
equity from its insurance subsidiaries in 2010 (including GBP0.8bn through exchange of equity
into subordinated debt) and completed further insurance capital restructurings in July 2011
(which will reduce CT1 deduction under Basel III by just over GBP2bn).
The Fitch core capital ratio, which is calculated after deductions for deferred tax assets and
equity in insurance subsidiaries, was an adequate 8.2% at end-H111. Lloyds‟ de-risking and
deleveraging actions make it well placed to meet new regulatory requirements amid a more
difficult environment for internal capital generation. However, Fitch‟s core capital ratio is
unlikely to improve meaningfully until the group starts generating sustainable profits.
Hybrid Instruments
As part of its capital raising measures in 2009, Lloyds exchanged certain Tier 1 and Upper Tier
2 securities into enhanced capital notes (ECNs), which constitute Lower Tier 2 debt under
normal circumstances but automatically convert entirely to equity as soon as Lloyds reports a
core Tier 1 ratio below 5%. This provides Lloyds with EUR9bn of contingency capital, equal to
2% of RWA. However, given the developments in regulation, these ECNs are unlikely to ever
be converted since the trigger point is so low.
Following European Commission state aid requirements, Lloyds will not pay coupons on certain
Tier 1 and Upper Tier 2 securities for a period of two years from 31 January 2010. As a result,
the bank will not pay any dividends in this period on its ordinary shares. Management has
Figure 11 LBG: Sources of Funding at End-June 2011 (GBPbn) H111 2010 2009
Retail deposits
242.3 235.6 224.1
Corporate deposits
152.6 146.9 147.1
Customer repos
5.0 11.1 35.5
Bank repos 9.4 24.0 27.6 Deposits by banks
21.9 26.4 48.6
CDs/CPs 73.7 74.9 85.9 Covered bonds
39.1 32.1 28.1
Securitisation
37.1 39.0 35.8
Debt under CGS
37.1 45.4 50.0
Senior debt 49.5 42.3 89.7 Subordinated debt
37.2 37.9 37.4
Derivatives 36.1 42.2 40.5 Trading 27.3 26.8 28.3 Other 52.8 51.4 46.3 Accounting adjust
-6.9 -6.5 -2.4
Total 814 829 922
Other include: Liabilities arising from non-participating investment contracts Source: Lloyds, Fitch
Page 9
Banks
Lloyds Banking Group plc
January 2012 9
stated it intends to be in a position to recommence payment of coupons and dividends on these
hybrid capital securities after 31 January 2012.
Holding Company Analysis
At end-2010, Lloyds reported GBP37bn of equity at the parent company (compared with
GBP46bn at group level). The holding company itself does not undertake any activity other
than investment in its regulated operating subsidiaries. Its investment in its subsidiaries was
GBP38bn, hence double leverage is very limited (with a double leverage ratio of 103%).
However, the larger equity base at group level indicates that some debt at the holding company
was injected into group subsidiaries as capital.
The change in company structure on 1 January 2010 saw GBP9bn of enhanced capital notes
transferred to the parent company, increasing its burden of coupon payments, while all
preference shares and almost all other dated and undated securities were transferred to
banking subsidiaries. Fitch considers that the current extent of double leverage is acceptable.
Page 10
Banks
Lloyds Banking Group plc
January 2012 10
Figure 12 Peer Comparison
Lloyds Banking Group plc (GBPm)
‘A’/Stable/‘bbb’
The Royal Bank of Scotland Group plc
(GBPm)
‘A’/Stable/‘bbb’
Santander UK plc (GBPm)
‘A+’/Stable/‘a+’
Nationwide Building Society
(GBPm)
‘A+’/Negative/‘a+’
Q311 2010 2009 Q311 2010 H111 2010 H112 FY11
Total assets (GBPm) 984,081 991,574 1,027,255 2,507,374 1,453,576 313,054 302,860 193,882 188,878 Total equity (GBPm) 46,325 46,902 44,107 113,345 70,622 11,346 11,380 6,077 6,254 Net interest income 9,933 12,546 9,026 9,605 14,209 1,981 3,814 783 1,541 Net fees and commission income 2,176 2,733 2,737 3,907 5,982 432 699 222 436 Other operating income 3,001 9,677 10,017 5,476.0 6,092.0 254 370 72.0 125.0 Non-interest operating costs 9,772 13,270 15,984 13,459 18,218 1,128 2,197 683 1,331 Loan impairment charge 6,017 10,771 16,028 5,747 9,256 259 712 144 359 Other impairment charges n.a. 181 645 1,044 n.a. n.a. n.a. 6 66 Operating profit 679 734 -10,877 -1,262 -1,191 1,280 2,086 244 346 Non-operating income and expenses 3,179 453 11,919 2,472 792 -731 - -6 -29 Pre-tax profit 3,858 281 1,042 1,210 -399 549 2,086 238 317 Taxes and discontinued operations 1,079 539 1,911 1,399 1,267 136 581 50 69 Net income 2,779 258 2,953 -189 -1,666 413 1,583 188 248 Net interest margin (%) na 1.34 1.16 0.94 1.47 1.47 1.41 0.85 0.84 Cost/income (%) 64.67 53.17 73.39 70.88 69.31 42.29 44.99 63.42 63.32 Pre-impairment operating ROAA (%) 0.73 1.15 0.69 0.5 0.48 1.01 0.96 0.41 0.41 Operating ROAA (%) -0.09 0.07 -1.29 -0.11 -0.07 0.84 0.71 0.25 0.18 Operating ROAE (%) -1.98 1.59 -36.73 -2.38 -1.55 24.77 25.48 7.89 5.82 Regulatory core tier 1 (%) 10.3 10.2 8.1 11.3 10.7 11.4 11.5 12.7 12.5 Regulatory tier 1 capital (%) 11.9 11.6 9.6 13.8 12.9 14.7 14.8 16.1 15.7 Regulatory total capital (%) 15.3 15.2 12.4 14.7 14 20.4 20.6 19.9 19.5 Fitch core capital/RWA (%) n.a. 8.24 5.91 7.79 6.69 12.26 11.96 12.04 11.62 Equity/assets (%) 4.71 4.73 4.29 4.52 4.86 3.62 3.76 3.13 3.31 Impaired/total loans (%) 10.56 10.38 9.01 7.63 6.73 1.13 1.14 2.02 1.95 Loan impairment cover (%) n.a. 45.87 44.17 48.21 46.78 70.52 71.65 25.33 26.14 Loan impairment charge/avg. gross loans (%)
1.33 1.69 3.04 1.35 1.48 0.26 0.36 0.19 0.24
Loan/deposit ratio (%) 140.47 154.12 168.62 111.97 117.30 132.88 132.5 115.31 116.77 a Financial year end on 4 April
Source: Companies‟ accounts adapted by Fitch
Page 11
Banks
Lloyds Banking Group plc
January 2012 11
Lloyds Banking Group plc
Income Statement
6 Months - Interim 6 Months - Interim As % of Year End As % of Year End As % of Year End As % of
USDm GBPm Earning GBPm Earning GBPm Earning GBPm Earning
Unaudited Unaudited Assets Unqualified Assets Unqualified Assets Unqualified Assets
1. Interest Income on Loans n.a. n.a. - 26,085.0 2.86 25,023.0 2.62 15,716.0 3.75
2. Other Interest Income 21,509.5 13,437.0 3.08 3,255.0 0.36 3,215.0 0.34 1,853.0 0.44
3. Dividend Income n.a. n.a. - n.a. - n.a. - n.a. -
4. Gross Interest and Dividend Income 21,509.5 13,437.0 3.08 29,340.0 3.21 28,238.0 2.96 17,569.0 4.20
5. Interest Expense on Customer Deposits n.a. n.a. - 5,381.0 0.59 4,410.0 0.46 4,932.0 1.18
6. Other Interest Expense 11,922.5 7,448.0 1.71 11,413.0 1.25 14,802.0 1.55 4,919.0 1.18
7. Total Interest Expense 11,922.5 7,448.0 1.71 16,794.0 1.84 19,212.0 2.02 9,851.0 2.35
8. Net Interest Income 9,587.0 5,989.0 1.37 12,546.0 1.37 9,026.0 0.95 7,718.0 1.84
9. Net Gains (Losses) on Trading and Derivatives 4,991.2 3,118.0 0.71 15,724.0 1.72 19,098.0 2.00 -9,186.0 -2.19
10. Net Gains (Losses) on Other Securities n.a. n.a. - n.a. - n.a. - n.a. -
11. Net Gains (Losses) on Assets at FV through Income Statement n.a. n.a. - n.a. - n.a. - n.a. -
12. Net Insurance Income -1,959.3 -1,224.0 -0.28 -10,363.0 -1.14 -13,073.0 -1.37 8,271.0 1.98
13. Net Fees and Commissions 2,341.9 1,463.0 0.34 2,733.0 0.30 2,737.0 0.29 2,537.0 0.61
14. Other Operating Income 2,414.0 1,508.0 0.35 4,316.0 0.47 3,992.0 0.42 532.0 0.13
15. Total Non-Interest Operating Income 7,787.7 4,865.0 1.12 12,410.0 1.36 12,754.0 1.34 2,154.0 0.51
16. Personnel Expenses 5,076.0 3,171.0 0.73 5,469.0 0.60 6,675.0 0.70 2,931.0 0.70
17. Other Operating Expenses 5,213.7 3,257.0 0.75 7,801.0 0.85 9,309.0 0.98 3,252.0 0.78
18. Total Non-Interest Expenses 10,289.7 6,428.0 1.47 13,270.0 1.45 15,984.0 1.68 6,183.0 1.48
19. Equity-accounted Profit/ Loss - Operating n.a. n.a. - n.a. - n.a. - n.a. -
20. Pre-Impairment Operating Profit 7,085.0 4,426.0 1.01 11,686.0 1.28 5,796.0 0.61 3,689.0 0.88
21. Loan Impairment Charge 7,112.2 4,443.0 1.02 10,771.0 1.18 16,028.0 1.68 2,876.0 0.69
22. Securities and Other Credit Impairment Charges 76.8 48.0 0.01 181.0 0.02 645.0 0.07 6.0 0.00
23. Operating Profit -104.0 -65.0 -0.01 734.0 0.08 -10,877.0 -1.14 807.0 0.19
24. Equity-accounted Profit/ Loss - Non-operating 22.4 14.0 0.00 -88.0 -0.01 -752.0 -0.08 n.a. -
25. Non-recurring Income n.a. n.a. - n.a. - 12,671.0 1.33 0.0 0.00
26. Non-recurring Expense 5,122.5 3,200.0 0.73 365.0 0.04 n.a. - n.a. -
27. Change in Fair Value of Own Debt n.a. n.a. - n.a. - n.a. - n.a. -
28. Other Non-operating Income and Expenses n.a. n.a. - n.a. - n.a. - n.a. -
29. Pre-tax Profit -5,204.1 -3,251.0 -0.75 281.0 0.03 1,042.0 0.11 807.0 0.19
30. Tax expense -1,557.5 -973.0 -0.22 539.0 0.06 -1,911.0 -0.20 -38.0 -0.01
31. Profit/Loss from Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a. -
32. Net Income -3,646.6 -2,278.0 -0.52 -258.0 -0.03 2,953.0 0.31 845.0 0.20
33. Change in Value of AFS Investments 672.3 420.0 0.10 493.0 0.05 2,248.0 0.24 399.0 0.10
34. Revaluation of Fixed Assets n.a. n.a. - n.a. - n.a. - n.a. -
35. Currency Translation Differences -123.3 -77.0 -0.02 -129.0 -0.01 -219.0 -0.02 1.0 0.00
36. Remaining OCI Gains/(losses) 709.1 443.0 0.10 -86.0 -0.01 -290.0 -0.03 n.a. -
37. Fitch Comprehensive Income -2,388.3 -1,492.0 -0.34 20.0 0.00 4,692.0 0.49 1,245.0 0.30
38. Memo: Profit Allocation to Non-controlling Interests 43.2 27.0 0.01 62.0 0.01 126.0 0.01 26.0 0.01
39. Memo: Net Income after Allocation to Non-controlling Interests -3,689.8 -2,305.0 -0.53 -320.0 -0.04 2,827.0 0.30 819.0 0.20
40. Memo: Common Dividends Relating to the Period 0.0 0.0 0.00 47.0 0.01 0.0 0.00 2,042.0 0.49
41. Memo: Preferred Dividends Related to the Period 0.0 0.0 0.00 n.a. - n.a. - n.a. -
Exchange rate
31 Dec 2009
USD1 = GBP0.61748
31 Dec 2008
USD1 = GBP0.68597
30 Jun 2011
USD1 = GBP0.62470
31 Dec 2010
USD1 = GBP0.63880
Page 12
Banks
Lloyds Banking Group plc
January 2012 12
Lloyds Banking Group plc
Balance Sheet
6 Months - Interim 6 Months - Interim As % of Year End As % of Year End As % of Year End As % of
USDm GBPm Assets GBPm Assets GBPm Assets GBPm Assets
AssetsA. Loans
1. Residential Mortgage Loans 566,230.2 353,724.0 36.13 356,261.0 35.93 362,667.0 35.30 114,643.0 26.29
2. Other Mortgage Loans n.a. n.a. - n.a. - n.a. - n.a. -
3. Other Consumer/ Retail Loans 51,948.1 32,452.0 3.31 36,967.0 3.73 42,958.0 4.18 25,318.0 5.81
4. Corporate & Commercial Loans 330,246.5 206,305.0 21.07 202,243.0 20.40 229,315.0 22.32 96,428.0 22.11
5. Other Loans 39,912.0 24,933.0 2.55 26,761.0 2.70 18,017.0 1.75 9,915.0 2.27
6. Less: Reserves for Impaired Loans/ NPLs 47,336.3 29,571.0 3.02 29,635.0 2.99 25,988.0 2.53 3,569.0 0.82
7. Net Loans 941,000.5 587,843.0 60.05 592,597.0 59.76 626,969.0 61.03 242,735.0 55.67
8. Gross Loans 988,336.8 617,414.0 63.07 622,232.0 62.75 652,957.0 63.56 246,304.0 56.49
9. Memo: Impaired Loans included above 104,799.1 65,468.0 6.69 64,606.0 6.52 58,833.0 5.73 8,542.0 1.96
10. Memo: Loans at Fair Value included above n.a. n.a. - n.a. - n.a. - n.a. -
B. Other Earning Assets
1. Loans and Advances to Banks 45,093.6 28,170.0 2.88 30,272.0 3.05 35,361.0 3.44 41,704.0 9.56
2. Reverse Repos and Cash Collateral n.a. n.a. - n.a. - n.a. - n.a. -
3. Trading Securities and at FV through Income 40,212.9 25,121.0 2.57 26,489.0 2.67 31,438.0 3.06 45,064.0 10.33
4. Derivatives 72,444.4 45,256.0 4.62 50,777.0 5.12 49,928.0 4.86 28,884.0 6.62
5. Available for Sale Securities 52,494.0 32,793.0 3.35 42,955.0 4.33 46,602.0 4.54 55,707.0 12.78
6. Held to Maturity Securities 12,553.2 7,842.0 0.80 7,905.0 0.80 n.a. - n.a. -
7. At-equity Investments in Associates 683.5 427.0 0.04 429.0 0.04 479.0 0.05 n.a. -
8. Other Securities n.a. n.a. - n.a. - n.a. - n.a. -
9. Total Securities 178,388.0 111,439.0 11.38 128,555.0 12.96 128,447.0 12.50 129,655.0 29.74
10. Memo: Government Securities included Above 29,102.0 18,180.0 1.86 18,649.0 1.88 8,700.0 0.85 3,282.0 0.75
11. Memo: Total Securities Pledged n.a. n.a. - n.a. - n.a. - n.a. -
12. Investments in Property 10,310.5 6,441.0 0.66 5,997.0 0.60 4,757.0 0.46 2,631.0 0.60
13. Insurance Assets 208,195.9 130,060.0 13.29 129,702.0 13.08 125,258.0 12.19 1,893.0 0.43
14. Other Earning Assets 24,845.5 15,521.0 1.59 25,735.0 2.60 32,652.0 3.18 0.0 0.00
15. Total Earning Assets 1,407,834.2 879,474.0 89.84 912,858.0 92.06 953,444.0 92.81 418,618.0 96.01
C. Non-Earning Assets
1. Cash and Due From Banks 90,654.7 56,632.0 5.78 39,483.0 3.98 40,573.0 3.95 5,008.0 1.15
2. Memo: Mandatory Reserves included above n.a. n.a. - n.a. - n.a. - n.a. -
3. Foreclosed Real Estate n.a. n.a. - n.a. - n.a. - n.a. -
4. Fixed Assets 12,604.5 7,874.0 0.80 8,190.0 0.83 9,224.0 0.90 2,965.0 0.68
5. Goodwill 3,227.1 2,016.0 0.21 2,016.0 0.20 2,016.0 0.20 2,256.0 0.52
6. Other Intangibles 5,213.7 3,257.0 0.33 3,496.0 0.35 4,087.0 0.40 197.0 0.05
7. Current Tax Assets 893.2 558.0 0.06 621.0 0.06 680.0 0.07 300.0 0.07
8. Deferred Tax Assets 8,199.1 5,122.0 0.52 4,164.0 0.42 5,006.0 0.49 833.0 0.19
9. Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a. -
10. Other Assets 38,447.3 24,018.0 2.45 20,746.0 2.09 12,225.0 1.19 5,856.0 1.34
11. Total Assets 1,567,073.8 978,951.0 100.00 991,574.0 100.00 1,027,255.0 100.00 436,033.0 100.00
Liabilities and Equity
D. Interest-Bearing Liabilities
1. Customer Deposits - Current 32,607.7 20,370.0 2.08 21,516.0 2.17 103,151.0 10.04 51,285.0 11.76
2. Customer Deposits - Savings 357,768.5 223,498.0 22.83 215,733.0 21.76 207,474.0 20.20 76,144.0 17.46
3. Customer Deposits - Term 249,801.5 156,051.0 15.94 156,384.0 15.77 96,116.0 9.36 43,509.0 9.98
4. Total Customer Deposits 640,177.7 399,919.0 40.85 393,633.0 39.70 406,741.0 39.59 170,938.0 39.20
5. Deposits from Banks 50,094.4 31,294.0 3.20 50,363.0 5.08 82,452.0 8.03 67,022.0 15.37
6. Repos and Cash Collateral n.a. n.a. - n.a. - n.a. - n.a. -
7. Other Deposits and Short-term Borrowings n.a. n.a. - n.a. - n.a. - n.a. -
8. Total Deposits, Money Market and Short-term Funding 690,272.1 431,213.0 44.05 443,996.0 44.78 489,193.0 47.62 237,960.0 54.57
9. Senior Debt Maturing after 1 Year 370,088.0 231,194.0 23.62 228,866.0 23.08 233,502.0 22.73 75,710.0 17.36
10. Subordinated Borrowing 56,963.3 35,585.0 3.64 36,232.0 3.65 34,727.0 3.38 17,256.0 3.96
11. Other Funding 84,557.4 52,823.0 5.40 51,363.0 5.18 46,348.0 4.51 14,243.0 3.27
12. Total Long Term Funding 511,608.8 319,602.0 32.65 316,461.0 31.92 314,577.0 30.62 107,209.0 24.59
13. Derivatives 57,706.1 36,049.0 3.68 42,158.0 4.25 40,485.0 3.94 26,892.0 6.17
14. Trading Liabilities 43,685.0 27,290.0 2.79 26,762.0 2.70 28,271.0 2.75 6,754.0 1.55
15. Total Funding 1,303,272.0 814,154.0 83.17 829,377.0 83.64 872,526.0 84.94 378,815.0 86.88
E. Non-Interest Bearing Liabilities
1. Fair Value Portion of Debt n.a. n.a. - n.a. - n.a. - n.a. -
2. Credit impairment reserves n.a. n.a. - n.a. - n.a. - n.a. -
3. Reserves for Pensions and Other 7,286.7 4,552.0 0.46 1,955.0 0.20 1,763.0 0.17 n.a. -
4. Current Tax Liabilities 168.1 105.0 0.01 149.0 0.02 51.0 0.00 0.0 0.00
5. Deferred Tax Liabilities 659.5 412.0 0.04 247.0 0.02 209.0 0.02 0.0 0.00
6. Other Deferred Liabilities n.a. n.a. - n.a. - n.a. - n.a. -
7. Discontinued Operations n.a. n.a. - n.a. - n.a. - n.a. -
8. Insurance Liabilities 129,539.0 80,923.0 8.27 81,372.0 8.21 77,261.0 7.52 34,062.0 7.81
9. Other Liabilities 53,240.0 33,259.0 3.40 31,572.0 3.18 31,338.0 3.05 13,457.0 3.09
10. Total Liabilities 1,494,165.2 933,405.0 95.35 944,672.0 95.27 983,148.0 95.71 426,334.0 97.78
F. Hybrid Capital
1. Pref. Shares and Hybrid Capital accounted for as Debt n.a. n.a. - n.a. - n.a. - n.a. -
2. Pref. Shares and Hybrid Capital accounted for as Equity n.a. n.a. - n.a. - n.a. - n.a. -
G. Equity
1. Common Equity 71,888.9 44,909.0 4.59 46,061.0 4.65 43,278.0 4.21 9,393.0 2.15
2. Non-controlling Interest 1,019.7 637.0 0.07 841.0 0.08 829.0 0.08 306.0 0.07
3. Securities Revaluation Reserves n.a. n.a. - n.a. - n.a. - n.a. -
4. Foreign Exchange Revaluation Reserves n.a. n.a. - n.a. - n.a. - n.a. -
5. Fixed Asset Revaluations and Other Accumulated OCI n.a. n.a. - n.a. - n.a. - n.a. -
6. Total Equity 72,908.6 45,546.0 4.65 46,902.0 4.73 44,107.0 4.29 9,699.0 2.22
7. Total Liabilities and Equity 1,567,073.8 978,951.0 100.00 991,574.0 100.00 1,027,255.0 100.00 436,033.0 100.00
8. Memo: Fitch Core Capital 50,268.9 31,403.0 3.21 33,478.0 3.38 29,158.0 2.84 n.a. -
9. Memo: Fitch Eligible Capital 54,999.2 34,358.0 3.51 36,400.5 3.67 33,805.0 3.29 n.a. -
Exchange rate
31 Dec 2009
USD1 = GBP0.61748
31 Dec 2008
USD1 = GBP0.68597
30 Jun 2011
USD1 = GBP0.62470
31 Dec 2010
USD1 = GBP0.63880
Page 13
Banks
Lloyds Banking Group plc
January 2012 13
Lloyds Banking Group plc
Summary Analytics30 Jun 2011 31 Dec 2010 31 Dec 2009 31 Dec 2008
6 Months - Interim Year End Year End Year End
A. Interest Ratios
1. Interest Income on Loans/ Average Gross Loans n.a. 4.09 4.74 6.83
2. Interest Expense on Customer Deposits/ Average Customer Deposits n.a. 1.32 1.31 2.92
3. Interest Income/ Average Earning Assets 3.05 3.14 3.63 4.76
4. Interest Expense/ Average Interest-bearing Liabilities 1.87 1.95 2.65 3.03
5. Net Interest Income/ Average Earning Assets 1.36 1.34 1.16 2.09
6. Net Int. Inc Less Loan Impairment Charges/ Av. Earning Assets 0.35 0.19 -0.90 1.31
7. Net Interest Inc Less Preferred Stock Dividend/ Average Earning Assets 1.36 1.34 1.16 2.09
B. Other Operating Profitability Ratios
1. Non-Interest Income/ Gross Revenues 44.82 49.73 58.56 21.82
2. Non-Interest Expense/ Gross Revenues 59.22 53.17 73.39 62.63
3. Non-Interest Expense/ Average Assets 1.32 1.31 1.90 1.60
4. Pre-impairment Op. Profit/ Average Equity 19.58 25.28 19.57 33.33
5. Pre-impairment Op. Profit/ Average Total Assets 0.91 1.15 0.69 0.96
6. Loans and securities impairment charges/ Pre-impairment Op. Profit 101.47 93.72 287.66 78.12
7. Operating Profit/ Average Equity -0.29 1.59 -36.73 7.29
8. Operating Profit/ Average Total Assets -0.01 0.07 -1.29 0.21
9. Taxes/ Pre-tax Profit 29.93 191.81 -183.40 -4.71
10. Pre-Impairment Operating Profit / Risk Weighted Assets 2.33 2.88 1.17 2.16
11. Operating Profit / Risk Weighted Assets -0.03 0.18 -2.20 0.47
C. Other Profitability Ratios
1. Net Income/ Average Total Equity -10.08 -0.56 9.97 7.63
2. Net Income/ Average Total Assets -0.47 -0.03 0.35 0.22
3. Fitch Comprehensive Income/ Average Total Equity -6.60 0.04 15.85 11.25
4. Fitch Comprehensive Income/ Average Total Assets -0.31 0.00 0.56 0.32
5. Net Income/ Av. Total Assets plus Av. Managed Securitized Assets n.a. n.a. n.a. n.a.
6. Net Income/ Risk Weighted Assets -1.20 -0.06 0.60 0.50
7. Fitch Comprehensive Income/ Risk Weighted Assets -0.79 0.00 0.95 0.73
D. Capitalization
1. Fitch Core Capital/Weighted Risks 8.19 8.24 5.91 n.a.
2. Fitch Eligible Capital/ Weighted Risks 8.96 8.96 6.85 n.a.
3. Tangible Common Equity/ Tangible Assets 3.63 3.79 3.25 1.48
4. Tier 1 Regulatory Capital Ratio 11.60 11.60 9.60 8.00
5. Total Regulatory Capital Ratio 15.00 15.20 12.40 11.20
6. Core Tier 1 Regulatory Capital Ratio 10.10 10.20 8.10 5.60
7. Equity/ Total Assets 4.65 4.73 4.29 2.22
8. Cash Dividends Paid & Declared/ Net Income 0.00 -18.22 0.00 241.66
9. Cash Dividend Paid & Declared/ Fitch Comprehensive Income 0.00 235.00 0.00 164.02
10. Cash Dividends & Share Repurchase/Net Income n.a. n.a. n.a. n.a.
11. Net Income - Cash Dividends/ Total Equity -10.09 -0.65 6.70 -12.34
E. Loan Quality
1. Growth of Total Assets -1.27 -3.47 135.59 23.40
2. Growth of Gross Loans -0.77 -4.71 165.10 16.06
3. Impaired Loans(NPLs)/ Gross Loans 10.60 10.38 9.01 3.47
4. Reserves for Impaired Loans/ Gross loans 4.79 4.76 3.98 1.45
5. Reserves for Impaired Loans/ Impaired Loans 45.17 45.87 44.17 41.78
6. Impaired Loans less Reserves for Imp Loans/ Equity 78.81 74.56 74.47 51.27
7. Loan Impairment Charges/ Average Gross Loans 1.47 1.69 3.04 1.25
8. Net Charge-offs/ Average Gross Loans 1.47 1.08 0.78 0.65
9. Impaired Loans + Foreclosed Assets/ Gross Loans + Foreclosed Assets 10.60 10.38 9.01 3.47
F. Funding
1. Loans/ Customer Deposits 154.38 158.07 160.53 144.09
2. Interbank Assets/ Interbank Liabilities 90.02 60.11 42.89 62.22
3. Customer Deposits/ Total Funding excl Derivatives 51.40 50.00 48.88 48.57
Page 14
Banks
Lloyds Banking Group plc
January 2012 14
Lloyds Banking Group plc
Reference Data
6 Months - Interim 6 Months - Interim As % of Year End As % of Year End As % of Year End As % of
USDm GBPm Assets GBPm Assets GBPm Assets GBPm Assets
A. Off-Balance Sheet Items
1. Managed Securitized Assets Reported Off-Balance Sheet n.a. n.a. - n.a. - n.a. - n.a. -
2. Other off-balance sheet exposure to securitizations n.a. n.a. - n.a. - n.a. - n.a. -
3. Guarantees 6,497.5 4,059.0 0.41 4,131.0 0.42 6,049.0 0.59 4,720.0 1.08
4. Acceptances and documentary credits reported off-balance sheet 88.0 55.0 0.01 48.0 0.00 59.0 0.01 49.0 0.01
5. Committed Credit Lines 174,522.2 109,024.0 11.14 116,156.0 11.71 127,537.0 12.42 80,823.0 18.54
6. Other Contingent Liabilities 1,421.5 888.0 0.09 1,142.0 0.12 1,046.0 0.10 2,569.0 0.59
7. Total Business Volume 1,749,603.0 1,092,977.0 111.65 1,113,051.0 112.25 1,161,946.0 113.11 524,194.0 120.22
8. Memo: Total Weighted Risks 613,521.7 383,267.0 39.15 406,372.0 40.98 493,307.0 48.02 170,500.0 39.10
9. Fitch Adjustments to Weighted Risks. n.a. n.a. - n.a. - n.a. - n.a. -
10. Fitch Adjusted Weighted Risks 613,521.7 383,267.0 39.15 406,372.0 40.98 493,307.0 48.02 170,500.0 39.10
B. Average Balance Sheet
Average Loans 973,841.8 608,359.0 62.14 638,529.0 64.40 527,516.0 51.35 230,246.7 52.80
Average Earning Assets 1,423,488.1 889,253.0 90.84 935,860.0 94.38 778,085.0 75.74 368,726.3 84.56
Average Assets 1,575,702.4 984,341.3 100.55 1,015,651.3 102.43 842,139.0 81.98 385,720.3 88.46
Average Managed Securitized Assets (OBS) n.a. n.a. - n.a. - n.a. - n.a. -
Average Interest-Bearing Liabilities 1,284,962.9 802,716.3 82.00 859,154.0 86.65 726,310.7 70.70 324,593.3 74.44
Average Common equity 72,164.2 45,081.0 4.61 45,370.7 4.58 28,697.3 2.79 11,120.0 2.55
Average Equity 72,952.9 45,573.7 4.66 46,221.7 4.66 29,610.7 2.88 11,068.3 2.54
Average Customer Deposits 636,262.2 397,473.0 40.60 406,929.3 41.04 335,587.0 32.67 168,651.0 38.68
C. Maturities
Asset Maturities:
Loans & Advances < 3 months n.a. n.a. - 68,941.0 6.95 97,064.0 9.45 47,108.0 10.80
Loans & Advances 3 - 12 Months n.a. n.a. - 28,193.0 2.84 30,296.0 2.95 15,430.0 3.54
Loans and Advances 1 - 5 Years n.a. n.a. - 114,102.0 11.51 126,355.0 12.30 56,331.0 12.92
Loans & Advances > 5 years n.a. n.a. - 381,361.0 38.46 373,254.0 36.34 123,866.0 28.41
Debt Securities < 3 Months n.a. n.a. - 8,665.0 0.87 4,574.0 0.45 38,416.0 8.81
Debt Securities 3 - 12 Months n.a. n.a. - 3,909.0 0.39 3,729.0 0.36 2,682.0 0.62
Debt Securities 1 - 5 Years n.a. n.a. - 15,702.0 1.58 24,034.0 2.34 11,902.0 2.73
Debt Securities > 5 Years n.a. n.a. - 48,319.0 4.87 46,917.0 4.57 47,771.0 10.96
Interbank < 3 Months n.a. n.a. - 25,274.0 2.55 27,424.0 2.67 28,297.0 6.49
Interbank 3 - 12 Months n.a. n.a. - 2,550.0 0.26 4,759.0 0.46 7,002.0 1.61
Interbank 1 - 5 Years n.a. n.a. - 1,529.0 0.15 1,880.0 0.18 5,354.0 1.23
Interbank > 5 Years n.a. n.a. - 919.0 0.09 1,298.0 0.13 105.0 0.02
Liability Maturities:
Retail Deposits < 3 months n.a. n.a. - 326,456.0 32.92 353,568.0 34.42 160,514.0 36.81
Retail Deposits 3 - 12 Months n.a. n.a. - 30,790.0 3.11 18,234.0 1.78 7,925.0 1.82
Retail Deposits 1 - 5 Years n.a. n.a. - 33,802.0 3.41 30,627.0 2.98 2,054.0 0.47
Retail Deposits > 5 Years n.a. n.a. - 2,585.0 0.26 4,312.0 0.42 445.0 0.10
Other Deposits < 3 Months n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits 3 - 12 Months n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits 1 - 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Other Deposits > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Interbank < 3 Months n.a. n.a. - 34,753.0 3.50 61,399.0 5.98 63,159.0 14.48
Interbank 3 - 12 Months n.a. n.a. - 4,152.0 0.42 16,612.0 1.62 1,399.0 0.32
Interbank 1 - 5 Years n.a. n.a. - 9,467.0 0.95 1,106.0 0.11 1,956.0 0.45
Interbank > 5 Years n.a. n.a. - 1,991.0 0.20 3,335.0 0.32 0.0 0.00
Senior Debt Maturing < 3 months n.a. n.a. - 63,394.0 6.39 74,302.0 7.23 49,386.0 11.33
Senior Debt Maturing 3-12 Months n.a. n.a. - 46,629.0 4.70 33,475.0 3.26 9,192.0 2.11
Senior Debt Maturing 1- 5 Years n.a. n.a. - 67,190.0 6.78 75,912.0 7.39 13,643.0 3.13
Senior Debt Maturing > 5 Years n.a. n.a. - 51,653.0 5.21 49,813.0 4.85 3,489.0 0.80
Total Senior Debt on Balance Sheet n.a. n.a. - 228,866.0 23.08 233,502.0 22.73 75,710.0 17.36
Fair Value Portion of Senior Debt n.a. n.a. - n.a. - n.a. - n.a. -
Covered Bonds n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing < 3 months n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing 3-12 Months n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing 1- 5 Year n.a. n.a. - n.a. - n.a. - n.a. -
Subordinated Debt Maturing > 5 Years n.a. n.a. - n.a. - n.a. - n.a. -
Total Subordinated Debt on Balance Sheet 56,963.3 35,585.0 3.64 36,232.0 3.65 34,727.0 3.38 17,256.0 3.96
Fair Value Portion of Subordinated Debt n.a. n.a. - n.a. - n.a. - n.a. -
D. Equity Reconciliation
1. Equity 72,908.6 45,546.0 4.65 46,902.0 4.73 44,107.0 4.29 9,699.0 2.22
2. Add: Pref. Shares and Hybrid Capital accounted for as Equity n.a. n.a. - n.a. - n.a. - n.a. -
3. Add: Other Adjustments n.a. n.a. - n.a. - n.a. - n.a. -
4. Published Equity 72,908.6 45,546.0 4.65 46,902.0 4.73 44,107.0 4.29 n.a. -
E. Fitch Eligible Capital Reconciliation
1. Total Equity as reported (including non-controlling interests) 72,908.6 45,546.0 4.65 46,902.0 4.73 44,107.0 4.29 9,699.0 2.22
2. Fair value effect incl in own debt/borrowings at fv on the B/S- CC only 0.0 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00
3. Non-loss-absorbing non-controlling interests 0.0 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00
4. Goodwill 3,227.1 2,016.0 0.21 2,016.0 0.20 2,016.0 0.20 2,256.0 0.52
5. Other intangibles 5,213.7 3,257.0 0.33 3,496.0 0.35 4,087.0 0.40 197.0 0.05
6. Deferred tax assets deduction 8,199.1 5,122.0 0.52 4,164.0 0.42 5,006.0 0.49 833.0 0.19
7. Net asset value of insurance subsidiaries 5,999.7 3,748.0 0.38 3,748.0 0.38 3,840.0 0.37 n.a. -
8. First loss tranches of off-balance sheet securitizations 0.0 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00
9. Fitch Core Capital 50,268.9 31,403.0 3.21 33,478.0 3.38 29,158.0 2.84 n.a. -
10. Eligible weighted Hybrid capital 4,730.3 2,955.0 0.30 2,922.5 0.29 4,647.0 0.45 5,567.0 1.28
11. Government held Hybrid Capital 0.0 0.0 0.00 0.0 0.00 0.0 0.00 0.0 0.00
12. Fitch Eligible Capital 54,999.2 34,358.0 3.51 36,400.5 3.67 33,805.0 3.29 n.a. -
13. Eligible Hybrid Capital Limit 21,543.8 13,458.4 1.37 14,347.7 1.45 12,496.2 1.22 n.a. -
Exchange Rate
31 Dec 2009
USD1 = GBP0.61748
31 Dec 2008
USD1 = GBP0.68597
30 Jun 2011
USD1 = GBP0.62470
31 Dec 2010
USD1 = GBP0.63880
Page 15
Banks
Lloyds Banking Group plc
January 2012 15
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