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Lloyds Banking Group alert service

RNS Number : 5543F
Lloyds Banking Group PLC
28 July 2016
 

Lloyds Banking Group plc

 

2016 Half-Year

Pillar 3 disclosures

 

28 July 2016

 

 

 

BASIS OF PRESENTATION

 

This report presents the condensed half-year Pillar 3 disclosures of Lloyds Banking Group plc ('the Group') as at 30 June 2016, prepared in accordance with European Banking Authority (EBA) guidelines on Pillar 3 disclosure frequency. The report should be read in conjunction with the 2016 Lloyds Banking Group Half-Year Results News Release.

 

The EBA guidelines on Pillar 3 disclosure frequency set out key information that institutions in the EU banking sector should consider disclosing on a more frequent than annual basis under Pillar 3. The Group's assessment of these guidelines has resulted in the disclosure of specific capital and leverage information at the interim quarter ends, with further detailed analysis provided at half-year as covered by this report. These half-year disclosures remain in addition to the full annual disclosure of the Group's Pillar 3 report. Risk-weighted assets by type of risk are included in the individual half-year Management Reports for the Group's significant subsidiaries; 'Lloyds Bank Group' and 'Bank of Scotland Group'.

 

A number of significant differences exist between accounting disclosures published in accordance with International Financial Reporting Standards (IFRS) and Pillar 3 disclosures published in accordance with prudential requirements which prevent direct comparison in a number of areas. Of particular note are the differences surrounding scope of consolidation, the definition of credit risk exposure and the recognition, classification and valuation of capital securities.

 

Unless otherwise specified, credit risk exposures are defined as the exposure at default (EAD), prior to the application of credit risk mitigation (CRM). EAD is defined as the aggregate of drawn (on balance sheet) exposures, undrawn (off balance sheet) commitments and contingent liabilities, after application of credit conversion factors (CCF), and other relevant regulatory adjustments. Notable exceptions to this definition include securitisation positions and counterparty credit risk exposures. A summary, noting the definitions applied, is provided below.

 

Exposure type

Exposure type

Credit risk exposures (excluding securitisation positions)

EAD pre CRM1  

Counterparty credit risk exposures

EAD post CRM

Securitisation positions

The aggregate of the Group's retained or purchased positions, excluding those positions rated below BB- or that are unrated and therefore deducted from capital. 

 

1

For credit risk exposures risk-weighted under the Standardised Approach the EAD pre CRM value is stated net of specific credit risk adjustments (SCRAs). SCRAs relating to credit risk exposures risk-weighted under a relevant Internal Ratings Based (IRB) Approach methodology are netted against expected losses.

 

FORWARD LOOKING STATEMENTS

This document contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group's or its directors' and/or management's beliefs and expectations, are forward looking statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future. Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates (including low or negative rates), exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the exit by the UK from the European Union (EU) and the potential for one or more other countries to exit the EU or the  Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of an exit by the UK from the EU, a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; requirements or limitations on the Group as a result of HM Treasury's investment in the Group; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the provision of banking operations services to TSB Banking Group plc; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services and lending companies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements. Except as required by any applicable law or regulation, the forward looking statements contained in this document are made as of today's date, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.
 

Contents

 

Table 1:

Risk-weighted assets movement by key driver

Table 2:

Capital requirements

Table 3:

Credit risk exposures

Table 4:

Corporate master scale

Table 5:

Retail master scale

Table 6:

Corporate Main exposure by PD grade

Table 7:

Corporate SME exposure by PD grade

Table 8:

Central governments and central bank exposures by PD grade

Table 9:

Institution exposures by PD grade

Table 10:

Residential mortgages (SME) exposures by PD grade

Table 11:

Residential mortgages (non-SME) exposures by PD grade

Table 12:

Qualifying revolving retail exposures by PD grade

Table 13:

Other SME exposures by PD grade

Table 14:

Other non-SME exposures by PD grade

Table 15:

Corporate Specialised Lending exposures subject to supervisory slotting

Table 16:

Lloyds Banking Group own funds template

Table 17:

Lloyds Banking Group leverage ratio common disclosure

Table 18:

Lloyds Banking Group summary reconciliation of accounting assets and leverage ratio exposures

 

 

2016 Half-Year Pillar 3 Update

 

The following disclosures include information on Lloyds Banking Group's own-funds, leverage, risk-weighted assets and capital requirements by type of risk and by exposure class. Additional detail has been included in relation to the Group's exposures subject to the Internal Ratings Based (IRB) approach.

 

 

At 30 June 

2016 

 

At 31 Dec 

2015 

Key ratios and risk-weighted assets

 

 

 

Fully loaded common equity tier 1 (CET1) capital ratio2

13.0% 

 

13.0% 

Fully loaded tier 1 capital ratio

15.4% 

 

15.2% 

Fully loaded total capital ratio

18.7% 

 

18.0% 

Fully loaded total risk-weighted assets

£222,297m 

 

£222,747m 

 

 

 

 

Transitional CET1 capital ratio

13.1% 

 

12.8% 

Transitional tier 1 capital ratio

16.4% 

 

16.4% 

Transitional total capital ratio

21.8% 

 

21.5% 

Transitional total risk-weighted assets

£222,778m 

 

£222,845m 

 

 

 

 

Leverage ratio1,2

4.7% 

 

4.8% 

Average leverage ratio3

4.8% 

 

 

 

1

Reported on a fully loaded basis.

2

The common equity tier 1 and leverage ratios at 31 December 2015 were reported on a pro forma basis, including the dividend paid by the Insurance business in February 2016 relating to 2015.

3

The average leverage ratio is based on the average of the month end tier 1 capital and exposure measures over the quarter (1 April 2016 to 30 June 2016). The average of 4.8 per cent compares to 4.7 per cent at the start and end of the quarter.

 

 

Table 1: Risk-weighted assets movement by key driver

 

 

Credit 

risk

IRB

Credit 

risk

STA

Credit 

risk

Counterparty 

credit 

risk3

Market 

risk 

Operational  risk 

Total 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

Fully loaded risk-weighted assets as at 31 December 2015

 

 

 

 

 

 

222,747 

Less total threshold risk-weighted assets1, 2

 

 

 

 

 

 

(10,690) 

Risk-weighted assets as at
31 December 2015

151,563 

20,443 

172,006 

10,153 

3,775 

26,123 

212,057 

Asset size

(1,940)

(831)

(2,771)

(1,220)

(137)

(4,128)

Acquisitions and disposals

(1,686)

(1,686)

38 

(1,648)

Model updates

3,229 

(28)

3,201 

99 

(418)

2,882 

Methodology and policy

(327)

121 

(206)

(206)

Asset quality

(1,931)

143 

(1,788)

1,203 

(64)

(649)

Movement in risk levels

(215)

(215)

Foreign exchange movements

2,506 

420 

2,926 

453 

(19)

3,360 

Risk-weighted assets as at

30 June 2016

151,414 

20,268 

171,682 

10,726 

2,922 

26,123 

211,453 

Threshold risk-weighted assets1  

 

 

 

 

 

 

11,325 

Transitional risk-weighted assets as at 30June 2016

 

 

 

 

 

 

222,778 

Movement to fully loaded

risk-weighted assets2

 

 

 

 

 

 

(481)

Fully loaded risk-weighted assets as at 30 June 2016

 

 

 

 

 

 

222,297 

 

1

Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be
risk-weighted instead of deducted from CET1 capital. Significant investments primarily arise from the investment in the Group's Insurance business.

2

Differences may arise between transitional and fully loaded threshold risk-weighted assets where deferred tax assets reliant on future profitability and arising from temporary timing differences and significant investments exceed the fully loaded threshold limit, resulting in an increase in amounts deducted from CET1 capital rather than being risk-weighted.

3

Counterparty credit risk includes movements in contributions to the default fund of central counterparties and movements in credit valuation adjustment risk.

 

The risk-weighted assets movement table provides analysis of the reduction in risk-weighted assets in the period by risk type and an insight into the key drivers of the movements. The key driver analysis is compiled on a monthly basis through the identification and categorisation of risk-weighted asset movements and is subject to management judgment.

 

Movements in credit risk-weighted assets in the six months to 30 June 2016 were driven by the following:

·     Asset size movements include risk-weighted asset movements arising from new lending and asset run-off. During the six months to 30 June, credit risk-weighted assets assessed on both Standardised and Internal Ratings Based approaches decreased by £2.8 billion primarily due to repayments and exits, partly offset by growth in targeted customer segments.

·     Disposal of the Group's interest in Visa Europe and further disposals within the run-off business reduced credit risk- weighted assets by £1.7 billion

·     Model update increases of £3.2 billion were mainly driven by a change in approach for the Retail Buy-to-let mortgage portfolio and other small model refinements.

·     Methodology and policy movements include changes due to refinements in the application of regulatory policy.

·     Asset quality movements capture movements in the assessed quality of assets due to changes in borrower risk, including changes in the economic environment. Net reductions in credit risk-weighted assets of £1.8 billion primarily relate to model calibrations and a net change in credit quality, partially offset by increases in valuation of centrally held strategic equity investments.

·     Foreign exchange movements reflect the depreciation of Sterling which has contributed to a £2.9 billion increase in credit risk-weighted assets of which £2.3 billion arose in the final week of June following the outcome of the EU referendum.

 

Counterparty credit risk and CVA risk increases of £0.6 billion are principally driven by yield curve and foreign exchange movements of which £0.9 billion arose in the final week of June following the outcome of the EU referendum, partially offset by increased capital relief from CVA related hedges.

 

Market risk-weighted assets reduced by £0.9 billion due to a reduction in the Value-at-Risk multiplier and active portfolio management.

 

 

 

The risk-weighted assets and Pillar 1 capital requirements, by key regulatory risk type, of the Group as at 30 June 2016 are presented in the table below.

 

Table 2: Capital requirements

 

June-16 

June-16 

Dec-15 

Dec-15 

Risk- 
weighted 

assets 

Pillar 1 

 capital 

requirements 

Risk- 

weighted 

assets 

Pillar 1 

capital 

requirements 

CREDIT RISK

£m 

£m 

£m 

£m 

Exposures subject to the IRB approach

 

 

 

 

Foundation IRB approach

 

 

 

 

Corporate - main

43,103 

3,448 

43,005 

3,441 

Corporate - SME

8,471 

678 

8,814 

705 

Corporate − specialised lending

Central governments and central banks

1,661 

133 

1,347 

108 

Institutions

1,216 

97 

1,430 

114 

Retail IRB approach

 

 

 

 

Retail mortgages

39,032 

3,122 

38,252 

3,060 

    of which: residential mortgages (SME)

2,891 

231 

3,214 

257 

    of which: residential mortgages (non-SME)

36,141 

2,891 

35,038 

2,803 

Qualifying revolving retail exposures

12,066 

965 

12,501 

1,000 

Other SME

1,766 

141 

1,807 

145 

Other non-SME

11,523 

922 

11,352 

908 

Other IRB approaches1

 

 

 

 

Corporate − specialised lending

14,296 

1,144 

14,386 

1,151 

Equities − exchange traded

2,484 

199 

2,837 

227 

Equities − private equity

5,649 

452 

5,664 

453 

Equities − other

1,321 

106 

1,392 

111 

Securitisation positions2

3,069 

245 

3,266 

261 

Non-credit obligation assets3

5,751 

460 

5,502 

440 

Total − IRB approach

151,414 

12,113 

151,563 

12,125 

Exposures subject to the standardised approach

 

 

 

 

Central governments and central banks

−   

− 

−   

− 

Regional governments or local authorities

−   

− 

−   

− 

Public sector entities

− 

− 

Multilateral development banks

  

− 

−   

− 

Institutions

36 

24 

Corporates

11,829 

946 

11,921 

954 

Retail

3,088 

247 

2,880 

230 

Secured by mortgages on immovable property

2,092 

167 

2,109 

168 

     of which: residential property

2,063 

165 

2,078 

166 

     of which: commercial property

29 

31 

Exposures in default

1,074 

86 

1,198 

96 

Other items3

2,146 

172 

2,309 

185 

Total − standardised approach

20,268 

1,621 

20,443 

1,635 

Total credit risk

171,682 

13,734 

172,006 

13,760 

Threshold − significant investments

8,349 

668 

7,817 

625 

Threshold − deferred tax

2,976 

238 

2,971 

238 

Total credit risk (transitional)

183,007 

14,640 

182,794 

14,623

 

 

 

Table 2: Capital requirements (continued)

 

 

June-16 

June-16 

Dec-15 

Dec-15 

Risk- 

weighted 

assets 

Pillar 1 

capital 

requirements 

Risk- 

weighted 

assets 

Pillar 1 

capital 

requirements 

 

£m 

£m 

£m 

£m 

COUNTERPARTY CREDIT RISK

 

 

 

 

IRB approach

8,485 

679 

7,328 

586 

Standardised approach

531 

43 

509 

41 

Central counterparties

143 

11 

144 

12 

Settlement risk

-  

-  

Contributions to the default fund of a central counterparty

466 

37 

488 

39 

Total counterparty credit risk

9,625 

770 

8,469 

678 

Credit valuation adjustment (CVA)

 

 

 

 

Standardised method

1,101 

88 

1,684 

135 

Total credit valuation adjustment

1,101 

88 

1,684 

135 

 

 

 

 

 

MARKET RISK

 

 

 

---------------------------

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