Lloyds Banking Group plc

Transcription

1 Rating Report Previous Report: July 4, 213 Analysts Lloyds Banking Ratings Elisabeth Rudman ERudman@dbrs.com Ross Abercromby RAbercromby@dbrs.com Jack Deegan JDeegan@dbrs.com Media Contact Stephen Bernard SBernard@dbrs.com The Group Lloyds Banking is a leading U.K. based financial services group providing a wide range of banking and financial services, primarily in the U.K., to personal and corporate customers. The Group s main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision. Recent Actions Issuer Debt Rated Rating Trend Lloyds Banking Issuer and Long-Term Debt A (high) Stable Lloyds Bank plc Senior Debt & Deposits AA (low) Stable Lloyds Bank plc Short-Term Debt R-1 (middle) Stable HBOS plc Senior Debt & Deposits AA (low) Stable HBOS plc Commercial Paper R-1 (middle) Stable Bank of Scotland plc Senior Debt & Deposits AA (low) Stable Bank of Scotland plc Commercial Paper R-1 (middle) Stable For a complete list of ratings, see page 13 Rating Rationale DBRS rates Lloyds Banking (Lloyds or the Group) at A (high) for Issuer and Long-Term debt ratings. The ratings of Lloyds Bank plc are AA (low) for the Senior debt and deposit rating and R-1 (middle) for the Short-term rating. The trend on all long-term ratings was revised to Stable from Negative in August 214. The trend on the Short-term rating is Stable. The Intrinsic Assessment (IA) for Lloyds Banking Group is A while for Lloyds Bank plc the IA is A (high). DBRS views the Group as systemically important within the U.K. (categorised as SA-2) and the ratings incorporate one notch of uplift from the IA for systemic support. (Continued on page 2) Rating Considerations Strengths (1) Very strong franchise in UK retail and commercial banking, and insurance (2) Significantly lower risk balance sheet following successful reduction in non-core assets (3) Strong funding and liquidity profile Challenges (1) Conduct issues continue to impact the Group s financial profile and reputation (2) Challenging regulatory environment (3) Uncertainty regarding outcome of Scottish referendum and implementation of ring-fencing August 18, 214 DBRS Confirms Lloyds Banking Group at A (high), Trend Revised to Stable May 2, 214 DBRS: Lloyds Reports Strong Q1 Results: Lower Impairments and No Conduct Charges February 13, 214 DBRS: PPI Hits Lloyds Results; but Core Franchise Resilient March 21, 213 DBRS Confirms Lloyds Banking Group at A (high), Trend Revised to Negative Financial Information Lloyds Banking Group Plc 3/6/214 31/12/213 31/12/212 31/12/211 31/12/21 GBP million, unless otherw ise stated Total Assets 843,94 847,3 934,221 98, ,574 Equity 45,878 39,336 42,581 46,18 46,92 Pre-provision operating income (IBPT) 1,54 3,156 4,543 7,68 11,8 Net Income , Net Interest Income / Risk Weighted Assets (%) 4.9% 2.78% 2.49% 3.6% 3.9% Risk-Weighted Earning Capacity (%) 1.14% 1.9% 1.36% 2.% 2.62% Post-provision Risk-Weighted Earning Capacity (%).65%.14% -.18% -.13%.19% Efficiency Ratio (%) 8.46% 82.92% 77.86% 63.43% 52.55% Impaired Loans % Gross Loans 5.6% 6.36% 8.69% 1.31% 1.57% Core Tier 1 (As-reported) 11.1% 14.% 12.% 1.8% 1.2% Source: DBRS Analysis, SNL Financial, Company Reports 1 Financial Institutions: Banks & Trusts

2 Rating Rationale (Continued from page 1) The ratings are underpinned by the Group s powerful retail and commercial banking franchise in the UK and the significant progress the Group has made in simplifying and strengthening the balance sheet following the problematic acquisition of HBOS in 28. In revising the trend to Stable in August 214, DBRS recognises the significant progress that Lloyds has continued to make over the past 18 months in the restructuring of the Group, and notes that this is now in its final stages. Over this period, Lloyds has also demonstrated further improvements in asset quality, costs, funding and capital. In addition, the UK Government has been able to reduce its shareholding to 24.9% and the Group has now sold a 38.5% stake in TSB, the first step in the EU mandated sale of this business. DBRS notes that the Group s net profitability continues to be affected by legacy and one-off items, but expects the impact of these to decline considerably in coming periods. In 1H14, Lloyds reported a further improvement in asset quality with the non-performing loan (NPL) ratio declining to 5% at end-june 214 (compared to 8.6% at end-212) and the impairment charge falling to.3% of average advances (1.% in 212). The Group s reduction in its run-off portfolio to GBP 25 billion at end- June (from GBP 33 billion at end-213) has also contributed to strengthening its risk profile and capital ratios. In addition, the Group improved its loan-to-deposit (LTD) ratio to 19% at end-june 214, as it continues to grow deposits. And the Group s underlying profitability has been helped by an increase in the Banking net interest margin to 2.48% in 2Q14 from 2.6% in 2Q13. Moreover, DBRS expects Lloyds to benefit from the current recovery in the UK economy and any gradual increases in interest rates in the UK. However, Lloyds statutory profit before tax (GBP 863 million in 1H14) has still been hampered by a number of legacy issues, including Payment Protection Insurance (PPI) provisions (totalling GBP billion over 211 to 1H14), as well as restructuring costs and other one-off issues. On an underlying basis, Lloyds reported pre-tax profit of GBP 3.8 billion in 1H14, and DBRS expects the Group s statutory profit to be much closer to its underlying profit in coming periods. As an example, Lloyds has already taken GBP 2.21 billion of the planned GBP 2.4 billion Simplification Programme costs, and although UK banks have struggled to accurately forecast PPI charges, there continues to be a reduction in claims, and Lloyds holds GBP 2.3 billion unutilised provisions for PPI redress. Although there are still a number of regulatory developments to come including the PRA s finalisation of capital buffers and leverage ratios, and implementation of ringfencing in the UK, DBRS considers that Lloyds is relatively well positioned to meet these challenges reporting a fully-loaded Common Equity Tier 1 ratio of 11.1% at end-june 214 and Basel 3 fully loaded leverage ratio 4.5%. Rating Drivers Factors with Positive Rating Implications The ratings are unlikely to see upward pressure in the medium term, given the already high level of the ratings and the need for Lloyds to demonstrate the ability to deliver strong, stable net earnings. Factors with Negative Rating Implications Downward rating pressure could emerge from an unexpected deterioration in the UK housing market with a knock-on effect on the Group s asset quality. 2 Financial Institutions: Banks & Trusts

3 Franchise Strength Lloyds Banking Group (Lloyds or the Group) is one of the largest UK banking groups, with total assets of GBP 844 billion at end-june 214. The Group has a dominant market share in UK retail and commercial banking and a top 3 position in life insurance, and this underpins DBRS ratings for the Group. Lloyds has been through considerable restructuring since its problematic acquisition of HBOS in 28. The Group has largely delivered its strategic plan, which aimed to simplify the Group s business model, and strengthen its balance sheet and liquidity position. However, the burden of legacy issues has meant the Group has yet to deliver sustainable, predictable RoE in excess of Cost of Equity. In 214 the Group made progress with the EU-mandated divestment of branches, and sold a 38.5% stake in TSB Bank. As part of the Initial Public Offering (IPO), the Group has signed an arm s length Transitional Services Agreement with TSB, governing the provision of banking operations services, which continues for 7.5 years. As a condition of the State aid received in 29, Lloyds Banking Group is required to divest its entire interest in TSB by end-december 215, with this date extendable to end-june 216 or end-december 216 in the event of disorderly markets. A potential future uncertainty is the outcome of the Scottish Independence referendum in September 214. The Group s registered office is in Scotland, but the majority of its assets are in England. Therefore, a Yes vote in favour of independence and any subsequent decisions on currency and financial regulation could have significant implications for the Group. However, DBRS expects that the Group would have sufficient lead-time to make any necessary changes. The introduction of ringfencing of retail operations for UK banks could also lead to further restructuring and associated costs, but will have less of an impact on Lloyds than banks that have larger wholesale banking operations. Secondary legislation is currently being drafted with the implementation timeframe expected to be by 219. Following a reorganisation at the beginning of 214, the Group now organises its business into the following divisions: Retail, Commercial Banking, Consumer Finance, Insurance. Prior to that the key divisions were Retail; Commercial Banking; Asset Finance; Wealth & International; Insurance (see Exhibit 1 below). Retail (Underlying profit of GBP 1.7 billion in 1H14 45% of Group underlying profit) The Group has a significant market share in retail mortgages, savings, personal loans, current accounts. It has over 3 million customers and operates through a number of brands: Lloyds Bank, Halifax, and Bank of Scotland. Although maintaining multiple brands involves extra costs, it allows Lloyds to target a broader customer base. These relationship brands have seen deposit growth of 5% and 6.4% in the past two years, both ahead of the UK market average. As of 214 the division includes the wealth/ private banking activities of the Group. The division s results do not include the significant charges the Group has incurred for misselling of PPI (see Risk section). Commercial Banking (Underlying profit of GBP billion in 1H14 3% of Group underlying profit) Lloyds has a strong market position in UK commercial banking, reporting market shares between 15 3% depending on client type and region. The division was restructured in 214 to bring together Lloyds commercial banking activities across major client segments: SME, Mid-Markets, Global Corporates and Financial Institutions. The product range spreads across Lending, Transaction Banking, Financial Markets and 3 Financial Institutions: Banks & Trusts

4 Capital Markets. The division had Loans and Advances (excluding repos) of GBP 15 billion and deposits of GBP 117 billion at end of 1H14. Consumer Finance (Underlying profit of GBP 534 million in 1H14 14% of Group underlying profit) The Consumer Finance division was created in 214 to include Credit Cards, Asset Finance and European online deposit businesses. In Asset Finance the Group carries out leasing and speciality lending businesses in the UK (including auto leasing, car and personal finance). Insurance (Underlying profit of GBP 461 million in 1H14 12% of Group underlying profit) The Group is one of the largest life insurance and pension providers in the UK. It provides long-term savings, protection and investment products distributed through bancassurance, intermediary and direct channels of Lloyds, Halifax, BoS and Scottish Widows brands. The Group increased its focus on UK business in 213, following the agreed sale of the German life insurance business Heidelberger Leben Exhibit 1: Lloyds Underlying Profit before Tax* by Division (GBP thousand) 1H13 2H13 1H14 Retail Commercial Banking Consumer Finance Insurance Run Off & Central Items * Underlying Profit excludes Simplification costs, TSB build and dual running costs, PPI Provision, other regulatory provisions, volatility relating to the insurance businesses, insurance gross up, certain pension items in respect of the Group's defined benefit pension schemes, the unwind of acquisition-related fair value adjustment, the amortisation of purchased intangible assets & the effects of certain asset sales, liability management and volatile items Earnings Power The Group s earnings generation has improved markedly in recent years, as a result of strong underlying profitability growth and cost reduction. However, Lloyds has reported statutory losses on an annual basis up until 213 (see Exhibit 2), as the Group s results continued to be burdened by a variety of legacy issues. 4 Financial Institutions: Banks & Trusts

5 8, 6, 4, 2, -2, 2,895 Exhibit 2: Lloyds Underlying* vs. Statutory Profit (GBP thousand) Statutory Underlying 6,166 2,212 2, , ,819-4, -2,89-6, -8, -6, H14 * Underlying Profit excludes Simplification costs, TSB build and dual running costs, PPI Provision, other regulatory provisions, volatility relating to the insurance businesses, insurance gross up, certain pension items in respect of the Group's defined benefit pension schemes, the unwind of acquisition-related fair value adjustment, the amortisation of purchased intangible assets & the effects of certain asset sales, liability management and volatile items These legacy issues, in particular redress for Payment Protection Insurance (PPI), continue to have a significant impact on the Group s profitability as well as a heavy financial, reputational and management cost on the Group. Legacy-related provisions totalled GBP 3.5 billion in 213, with 88% related to PPI. Other items that have affected the Group s statutory profit in the last couple of years include Simplification Programme charges, costs related to the establishment of TSB, the Enhanced Capital Notes (ECN) exchange (see Capital section for details), and gains/ losses on asset sales. DBRS expects the impact of these items to decline considerably in coming periods. On an underlying basis the Group has continued to see significant improvements, with a 14% year-on-year (YoY) increase in underlying profit before tax (PBT) in 213 to GBP 6.2 billion, and a 32% YoY increase to GBP 3.8 billion in 1H14. The key drivers have been solid net interest income (NII) growth, and reduced impairments charges. Impairment charges were down 47% YoY to GBP 3 billion in 213 and down 58% YoY to GBP 758 million in 1H14 following continued progress in deleveraging the non-core assets. NII was up 5% in 213 and 11% in 1H14 with strong improvements across all the Group s banking divisions. Reduced wholesale funding use and cost, deposit pricing, the ECN exchange (as the coupons on the new AT1 securities are reported as distributions from equity reserves) and non-core deleveraging also helped the Group s Banking net interest margin (NIM) increase to 2.48% in 2Q14, from 2.6% a year before. DBRS also notes the progress Lloyds has made with regards to its cost and simplification programme, which reached run rate savings of GBP 1.8 billion as of end-june 214. The Group has already achieved its June 211 Strategic Review target of a cost base of circa GBP 1 billion in 214, and is now targeting a cost base of approximately GBP 9 billion, excluding TSB, for 214. Funding and Liquidity Lloyds has made considerable improvements to its funding profile over the past few years. Further growth in customer deposits and non-core asset deleveraging, helped to reduce the Group s loan-to-deposit (LTD) ratio to 19% at end-june 214 (see Exhibit 3). 5 Financial Institutions: Banks & Trusts

6 Exhibit 3: Funding Profile (GBP billion) Customer deposits Loans exc. Reverse Repos Loan to deposit ratio (RHS) 9 18% 8 169% 17% 7 16% 6 155% 15% 5 14% 4 135% 3 13% 2 121% 12% 1 113% 19% 11% 1% H14 DBRS also notes positively that the Group s wholesale funding requirement has decreased significantly in recent years, down to GBP 12 billion at end-june 214 (see Exhibit 4). Additionally, the usage of short-term funding (i.e. wholesale funding maturing within a year) has also been reduced, down to GBP 42 billion from GBP 5.6 billion at end 212. Lloyds continues to utilise the Bank of England s Funding for Lending Scheme a secured borrowing scheme designed to promote lending to the UK economy. Lloyds signed up in 213 to the extension of the scheme, which focuses solely on business lending and allows drawdowns up to the end of January 215. As of end-june 214, Lloyds had drawn down GBP 14 billion under the programme Exhibit 1H144: Liquidity Profile (GBP billion) H14 Secondary Liquid Assets Primary Liquid Assets Wholesale Funding > 1 year Maturity Wholesale funding <1 year maturity 6 Financial Institutions: Banks & Trusts The Group has a solid liquidity profile, with GBP 92.3 billion of primary liquid assets (largely central bank deposits and highly rated government securities) at end-june 214. In addition, Lloyds held a significant secondary liquidity buffer (broader asset mix of unencumbered collateral) of GBP billion at end-june 214.

7 Risk Profile Lloyds continued to make progress in reducing its risk profile over Following an accelerated deleveraging of the non-core assets (GBP 63.5 billion at end 213), the Group no longer reports a core/noncore split. At end-213, GBP 31 billion previously non-core retail assets were re-absorbed into the ongoing Bank, with the remaining GBP 33 billion of assets (principally International Retail, UK CRE, Treasury Assets, International Corporate assets and shipping and aviation) transferred to a Run-Off unit, which was further reduced to GBP 25 billion as of end- June 214 (Exhibit 5) Exhibit 5: Non-Core to Run-Off (GBP billion) (55%) since UK Retail International Retail UK CRE International Corporate Run-Off portfolio Dutch Mortgage Treasury Assets Other Corporate Non Retail c Non-core 212 Non-Core 213 Non-Core 213 Mar-14 Jun-14 End-214 Target Impairment charges continued to fall across all divisions over 213-H114 (see Exhibit 6), with significant improvements in the Commercial Banking and the Irish portfolios. The improvements reflect both the deleveraging of the non-core/ run-off portfolio and the Group s more conservative risk appetite, which resulted in reduced charges in the core book. Exhibit 6: Evolution of Impairments (GBP billion) 3 3.3% Non-Core (Run-Off for 1H14) Core % of Average Advances (RHS) 3.5% 25 3.% 2 2.% % 1 1.% % 5.3% H % 2.% 1.5% 1.%.5%.% 7 Financial Institutions: Banks & Trusts The Group s non-performing loan (NPL) ratio was down to 5% at end-june 214, compared to 8.6% at end- 212, and the Group continues to make progress in writing down and selling non-performing assets. In 213, for example, the Group managed to dispose of Corporate Real Estate (CRE) assets totalling GBP 7.4 billion,

8 and GBP 1.6 billion of leveraged finance assets. The Group has also increased loan loss reserves to 54% of impaired loans as of end-june 214 (see Exhibit 7). A steady reduction in exposure to the CRE sector resulted in overall Property and Construction loans and advances reducing to 9.4% of Gross loans and advances at end- June 214 (1.2% at end 213). 7 6 Exhibit 7: Gross Impaired Loans (GBP billion) Non-Core (Run-Off for 1H14) Core Loan Loss Reserves % of Impaired Loans (RHS) 54% 56% 54% 5 52% % 5% % 47% 33 48% % 46% H14 44% 42% Exposure to the UK mortgage market remains a key risk for the Group, with the GBP 33 billion mortgage book representing 59% of total customer loans and advances at end-june 214. Average loan-to-values (LTVs) in the mainstream book (which makes up 75% of the total mortgage book) were 47.3% in 1H14 (5.6% in 1H13) and the LTVs of new residential lending in the mainstream book were 64.5% (63.4% in 1H13). The Financial Policy Committee and the Bank of England have expressed their concerns about over-heating in the UK residential real estate market (with house prices up 1.2% annually in the 3 months to July 214 according to the Halifax House Price Index) and announced in June 214 that they are consulting on a proposal that lenders do not extend more than 15% of their new residential mortgages at loan to income ratios at or greater than 4.5. Lloyds had already announced in May 214 that it would lend a maximum of 4x income multiple on mortgages over GBP 5,. DBRS does not expect these individual measures to have a significant impact on the Group s lending but they are indicative of the risks that are building in the UK housing market driven by an excess of demand over supply. Market Risk The Group takes relatively low levels of market risk, with an average 95% 1-day trading value-at-risk (VaR) of GBP 4.1 million in 213, down from GBP 7 million in 212. All trading VaR resides in the Commercial Banking divisions. Operational Risk /Conduct Risk The Group has suffered a significant financial and reputational impact from conduct risk issues, in particular mis-selling of Payment Protection Insurance (PPI) products and hedging products for SMEs. Over 211 to 1H14 provisions taken for PPI totalled GBP billion, with GBP 2.3 billion unutilised provisions at end- 1H14. Other UK banks have been affected by similar issues (see Exhibit 8), but DBRS notes that Lloyds provisions have been more significant than peers reflecting its large retail market share. 8 Financial Institutions: Banks & Trusts In addition, in July 214 Lloyds involvement in manipulating submissions of LIBOR and the Sterling Repo Rate between 26 and 29 resulted in a GBP 218 million payment to UK and US authorities (GBP 115

9 million to Financial Conduct Authority; GBP 62 million to the US Commodity Futures Trading Commission; and GBP 51 million to the US Department of Justice (DoJ)). As part of the settlement with the DoJ, the Group also entered into a 2 year Deferred Prosecution Agreement (DPA). The Group has also paid approximately GBP 8 million to the Bank of England as compensation for underpayment of Special Liquidity Scheme (SLS) fees, which were calculated using the Sterling Repo Rate. Lloyds has put in place Conduct Risk Appetite Measures against which all products (new and ongoing) are assessed in order to prevent further conduct issues arising. However, a much tougher regulatory regime and the culture that has developed over a number of years in the UK banking sector, makes it hard in the opinion of DBRS - for UK banks to fully eliminate these risks. Capitalisation: Structure and Adequacy The Group continues to report improving capital ratios, as a result of underlying earnings generation in 1H14 and 213, and continued deleveraging of non-core assets in a capital accretive way (see Exhibit 9). In 213 and 1H14, deleveraging included the sale of SWIP, Heidelberger Leben and the Group s stake in Sainsbury s Bank. At end-june 214, Lloyds reported a pro-forma fully loaded CRD IV Common Equity Tier 1 ratio of 11.1%, an increase of 8 basis points (bps) from end-213, and a pro-forma fully loaded Basel 3 leverage ratio of 4.5%, leaving the Group well-placed relative to peers (Exhibit 1). The Group meets the UK Prudential Regulatory Authority s (PRA) requirement for large banks and building societies of 7% adjusted and fully loaded Common Equity Tier 1 ratio, and 3% Tier 1 leverage ratio. 9 Financial Institutions: Banks & Trusts

10 Exhibit 9: Lloyds Capitalisation (28-1H14) 9, 8, 16% 14% GBP thousand 7, 6, 5, 4, 3, 2, 1, 12% 1% 8% 6% 4% 2% CT1 ratio Fully Loaded CRDIV 213 Tier 2 Capital Other Tier 1 Capital Core Tier 1 Capital Core Tier 1 Ratio (Common Equity Tier 1 as of CRDIV 213 & 1H14) Fully Loaded CRDIV 1H14 % The UK government shareholding stood at 24.9% at end-june 214, following sales of shares over the previous year and the PRA has confirmed that it will consider the Group s applications to make dividend payments in line with its normal procedures for other banks. In addition, it built its regulatory capital base further in 1Q14, with the exchange of approximately GBP 5 billion of tier 2 Enhanced Capital Notes (ECNs) for GBP 5.3 billion of CRD IV compliant Additional Tier 1 (AT1) securities, which also qualify as capital under the leverage ratio. However, the exchanges also resulted in a net accounting charge of approximately GBP 1.1 billion. Capital still remains a key consideration given the many regulatory challenges ahead, including the clarification and calibration of leverage ratio requirements in the UK, ongoing UK stress tests and the ring-fencing of certain activities in the UK (legislation expected to be finalised by 215, with implementation by 219). Exhibit 1: 1H214 Fully Loaded Common Equity Tier 1 & Leverage Ratios 12% 1% 9.9% 1.1% 11.1% 11.3% 8% 6% 4% 3.4% 3.7% 4.2% 4.3% 2% % Barclays RBS Lloyds HSBC CRDIV Fully Loaded Common Equity Tier 1 Fully loaded CRD4 Leverage ratio 1 Financial Institutions: Banks & Trusts

11 Lloyds Banking Financial Data Lloyds Banking Group Plc 3/6/214 31/12/213 31/12/212 31/12/211 GBP GBP GBP GBP GBP Millions IFRS IFRS IFRS IFRS Balance Sheet Cash and deposits with central banks 5, % 49, % 8, % 6, % Lending to/deposits w ith credit institutions 23, % 26, % 34, % 34, % Financial Securities* 198, % 188, % 197, % 26, % - Trading portfolio 42, % 37, % 23, %.% - At fair value 15, % 15, % 137, %.% - Available for sale 5, % 43, % 31, % 37, % - Held-to-maturity.%.%.% 8,98.83% - Other 1,266.15% 1,355.16% 5,273.56% 161, % Financial derivatives instruments 27, % 33, % 56, % 66, % - Fair Value Hedging Derivatives 6,44.76% 6,787.8% 11, % NA - - Mark to Market Derivatives 2, % 26, % 44, % NA - Gross lending to customers 51, % 57, % 532, % 584, % - Loan loss provisions 1, % 11, % 15, % 18, % Insurance assets 5,966.71% 6,67.72% 9,12.98% 6,638.68% Investments in associates/subsidiaries 72.1% 11.1% 313.3% NA - Fixed assets 12, % 12, % 12, % 13, % Goodwill and other intangible assets 4,28.5% 4,295.51% 4,88.51% 5,212.53% Other assets 29, % 31, % 21, % 21, % Total assets 843,94 1.% 847,3 1.% 934,221 1.% 98,248 1.% Total assets (USD) 1,443,62 1,42,368 1,517,578 1,523,781 Loans and deposits from credit institutions 13, % 14, % 39, % 4, % Repo Agreements in Deposits from Customers.% 2,978.35% 4,433.47% 7,996.82% Deposits from customers 445, % 438, % 422, % 45, % - Demand 126, % 118, % 12, % 94, % - Time and savings 262, % 265, % 261, % 222, % Issued debt securities 135,2 16.% 121, % 147, % 22, % Financial derivatives instruments 25,285 3.% 3, % 48, % 58, % - Fair Value Hedging Derivatives 4,699.56% 4,518.53% 6,598.71% NA - - Other 2, % 25, % 42,78 4.5% NA - Insurance liabilities 111, % 11, % 137, % 128, % Other liabilities 41, % 56, % 57, % 54, % - Financial liabilities at fair value through P/L 5,574.66% 5,36.63% 5,7.61% NA - Subordinated debt 15,7 1.86% 16, % 17, % 17, % Hybrid Capital 9, % 16, % 16, % 17, % Equity 45, % 39, % 42, % 46, % Total liabilities and equity funds 843,94 1.% 847,3 1.% 934,221 1.% 98,248 1.% Income Statement Interest income 9,728 21,163 23,548 26,316 Interest expenses 4,466 13,825 15,83 13,618 Net interest income and credit commissions 5, % 7, % 7, % 12, % Net fees and commissions 1, % 2, % 3, % 3, % Trading / FX Income NA % % % Net realised results on investment securities (available for sale) NA % 3, % % Net results from other financial instruments at fair value NA - 15, % 14, % 146.7% Net income from insurance operations -2, % -1, % -9, % 1, % Results from associates/subsidiaries accounted by the equity method NA % 28.14% 31.15% Other operating income (incl. dividends) 4, % 2, % % 2, % Total operating income 7,696 1.% 18,478 1.% 2,517 1.% 2,82 1.% Staff costs 2, % 5, % 5, % 6, % Other operating costs 3, % 7, % 8, % 4, % Depreciation/amortisation % 1, % 2, % 2, % Total operating expenses 6,192 1.% 15,322 1.% 15,974 1.% 13,194 1.% Pre-provision operating income 1,54 3,156 4,543 7,68 Loan loss provisions** 641 2,741 5,149 8,94 Post-provision operating income Impairment on tangible assets 65 Impairment on intangible assets Other non-operating items*** Pre-tax income (-)Taxes 164 1, (-)Other After-tax Items (Reported) (+)Discontinued Operations (Reported) (-)Minority interest Net income , Net income (USD) 1,11-1,311-2,331-1,6 *Includes derivatives when breakdown unavailable, **LLP includes Impairments on financial assets, ***Incl. Other Provisions 11 Financial Institutions: Banks & Trusts

12 Off-balance sheet and other items Asset under management NA 151,8 189,1 182, Derivatives (notional amount) NA 5,499,892 4,915,942 NA BIS Risk-weighted assets (RWA) 257,37 263,85 31, ,341 No. of employees (end-period) 87,354 88,977 92,788 98,538 Earnings and Expenses Earnings Net interest margin [1] 1.33%.89%.85% 1.36% Yield on average earning assets 2.47% 2.56% 2.6% 2.82% Cost of interest bearing liabilities 1.44% 2.28% 2.46% 1.99% Pre-provision earning capacity (total assets basis) [2].36%.36%.47%.77% Pre-provision earning capacity (risk-w eighted basis) [3] 1.14% 1.9% 1.36% 2.% Net Interest Income / Risk Weighted Assets 4.9% 2.78% 2.49% 3.6% Non-Interest Income / Total Revenues 31.63% 6.29% 62.38% 38.96% Post-provision earning capacity (risk-w eighted basis).65%.14% -.18% -.13% Expenses Efficiency ratio (operating expenses / operating income) 8.46% 82.92% 77.86% 63.43% All inclusive costs to revenues [4] 8.46% 82.92% 77.86% 63.74% Operating expenses by employee 141, ,22 172, ,898 Loan loss provision / pre-provision operating income 42.62% 86.85% % 16.39% Provision coverage by net interest income 82.9% % % % Profitability Returns Pre-tax return on Tier 1 (excl. hybrids) 6.4% 1.14% -1.86% -1.65% Return on equity 2.96% -2.15% -3.51% -1.38% Return on average total assets.16% -.9% -.15% -.6% Return on average risk-w eighted assets.5% -.29% -.44% -.16% Dividend payout ratio [5].%.%.%.% Internal capital generation [6] 2.5% -3.23% -5.7% -2.9% Grow th Loans.85% -2.73% -6.15% -6.1% Deposits 1.71% 3.37% 3.14% 5.15% Net interest income 6.92% -4.92% % 1.21% Fees and commissions % % -9.54% 7.7% Expenses -5.72% -4.8% 21.7%.96% Pre-provision earning capacity -6.6% -3.53% -4.29% % Loan-loss provisions % % % -26.1% Net income % -43.3% % 95.94% Risks RWA% total assets 3.5% 31.15% 33.21% 35.94% Credit Risks Impaired loans % gross loans 5.6% 6.36% 8.69% 1.31% Loss loan provisions % impaired loans 4.99% 37.9% 32.94% 31.8% Impaired loans (net of LLPs) % pre-provision operating income [7] % 643.% % % Impaired loans (net of LLPs) % equity 41.77% 87.8% 124.8% % Liquidity and Funding Customer deposits % total funding 73.7% 74.21% 67.4% 6.84% Total wholesale funding % total funding [8] 26.93% 25.79% 32.6% 39.16% - Interbank % total funding 2.19% 2.5% 6.29% 6.9% - Debt securities % total funding 22.16% 2.54% 23.53% 3.38% - Subordinated debt % total funding 2.58% 2.76% 2.78% 2.69% Short-term wholesale funding % total wholesale funding 8.12% 9.69% 19.28% 15.56% Liquid assets % total assets 32.34% 31.2% 33.35% 3.77% Net short-term w holesale funding reliance [9] % % % % Adjusted net short-term w holesale funding reliance [1] % % % % Customer deposits % gross loans 88.71% 86.41% 79.34% 69.46% Capital [11] Tier % 14.47% 13.78% 12.49% Tier 1 excl. All Hybrids 1.88% 12.56% 11.97% 1.76% Core Tier 1 (As-reported) 11.1% 14.% 12.% 1.8% Tangible Common Equity / Tangible Assets 4.21% 4.12% 3.99% 4.13% Total Capital 19.67% 2.75% 17.27% 15.61% Retained earnings % Tier 1 NA NA NA 37.21% [1] (Net interest income + dividends)% average interest earning assets. [2] Pre-provision operating income % average total assets. [3] Pre-provision operating income % average total risk-weighted assets. [4] (Operating & non-op. costs) % (op. & non-op. revenues) [5] Paid dividend % net income. [6] (Net income - dividends) % shareholders' equity at t-1. [7] We take into account the stock of LLPs in this ratio. [8] Whole funding excludes corporate deposits. [9] (Short-term w holesale funding - liquid assets) % illiquid assets [1] (Short-term w holesale funding - liquid assets- loans maturing w ithin 1 year) % illiquid assets [11] Capital ratios of Interim results exclude profits for the year * Interim information is annualised w here needed. 12 Financial Institutions: Banks & Trusts

13 Ratings Issuer Debt Rated Rating Trend Lloyds Banking Issuer and Long-Term Debt A (high) Stable Lloyds Banking Mandatory Pay A (low) Stable Lloyds Banking Cumulative Discretionary Pay A (low) Stable Lloyds Banking Non-Cumulative Discretionary Pay BBB (high) Stable Lloyds Banking Preference Shares BBB Stable Lloyds Bank plc Senior Debt & Deposits AA (low) Stable Lloyds Bank plc Short-Term Debt R-1 (middle) Stable Lloyds Bank plc Cumulative Discretionary Pay A Stable Lloyds Bank plc Mandatory Pay A Stable Lloyds Bank plc Non-Cumulative Discretionary Pay A (low) Stable HBOS plc Senior Debt & Deposits AA (low) Stable HBOS plc Mandatory Pay A Stable HBOS plc Commercial Paper R-1 (middle) Stable HBOS plc Cumulative Discretionary Pay A Stable HBOS plc Non-Cumulative Discretionary Pay A (low) Stable LBG Capital No. 1 Enhanced Capital Notes BB (high) Stable LBG Capital No. 2 Enhanced Capital Notes BB (high) Stable Bank of Scotland plc Senior Debt & Deposits AA (low) Stable Bank of Scotland plc Commercial Paper R-1 (middle) Stable Bank of Scotland plc Mandatory Pay A Stable Bank of Scotland plc Cumulative Discretionary Pay A Stable Bank of Scotland plc Non-Cumulative Discretionary Pay A (low) Stable Ratings History Issuer Debt Rated Current Lloyds Banking Issuer and Long-Term Debt A (high) A (high) A (high) A (high) Lloyds Banking Mandatory Pay A (low) A A A Cumulative Discretionary Pay Lloyds Banking A (low) A A A (low) Non-Cumulative Discretionary Pay Lloyds Banking A (low) A (low) A (low) BBB (high) Lloyds Banking Preference Shares BBB BBB BBB (low) BB (high) Lloyds Bank plc Senior Debt & Deposits AA (low) AA (low) AA (low) AA (low) Lloyds Bank plc Short-Term Debt R-1 (middle) R-1 (middle) R-1 (middle) R-1 (middle) Lloyds Bank plc Cumulative Discretionary Pay A A (high) A A Lloyds Bank plc Mandatory Pay A A (high) A (high) A (high) Lloyds Bank plc Non-Cumulative Discretionary Pay A (low) A A (low) A (low) HBOS plc Senior Debt & Deposits AA (low) AA (low) AA (low) AA (low) HBOS plc Mandatory Pay A A (high) A (high) A (high) HBOS plc Commercial Paper R-1 (middle) R-1 (middle) R-1 (middle) R-1 (middle) HBOS plc Cumulative Discretionary Pay A A (high) A A HBOS plc Non-Cumulative Discretionary Pay A (low) A A (low) A (low) LBG Capital No. 1 Enhanced Capital Notes BB (high) BB (high) BB (high) BB (high) LBG Capital No. 2 Enhanced Capital Notes BB (high) BB (high) BB (high) BB (high) Bank of Scotland plc Senior Debt & Deposits AA (low) AA (low) AA (low) AA (low) Bank of Scotland plc Commercial Paper R-1 (middle) R-1 (middle) R-1 (middle) R-1 (middle) Bank of Scotland plc Mandatory Pay A A (high) A (high) A (high) Bank of Scotland plc Cumulative Discretionary Pay A A (high) A A Bank of Scotland plc Non-Cumulative Discretionary Pay A (low) A A (low) A (low) 13 Financial Institutions: Banks & Trusts

14 Notes: All figures are in British Pounds (GBP) unless otherwise noted. For the definition of Issuer Rating, please refer to Rating Definitions under Rating Policy on Issuer ratings apply to all general senior unsecured obligations of the issuer in question. Ratings assigned by DBRS Ratings Limited are subject to EU regulations only. For further information on DBRS historic default rates published by the European Securities and Markets Administration ( ESMA ) in a central repository see Copyright 214, DBRS Limited, DBRS, Inc. and DBRS Ratings Limited (collectively, DBRS). All rights reserved. The information upon which DBRS ratings and reports are based is obtained by DBRS from sources DBRS believes to be accurate and reliable. DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS ratings, reports and any other information provided by DBRS are provided as is and without representation or warranty of any kind. DBRS hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS or any DBRS Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. Ratings and other opinions issued by DBRS are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness or recommendations to purchase, sell or hold any securities. A report providing a DBRS rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS receives compensation for its rating activities from issuers, insurers, guarantors and/or underwriters of debt securities for assigning ratings and from subscribers to its website. DBRS is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS. ALL DBRS RATINGS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT ADDITIONAL INFORMATION REGARDING DBRS RATINGS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON 14 Financial Institutions: Banks & Trusts