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PRESS RELEASE : BoS half-year news release -6-

07/29/2021 | 10:26am EDT

Note 2: Critical accounting judgements and estimates (continued)

Scenarios by year

Key annual assumptions made by the Group are shown below. Gross domestic product is presented as an annual change, house price growth and commercial real estate price growth are presented as the growth in the respective indices within the period. UK Bank Rate and unemployment rate are averages for the period. The upside, base case and downside scenarios are weighted at 30 per cent each, with the severe downside scenario weighted at 10 per cent.

                                    2021     2022     2023     2024    2025    2021-2025 average 
At 30 June 2021                     %        %        %        %       %       % 
 
Upside 
Gross domestic product              6.1      5.5      1.4      1.4     1.2     3.1 
UK Bank Rate                        0.52     1.27     1.09     1.32    1.58    1.16 
Unemployment rate                   4.7      4.9      4.4      4.2     4.1     4.5 
House price growth                  6.8      3.4      4.6      3.9     3.4     4.4 
Commercial real estate price growth 9.2      5.7      2.4      0.3     (0.3)   3.4 
 
Base case 
Gross domestic product              5.5      5.5      1.6      1.4     1.2     3.0 
UK Bank Rate                        0.10     0.10     0.25     0.50    0.75    0.34 
Unemployment rate                   5.4      6.1      5.4      5.0     4.8     5.4 
House price growth                  5.6      0.1      0.1      0.6     1.1     1.5 
Commercial real estate price growth 0.4      1.0      0.6      0.3     0.5     0.6 
 
Downside 
Gross domestic product              4.8      4.2      1.3      1.4     1.4     2.6 
UK Bank Rate                        0.09     0.05     0.06     0.11    0.20    0.10 
Unemployment rate                   6.0      7.8      7.1      6.5     6.0     6.7 
House price growth                  3.5      (6.2)    (7.5)    (4.9)   (1.8)   (3.5) 
Commercial real estate price growth (5.3)    (5.3)    (2.8)    (1.5)   0.2     (3.0) 
 
Severe downside 
Gross domestic product              4.1      3.5      1.1      1.4     1.4     2.3 
UK Bank Rate                        0.06     0.00     0.01     0.02    0.03    0.02 
Unemployment rate                   7.0      9.9      9.1      8.3     7.6     8.4 
House price growth                  2.4      (11.0)   (13.2)   (9.6)   (5.1)   (7.5) 
Commercial real estate price growth (13.5)   (13.5)   (6.9)    (2.3)   0.5     (7.3) 

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and estimates (continued)

                                    2020     2021     2022     2023     2024    2020-2024 average 
At 31 December 2020                 %        %        %        %        %       % 
 
Upside 
Gross domestic product              (10.5)   3.7      5.7      1.7      1.5     0.3 
UK Bank Rate                        0.10     1.14     1.27     1.20     1.21    0.98 
Unemployment rate                   4.3      5.4      5.4      5.0      4.5     5.0 
House price growth                  6.3      (1.4)    5.2      6.0      5.0     4.2 
Commercial real estate price growth (4.6)    9.3      3.9      2.1      0.3     2.1 
 
Base case 
Gross domestic product              (10.5)   3.0      6.0      1.7      1.4     0.1 
UK Bank Rate                        0.10     0.10     0.10     0.21     0.25    0.15 
Unemployment rate                   4.5      6.8      6.8      6.1      5.5     5.9 
House price growth                  5.9      (3.8)    0.5      1.5      1.5     1.1 
Commercial real estate price growth (7.0)    (1.7)    1.6      1.1      0.6     (1.1) 
 
Downside 
Gross domestic product              (10.6)   1.7      5.1      1.4      1.4     (0.4) 
UK Bank Rate                        0.10     0.06     0.02     0.02     0.03    0.05 
Unemployment rate                   4.6      7.9      8.4      7.8      7.0     7.1 
House price growth                  5.6      (8.4)    (6.5)    (4.7)    (3.0)   (3.5) 
Commercial real estate price growth (8.7)    (10.6)   (3.2)    (0.8)    (0.8)   (4.9) 
 
Severe downside 
Gross domestic product              (10.8)   0.3      4.8      1.3      1.2     (0.8) 
UK Bank Rate                        0.10     0.00     0.00     0.01     0.01    0.02 
Unemployment rate                   4.8      9.9      10.7     9.8      8.7     8.8 
House price growth                  5.3      (11.1)   (12.5)   (10.7)   (7.6)   (7.5) 
Commercial real estate price growth (11.0)   (21.4)   (9.8)    (3.9)    (0.8)   (9.7) 

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and estimates (continued)

The table below shows the Group's ECL for the upside, base case, downside and severe downside scenarios. The stage allocation for an asset is based on the overall scenario probability-weighted PD and, hence, the Stage 2 allocation is constant across all the scenarios. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. Judgements applied through changes to inputs are reflected in the scenario sensitivities. It therefore shows the extent to which a higher ECL allowance has been recognised to take account of multiple economic scenarios from the probability-weighted view relative to the base case. The uplift being GBP236 million as at 30 June 2021.

                 Probability-                                     Severe 
                                Upside     Base case   Downside 
                 weighted                                         downside 
ECL allowance    GBPm             GBPm         GBPm          GBPm         GBPm 
 
At 30 June 2021  2,900          2,483      2,664       3,136      4,149 
 

The impact of changes in the UK unemployment rate and House Price Index (HPI) have also been assessed. Although such changes would not be observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives insight into the sensitivity of the Group's ECL to gradual changes in these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged.

The table below shows the estimated impact on the Group's ECL in respect of UK mortgages resulting from a decrease/ increase in loss given default for a 10 percentage point (pp) increase or decrease in the UK House Price Index (HPI). The increase/decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario.

                At 30 June 2021 
                10pp increase   10pp decrease 
 
                in HPI          in HPI 
 
ECL impact, GBPm  (162)           235 
 

The table below shows the estimated impact on the Group's ECL resulting from a 1 percentage point (pp) increase or decrease in the UK unemployment rate. The increase or decrease is presented based on the adjustment phased evenly over the first ten quarters of the base case scenario. An immediate increase or decrease would drive a more material ECL impact as it would be fully reflected in both 12 month and lifetime PDs.

                At 30 June 2021 
                1pp increase in     1pp decrease in 
 
                unemployment        unemployment 
 
ECL impact, GBPm  59                  (54) 
 

NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)

Note 2: Critical accounting judgements and estimates (continued)

Application of judgement in adjustments to modelled ECL

Impairment models fall within the Lloyds Banking Group's Model Risk framework with model monitoring, periodic validation and back testing performed on model components (i.e. probability of default, exposure at default and loss given default). Limitations in the Group's impairment models or data inputs may be identified through the ongoing assessment and validation of the output of the models. In these circumstances, management make appropriate adjustments to the Group's allowance for impairment losses to ensure that the overall provision adequately reflects all material risks. These adjustments are determined by considering the particular attributes of exposures which have not been adequately captured by the impairment models and range from changes to model inputs and parameters, at account level, through to more qualitative post-model overlays.

Judgements are not typically assessed under each distinct economic scenario used to generate ECL, but instead are applied on the basis of final modelled ECL which reflects the probability-weighted view of all scenarios. All adjustments are reviewed quarterly and are subject to internal review and challenge, including by the Lloyds Banking Group Audit Committee, to ensure that amounts are appropriately calculated and that there are specific release criteria within a reasonable timeframe.

The coronavirus pandemic and the various support measures that have been put in place have resulted in an economic environment which differs significantly from the historical economic conditions upon which the impairment models have been built. As a result there is a greater need for management judgements to be applied, as seen in the continued elevated levels. The nature and overall scale of significant judgmental adjustments remain consistent with those presented at 31 December 2020:

Management judgements in respect of COVID-19

Overlay in respect of economic uncertainty: GBP200 million (2020: GBP200 million)

The Group's GBP200 million uncertainty overlay was added at year end in recognition of the risks to the conditioning assumptions around the base case scenario being markedly to the downside given the potential for a material delay in the vaccination programme or reduction in its effectiveness from further virus mutation and the corresponding delayed withdrawal of restrictions on social interaction or introduction of further lockdowns.

(MORE TO FOLLOW) Dow Jones Newswires

July 29, 2021 10:25 ET (14:25 GMT)

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