This excerpt taken from the LYG 6-K filed Jul 30, 2008.
Limited exposure to assets affected by current capital markets uncertainties
Whilst no bank has been immune to the impact of the recent turbulence in global financial markets, Lloyds TSB’s high quality business model means that the Group’s Corporate Markets business has relatively limited exposure to assets affected by current capital markets uncertainties (page 40, note 4).
US sub-prime Asset Backed Securities (ABS) and ABS Collateralised Debt Obligations (CDOs)
Lloyds TSB has no direct exposure to US sub-prime ABS and
limited indirect exposure through ABS CDOs. During the first half of 2008, the market value
of our holdings in ABS CDOs reduced and, as a result, the Group has taken an income
statement charge of £62 million, leaving a residual investment of
£70 million, net of hedges. The
Group’s residual investment of £70 million is stated net of credit default
swap (CDS) protection totalling £297 million purchased from a monoline financial
guarantor. At 30 June 2008, the underlying assets supported by this protection
had fallen in value. During the first half of 2008, the Group has written down the value of
this protection by £170 million, following a rating agency downgrade to the
financial guarantor and consequent increased protection costs, leaving a reliance on the
CDS protection totalling £121 million. The Group has no exposure to mezzanine
ABS CDOs. In addition, we have £1,382 million (31 December 2007:
£1,861 million) of ABS CDOs which are fully cash collateralised by major global
Structured Investment Vehicles (SIVs)
During the first half of 2008 the Group wrote down the value of its SIV assets by £46 million, leaving a residual exposure to SIV Capital Notes at 30 June 200 8 of £35 million. Additionally, at 30 June 2008 the Group had commercial paper back up liquidity facilities totalling £85 million (31 December 2007: £370 million), of which £22 million had been drawn. During July 2008, these liquidity facilities were reduced to £22 million, fully drawn. The Group has no SIV-Lite exposure.
Scottish Widows has no exposure to US sub-prime ABS either
directly or indirectly through CDOs. At 30 June 2008,
commercial paper through Scottish Widows
totalled £7 million.
All of Scottish Widows’ short-dated SIV instruments
that have matured over the last 12 months have done so at expected value.
In the first half of 2008, Corporate Markets also saw a reduction in profit before tax of £307 million as a result of the impact of mark-to-market adjustments in certain legacy trading portfolios, to reflect the marketwide repricing of liquidity and credit. At 30 June 2008 the trading portfolio contained £173 million of indirect exposure to US sub-prime mortgages and ABS CDOs. This super senior exposure is protected by note subordination.
At 30 June 2008, the Group’s portfolio of available-for-sale assets totalled £25,032 million (31 December 2007: £20,196 million ) of which £24,414 million (31 December 2007: £19,662 million ) were held in Corporate Markets. A significant proportion of these Corporate Markets assets (£7,645 m illion) related to the ABS in Cancara, our hybrid Asset Backed Commercial Paper conduit. The residual assets comprised £3,231 m illion Student Loan ABS, predominantly guaranteed by the US Government, £8,342 m illion government bond and short-dated bank commercial paper and certificates of deposit and £5,196 million major bank senior paper and high quality ABS. Although the Group expects to hold its available-for-sale assets until maturity, temporary mark-to-market adjustments are required to be taken through reserves. During the first half of 2008, a net £630 million reserves adjustment, which has no impact on the Group’s capital ratios, has been made to reflect a reduction in the value of available-for-sale assets.
Total assets in Cancara were £11,653 m illion at 30 June 2008, comprising £7,645 million ABS and £4,008 million client receivables transactions. Cancara, which is fully consolidated in the Group’s accounts, is managed in a very conservative manner, and this is demonstrated by the quality and ratings stability of its underlying asset portfolio. At 30 June 200 8, the ABS bonds in Cancara were 92 per cent Aaa/AAA rated by Moody’s and Standard & Poor’s respectively, and there was no exposure either directly or indirectly to sub-prime US mortgages within the ABS portfolio. At 30 June 200 8 the client receivables portfolio included no US sub-prime mortgage exposure.