FINANCIAL RISK MANAGEMENT

12 Months Ended

Dec. 31, 2019

Disclosure of financial risk management [text block] [Abstract]

Disclosure of financial risk management [text block]

NOTE 53: FINANCIAL RISK MANAGEMENT

As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group.

The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and capital can be found on pages 41 to 108. The following additional disclosures, which provide quantitative information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.

Market risk

(A) INTEREST RATE RISK

Interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. The rates on the remaining deposits are contractually fixed for their term to maturity.

Many banking assets are sensitive to interest rate movements; there is a large volume of managed rate assets such as variable rate mortgages which may be considered as a natural offset to the interest rate risk arising from the managed rate liabilities. However, a significant proportion of the Group’s lending assets, for example many personal loans and mortgages, bear interest rates which are contractually fixed.

The Group’s risk management policy is to optimise reward whilst managing its market risk exposures within the risk appetite defined by the Board. The largest residual risk exposure arises from balances that are deemed to be insensitive to changes in market rates (including current accounts, a portion of variable rate deposits and investable equity), and is managed through the Group’s structural hedge. The structural hedge consists of longer-term fixed rate assets or interest rate swaps and the amount and duration of the hedging activity is reviewed regularly by the Group Asset and Liability Committee. Further details on the Group market risk policy can be found on page 102.

The Group establishes hedge accounting relationships for interest rate risk using cash flow hedges and fair value hedges. The Group is exposed to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The derivatives used to manage the structural hedge may be designated into cash flow hedges to manage income statement volatility. The economic items related to the structural hedge, for example current accounts, are not eligible hedged items under IAS 39 for inclusion into accounting hedge relationships. The Group is exposed to fair value interest rate risk on its fixed rate customer loans, its fixed rate customer deposits and the majority of its subordinated debt, and to cash flow interest rate risk on its variable rate loans and deposits together with its floating rate subordinated debt. The Group applies netting between similar risks before applying hedge accounting.

Hedge ineffectiveness arises during the management of interest rate risk due to residual unhedged risk. Sources of ineffectiveness, which the Group may decide to not fully mitigate, can include basis differences, timing differences and notional amount differences. The effectiveness of accounting hedge relationships is assessed between the hedging derivatives and the documented hedged item, which can differ to the underlying economically hedged item.

At 31 December 2019 the aggregate notional principal of interest rate swaps designated as fair value hedges was £183,489 million (2018: £150,971 million) with a net fair value asset of £569 million (2018: asset of £760 million) (note 17). The gains on the hedging instruments were £1,144 million (2018: gains of £94 million). The losses on the hedged items attributable to the hedged risk were £1,001 million (2018: losses of £32 million). The gains and losses relating to the fair value hedges are recorded in net trading income.

In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the commercial business. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2019 was £426,740 million (2018: £556,945 million) with a net fair value liability of £388 million (2018: liability of £486 million) (note 17). In 2019, ineffectiveness recognised in the income statement that arises from cash flow hedges was a gain of £134 million (2018: loss of £25 million).

INTEREST RATE BENCHMARK REFORM

As discussed in note 1, the Group has applied the hedge accounting amendments Interest Rate Benchmark Reform to hedge accounting relationships directly affected by the replacement of interest rate benchmarks. Under these amendments, for the purposes of:

–  determining whether a forecast transaction is highly probable;

– determining whether the hedged future cash flows are expected to occur;

– determining whether a hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; and

– determining whether an accounting hedging relationship should be discontinued because of a failure of the retrospective effectiveness test

the Group has assumed that the interest rate benchmark on which the hedged risk or the cash flows of the hedged item or hedging instrument are based is not altered by uncertainties resulting from the proposed interest rate benchmark reform. In addition, for a fair value hedge of a non-contractually specified benchmark portion of interest rate risk, the Group assesses only at inception of the hedge relationship and not on an ongoing basis that the risk is separately identifiable and hedge effectiveness can be measured.

The Group’s most significant hedge accounting relationships are exposed to the following interest rate benchmarks: Sterling LIBOR, US Dollar LIBOR and Euro LIBOR. The notional of the hedged items that the Group has designated into cash flow hedge relationships that is directly affected by the interest rate benchmark reform is £29,202 million, of which £25,438 million relates to Sterling LIBOR. These are principally loans and advances to customers in Commercial Banking. In addition, the interest rate benchmark reforms affect assets designated in fair value hedges with a notional of £102,969 million, of which £98,278 million is in respect of sterling LIBOR, and liabilities designated in fair value hedges with a notional of £62,295 million, of which £9,186 million is in respect of sterling LIBOR. These fair value hedges principally relate to mortgages in Retail and debt securities in issue.

The Group is managing the process to transition to alternative benchmark rates under its Group-wide IBOR Transition Programme. This programme is working towards ensuring that the Group has the market capability and infrastructure to deal with the reform. The programme also encompasses the associated impacts on accounting and reporting and includes dealing with the impact on hedge accounting relationships of the transition to alternative reference rates. Further information on the Group’s programme is set out on page 45.

The significant assumptions and judgements that the Group has made in applying these requirements include the following:

–  a hedge accounting relationship is assumed to be affected by the interest rate benchmark reform if the reform gives rise to uncertainties about the timing and/or amount of the interest rate benchmark-based cash flows of the hedged items and/or of the hedging instrument;

–  where the hedged item is a forecast transaction then, in the absence of any certainty in relation to the interest rate benchmark reform, assessments have been determined as to whether the forecast transaction is highly probable assuming that the interest rate benchmark on which the hedged cash flows are based is not altered as a result of the interest rate benchmark reform;

– any reclassification of amounts in cash flow hedge reserves to profit or loss have been based on assessing whether the hedged cash flows are no longer expected to occur assuming that the interest rate benchmark on which the hedged cash flows are based is not altered as a result of the interest rate benchmark reform; and

– all benchmark rate referenced hedged items and hedging instruments included in hedging relationships are subject to uncertainty due to interest rate benchmark reform.

In accordance with the Interest Rate Benchmark Reform amendments to IAS 39, the Group will cease to apply prospectively the reliefs outlined above when the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and the amount of the interest rate benchmark-based cash flows of the hedged item (or for the effectiveness assessments, the hedging instrument). The reliefs will be disapplied earlier if the hedging relationship is discontinued or the entire amount accumulated in the cash flow hedge reserve with respect to that hedging relationship is reclassified to profit or loss for a reason other than interest rate benchmark reform.

At 31 December 2019, the notional amount of the hedging instruments in hedging relationships to which these amendments apply was £604,602 million, of which £117,076 million relates to Sterling LIBOR fair value hedges and £400,439 million relates to Sterling LIBOR cash flow hedges.

(B) CURRENCY RISK

The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. These risks reside in the authorised trading centres who are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and liquidity risk function in London. Associated VaR and the closing, average, maximum and minimum are disclosed on page 108. The Group also manages foreign currency risk via cash flow hedge accounting, utilising currency swaps.

Risk arises from the Group’s investments in its overseas operations. The Group’s structural foreign currency exposure is represented by the net asset value of the foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency exposures are taken to reserves.

The Group ceased all hedging of the currency translation risk of the net investment in foreign operations on 1 January 2018.

The Group’s main overseas operations are in the Americas and Europe. Details of the Group’s structural foreign currency exposures are as follows:

(C) FUNCTIONAL CURRENCY OF GROUP OPERATIONS

	2019						2018
	Euro £m		US Dollar £m		Other non-sterling £m		Euro £m		US Dollar £m		Other non-sterling £m
Exposure		63		93		48		112		59		60

Credit risk

The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Information about the Group’s exposure to credit risk, credit risk management, measurement and mitigation can be found on pages 52 to 80.

(A) MAXIMUM CREDIT EXPOSURE

The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral held and the maximum exposure to loss, which includes amounts held to cover unit-linked and With Profits funds liabilities, is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.

	2019						2018
		Maximum exposure £m	Offset2 £m		Net exposure £m			Maximum exposure £m	Offset2 £m		Net exposure £m
Loans and advances to banks, net1		9,775	–			9,775		6,283	–			6,283
Loans and advances to customers, net1		494,988	(2,792	)		492,196		484,858	(3,241	)		481,617
Debt securities, net1		5,544	–			5,544		5,238	–			5,238
Financial assets at amortised cost		510,307	(2,792	)		507,515		496,379	(3,241	)		493,138
Financial assets at fair value through other comprehensive income3		24,865	–			24,865		24,794	–			24,794
Financial assets at fair value through profit or loss:3,4
Loans and advances		23,475	–			23,475		40,876	–			40,876
Debt securities, treasury and other bills		40,925	–			40,925		40,168	–			40,168
		64,400	–			64,400		81,044	–			81,044
Derivative assets		26,369	(14,696	)		11,673		23,595	(14,327	)		9,268
Assets arising from reinsurance contracts held		23,567	–			23,567		7,860	–			7,860
Off-balance sheet items:
Acceptances and endorsements		74	–			74		194	–			194
Other items serving as direct credit substitutes		366	–			366		632	–			632
Performance bonds and other transaction-related contingencies		2,454	–			2,454		2,425	–			2,425
Irrevocable commitments and guarantees		63,504	–			63,504		64,884	–			64,884
		66,398	–			66,398		68,135	–			68,135
		715,906	(17,488	)		698,418		701,807	(17,568	)		684,239

1	Amounts shown net of related impairment allowances.
2	Offset items comprise deposit amounts available for offset, and amounts available for offset under master netting arrangements, that do not meet the criteria under IAS 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.
3	Excluding equity shares.
4	Includes assets within the Group’s unit-linked funds for which credit risk is borne by the policyholders and assets within the Group’s With-Profits funds for which credit risk is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.

(B) CONCENTRATIONS OF EXPOSURE

The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall exposure to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation on page 53.

At 31 December 2019 the most significant concentrations of exposure were in mortgages (comprising 60 per cent of total loans and advances to customers) and to financial, business and other services (comprising 18 per cent of the total).

	2019 £m			2018 £m
Agriculture, forestry and fishing		7,558			7,314
Energy and water supply		1,432			1,517
Manufacturing		6,093			8,260
Construction		4,285			4,684
Transport, distribution and hotels		13,016			14,113
Postal and telecommunications		1,923			2,711
Property companies		27,596			28,451
Financial, business and other services		89,763			77,505
Personal:
Mortgages1		299,141			297,498
Other		29,272			28,699
Lease financing		1,671			1,822
Hire purchase		16,497			15,434
Total loans and advances to customers before allowance for impairment losses		498,247			488,008
Allowance for impairment losses (note 18)		(3,259	)		(3,150	)
Total loans and advances to customers		494,988			484,858

1 Includes both UK and overseas mortgage balances.

Following the reduction in the Group’s non-UK activities, an analysis of credit risk exposures by geographical region has not been provided.

(C) CREDIT QUALITY OF ASSETS

LOANS AND ADVANCES

The analysis of lending has been prepared based on the division in which the asset is held; with the business segment in which the exposure is recorded reflected in the ratings system applied. The internal credit ratings systems used by the Group differ between Retail and Commercial, reflecting the characteristics of these exposures and the way that they are managed internally; these credit ratings are set out below. All probabilities of default (PDs) include forward-looking information and are based on 12 month values, with the exception of credit impaired.

Stage 3 assets include balances of £205 million (2018: £250 million) (with outstanding amounts due of approximately £1,700 million (2018: £2,200 million)) which have been subject to a partial write-off and where the Group continues to enforce recovery action.

Stage 2 and Stage 3 assets with a carrying amount of £219 million (2018: £1,000 million) were modified during the year. No material gain or loss was recognised by the Group.

Gross drawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Loans and advances to banks:
CMS 1-10	0.00-0.50%		9,777		–		–		–		9,777
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			9,777		–		–		–		9,777
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		257,028		13,494		–		–		270,522
RMS 7-9	4.51-14.00%		15		2,052		–		–		2,067
RMS 10	14.01-20.00%		–		414		–		–		414
RMS 11-13	20.01-99.99%		–		975		–		–		975
RMS 14	100%		–		–		1,506		13,714		15,220
			257,043		16,935		1,506		13,714		289,198
Retail - unsecured
RMS 1-6	0.00-4.50%		22,151		1,098		–		–		23,249
RMS 7-9	4.51-14.00%		2,676		919		–		–		3,595
RMS 10	14.01-20.00%		76		189		–		–		265
RMS 11-13	20.01-99.99%		18		606		–		–		624
RMS 14	100%		–		–		678		–		678
			24,921		2,812		678		–		28,411
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		13,568		1,297		–		–		14,865
RMS 7-9	4.51-14.00%		314		368		–		–		682
RMS 10	14.01-20.00%		–		99		–		–		99
RMS 11-13	20.01-99.99%		2		178		–		–		180
RMS 14	100%		–		–		150		–		150
			13,884		1,942		150		–		15,976
Retail - Other
RMS 1-6	0.00-4.50%		9,520		390		–		–		9,910
RMS 7-9	4.51-14.00%		–		409		–		–		409
RMS 10	14.01-20.00%		–		7		–		–		7
RMS 11-13	20.01-99.99%		134		23		–		–		157
RMS 14	100%		–		–		150		–		150
			9,654		829		150		–		10,633
Total Retail			305,502		22,518		2,484		13,714		344,218

Gross drawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Commercial
CMS 1-10	0.00-0.50%		59,880		379		–		–		60,259
CMS 11-14	0.51-3.00%		25,638		2,322		–		–		27,960
CMS 15-18	3.01-20.00%		1,805		3,123		–		–		4,928
CMS 19	20.01-99.99%		–		169		–		–		169
CMS 20-23	100%		–		–		3,447		–		3,447
			87,323		5,993		3,447		–		96,763
Other
RMS 1-6	0.00-4.50%		754		32		–		–		786
RMS 7-9	4.51-14.00%		40		–		–		–		40
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		84		–		84
			794		32		84		–		910
CMS 1-10	0.00-0.50%		56,356		–		–		–		56,356
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			56,356		–		–		–		56,356
Total loans and advances to customers			449,975		28,543		6,015		13,714		498,247
In respect of:
Retail			305,502		22,518		2,484		13,714		344,218
Commercial			87,323		5,993		3,447		–		96,763
Other			57,150		32		84		–		57,266
Total loans and advances to customers			449,975		28,543		6,015		13,714		498,247

Expected credit losses in respect of drawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Loans and advances to banks:
CMS 1-10	0.00-0.50%		2		–		–		–		2
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			2		–		–		–		2
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		23		183		–		–		206
RMS 7-9	4.51-14.00%		–		39		–		–		39
RMS 10	14.01-20.00%		–		13		–		–		13
RMS 11-13	20.01-99.99%		–		46		–		–		46
RMS 14	100%		–		–		122		142		264
			23		281		122		142		568
Retail - unsecured
RMS 1-6	0.00-4.50%		188		42		–		–		230
RMS 7-9	4.51-14.00%		103		92		–		–		195
RMS 10	14.01-20.00%		7		34		–		–		41
RMS 11-13	20.01-99.99%		3		193		–		–		196
RMS 14	100%		–		–		233		–		233
			301		361		233		–		895
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		203		30		–		–		233
RMS 7-9	4.51-14.00%		10		15		–		–		25
RMS 10	14.01-20.00%		–		10		–		–		10
RMS 11-13	20.01-99.99%		1		32		–		–		33
RMS 14	100%		–		–		84		–		84
			214		87		84		–		385
Retail - Other
RMS 1-6	0.00-4.50%		25		9		–		–		34
RMS 7-9	4.51-14.00%		–		27		–		–		27
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		1		–		–		1
RMS 14	100%		–		–		51		–		51
			25		37		51		–		113
Total Retail			563		766		490		142		1,961

Expected credit losses in respect of drawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Commercial
CMS 1-10	0.00-0.50%		33		1		–		–		34
CMS 11-14	0.51-3.00%		50		37		–		–		87
CMS 15-18	3.01-20.00%		13		174		–		–		187
CMS 19	20.01-99.99%		–		16		–		–		16
CMS 20-23	100%		–		–		941		–		941
			96		228		941		–		1,265
Other
RMS 1-6	0.00-4.50%		6		1		–		–		7
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		16		–		16
			6		1		16		–		23
CMS 1-10	0.00-0.50%		10		–		–		–		10
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			10		–		–		–		10
Total loans and advances to customers			675		995		1,447		142		3,259
In respect of:
Retail			563		766		490		142		1,961
Commercial			96		228		941		–		1,265
Other			16		1		16		–		33
Total loans and advances to customers			675		995		1,447		142		3,259

Gross undrawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		12,242		62		–		–		12,304
RMS 7-9	4.51-14.00%		1		1		–		–		2
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		8		79		87
			12,243		63		8		79		12,393
Retail - unsecured
RMS 1-6	0.00-4.50%		60,653		1,986		–		–		62,639
RMS 7-9	4.51-14.00%		389		218		–		–		607
RMS 10	14.01-20.00%		5		39		–		–		44
RMS 11-13	20.01-99.99%		1		73		–		–		74
RMS 14	100%		–		–		83		–		83
			61,048		2,316		83		–		63,447
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		1,181		–		–		–		1,181
RMS 7-9	4.51-14.00%		193		4		–		–		197
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			1,374		4		–		–		1,378
Retail - Other
RMS 1-6	0.00-4.50%		1,240		–		–		–		1,240
RMS 7-9	4.51-14.00%		–		62		–		–		62
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		3		–		3
			1,240		62		3		–		1,305
Total Retail			75,905		2,445		94		79		78,523

Gross undrawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Commercial
CMS 1-10	0.00-0.50%		47,707		76		–		–		47,783
CMS 11-14	0.51-3.00%		5,134		850		–		–		5,984
CMS 15-18	3.01-20.00%		258		327		–		–		585
CMS 19	20.01-99.99%		–		43		–		–		43
CMS 20-23	100%		–		–		5		–		5
			53,099		1,296		5		–		54,400
Other
RMS 1-6	0.00-4.50%		239		–		–		–		239
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			239		–		–		–		239
CMS 1-10	0.00-0.50%		391		–		–		–		391
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			391		–		–		–		391
Total loans and advances to customers			129,634		3,741		99		79		133,553
In respect of:
Retail			75,905		2,445		94		79		78,523
Commercial			53,099		1,296		5		–		54,400
Other			630		–		–		–		630
Total loans and advances to customers			129,634		3,741		99		79		133,553

Expected credit losses in respect of undrawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		1		–		–		–		1
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			1		–		–		–		1
Retail - unsecured
RMS 1-6	0.00-4.50%		56		24		–		–		80
RMS 7-9	4.51-14.00%		6		8		–		–		14
RMS 10	14.01-20.00%		–		3		–		–		3
RMS 11-13	20.01-99.99%		–		15		–		–		15
RMS 14	100%		–		–		–		–		–
			62		50		–		–		112
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		2		–		–		–		2
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			2		–		–		–		2
Retail - Other
RMS 1-6	0.00-4.50%		11		–		–		–		11
RMS 7-9	4.51-14.00%		–		3		–		–		3
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			11		3		–		–		14
Total Retail			76		53		–		–		129

Expected credit losses in respect of undrawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2019
Commercial
CMS 1-10	0.00-0.50%		11		–		–		–		11
CMS 11-14	0.51-3.00%		7		9		–		–		16
CMS 15-18	3.01-20.00%		1		13		–		–		14
CMS 19	20.01-99.99%		–		2		–		–		2
CMS 20-23	100%		–		–		5		–		5
			19		24		5		–		48
Other
RMS 1-6	0.00-4.50%		–		–		–		–		–
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			–		–		–		–		–
CMS 1-10	0.00-0.50%		–		–		–		–		–
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			–		–		–		–		–
Total loans and advances to customers			95		77		5		–		177
In respect of:
Retail			76		53		–		–		129
Commercial			19		24		5		–		48
Other			–		–		–		–		–
Total loans and advances to customers			95		77		5		–		177

Gross drawn exposures	PD range	Stage 1 £m		Stage 2  £m		Stage 3  £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Loans and advances to banks:
CMS 1-10	0.00-0.50%		6,177		3		–		–		6,180
CMS 11-14	0.51-3.00%		105		–		–		–		105
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			6,282		3		–		–		6,285
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		257,740		10,784		–		–		268,524
RMS 7-9	4.51-14.00%		57		1,709		–		–		1,766
RMS 10	14.01-20.00%		–		262		–		–		262
RMS 11-13	20.01-99.99%		–		899		–		–		899
RMS 14	100%		–		–		1,393		15,391		16,784
			257,797		13,654		1,393		15,391		288,235
Retail - unsecured
RMS 1-6	0.00-4.50%		22,363		1,079		–		–		23,442
RMS 7-9	4.51-14.00%		2,071		774		–		–		2,845
RMS 10	14.01-20.00%		72		167		–		–		239
RMS 11-13	20.01-99.99%		199		687		–		–		886
RMS 14	100%		–		–		703		–		703
			24,705		2,707		703		–		28,115
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		12,918		954		–		–		13,872
RMS 7-9	4.51-14.00%		301		318		–		–		619
RMS 10	14.01-20.00%		–		111		–		–		111
RMS 11-13	20.01-99.99%		5		197		–		–		202
RMS 14	100%		–		–		129		–		129
			13,224		1,580		129		–		14,933
Retail - Other
RMS 1-6	0.00-4.50%		9,033		704		–		–		9,737
RMS 7-9	4.51-14.00%		190		66		–		–		256
RMS 10	14.01-20.00%		–		7		–		–		7
RMS 11-13	20.01-99.99%		211		23		–		–		234
RMS 14	100%		–		–		165		–		165
			9,434		800		165		–		10,399
Total Retail			305,160		18,741		2,390		15,391		341,682

Gross drawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Commercial
CMS 1-10	0.00-0.50%		65,089		100		–		–		65,189
CMS 11-14	0.51-3.00%		25,472		3,450		–		–		28,922
CMS 15-18	3.01-20.00%		1,441		2,988		–		–		4,429
CMS 19	20.01-99.99%		–		54		–		–		54
CMS 20-23	100%		–		–		3,230		–		3,230
			92,002		6,592		3,230		–		101,824
Other
RMS 1-6	0.00-4.50%		804		6		–		–		810
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		55		–		55
			804		6		55		–		865
CMS 1-10	0.00-0.50%		43,565		–		–		–		43,565
CMS 11-14	0.51-3.00%		–		6		–		–		6
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		66		–		66
			43,565		6		66		–		43,637
Total loans and advances to customers			441,531		25,345		5,741		15,391		488,008
In respect of:
Retail			305,160		18,741		2,390		15,391		341,682
Commercial			92,002		6,592		3,230		–		101,824
Other			44,369		12		121		–		44,502
Total loans and advances to customers			441,531		25,345		5,741		15,391		488,008

Expected credit losses in respect of drawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Loans and advances to banks:
CMS 1-10	0.00-0.50%		2		–		–		–		2
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			2		–		–		–		2
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		37		141		–		–		178
RMS 7-9	4.51-14.00%		–		34		–		–		34
RMS 10	14.01-20.00%		–		9		–		–		9
RMS 11-13	20.01-99.99%		–		42		–		–		42
RMS 14	100%		–		–		118		78		196
			37		226		118		78		459
Retail - unsecured
RMS 1-6	0.00-4.50%		135		45		–		–		180
RMS 7-9	4.51-14.00%		57		83		–		–		140
RMS 10	14.01-20.00%		4		29		–		–		33
RMS 11-13	20.01-99.99%		3		172		–		–		175
RMS 14	100%		–		–		228		–		228
			199		329		228		–		756
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		114		19		–		–		133
RMS 7-9	4.51-14.00%		6		15		–		–		21
RMS 10	14.01-20.00%		–		11		–		–		11
RMS 11-13	20.01-99.99%		1		34		–		–		35
RMS 14	100%		–		–		78		–		78
			121		79		78		–		278
Retail - Other
RMS 1-6	0.00-4.50%		30		25		–		–		55
RMS 7-9	4.51-14.00%		2		2		–		–		4
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		1		–		–		1
RMS 14	100%		–		–		60		–		60
			32		28		60		–		120
Total Retail			389		662		484		78		1,613

Expected credit losses in respect of drawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Commercial
CMS 1-10	0.00-0.50%		32		1		–		–		33
CMS 11-14	0.51-3.00%		50		86		–		–		136
CMS 15-18	3.01-20.00%		11		231		–		–		242
CMS 19	20.01-99.99%		–		7		–		–		7
CMS 20-23	100%		–		–		1,031		–		1,031
			93		325		1,031		–		1,449
Other
RMS 1-6	0.00-4.50%		43		1		–		–		44
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		11		–		11
			43		1		11				55
CMS 1-10	0.00-0.50%		–		–		–		–		–
CMS 11-14	0.51-3.00%		–		6		–		–		6
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		27		–		27
			–		6		27		–		33
Total loans and advances to customers			525		994		1,553		78		3,150
In respect of:
Retail			389		662		484		78		1,613
Commercial			93		325		1,031		–		1,449
Other			43		7		38		–		88
Total loans and advances to customers			525		994		1,553		78		3,150

Gross undrawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		12,024		19		–		–		12,043
RMS 7-9	4.51-14.00%		2		1		–		–		3
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		5		90		95
			12,026		20		5		90		12,141
Retail - unsecured
RMS 1-6	0.00-4.50%		57,433		1,811		–		–		59,244
RMS 7-9	4.51-14.00%		391		155		–		–		546
RMS 10	14.01-20.00%		10		27		–		–		37
RMS 11-13	20.01-99.99%		3		51		–		–		54
RMS 14	100%		–		–		36		–		36
			57,837		2,044		36		–		59,917
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		1,565		–		–		–		1,565
RMS 7-9	4.51-14.00%		141		–		–		–		141
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			1,706		–		–		–		1,706
Retail - Other
RMS 1-6	0.00-4.50%		1,381		47		–		–		1,428
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		360		–		–		–		360
RMS 14	100%		–		–		3		–		3
			1,741		47		3		–		1,791
Total Retail			73,310		2,111		44		90		75,555

Gross undrawn exposures (continued)	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Commercial
CMS 1-10	0.00-0.50%		51,632		–		–		–		51,632
CMS 11-14	0.51-3.00%		6,501		693		–		–		7,194
CMS 15-18	3.01-20.00%		126		297		–		–		423
CMS 19	20.01-99.99%		31		11		–		–		42
CMS 20-23	100%		–		–		6		–		6
			58,290		1,001		6		–		59,297
Other
RMS 1-6	0.00-4.50%		246		–		–		–		246
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			246		–		–		–		246
CMS 1-10	0.00-0.50%		–		–		–		–		–
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			–		–		–		–		–
Total loans and advances to customers			131,846		3,112		50		90		135,098
In respect of:
Retail			73,310		2,111		44		90		75,555
Commercial			58,290		1,001		6		–		59,297
Other			246		–		–		–		246
Total loans and advances to customers			131,846		3,112		50		90		135,098

Expected credit losses in respect of undrawn exposures	PD range	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit-impaired £m		Total £m
At 31 December 2018
Loans and advances to customers:
Retail - mortgages
RMS 1-6	0.00-4.50%		1		–		–		–		1
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			1		–		–		–		1
Retail - unsecured
RMS 1-6	0.00-4.50%		85		26		–		–		111
RMS 7-9	4.51-14.00%		5		10		–		–		15
RMS 10	14.01-20.00%		–		3		–		–		3
RMS 11-13	20.01-99.99%		–		10		–		–		10
RMS 14	100%		–		–		–		–		–
			90		49		–		–		139
Retail - UK Motor Finance
RMS 1-6	0.00-4.50%		2		–		–		–		2
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			2		–		–		–		2
Retail - Other
RMS 1-6	0.00-4.50%		11		2		–		–		13
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			11		2		–		–		13
Total Retail			104		51		–		–		155

								Purchased or
								originated
		Stage 1		Stage 2		Stage 3		credit-impaired		Total
Expected credit losses in respect of undrawn exposures (continued)	PD range	£m		£m		£m		£m		£m
At 31 December 2018
Commercial
CMS 1-10	0.00-0.50%		9		–		–		–		9
CMS 11-14	0.51-3.00%		7		7		–		–		14
CMS 15-18	3.01-20.00%		1		5		–		–		6
CMS 19	20.01-99.99%		1		1		–		–		2
CMS 20-23	100%		–		–		6		–		6
			18		13		6		–		37
Other
RMS 1-6	0.00-4.50%		1		–		–		–		1
RMS 7-9	4.51-14.00%		–		–		–		–		–
RMS 10	14.01-20.00%		–		–		–		–		–
RMS 11-13	20.01-99.99%		–		–		–		–		–
RMS 14	100%		–		–		–		–		–
			1		–		–		–		1
CMS 1-10	0.00-0.50%		–		–		–		–		–
CMS 11-14	0.51-3.00%		–		–		–		–		–
CMS 15-18	3.01-20.00%		–		–		–		–		–
CMS 19	20.01-99.99%		–		–		–		–		–
CMS 20-23	100%		–		–		–		–		–
			–		–		–		–		–
Total loans and advances to customers			123		64		6		–		193
In respect of:
Retail			104		51		–		–		155
Commercial			18		13		6		–		37
Other			1		–		–		–		1
Total loans and advances to customers			123		64		6		–		193

DEBT SECURITIES HELD AT AMORTISED COST

An analysis by credit rating of the Group’s debt securities held at amortised cost is provided below:

	2019							2018
	Investment							Investment
	grade1		Other2		Total			grade1		Other2		Total
	£m		£m		£m			£m		£m		£m
Asset-backed securities:
Mortgage-backed securities		3,007		–		3,007			3,263		9		3,272
Other asset-backed securities		876		–		876			763		17		780
		3,883		–		3,883			4,026		26		4,052
Corporate and other debt securities		1,650		14		1,664			1,176		16		1,192
Gross exposure		5,533		14		5,547			5,202		42		5,244
Allowance for impairment losses						(3	)						(6	)
Total debt securities held at amortised cost						5,544							5,238

1	Credit ratings equal to or better than ‘BBB’.
2	Other comprises sub-investment grade (31 December 2019: £nil; 31 December 2018: £6 million) and not rated (31 December 2019: £14 million; 31 December 2018: £36 million).

FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME (EXCLUDING EQUITY SHARES)

An analysis of the Group’s financial assets at fair value through other comprehensive income is included in note 19. The credit quality of the Group’s financial assets at fair value through other comprehensive income (excluding equity shares) is set out below:

	2019						2018
	Investment						Investment
	grade1		Other2		Total		grade1		Other2		Total
	£m		£m		£m		£m		£m		£m
Debt securities:
Government securities		13,084		14		13,098		18,971		–		18,971
Bank and building society certificates of deposit		–		–		–		118		–		118
Asset-backed securities:
Mortgage-backed securities		121		–		121		120		–		120
Other asset-backed securities		–		60		60		–		131		131
		121		60		181		120		131		251
Corporate and other debt securities		11,036		15		11,051		4,934		217		5,151
Total debt securities		24,241		89		24,330		24,143		348		24,491
Treasury and other bills		535		–		535		303		–		303
Total financial assets at fair value through other comprehensive income		24,776		89		24,865		24,446		348		24,794

1	Credit ratings equal to or better than ‘BBB’.
2	Other comprises sub-investment grade (31 December 2019: £89 million; 31 December 2018: £85 million) and not rated (31 December 2019: £nil; 31 December 2018: £263 million).

DEBT SECURITIES, TREASURY AND OTHER BILLS HELD AT FAIR VALUE THROUGH PROFIT OR LOSS

An analysis of the Group’s financial assets at fair value through profit or loss is included in note 14. The credit quality of the Group’s debt securities, treasury and other bills held at fair value through profit or loss is set out below:

	2019						2018
	Investment						Investment
	grade1		Other2		Total		grade1		Other2		Total
	£m		£m		£m		£m		£m		£m
Debt securities, treasury and other bills held at fair value through profit or loss
Trading assets:
Government securities		6,791		–		6,791		7,192		–		7,192
Asset-backed securities:
Mortgage-backed securities		1		5		6		10		–		10
Other asset-backed securities		14		3		17		63		–		63
		15		8		23		73		–		73
Corporate and other debt securities		232		1		233		228		19		247
Total held as trading assets		7,038		9		7,047		7,493		19		7,512
Other assets held at fair value through profit or loss:
Government securities		12,044		19		12,063		10,903		–		10,903
Other public sector securities		2,118		8		2,126		2,059		5		2,064
Bank and building society certificates of deposit		984		–		984		1,105		–		1,105
Asset-backed securities:
Mortgage-backed securities		452		10		462		208		7		215
Other asset-backed securities		241		–		241		283		3		286
		693		10		703		491		10		501
Corporate and other debt securities		15,932		2,051		17,983		16,141		1,922		18,063
Total debt securities held at fair value through profit or loss		31,771		2,088		33,859		30,699		1,937		32,636
Treasury bills and other bills		19		–		19		20		–		20
Total other assets held at fair value through profit or loss		31,790		2,088		33,878		30,719		1,937		32,656
Total held at fair value through profit or loss		38,828		2,097		40,925		38,212		1,956		40,168

1	Credit ratings equal to or better than ‘BBB’.
2	Other comprises sub-investment grade (2019: £251 million; 2018: £411 million) and not rated (2019: £1,846 million; 2018: £1,545 million).

Credit risk in respect of trading and other financial assets at fair value through profit or loss held within the Group’s unit-linked funds is borne by the policyholders and credit risk in respect of with-profits funds is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back those contract liabilities.

DERIVATIVE ASSETS

An analysis of derivative assets is given in note 17. The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the Group’s net credit risk relating to derivative assets of £11,673 million (2018: £9,268 million), cash collateral of £7,650 million (2018: £6,039 million) was held and a further £274 million was due from OECD banks (2018: £213 million).

	2019						2018
	Investment						Investment
	grade1		Other2		Total		grade1		Other2		Total
	£m		£m		£m		£m		£m		£m
Trading and other		22,991		2,142		25,133		19,797		2,235		22,032
Hedging		1,178		58		1,236		1,534		29		1,563
Total derivative financial instruments		24,169		2,200		26,369		21,331		2,264		23,595

1	Credit ratings equal to or better than ‘BBB’.
2	Other comprises sub-investment grade (2019: £1,555 million; 2018: £1,920 million) and not rated (2019: £645 million; 2018: £344 million).

FINANCIAL GUARANTEES AND IRREVOCABLE LOAN COMMITMENTS

Financial guarantees represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is expected to be significantly less; most commitments to extend credit are contingent upon customers maintaining specific credit standards.

(D) COLLATERAL HELD AS SECURITY FOR FINANCIAL ASSETS

A general description of collateral held as security in respect of financial instruments is provided on page 53. The Group holds collateral against loans and advances and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for financial assets at fair value through profit or loss and for derivative assets is also shown below.

The Group holds collateral in respect of loans and advances to banks and customers as set out below. The Group does not hold collateral against debt securities, comprising asset-backed securities and corporate and other debt securities, which are classified as financial assets held at amortised cost.

LOANS AND ADVANCES TO BANKS

There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying value of £1,555 million (2018: £461 million), against which the Group held collateral with a fair value of £1,516 million (2018: £481 million).

These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.

LOANS AND ADVANCES TO CUSTOMERS

Retail lending

Mortgages

An analysis by loan-to-value ratio of the Group’s residential mortgage lending is provided below. The value of collateral used in determining the loan-to-value ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowances for indexation error and dilapidations.

In some circumstances, where the discounted value of the estimated net proceeds from the liquidation of collateral (i.e. net of costs, expected haircuts and anticipated changes in the value of the collateral to the point of sale) is greater than the estimated exposure at default, no credit losses are expected and no ECL allowance is recognised.

			As at 31 December 2019										As at 31 December 2018
	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit- impaired £m		Total gross £m		Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit- impaired £m		Total gross £m
Drawn balances
Less than 70 per cent		179,566		13,147		1,174		10,728		204,615		185,556		10,728		1,035		11,846		209,165
70 per cent to 80 per cent		44,384		2,343		181		1,751		48,659		41,827		1,802		190		1,884		45,703
80 per cent to 90 per cent		27,056		1,057		86		677		28,876		24,854		832		95		1,032		26,813
90 per cent to 100 per cent		5,663		199		34		207		6,103		4,957		164		39		302		5,462
Greater than 100 per cent		374		189		31		351		945		603		128		34		327		1,092
Total		257,043		16,935		1,506		13,714		289,198		257,797		13,654		1,393		15,391		288,235

			As at 31 December 2019										As at 31 December 2018
	Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit- impaired £m		Total £m		Stage 1 £m		Stage 2 £m		Stage 3 £m		Purchased or originated credit- impaired £m		Total £m
Expected credit losses on drawn balances
Less than 70 per cent		6		104		41		44		195		3		94		34		19		150
70 per cent to 80 per cent		7		75		29		38		149		11		51		24		12		98
80 per cent to 90 per cent		7		58		25		23		113		14		47		27		16		104
90 per cent to 100 per cent		2		17		12		10		41		4		16		14		9		43
Greater than 100 per cent		1		27		15		27		70		5		18		19		22		64
Total		23		281		122		142		568		37		226		118		78		459

Other

The majority of non-mortgage retail lending is unsecured. At 31 December 2019, Stage 3 non-mortgage lending amounted to £610 million, net of an impairment allowance of £368 million (2018: £631 million, net of an impairment allowance of £366 million).

Stage 1 and Stage 2 non-mortgage retail lending amounted to £54,042 million (2018: £52,450 million). Lending decisions are predominantly based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at the time of loan origination and are thereafter monitored in accordance with business unit credit policy.

The Group credit risk disclosures for unimpaired non-mortgage retail lending report assets gross of collateral and therefore disclose the maximum loss exposure. The Group believes that this approach is appropriate.

Commercial lending

Reverse repurchase transactions

At 31 December 2019 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £54,600 million (2018: £40,483 million), against which the Group held collateral with a fair value of £52,982 million (2018: £42,339 million), all of which the Group was able to repledge. There were no collateral balances in the form of cash provided in respect of reverse repurchase agreements included in these amounts (2018: £nil). These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.

Stage 3 secured lending

The value of collateral is re-evaluated and its legal soundness re-assessed if there is observable evidence of distress of the borrower; this evaluation is used to determine potential loss allowances and management’s strategy to try to either repair the business or recover the debt.

At 31 December 2019, Stage 3 secured commercial lending amounted to £966 million, net of an impairment allowance of £243 million (2018: £658 million, net of an impairment allowance of £215 million). The fair value of the collateral held in respect of impaired secured commercial lending was £744 million (2018: £590 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.

Stage 3 secured commercial lending and associated collateral relates to lending to property companies and to customers in the financial, business and other services; transport, distribution and hotels; and construction industries.

Stage 1 and Stage 2 secured lending

For Stage 1 and Stage 2 secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of collateral if the obligor enters a distressed state.

Stage 1 and Stage 2 secured commercial lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of underlying collateral, although, for Stage 3 lending, this will not always involve assessing it on a fair value basis. No aggregated collateral information for the entire unimpaired secured commercial lending portfolio is provided to key management personnel.

FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS (EXCLUDING EQUITY SHARES)

Included in financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with a carrying value of £11,269 million (2018: £28,356 million). Collateral is held with a fair value of £11,081 million (2018: £36,101 million), all of which the Group is able to repledge. At 31 December 2019, £9,605 million had been repledged (2018: £31,013 million).

In addition, securities held as collateral in the form of stock borrowed amounted to £32,888 million (2018: £51,202 million). Of this amount, £30,594 million (2018: £49,233 million) had been resold or repledged as collateral for the Group’s own transactions.

These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.

DERIVATIVE ASSETS, AFTER OFFSETTING OF AMOUNTS UNDER MASTER NETTING ARRANGEMENTS

The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of £11,673 million (2018: £9,268 million), cash collateral of £7,650 million (2018: £6,039 million) was held.

IRREVOCABLE LOAN COMMITMENTS AND OTHER CREDIT-RELATED CONTINGENCIES

At 31 December 2019, the Group held irrevocable loan commitments and other credit-related contingencies of £66,398 million (2018: £68,135 million). Collateral is held as security, in the event that lending is drawn down, on £12,391 million (2018: £10,661 million) of these balances.

COLLATERAL REPOSSESSED

During the year, £413 million of collateral was repossessed (2018: £245 million), consisting primarily of residential property.

In respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses external agents to realise the value as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise dealt with in accordance with appropriate insolvency regulations. In certain circumstances the Group takes physical possession of assets held as collateral against commercial lending. In such cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s accounting policies.

(E) COLLATERAL PLEDGED AS SECURITY

The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts.

REPURCHASE TRANSACTIONS

Deposits from banks

Included in deposits from banks are balances arising from repurchase transactions of £18,105 million (2018: £21,170 million); the fair value of the collateral provided under these agreements at 31 December 2019 was £17,545 million (2018: £19,615 million).

Customer deposits

Included in customer deposits are balances arising from repurchase transactions of £9,530 million (2018: £1,818 million); the fair value of the collateral provided under these agreements at 31 December 2019 was £9,221 million (2018: £1,710 million).

Financial liabilities at fair value through profit or loss

The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowing, where the secured party is permitted by contract or custom to repledge was £8,324 million (2018: £28,438 million).

SECURITIES LENDING TRANSACTIONS

The following on balance sheet financial assets have been lent to counterparties under securities lending transactions:

	2019 £m		2018 £m
Financial assets at fair value through profit or loss		5,857		5,837
Financial assets at fair value through other comprehensive income		2,020		1,917
		7,877		7,754

SECURITISATIONS AND COVERED BONDS

In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group’s asset-backed conduits and its securitisation and covered bond programmes. Further details of these assets are provided in note 31.

Liquidity risk

Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost. Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity. The Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the PRA. The Group’s liquidity risk appetite is also calibrated against a number of stressed liquidity metrics.

The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category. Certain balances, included in the table below on the basis of their residual maturity, are repayable on demand upon payment of a penalty.

(A) MATURITIES OF ASSETS AND LIABILITIES

	Up to 1 month £m		1-3 months £m		3-6 months £m		6-9 months £m		9-12 months £m		1-2 years £m		2-5 years £m		Over 5 years £m		Total £m
At 31 December 2019
Assets
Cash and balances at central banks		55,128		2		–		–		–		–		–		–		55,130
Financial assets at fair value through profit or loss		7,195		3,689		3,016		1,710		451		2,801		5,385		135,942		160,189
Derivative financial instruments		583		739		627		404		336		1,294		2,763		19,623		26,369
Loans and advances to banks		4,953		1,017		265		124		91		26		–		3,299		9,775
Loans and advances to customers		35,973		26,036		23,283		12,626		11,425		29,917		74,416		281,312		494,988
Debt securities held at amortised cost		131		19		–		–		–		74		3,085		2,235		5,544
Financial assets at fair value through other comprehensive income		111		179		729		102		234		2,929		12,809		7,999		25,092
Other assets		2,224		1,155		533		160		520		568		1,218		50,428		56,806
Total assets		106,298		32,836		28,453		15,126		13,057		37,609		99,676		500,838		833,893
Liabilities
Deposits from banks		4,530		2,715		267		85		55		15,686		433		4,408		28,179
Customer deposits		382,885		12,945		6,716		4,377		3,207		6,742		1,752		2,696		421,320
Derivative financial instruments and financial liabilities at fair value through profit or loss		5,182		6,101		2,579		784		528		1,644		5,238		25,209		47,265
Debt securities in issue		4,070		9,159		7,135		7,418		1,963		13,618		30,897		23,429		97,689
Liabilities arising from insurance and investment contracts		1,213		1,658		2,370		2,348		2,882		9,028		24,870		104,539		148,908
Other liabilities		4,541		1,914		772		893		1,682		898		906		13,990		25,596
Subordinated liabilities		–		1,339		96		1,137		108		575		4,105		9,770		17,130
Total liabilities		402,421		35,831		19,935		17,042		10,425		48,191		68,201		184,041		786,087
At 31 December 2018
Assets
Cash and balances at central banks		54,662		1		–		–		–		–		–		–		54,663
Financial assets at fair value through profit or loss		10,686		8,826		8,492		5,133		2,587		2,090		5,467		115,248		158,529
Derivative financial instruments		579		688		418		336		441		1,064		3,075		16,994		23,595
Loans and advances to banks		2,594		520		584		172		203		160		–		2,050		6,283
Loans and advances to customers		36,326		19,383		18,415		14,378		11,318		30,459		72,028		282,551		484,858
Debt securities held as at amortised cost		7		–		–		521		–		–		2,262		2,448		5,238
Financial assets at fair value through other comprehensive income		166		453		249		800		1,685		2,536		11,496		7,430		24,815
Other assets		2,667		1,552		196		238		219		387		1,118		33,240		39,617
Total assets		107,687		31,423		28,354		21,578		16,453		36,696		95,446		459,961		797,598
Liabilities
Deposits from banks		2,793		1,688		748		54		45		4,758		16,052		4,182		30,320
Customer deposits		380,753		10,623		5,628		4,543		4,431		6,421		3,244		2,423		418,066
Derivative financial instruments and financial liabilities at fair value through profit or loss		5,160		11,877		5,048		1,663		522		1,104		4,108		22,438		51,920
Debt securities in issue		4,172		5,692		9,007		4,668		1,694		13,062		28,676		24,197		91,168
Liabilities arising from insurance and investment contracts		1,844		1,850		2,316		2,302		2,104		7,995		20,986		73,330		112,727
Other liabilities		4,403		3,201		733		1,182		1,383		756		232		13,652		25,542
Subordinated liabilities		85		145		95		251		–		2,600		2,559		11,921		17,656
Total liabilities		399,210		35,076		23,575		14,663		10,179		36,696		75,857		152,143		747,399

The above tables are provided on a contractual basis. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later than implied by their contractual terms and readers are, therefore, advised to use caution when using this data to evaluate the Group’s liquidity position. In particular, amounts in respect of customer deposits are usually contractually payable on demand or at short notice. However, in practice, these deposits are not usually withdrawn on their contractual maturity.

The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts, on an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.

	Up to 1 month £m			1-3 months £m			3-12 months £m			1-5 years £m			Over 5 years £m			Total £m
At 31 December 2019
Deposits from banks		5,009			2,564			762			20,066			317			28,718
Customer deposits		385,864			14,433			14,327			10,661			1,393			426,678
Financial liabilities at fair value through profit or loss		4,370			5,543			2,255			2,690			14,653			29,511
Debt securities in issue		5,335			9,858			19,205			54,638			36,321			125,357
Liabilities arising from non-participating investment contracts		37,459			–			–			–			–			37,459
Other liabilities (Lease liabilities)		2			61			190			803			946			2,002
Subordinated liabilities		942			1,462			1,918			7,837			14,857			27,016
Total non-derivative financial liabilities		438,981			33,921			38,657			96,695			68,487			676,741
Derivative financial liabilities:
Gross settled derivatives – outflows		43,118			44,379			34,012			36,012			18,238			175,759
Gross settled derivatives – inflows		(40,829	)		(42,954	)		(32,966	)		(34,758	)		(17,753	)		(169,260	)
Gross settled derivatives – net flows		2,289			1,425			1,046			1,254			485			6,499
Net settled derivatives liabilities		23,648			48			122			700			2,201			26,719
Total derivative financial liabilities		25,937			1,473			1,168			1,954			2,686			33,218
At 31 December 2018
Deposits from banks		2,820			2,710			1,022			20,920			3,502			30,974
Customer deposits		380,985			10,584			14,169			11,634			1,554			418,926
Financial liabilities at fair value through profit or loss		9,693			10,984			7,553			930			10,771			39,931
Debt securities in issue		5,942			7,314			22,564			48,233			24,201			108,254
Liabilities arising from non-participating investment contracts		13,853			–			–			–			–			13,853
Subordinated liabilities		247			1,017			1,144			8,231			19,328			29,967
Total non-derivative financial liabilities		413,540			32,609			46,452			89,948			59,356			641,905
Derivative financial liabilities:
Gross settled derivatives – outflows		39,165			27,976			23,978			43,239			33,763			168,121
Gross settled derivatives – inflows		(38,301	)		(27,283	)		(23,134	)		(40,690	)		(28,933	)		(158,341	)
Gross settled derivatives – net flows		864			693			844			2,549			4,830			9,780
Net settled derivatives liabilities		13,511			103			209			782			2,193			16,798
Total derivative financial liabilities		14,375			796			1,053			3,331			7,023			26,578

The majority of the Group’s non-participating investment contract liabilities are unit-linked. These unit-linked products are invested in accordance with unit fund mandates. Clauses are included in policyholder contracts to permit the deferral of sales, where necessary, so that linked assets can be realised without being a forced seller.

The principal amount for undated subordinated liabilities with no redemption option is included within the over five years column; interest of approximately £29 million (2018: £27 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond five years.

Further information on the Group’s liquidity exposures is provided on pages 94 to 100.

Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:

	Up to 1 month £m		1-3 months £m		3-12 months £m		1-5 years £m		Over 5 years £m		Total £m
At 31 December 2019		1,340		1,240		5,378		25,349		78,142		111,449
At 31 December 2018		1,667		1,624		5,925		25,414		64,244		98,874

For insurance and participating investment contracts which are neither unit-linked nor in the Group’s with-profit funds, in particular annuity liabilities, the aim is to invest in assets such that the cash flows on investments match those on the projected future liabilities.

The following tables set out the amounts and residual maturities of the Group’s off balance sheet contingent liabilities, commitments and guarantees.

	Up to 1 month £m		1-3 months £m		3-6 months £m		6-9 months £m		9-12 months £m		1-3 years £m		3-5 years £m		Over 5 years £m		Total £m
At 31 December 2019
Acceptances and endorsements		25		24		4		–		21		–		–		–		74
Other contingent liabilities		381		409		387		177		207		475		101		683		2,820
Total contingent liabilities		406		433		391		177		228		475		101		683		2,894
Lending commitments and guarantees		68,638		2,682		15,297		4,637		7,367		17,365		14,114		3,264		133,364
Other commitments		–		1		16		5		–		72		43		52		189
Total commitments and guarantees		68,638		2,683		15,313		4,642		7,367		17,437		14,157		3,316		133,553
Total contingents, commitments and guarantees		69,044		3,116		15,704		4,819		7,595		17,912		14,258		3,999		136,447
At 31 December 2018
Acceptances and endorsements		64		83		34		13		–		–		–		–		194
Other contingent liabilities		450		484		203		223		150		665		133		749		3,057
Total contingent liabilities		514		567		237		236		150		665		133		749		3,251
Lending commitments and guarantees		67,055		2,947		4,474		6,055		16,123		17,737		15,374		4,602		134,367
Other commitments		428		–		–		2		92		20		13		176		731
Total commitments and guarantees		67,483		2,947		4,474		6,057		16,215		17,757		15,387		4,778		135,098
Total contingents, commitments and guarantees		67,997		3,514		4,711		6,293		16,365		18,422		15,520		5,527		138,349