Business Context and Reporting Period
This Form 6-K filing by Lloyds Banking Group plc, dated August 12, 2011, incorporates a Statement of Computation of Ratio of Earnings to Fixed Charges. The primary data presented covers the six months ended June 30, 2011, with comparative historical data for the years ended December 31, 2010, 2009, 2008, 2007, and 2006.
Key Financial Metrics
The filing focuses on earnings coverage ratios rather than standard revenue or cash flow statements. Key figures for the six months ended June 30, 2011, include:
- Profit Before Tax: Loss of £51 million.
- Fixed Charges: £7,681 million (comprising £7,616 million in interest expensed/capitalized and £65 million in estimated rental interest).
- Earnings for Ratio Calculation: £7,618 million.
- Coverage Shortfall: Earnings were inadequate to cover fixed charges by £63 million.
For the full year ended December 31, 2010, the group reported a profit before tax loss of £2,919 million and fixed charges of £17,173 million, resulting in an earnings shortfall of £2,830 million against fixed charges.
Material Changes Versus Prior Periods
The filing highlights a significant deterioration in earnings coverage capability in recent periods compared to historical performance:
- 2011 (H1) vs. 2010 (Full Year): The shortfall in covering fixed charges decreased from £2,830 million in 2010 to £63 million in the first half of 2011, indicating an improvement in the rate of loss relative to fixed obligations, though coverage remains negative.
- Historical Context: The group last achieved positive coverage of fixed charges in 2009 (Ratio 1.09). In 2008, the ratio was 1.08. Prior to 2009, ratios ranged from 1.36 to 1.46.
- Profitability Trend: Profit before tax swung from a £4,249 million profit in 2006 to a £2,919 million loss in 2010, before narrowing to a £51 million loss in the first half of 2011.
Guidance, Risks, and Unusual Items
The filing does not contain forward-looking guidance, management commentary on future outlook, or specific risk factors beyond the financial data presented. However, the following items are noted:
- Accounting Restatements: Profit before tax figures for 2008 and preceding years were restated in 2009 to reflect the adoption of IFRS 2 Share-based Payment.
- Preference Dividends: There are no preference shares accounted for as equity; all are treated as debt. Consequently, preference dividends are included in interest costs, making the "Ratio of Earnings to Fixed Charges" identical to the "Ratio of Earnings to Combined Fixed Charges and Preference Dividends."
- Unusual Items: The filing explicitly states that for the six months ended June 30, 2011, and the year ended December 31, 2010, earnings were inadequate to cover fixed charges.
Investor Verification Checklist
- Verify the full-year 2011 financial results to determine if the narrowing of the earnings shortfall observed in H1 2011 continued into the second half.
- Review the Group's 2010 Annual Report on Form 20-F (specifically Note 1) for details on the IFRS 2 restatements affecting 2008 and prior years.
- Confirm the composition of the £7,616 million interest expense to understand the split between banking book and trading book interest costs.
- Assess the sustainability of the 30% estimate used to calculate the interest portion of rental expenses.