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Fair values of financial assets and liabilities
6 Months Ended
Jun. 30, 2022
Financial Instruments [Abstract]  
Fair values of financial assets and liabilities
Note 17: Fair values of financial assets and liabilities
The valuations of financial instruments have been classified into three levels according to the quality and reliability of information used to determine those fair values. Note 48 to the Group’s financial statements for the year ended 31 December 2021 details the definitions of the three levels in the fair value hierarchy.
Valuation control framework
Key elements of the valuation control framework, which covers processes for all levels in the fair value hierarchy including level 3 portfolios, include model validation (incorporating pre-trade and post-trade testing), product implementation review and independent price verification. Formal committees meet quarterly to discuss and approve valuations in more judgemental areas.
Transfers into and out of level 3 portfolios
Transfers out of level 3 portfolios arise when inputs that could have a significant impact on the instrument’s valuation become market observable; conversely, transfers into the portfolios arise when sources of data cease to be observable.
Valuation methodology
For level 2 and level 3 portfolios, there is no significant change to the valuation methodology (techniques and inputs) disclosed in the Group’s financial statements for the year ended 31 December 2021 applied to these portfolios.
The table below summarises the carrying values of financial assets and liabilities measured at amortised cost in the Group’s consolidated balance sheet. The fair values presented in the table are at a specific date and may be significantly different from the amounts which will actually be paid or received on the maturity or settlement date.
At 30 June 2022
At 31 December 2021
Carrying
value
£m
Fair
value
£m
Carrying
value
£m
Fair
value
£m
Financial assets
Loans and advances to banks7,843 7,845 7,001 6,997 
Loans and advances to customers456,095 459,135 448,567 451,772 
Reverse repurchase agreements56,516 56,516 54,753 54,753 
Debt securities8,980 8,865 6,835 6,876 
Financial assets at amortised cost529,434 532,361 517,156 520,398 
Financial liabilities
Deposits from banks7,470 7,471 7,647 7,647 
Customer deposits478,213 478,295 476,344 476,506 
Repurchase agreements at amortised cost48,175 48,175 31,125 31,125 
Debt securities in issue74,284 73,694 71,552 74,665 
Subordinated liabilities 10,773 11,246 13,108 14,804 
Financial instruments classified as financial assets at fair value through profit or loss, derivative financial instruments, financial assets at fair value through other comprehensive income and financial liabilities at fair value through profit or loss are recognised at fair value.
The carrying amount of the following financial instruments is a reasonable approximation of fair value: cash and balances at central banks, items in the course of collection from banks, items in course of transmission to banks and notes in circulation. Fair values have not been disclosed for discretionary participating investment contracts. There is currently no agreed definition of fair valuation for discretionary participation features applied under IFRS and therefore the range of possible fair values of these contracts cannot be measured reliably.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)
Note 17: Fair values of financial assets and liabilities (continued)
The Group manages valuation adjustments for its derivative exposures on a net basis; the Group determines their fair values on the basis of their net exposures. In all other cases, fair values of financial assets and liabilities measured at fair value are determined on the basis of their gross exposures.
The following tables provide an analysis of the financial assets and liabilities of the Group that are carried at fair value in the Group’s consolidated balance sheet, grouped into levels 1 to 3 based on the degree to which the fair value is observable. There were no significant transfers between level 1 and level 2 during the period.
Financial assetsLevel 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 30 June 2022
Financial assets at fair value through profit or loss:
Loans and advances to banks 5,096  5,096 
Loans and advances to customers 13,014 8,730 21,744 
Debt securities10,287 27,070 1,737 39,094 
Treasury and other bills21   21 
Contracts held with reinsurers 11,194  11,194 
Equity shares100,655  1,641 102,296 
Total financial assets at fair value through profit or loss110,963 56,374 12,108 179,445 
Financial assets at fair value through other comprehensive income:
Debt securities10,955 13,040 67 24,062 
Treasury and other bills    
Equity shares  267 267 
Total financial assets at fair value through other comprehensive income10,955 13,040 334 24,329 
Derivative financial instruments323 28,791 620 29,734 
Total financial assets carried at fair value122,241 98,205 13,062 233,508 
At 31 December 2021
Financial assets at fair value through profit or loss:
Loans and advances to banks— 4,170 — 4,170 
Loans and advances to customers— 15,575 9,793 25,368 
Debt securities17,668 27,773 1,777 47,218 
Treasury and other bills19 — — 19 
Contracts held with reinsurers— 12,371 — 12,371 
Equity shares115,882 — 1,743 117,625 
Total financial assets at fair value through profit or loss133,569 59,889 13,313 206,771 
Financial assets at fair value through other comprehensive income:
Debt securities15,257 12,490 70 27,817 
Treasury and other bills85 — — 85 
Equity shares— — 235 235 
Total financial assets at fair value through other comprehensive income15,342 12,490 305 28,137 
Derivative financial instruments44 21,114 893 22,051 
Total financial assets carried at fair value148,955 93,493 14,511 256,959 
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)
Note 17: Fair values of financial assets and liabilities (continued)
Financial liabilitiesLevel 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 30 June 2022
Financial liabilities at fair value through profit or loss:
Liabilities designated at fair value through profit or loss 5,613 44 5,657 
Trading liabilities2,342 11,736  14,078 
Total financial liabilities at fair value through profit or loss2,342 17,349 44 19,735 
Derivative financial instruments135 25,584 812 26,531 
Liabilities arising from non-participating investment contracts 40,542  40,542 
Total financial liabilities carried at fair value2,477 83,475 856 86,808 
At 31 December 2021
Financial liabilities at fair value through profit or loss:
Liabilities designated at fair value through profit or loss— 6,504 37 6,541 
Trading liabilities1,569 15,013 — 16,582 
Total financial liabilities at fair value through profit or loss1,569 21,517 37 23,123 
Derivative financial instruments62 17,054 944 18,060 
Liabilities arising from non-participating investment contracts— 45,040 — 45,040 
Total financial liabilities carried at fair value1,631 83,611 981 86,223 
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)
Note 17: Fair values of financial assets and liabilities (continued)
Movements in level 3 portfolio
The tables below analyse movements in the level 3 financial assets portfolio.
Financial
assets at
fair value
through profit
or loss
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
Derivative
assets
£m
Total
financial
assets
carried at
fair value
£m
At 1 January 2022
13,313 305 893 14,511 
Exchange and other adjustments15 1 21 37 
(Losses) gains recognised in the income statement within other income(1,140) 160 (980)
Gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income 32  32 
Purchases/increases to customer loans622  41 663 
Sales/repayments of customer loans(818)(4)(9)(831)
Transfers into the level 3 portfolio161   161 
Transfers out of the level 3 portfolio(45) (486)(531)
At 30 June 2022
12,108 334 620 13,062 
(Losses) gains recognised in the income statement, within other income, relating to the change in fair value of those assets held at 30 June 2022
(1,080) 254 (826)
At 1 January 2021
15,046 346 981 16,373 
Exchange and other adjustments(16)(7)(20)
Losses recognised in the income statement within other income(135)— (154)(289)
Gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income— 43 — 43 
Purchases/increases to customer loans644 — 302 946 
Sales/repayments of customer loans(1,520)(8)(64)(1,592)
Transfers into the level 3 portfolio19 — — 19 
Transfers out of the level 3 portfolio(778)— — (778)
At 30 June 2021
13,260 374 1,068 14,702 
Losses recognised in the income statement, within other income, relating to the change in fair value of those assets held at 30 June 2021
(187)— (156)(343)
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)
Note 17: Fair values of financial assets and liabilities (continued)
The tables below analyse movements in the level 3 financial liabilities portfolio.
Financial
liabilities
at fair value through
profit or loss
£m
Derivative liabilities
£m
Total
financial liabilities carried at
fair value
£m
At 1 January 2022
37 944 981 
Exchange and other adjustments 17 17 
Losses recognised in the income statement within other income8 5 13 
Additions4 37 41 
Redemptions(2)(13)(15)
Transfers into the level 3 portfolio   
Transfers out of the level 3 portfolio(3)(178)(181)
At 30 June 2022
44 812 856 
Losses recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 30 June 2022
7 33 40 
At 1 January 2021
45 1,374 1,419 
Exchange and other adjustments— 
Gains recognised in the income statement within other income(2)(247)(249)
Additions201 202 
Redemptions(5)(19)(24)
Transfers into the level 3 portfolio— — — 
Transfers out of the level 3 portfolio— (43)(43)
At 30 June 2021
39 1,269 1,308 
Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 30 June 2021
(2)(244)(246)
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)
Note 17: Fair values of financial assets and liabilities (continued)
The tables below set out the effects of reasonably possible alternative assumptions for categories of level 3 financial assets and financial liabilities which have an aggregated carrying value greater than £500 million.
Effect of reasonably
possible alternative
assumptions1
At 30 June 2022
Valuation
techniques
Significant unobservable inputs2
Carrying value
£m
Favourable changes
£m
Unfavourable
changes
£m
Financial assets at fair value through profit or loss
Loans and advances to customersDiscounted cash flows
Interest rate spreads (-50bps/+213bps)
8,730 429 (359)
Equity and venture capital investmentsMarket approach
Earnings multiple (3.5/16.8)
1,672 118 (118)
Underlying asset/net asset value (incl. property prices)3
n/a911 119 (125)
Unlisted equities, debt securities and property partnerships in the life funds
Underlying asset/net asset value (incl. property prices), broker quotes or discounted cash flows3
n/a626 8 (35)
Other169 12 (12)
12,108 
Financial assets at fair value through other comprehensive income334 
Derivative financial assets
Interest rate derivativesOption pricing model
Interest rate volatility (11%/147%)
620 5 (5)
620 
Level 3 financial assets carried at fair value
13,062 
Financial liabilities at fair value through profit or loss44 
Derivative financial liabilities
Interest rate derivativesOption pricing model
Interest rate volatility (11%/147%)
812 
812 
Level 3 financial liabilities carried at fair value
856 
1Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
2Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
3Underlying asset/net asset values represent fair value.
NOTES TO THE CONDENSED CONSOLIDATED HALF-YEAR FINANCIAL STATEMENTS (continued)
Note 17: Fair values of financial assets and liabilities (continued)
Effect of reasonably
possible alternative
assumptions1
At 31 December 2021
Valuation
techniques
Significant
unobservable inputs2
Carrying value
£m
Favourable changes
£m
Unfavourable changes
£m
Financial assets at fair value through profit or loss
Loans and advances to customersDiscounted cash flows
Interest rate spreads (-50bps/+213bps)
9,793 502 (460)
Equity and venture capital investmentsMarket approach
Earnings multiple (3.5/14.9)
1,692 191 (191)
Underlying asset/net asset value (incl. property prices)3
n/a892 123 (131)
Unlisted equities, debt securities and property partnerships in the life funds
Underlying asset/net asset value (incl. property prices), broker quotes or discounted cash flows3
n/a745 22 (16)
Other191 13 (13)
13,313 
Financial assets at fair value through other comprehensive income305 
Derivative financial assets
Interest rate derivativesOption pricing model
Interest rate volatility (13%/168%)
893 10 (23)
893 
Level 3 financial assets carried at fair value
14,511 
Financial liabilities at fair value through profit or loss37 
Derivative financial liabilities
Interest rate derivativesOption pricing model
Interest rate volatility (13%/168%)
944 
944 
Level 3 financial liabilities carried at fair value
981 
1Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
2Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
3Underlying asset/net asset values represent fair value.
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are unchanged from those described in the Group’s financial statements for the year ended 31 December 2021.
Reasonably possible alternative assumptions
Valuation techniques applied to many of the Group’s level 3 instruments often involve the use of two or more inputs whose relationship is interdependent. The calculation of the effect of reasonably possible alternative assumptions included in the table above reflects such relationships and is unchanged from that described in note 48 to the Group’s financial statements for the year ended 31 December 2021.