v3.25.4
Fair values of financial assets and liabilities
 12 Months Ended
Dec. 31, 2025
Disclosure of detailed information about financial instruments [abstract]  
Fair values of financial assets and liabilities Note 17: Fair values of financial assets and liabilities
At 31 December 2025, the carrying value of the Group’s financial instrument assets held at fair value was £296,460 million
(2024: £270,680 million), and its financial instrument liabilities held at fair value was £105,681 million (2024: £100,515 million).
(A)Fair value measurement
Fair value is the price that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. It is a measure as at a specific date and may be significantly different from the amount which will
actually be paid or received on maturity or settlement date.
Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments to
those held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been
determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market
observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate,
comparison to instruments with characteristics similar to those of the instruments held by the Group. The Group measures valuation
adjustments for its derivative exposures on the same basis as the derivatives are managed.
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. Liabilities arising from non-
participating investment contracts are carried at fair value.
Because a variety of estimation techniques are employed and significant estimates made, comparisons of fair values between financial
institutions may not be meaningful. Readers of these financial statements are thus advised to use caution when using this data to evaluate
the Group’s financial position.
Fair value information is not provided for items that are not financial instruments or for other assets and liabilities which are not carried at
fair value in the Group’s consolidated balance sheet. These items include intangible assets, property, plant and equipment, and
shareholders’ equity. These items are material and accordingly the Group believes that any fair value information presented would not
represent the underlying value of the Group.
Valuation control framework
The key elements of the control framework for the valuation of financial instruments include model validation, product implementation
review and independent price verification. These functions are carried out by appropriately skilled risk and finance teams, independent of
the business area responsible for the products.
Model validation covers both qualitative and quantitative elements relating to new models. In respect of new products, a product
implementation review is conducted pre and post-trading. Pre-trade testing ensures that the new model is integrated into the Group’s
systems and that the profit and loss and risk reporting are consistent throughout the trade lifecycle. Post-trade testing examines the
explanatory power of the implemented model, actively monitoring model parameters and comparing in-house pricing to external sources.
Independent price verification procedures cover financial instruments carried at fair value and are performed at a minimum on a monthly
basis. Valuation differences in breach of established thresholds are escalated to senior management. The results from independent pricing
and valuation reserves are reviewed monthly by senior management.
Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations
in more judgemental areas, in particular for unquoted equities, structured credit, derivatives and the credit valuation adjustment (CVA),
funding valuation adjustment (FVA) and other valuation adjustments.
Valuation of financial assets and liabilities
Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the quality
and reliability of information used to determine the fair values.
Level 1
Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities.
Products classified as level 1 predominantly comprise listed equity shares, treasury bills and other government securities.
Level 2
Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is
not considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based
significantly on observable market data. Examples of such financial instruments include most over-the-counter derivatives, financial
institution issued securities, certificates of deposit and certain asset-backed securities.
Level 3
Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on
observable market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued
using various valuation techniques that require significant management judgement in determining appropriate assumptions, including
earnings multiples and estimated future cash flows. Certain of the Group’s asset-backed securities, loans and advances recognised at fair
value and derivatives are also classified as level 3.
Transfers in or out of the level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become
unobservable or observable, or where an unobservable input becomes significant or insignificant to an instrument’s value.
Note 17: Fair values of financial assets and liabilities continued
(B)Financial assets and liabilities carried at fair value
(1)Financial assets (excluding derivatives)
Valuation hierarchy
At 31 December 2025, the Group’s financial assets (excluding derivatives) carried at fair value totalled £276,733 million (2024:
£246,615 million). The table below analyses these financial assets by balance sheet classification, asset type and valuation methodology
(level 1, 2 or 3, as described on page 257). The fair value measurement approach is recurring in nature. There were no significant transfers
between level 1 and 2 during the year.
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 31 December 2025
Trading assets
Loans and advances to customers
–
621
–
621
Reverse repurchase agreements
–
20,981
–
20,981
Debt securities:
Government securities
2,908
–
–
2,908
Asset-backed securities
–
182
–
182
Corporate and other debt securities
–
845
–
845
2,908
1,027
–
3,935
Total trading assets
2,908
22,629
–
25,537
Other financial assets mandatorily held at fair value through profit or loss
Loans and advances to banks
–
2,851
–
2,851
Loans and advances to customers
–
2,322
6,058
8,380
Debt securities:
Government securities
16,588
5
–
16,593
Other public sector securities
–
1,905
–
1,905
Bank and building society certificates of deposit
–
7,036
–
7,036
Asset-backed securities
–
272
651
923
Corporate and other debt securities
–
21,303
2,107
23,410
16,588
30,521
2,758
49,867
Treasury and other bills
11
–
–
11
Equity shares
144,164
–
1,435
145,599
Contracts held with reinsurers
–
8,168
–
8,168
Total other financial assets mandatorily held at fair value through profit or loss1
160,763
43,862
10,251
214,876
Total financial assets at fair value through profit or loss
163,671
66,491
10,251
240,413
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
22,875
308
–
23,183
Asset-backed securities
–
167
50
217
Corporate and other debt securities
1,276
11,593
–
12,869
24,151
12,068
50
36,269
Equity shares
–
–
51
51
Total financial assets at fair value through other comprehensive income
24,151
12,068
101
36,320
Total financial assets (excluding derivatives) at fair value
187,822
78,559
10,352
276,733
1Other financial assets mandatorily at fair value through profit or loss include assets backing insurance contracts and investment contracts of £209,545 million. Included within these
assets are investments in unconsolidated structured entities of £45,991 million; see note 37.
Note 17: Fair values of financial assets and liabilities continued
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 31 December 2024
Trading assets
Loans and advances to customers
–
621
–
621
Reverse repurchase agreements
–
20,466
–
20,466
Debt securities:
Government securities
3,473
–
–
3,473
Asset-backed securities
–
149
–
149
Corporate and other debt securities
–
741
–
741
3,473
890
–
4,363
Total trading assets
3,473
21,977
–
25,450
Other financial assets mandatorily held at fair value through profit or loss
Loans and advances to banks
–
2,787
–
2,787
Loans and advances to customers
–
2,418
6,010
8,428
Debt securities:
Government securities
7,091
2
–
7,093
Other public sector securities
–
2,288
–
2,288
Bank and building society certificates of deposit
–
8,667
–
8,667
Asset-backed securities
–
285
367
652
Corporate and other debt securities
–
14,722
2,161
16,883
7,091
25,964
2,528
35,583
Treasury and other bills
32
–
–
32
Equity shares
131,767
–
1,351
133,118
Contracts held with reinsurers
–
10,527
–
10,527
Total other financial assets mandatorily held at fair value through profit or loss1
138,890
41,696
9,889
190,475
Total financial assets at fair value through profit or loss
142,363
63,673
9,889
215,925
Financial assets at fair value through other comprehensive income
Debt securities:
Government securities
15,146
115
–
15,261
Asset-backed securities
–
149
48
197
Corporate and other debt securities
1,152
13,755
–
14,907
16,298
14,019
48
30,365
Equity shares
–
–
325
325
Total financial assets at fair value through other comprehensive income
16,298
14,019
373
30,690
Total financial assets (excluding derivatives) at fair value
158,661
77,692
10,262
246,615
1Other financial assets mandatorily at fair value through profit or loss include assets backing insurance contracts and investment contracts of £185,201 million. Included within these
assets are investments in unconsolidated structured entities of £86,630 million; see note 37.
Note 17: Fair values of financial assets and liabilities continued
Movements in level 3 portfolio
The table below analyses movements in level 3 financial assets (excluding derivatives) at fair value, recurring basis.
2025
2024
Financial
assets at
fair value
through
profit or loss
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
Total level 3
financial assets
(excluding
derivatives)
at fair value,
recurring basis
£m
Financial
assets at
fair value
through
profit or loss
£m
Financial
assets at
fair value
through other
comprehensive
income
£m
Total level 3
financial assets
(excluding
derivatives)
at fair value,
recurring basis
£m
At 1 January
9,889
373
10,262
11,681
284
11,965
Exchange and other adjustments
(1)
3
2
1
(3)
(2)
Gains recognised in the income statement within
other income
529
2
531
352
3
355
(Losses) gains recognised in other comprehensive
income within the revaluation reserve in respect of
financial assets at fair value through other
comprehensive income
–
(71)
(71)
–
92
92
Purchases/increases to customer loans
1,251
–
1,251
1,080
–
1,080
Sales/repayments of customer loans
(1,365)
(206)
(1,571)
(3,266)
(3)
(3,269)
Transfers into the level 3 portfolio
32
–
32
84
–
84
Transfers out of the level 3 portfolio
(84)
–
(84)
(43)
–
(43)
At 31 December
10,251
101
10,352
9,889
373
10,262
Gains (losses) recognised in the income statement,
within other income, relating to the change in fair
value of those assets held at 31 December
273
5
278
186
(1)
185
Valuation methodology for financial assets (excluding derivatives)
Loans and advances to banks and customers
The fair value of these assets is determined using discounted cash flow techniques. The discount rates are derived from market observable
interest rates, a risk margin that reflects loan credit ratings and an incremental illiquidity premium based on historical spreads at origination
on similar loans.
Reverse repurchase agreements
The fair value of these assets is determined using discounted cash flow techniques. The discount rates are derived from observable
repurchase agreement rate curves specific to the type of security sold under the reverse repurchase agreement.
Debt securities
Debt securities measured at fair value and classified as level 2 are valued by discounting expected cash flows using an observable credit
spread applicable to the particular instrument.
Where there is limited trading activity in debt securities, the Group uses valuation models, consensus pricing information from third party
pricing services and broker or lead manager quotes to determine an appropriate valuation. Debt securities are classified as level 3 if there is
a significant valuation input that cannot be corroborated through market sources or where there are materially inconsistent values for an
input. Asset classes classified as level 3 mainly comprise venture capital investments.
Equity investments
Unlisted equity and fund investments are valued using different techniques in accordance with the Group’s valuation policy and
International Private Equity and Venture Capital Guidelines.
Depending on the business sector and the circumstances of the investment, unlisted equity valuations are based on earnings multiples, net
asset values or discounted cash flows.
•A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings
before interest, tax, depreciation and amortisation. The particular multiple selected is appropriate for the size and type of business
being valued and is derived by reference to the current market-based multiple. Consideration is given to the risk attributes, growth
prospects and financial gearing of comparable businesses when selecting the appropriate multiple
•Discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of
appropriate exit yields or terminal multiples and discounted using rates appropriate to the specific investment, business sector or recent
economic rates of return. Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference in
deriving an appropriate multiple
•For fund investments the most recent capital account value calculated by the fund manager is used as the basis for the valuation and
adjusted, if necessary, to align valuation techniques with the Group’s valuation policy
Unlisted equity investments and investments in property partnerships held in the life assurance funds are valued using third party
valuations. Management take account of any pertinent information, such as recent transactions and information received on particular
investments, to adjust the third party valuations where necessary.
Note 17: Fair values of financial assets and liabilities continued
(2)Financial liabilities (excluding derivatives)
Valuation hierarchy
At 31 December 2025, the Group’s financial liabilities (excluding derivatives) carried at fair value, comprised its financial liabilities at fair
value through profit or loss and totalled £27,909 million (2024: £27,611 million).
The table below analyses these financial liabilities by balance sheet classification and valuation methodology (level 1, 2 or 3, as described on
page 257). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the
year.
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
At 31 December 2025
Trading liabilities
Liabilities in respect of securities sold under repurchase agreements
–
21,710
–
21,710
Short positions in securities
1,722
234
–
1,956
Total trading liabilities
1,722
21,944
–
23,666
Debt securities in issue designated at fair value through profit or loss
–
4,226
17
4,243
Total financial liabilities (excluding derivatives) at fair value
1,722
26,170
17
27,909
At 31 December 2024
Trading liabilities
Liabilities in respect of securities sold under repurchase agreements
–
20,564
–
20,564
Short positions in securities
2,400
17
–
2,417
Total trading liabilities
2,400
20,581
–
22,981
Debt securities in issue designated at fair value through profit or loss
–
4,608
22
4,630
Total financial liabilities (excluding derivatives) at fair value
2,400
25,189
22
27,611
Liabilities designated at fair value through profit or loss primarily represent debt securities in issue which either contain substantive
embedded derivatives which would otherwise need to be recognised and measured at fair value separately from the related debt
securities, or which are accounted for at fair value to significantly reduce an accounting mismatch.
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2025 was
£8,934 million, which was £4,691 million higher than the balance sheet carrying value (2024: £9,863 million, which was £5,233 million
higher than the balance sheet carrying value). At 31 December 2025 there was a cumulative £114 million increase in the fair value of these
liabilities attributable to changes in credit spread risk; this is determined by reference to the quoted credit spreads of Lloyds Bank plc, the
issuing entity within the Group. Of the cumulative amount, an increase of £126 million arose in 2025 and an increase of £78 million arose
in 2024.
For the fair value of collateral pledged in respect of repurchase agreements see page 255.
In addition to the liabilities above, the Group’s non-participating investment contracts are held at fair value through profit or loss and were
all categorised as level 2.
Movements in level 3 portfolio
The table below analyses movements in the level 3 financial liabilities (excluding derivatives) at fair value portfolio.
2025
£m
2024
£m
At 1 January
22
42
(Gains) losses recognised in the income statement within other income
(2)
2
Redemptions
(3)
(3)
Transfers out of the level 3 portfolio
–
(19)
At 31 December
17
22
(Gains) losses recognised in the income statement, within other income, relating to the change in fair value of those
liabilities held at 31 December
(2)
3
Valuation methodology for financial liabilities (excluding derivatives)
Liabilities held at fair value through profit or loss
These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose
inputs are based on observable market data. The carrying amount of the securities is adjusted to reflect the effect of changes in own credit
spreads and the resulting gain or loss is recognised in other comprehensive income.
In the year ended 31 December 2025, the own credit adjustment arising from the fair valuation of £4,243 million (2024: £4,630 million) of
the Group’s debt securities in issue designated at fair value through profit or loss resulted in a loss of £126 million (2024: loss of £78 million),
before tax, recognised in other comprehensive income.
Trading liabilities in respect of securities sold under repurchase agreements
The fair value of these liabilities is determined using discounted cash flow techniques. The discount rates are derived from observable
repurchase agreement rate curves specific to the type of security sold under the repurchase agreement.
Note 17: Fair values of financial assets and liabilities continued
(3)Derivatives
Valuation hierarchy
All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2025, such assets totalled £19,727 million
(2024: £24,065 million) and liabilities totalled £16,132 million (2024: £21,676 million).
The table below analyses these derivative balances by valuation methodology (level 1, 2 or 3, as described on page 257). The fair value
measurement approach is recurring in nature. There were no significant transfers between level 1 and level 2 during the year.
2025
2024
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Derivative assets
57
19,206
464
19,727
103
23,221
741
24,065
Derivative liabilities
(29)
(15,879)
(224)
(16,132)
(79)
(21,175)
(422)
(21,676)
Movements in level 3 portfolio
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
2025
2024
Derivative
assets
£m
Derivative
liabilities
£m
Derivative
assets
£m
Derivative
liabilities
£m
At 1 January
741
(422)
422
(444)
Exchange and other adjustments
19
(9)
(15)
7
(Losses) gains recognised in the income statement within other income
(216)
189
11
(7)
Purchases (additions)
7
(7)
5
(4)
(Sales) redemptions
(22)
25
(29)
53
Transfers into the level 3 portfolio
–
–
347
(27)
Transfers out of the level 3 portfolio
(65)
–
–
–
At 31 December
464
(224)
741
(422)
(Losses) gains recognised in the income statement, within other income, relating to the
change in fair value of those assets or liabilities held at 31 December
(43)
31
12
(7)
Valuation methodology for derivatives
The Group’s derivatives are valued using techniques including discounted cash flow and options pricing models, as appropriate. The types
of derivatives classified as level 2 and the valuation techniques used include:
•Interest rate swaps which are valued using discounted cash flow models; the most significant inputs into those models are interest rate
yield curves which are developed from publicly quoted rates
•Foreign exchange derivatives that do not contain options which are priced using rates available from publicly quoted sources
•Credit derivatives are valued using standard models with observable inputs, including publicly available yield and credit default swap
(CDS) curves
•Less complex interest rate and foreign exchange option products which are valued using volatility surfaces developed from publicly
available interest rate cap, interest rate swaption and other option volatilities; option volatility skew information is derived from a
market standard consensus pricing service
Complex interest rate products where inputs to the valuation are significant and unobservable are classified as level 3.
Derivatives where the counterparty becomes distressed from a credit perspective are generally reclassified to level 3 given limited
observability in all traded levels.
Note 17: Fair values of financial assets and liabilities continued
Derivative valuation adjustments
Derivative financial instruments which are carried in the balance sheet at fair value are adjusted where appropriate to reflect credit risk,
funding risk and liquidity.
Adjustment
2025
£m
2024
£m
Credit Valuation Adjustment
98
122
Debit Valuation Adjustment
(43)
(42)
Funding Valuation Adjustment
29
47
Liquidity Adjustment
57
60
Other
3
3
Total
144
190
Credit, Debit and Funding Valuation Adjustments (CVA, DVA and FVA) are applied to the Group’s over-the-counter derivative exposures
with counterparties that are not subject to strong interbank collateral arrangements. These exposures largely relate to the provision of risk
management solutions for corporate customers within the Corporate and Institutional Banking division.
Credit valuation adjustment
A CVA is taken where the Group has a positive future uncollateralised exposure on derivative transactions. This adjustment reflects future
expectations of counterparty creditworthiness.
Debit valuation adjustment
A DVA is taken where the Group has a negative future uncollateralised exposure on derivative transactions. This adjustment reflects future
expectations of our own creditworthiness.
Funding valuation adjustment
An FVA is taken where the Group has a future uncollateralised exposure on derivative transactions. This adjustment reflects expected
future funding costs observed in the market.
Liquidity adjustment
A liquidity reserve is taken where the Group has an exposure valued at mid-market and requires an adjustment to value at bid or offer. This
adjustment reflects the cost of neutralising market risk through offsetting transactions in standard market conditions.
Note 17: Fair values of financial assets and liabilities continued
(4)Sensitivity of level 3 valuations
Critical accounting judgements and key sources of estimation uncertainty
Key sources of estimation uncertainty:
Interest rate spreads, credit spreads, earnings multiples, interest rate volatility and recovery rates
The Group’s valuation control framework and a description of level 1, 2 and 3 financial assets and liabilities is set out in section (A) above.
The valuation techniques for level 3 financial instruments involve management judgement and estimates, the extent of which depends
on the complexity of the instrument and the availability of market observable information. In addition, in line with market practice,
the Group applies credit, debit and funding valuation adjustments in determining the fair value of its uncollateralised derivative positions.
A description of these adjustments is set out in section (3) above. A quantitative analysis of the sensitivities to market risk arising from
the Group’s trading portfolios is set out in the tables marked audited on page 193.
2025
2024
Effect of reasonably possible
alternative assumptions1
Effect of reasonably possible
alternative assumptions1
Valuation techniques
Significant
unobservable inputs2
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Carrying
value
£m
Favourable
changes
£m
Unfavourable
changes
£m
Financial assets at fair value through profit or loss
Loans and
advances to
customers
Discounted cash flows
Interest rate
spreads
(+/- 16%)3
6,058
168
(159)
6,022
245
(231)
Debt securities
Discounted cash flows
Credit spreads
(+/- 27%)4
860
36
(56)
621
35
(55)
Equity and
venture capital
investments
Market approach
Earnings multiple
(+/- 10%)5
2,275
101
(101)
2,267
150
(150)
Underlying asset/net
asset fair value (incl.
property prices)
n/a
811
85
(87)
773
80
(84)
Unlisted equities,
debt securities
and property
partnerships in
the life funds
Underlying asset/net
asset fair value (incl.
property prices),
broker quotes or
discounted cash flows
n/a
247
1
(2)
206
–
(7)
10,251
9,889
Financial assets at fair value through other comprehensive income
Asset-backed
securities
Lead manager or
broker quote/
consensus pricing
n/a
50
2
(2)
48
2
(2)
Equity and
venture capital
investments
Underlying asset/net
asset fair value (incl.
property prices)
n/a
51
3
(3)
325
33
(33)
101
373
Derivative financial assets
Interest rate
options
Option pricing
model
Interest rate
volatility
(12%/195%)6
202
4
(4)
394
4
(6)
Interest rate
derivatives
Discounted cash flows
(+/- 8%)
uncertainty of
recovery rates7
262
21
(21)
347
21
(21)
464
741
Level 3 financial assets carried at fair value
10,816
11,003
Financial liabilities at fair value through profit or loss
Securitisation
notes and other
Discounted cash flows
Interest rate
spreads
(+/– 50bps)8
17
1
(1)
22
1
(1)
Derivative financial liabilities
Interest rate
derivatives
Option pricing model
Interest rate
volatility
(12% /195% )6
224
15
(13)
422
17
(15)
Level 3 financial liabilities carried at fair value
241
444
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.
32024: -241bps/+131bps.
42024: +/- 17%.
52024: 3.5/15.0.
62024: 11%/183%.
72024: +/- 8%.
82024: +/- 50bps.
Note 17: Fair values of financial assets and liabilities continued
Unobservable inputs
Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows:
•Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality;
higher spreads lead to a lower fair value
•Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of
possible outcomes
•Earnings multiples are used to value certain unlisted equity investments. The earnings multiples used are derived from those of listed
entities operating in the same sector with adjustments made for factors such as the size of the company and the quality of its earnings.
The majority of the Group’s venture capital investments are valued using an estimate of the company’s maintainable earnings before
interest, tax, depreciation and amortisation and in accordance with the International Private Equity and Venture Capital Valuation
Guidelines. A higher earnings multiple will result in a higher fair value
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.
Debt securities
Reasonably possible alternative assumptions have been determined in respect of the Group’s structured credit investments by flexing
credit spreads.
Derivatives
Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are
priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer
maturities. To derive reasonably possible alternative valuations these volatility parameters have been flexed within a range of 12% to 195%
(2024: 11% to 183%).
Further reasonably possible alternative assumptions have been determined in respect of the recovery rate on distressed derivatives, with
recovery rates flexed by 8% in order to determine possible alternative valuations.
Unlisted equity, venture capital investments and investments in property partnerships
The valuation techniques used for unlisted equity and venture capital investments vary depending on the nature of the investment.
Reasonably possible alternative valuations for these investments have been calculated by reference to the approach taken, as appropriate
to the business sector and investment circumstances and as such the following inputs have been considered:
•For valuations derived from earnings multiples, consideration is given to the risk attributes, growth prospects and financial gearing of
comparable businesses when selecting an appropriate multiple
•The discount rates used in discounted cash flow valuations
•In line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in fund investment portfolios
(C)Financial assets and liabilities carried at amortised cost
(1)Financial assets
Valuation hierarchy
The table below analyses the fair values of those financial assets of the Group which are carried at amortised cost by valuation
methodology (level 1, 2 or 3, as described on page 257). Financial assets carried at amortised cost are mainly classified as level 3 due to
significant unobservable inputs used in the valuation models. Where inputs are observable, debt securities are classified as level 1 or 2.
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
At 31 December 2025
Loans and advances to banks
7,236
7,235
–
–
7,235
Loans and advances to customers
481,463
480,703
–
–
480,703
Reverse repurchase agreements
50,986
50,986
–
50,986
–
Debt securities
13,987
14,082
–
12,908
1,174
At 31 December 2024
Loans and advances to banks
7,900
7,892
–
–
7,892
Loans and advances to customers
459,857
455,846
–
–
455,846
Reverse repurchase agreements
49,476
49,476
–
49,476
–
Debt securities
14,544
14,380
–
11,980
2,400
Note 17: Fair values of financial assets and liabilities continued
Valuation methodology
Loans and advances to banks
The carrying value of short-dated loans and advances to banks is assumed to be their fair value. The fair value of other loans and advances
to banks is estimated by discounting the anticipated cash flows at a market discount rate adjusted for the credit spread of the obligor or,
where not observable, the credit spread of borrowers of similar credit quality.
Loans and advances to customers
The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates.
To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of
techniques are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends,
prevailing market interest rates and expected future cash flows. For retail exposures, fair value is usually estimated by discounting
anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial
institutions. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after
which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to market rates for similar loans of
maturity equal to the remaining fixed interest rate period. The fair value of commercial loans is estimated by discounting anticipated cash
flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk.
Reverse repurchase agreements
The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
Debt securities
The fair values of debt securities are determined predominantly from lead manager quotes and, where these are not available, by
alternative techniques including reference to credit spreads on similar assets with the same obligor, market standard consensus pricing
services, broker quotes and other research data.
(2)Financial liabilities
Valuation hierarchy
The table below analyses the fair values of those financial liabilities of the Group which are carried at amortised cost by valuation
methodology (level 1, 2 or 3, as described on page 257).
Carrying
value
£m
Fair
value
£m
Valuation hierarchy
Level 1
£m
Level 2
£m
Level 3
£m
At 31 December 2025
Deposits from banks
5,779
5,779
–
5,779
–
Customer deposits
496,457
497,849
–
497,849
–
Repurchase agreements at amortised cost
38,570
38,570
–
38,570
–
Debt securities in issue at amortised cost
78,271
78,900
–
78,900
–
Subordinated liabilities
9,894
11,475
–
11,475
–
At 31 December 2024
Deposits from banks
6,158
6,158
–
6,158
–
Customer deposits
482,745
483,568
–
483,568
–
Repurchase agreements at amortised cost
37,760
37,760
–
37,760
–
Debt securities in issue at amortised cost
70,834
70,894
–
70,894
–
Subordinated liabilities
10,089
10,419
–
10,419
–
Valuation methodology
Deposits from banks and customer deposits
The fair value of bank and customer deposits repayable on demand is assumed to be equal to their carrying value.
The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates
for deposits of similar remaining maturities.
Repurchase agreements at amortised cost
The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
Debt securities in issue at amortised cost
The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities in issue
is calculated based on quoted market prices where available. Where quoted market prices are not available, fair value is estimated using
discounted cash flow techniques at a rate which reflects market rates of interest and the Group’s own credit spread.
Subordinated liabilities
The fair value of subordinated liabilities is determined by reference to quoted market prices where available or by reference to quoted
market prices of similar instruments. Subordinated liabilities are classified as level 2, since the inputs used to determine their fair value are
largely observable.
(D)Reclassifications of financial assets
There have been no reclassifications of financial assets in 2024 or 2025.