Risk management The Group’s approach to risk 144 Emerging risks 147 Risk governance 150 Capital stress testing 152 Full analysis of risk categories 153
We are doing our best to help and advise British businesses of all sizes so that as lockdown eases they can adapt their business models to re-open safely and profitably.
The public health crisis caused by coronavirus has affected all of us and the society in which we live. Our priority is to help the UK recover in an effective, inclusive and sustainable way.
We’re keeping our colleagues as safe as we can while they provide essential services to people across the UK. And we’re working with the Government to get practical help to those who need it most, in communities across all the regions of the UK.
As disclosed in last year’s annual report, Catherine Woods joined the Board as a Non-Executive Director in March. In May, Anita Frew retired as Deputy Chair and NonExecutive Director, having served 9 years on the Board. Alan Dickinson succeeded Anita as Senior Independent Director and also took on the role of Deputy Chair, bringing his significant Board, financial and regulatory experience to these roles. In addition, Nick Prettejohn took on the role of Chair of the Board Risk Committee on an interim basis in May, with Catherine Woods taking over from Nick from 1 January 2021.
Completion of the Group Strategic Review 2 GSR2 enabled the Group to become the largest digital bank in the UK while delivering a simple, low risk, customer focused, UK retail and commercial bank.
Improving the experience of our personal customers COVID-19 has accelerated the shift towards digital for everyday banking needs. We are the largest digital bank in the UK and have seen our digitally-active customer base increase by 6 per cent to 17.4 million customers, while our active mobile app users have also increased by nearly 2 million to 12.5 million customers. We have continued to enhance our digital propositions, with a focus on speed, convenience, personalisation and control. These include the broadening of our unique Single Customer View functionality to include stockbroking portfolios, biometric functionality to authorise payments through the mobile banking app, more personalised customer communication and navigation within digital apps, and enhanced control features, such as upcoming payment notifications and ’confirmation of payee’ functionality, to protect against fraud. As a consequence, we have seen our digital and all channel customer satisfaction scores continue to improve and reach respective all-time highs of 67 and 68.
We continue to improve the sustainability of our own operations and have recently updated our operational climate pledges (see page 22) This year we have calculated and disclosed the emissions associated with increased homeworking as a result of COVID-19, and sponsored a white paper in this area
We have continued to reduce the energy and carbon intensity of our properties and have supported low carbon travel Our overall location-based carbon emissions were 159,487 tonnes CO2e; a 24 per cent decrease since 2019 and 72 per cent since our 2009 baseline (legacy scope)
3 Covers 95 per cent of motor vehicle loans and operating lease assets. Excludes assets that do not have a motor, specialist vehicles and vehicles where mileage is difficult to estimate. Currently does not apply a loan-to-value ratio for emissions.
Responsible investment and stewardship Over the course of 2020 we have focused on building robust foundations for future responsible investment activity, launching our responsible investment framework in March and developing Stewardship and exclusions policies. We have also established a Responsible Investment (RI) team which is made up of professionals with diverse backgrounds in RI, policy, research, advocacy, data, and climate science.
Read more on how we are helping Britain to get a home lloydsbankinggroup.com/who-we-are responsible-business/downloads.html
Agile working We have seen changing customer demands, changing colleague needs and expectations, a fluctuating and less stable business environment, and significant economic issues which have led the Group to consider how to reimagine the way we work.
Uncertainty for the longer-term growth outlook has increased. Productivity growth averaged just 0.4 per cent per annum over the five years to 2019, compared with nearly 2 per cent per annum before the 2008 financial crisis, and it is unclear how it will evolve in future. The postfinancial -crisis recovery in business investment was weak, and investment fell very sharply again during the pandemic. Additionally, the change in our trading relationship with the EU has introduced additional processes and costs for some businesses. The pandemic may have provided an opportunity to boost productivity through more rapid changes to working practices, preferences for living locations, and accelerated adoption of online purchasing than would have happened otherwise. More positively, the Government’s plans to ‘level-up’ the UK across its regions via a step-change in infrastructure investment could help to spur improved productivity growth.
Market dynamics The unprecedented social and economic challenges posed by COVID-19 have significantly impacted the lives of our personal and business customers, while also having the potential to adversely affect financial resilience and vulnerability, as well as inequality more generally, in the longer-term.
Uncertainty remains around the impact of the UK’s exit from the EU on the existing regulatory and legal framework, in particular the extent of friction created by changing arrangement and potential for the UK to deviate from the EU’s regulatory system
These assessments led to the identification of the key emerging priorities for the next strategic plan.
Strengthen Corporate and Institutional product capabilities We also have a significant presence at the larger end of the market, with over 60 per cent of FTSE 100 companies having an active relationship with the Group. We will build on the progress made in our previous strategic plan by continuing to deepen our relationships with these larger clients and strengthening our simple and low risk commercial banking offering. At the same time we will enhance our fee based client propositions, with the aim of diversifying our revenue generation.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 43
Deliver sustainable workplace solutions, including reduced office footprint The pandemic has led to unprecedented change in the way companies operate, while also accelerating the shift to more agile working patterns. While recent internal surveys show that the vast majority of our colleagues would like to retain some form of home working, offices will undoubtedly remain important for colleague interaction, collaboration and innovation.
In response, we will deliver a reduced, sustainable and future ready office footprint, with activity expected to commence in several of our collaboration hubs as we emerge from the COVID crisis. These programmes, which are expected to deliver an 8 per cent reduction in our office space in 2021 as well as cumulative reductions of c.20 per cent by 2023, will be informed by behavioural experiments and pilots that will help us determine the future look of our offices and ways of working.
Stakeholder engagement is embedded in all aspects of the Board’s decision-making and can be seen in the range of tailored activities across the stakeholder groups. It is also embedded in the Board’s delegation of the management of the business to the Executive, with examples of related action taken included across the report, in particular the sections referenced under ‘More Detail’.
The Board was keen that 2020’s AGM adapt to the challenges of the pandemic, and provision was made so shareholders could access as many of the benefits of an AGM as possible.
Considerable time was therefore given to the processes relating to succession and recruitment to these positions, which concluded in the appointment of Robin Budenberg as Chair, and confirmation that Charlie Nunn would be appointed as Group Chief Executive. These processes are discussed in greater detail in the report of the Board’s Nomination and Governance Committee on page 98.
The Board reviewed plans to further improve ways of working, encourage greater collaboration, and continue the reduction in bureaucracy. Opportunities were encouraged to promote simplicity in process and practice wherever possible.
A commitment was approved to invest £2 billion in BlackRock’s ACS Climate Transition World Equity Fund, via Scottish Widows' default fund offering. The Group’s investment will make up 10 per cent of the equities portion of our default pension investment approach within Scottish Widows, focused on investing in the companies already at the forefront of decarbonisation and responsible use of natural resources. The Board’s consideration of environmental ambitions is discussed further on page 50.
The feedback of these ambassadors informs not only the Board’s view of stakeholder priorities, but allows the Group to offer locally its insight on the major economic and social debates the country faces.
The Board is supported in environmental and community matters by its Responsible Business Committee. This Committee supports the Board with consideration of stakeholder views on all matters relating to the Group’s goals to be a trusted, sustainable and responsible business.
Following these interactions, the Board approved the Group’s participation in the Government’s economic response, successfully providing our customers with access to the Government’s support measures and loan schemes.
Maintained the UK’s largest branch network with around 90 per cent of branches remaining open throughout the pandemic, whilst implementing coronavirus safeguarding measures to protect customers and colleagues
Being the first major pensions and insurance provider to target halving the carbon footprint of its investments by 2030 on its path to net zero by 2050
Financial results Results for the full year 61 Summary of Group results 62 Divisional results 73 Other financial information 77
Transform ways of working; by delivering 5.3 million hours of future skills training and 65 per cent of change using agile methodologies
Lloyds Banking Group Annual Report and Accounts 2020 63 Strateg ic rep ort
Total ECL allowances on loans and advances to customers2 as % of drawn balances3 1.4% 0.8% 0.6pp 1 Underlying basis. Refer to basis of presentation.
2 Expected credit loss allowances on loans and advances to customers (drawn and undrawn).
Across all products, customers who are in extension remain of a typically lower credit quality than the wider book and tend to have higher average balances than customers who have not requested payment holidays. It should also be noted that of the customers missing payments after conclusion of the payment holiday, typically one third were in arrears at the start of the payment holiday.
Tangible net assets per share 52.3p 50.8p 1.5p 1 The CET1, total capital, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements. Excluding dividend accrual, the CET1 ratio at 31 December 2020 was 16.4 per cent.
Average interest-earning banking assets £437bn £436bn £435bn £432bn £437bn £435bn £433bn £433bn
Lloyds Banking Group Annual Report and Accounts 2020 79 Strateg ic rep ort
ther inform ation 5. Tangible net assets per share The table below sets out a reconciliation of the Group’s shareholders’ equity to its tangible net assets.
Inclusion & Diversity Approaching diversity as a business issue reflects our firm view that diverse teams, working within inclusive environments, are more innovative, engaged and deliver better outcomes for our customers. The Board was pleased to endorse a Race Action plan in support of Black colleagues to drive cultural change, recruitment and progression across the Group. Further information about the Race Action plan can be found on page 25.
Skills, experience, and contribution: Extensive experience in retail banking, insurance and consumer finance Significant experience in strategic planning and implementation Experience in consumer analysis, marketing and distribution Stuart is a former Non-Executive Director of TSB Banking Group plc, LV Group and Virgin Direct. He was previously the Interim Chairman of Provident Financial plc, Senior Independent Director of Swinton Group and of QBE and a Council Member, Chatham House. In his executive career, he was President and Chief Operating Officer of Aspen Insurance, President of GE Capital China, Chief Executive Officer of Tesco Personal Finance and Director of UK Retail Banking at the Royal Bank of Scotland.
Approved various Group policies including signing authorities and the Board and Group Executive Committee dealing policy Stakeholder groups
Gradual increase in UK confirmed cases with 23 UK confirmed cases as at month end
Behavioural changes of greater empathy, open communication, collaboration, and agile decision making have helped to advance our cultural development and have complemented our ambition to accelerate culture change.
Equity sub-group under LBG Equity Investments Limited, for which the principal subsidiary is Lloyds Development Capital Limited.
To leverage internal and external expertise, as well as to widen existing Non-Executive Director training curriculum, both online and (when conditions permit) in person.
D. The Board recognises that engaging with and acting on the needs of the Group’s stakeholders is key to achieving the strategy and long-term objectives of the Company. Engagement with stakeholders, across the organisation and including that of the Board, is discussed further on pages 46 to 51, and in the Directors’ statement of compliance with their duties under section 172 of the Companies Act 2006, also on pages 46 to 51. A final summary of the impact of the voting outcomes at the 2020 AGM for the Group’s Directors’ Remuneration Policy and Long Term Share Plan has had on the decisions the Board has taken and the actions or resolutions now proposed are set out on pages 118 and 119.
Alongside confirmation of my appointment, António Horta-Osório’s decision to step down as Group Chief Executive in 2021 was also announced. The Committee undertook a similarly thorough process to identify António’s successor, culminating in the decision to appoint Charlie Nunn as Group Chief Executive. Subject to regulatory approval, Charlie will join the Board in August 2021. As announced on 1 December 2020 António will step down from his role on 30 April 2021. The Board has agreed that during any interim period between António stepping down and Charlie joining the Board, William Chalmers, Chief Financial Officer will, subject to regulatory approval, take on the role of acting Group Chief Executive in addition to his ongoing responsibilities, with a range of measures put in place to provide appropriate support. Further details of the selection process for these appointments can be found on page 99.
The Committee also oversees training undertaken by the Non-Executive Directors. Learning and engagement opportunities have been undertaken by all Non-Executive Directors in relation to material aspects of the Group’s business.
Ensuring the effectiveness of the Group’s internal control systems, and of the Group’s Internal Audit function, key in delivering the Group’s strategic priorities.
Consideration was given to the Group’s approach to financial control, which has been enhanced in the year due to the rollout of a number of thematic initiatives. This review of the Group’s Financial Control and Reporting Framework focused on areas such as data and metrics, basis of substantiation, End User Computing and manual workarounds, 3rd party and non-finance reconciliation activity.
Assessed Group Internal Audit’s resources and skills (supplemented by externally sourced subject matter experts as required) as adequate to fulfil its mandate. Group Internal Audit reports on its detailed internal skills assessment including on the availability of specialist skills. The Group Internal Audit Quality Assurance function separately reports to the Committee giving a view on the adequacy of Group Internal Audit resource and skills.
Frequent reviews have allowed the Committee to assess the plans to support customers in need with easy access to payment holidays and improved self-support and digital journeys. The Committee has assessed the risks of introducing strategic changes such as a new vulnerable customer strategy and new treatments and toolkits while recruiting and training new colleagues to meet increased collections demand. Regular monitoring of the key changes have been reviewed by the Committee ensuring that focus is maintained on how changes are improving customer outcomes.
The Committee has also remained close to progress on material rectifications, including implementation of the recommendations in the Cranston report, arising from the review of the Group’s management of the HBOS Reading incident.
Conclusion: The Committee is satisfied with the good progress made by the Group in reducing the causes for customer complaints, and work is underway to address the impacts the pandemic has had on the Group’s ability to resolve complaints as efficiently as possible.
Fraud The Group’s management of fraud risk, while minimising the impact of controls on genuine customer journeys.
The Group’s management of financial crime risk considering continuous legislative change and regulatory scrutiny.
Committee purpose and responsibilities The Committee supports the Board in overseeing the Group’s performance as a responsible business by providing oversight of, and support for, the Group’s strategy and plans for embedding responsible business as part of the Group’s purpose to Help Britain Prosper. The Committee provides oversight and challenge on activities which impact the Group’s trust and reputation and by considering and recommending to the Board for approval the Environmental, Social and Governance (ESG) Report and the Helping Britain Prosper Plan. The Committee’s terms of reference can be found at www.lloydsbankinggroup.com/who-we-are/ group-overview/corporate-governance.html
Taken together, the effects of the COVID pandemic and advancing climate change bring fundamental shifts in our economy and society. The Group’s role is more vital than ever, and the Responsible Business Committee will support the Board in developing and overseeing the business’s plans to play its part in Helping Britain Recover.
Profit and dividends The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2020 of £1,226 million (2019 £4,393 million). The Directors have recommended a final dividend for 2020 which is subject to approval by the shareholders at the AGM, of 0.57 pence per share totalling £404 million. The final dividend will be paid on 25 May 2021.
2 The most recent notification provided by BlackRock, Inc. under Rule 5 of the DTR identifies (i) an indirect holding of 3,599,451,380 shares in the Company representing 5.04 per cent of the voting rights in the Company, and (ii) a holding of 69,305,385 in other financial instruments in respect of the Company representing 0.09 per cent of the voting rights of the Company. BlackRock, Inc.’s holding most recently notified to the Company under Rule 5 of the DTR varies from the holding disclosed in BlackRock, Inc.’s Schedule 13-G filing with the US Securities and Exchange Commission dated 29 January 2021, which identifies beneficial ownership of 5,443,120,289 shares in the Company representing 7.7 per cent of the issued share capital in the Company. This variance is attributable to different notification and disclosure requirements between these regulatory regimes.
GHG emissions (CO2e) per £m of underlying income (Location Based)* 10.4 11.5 13.0
In order to ensure the continued long-term motivation and retention of key staff the Remuneration Committee supported making awards under the new Long Term Share Plan (LTSP) introduced at the AGM in May 2020. The LTSP is subject to underpins for three years, with vesting spread between the third and seventh anniversary of award for Executive Directors.
Full details of the 2021 LTSP award, including the factors supporting the pre-grant assessment and the underpins that apply, are included on page 132.
Clearer alignment to purpose Consistent feedback suggested the structure of our balanced scorecard with 15 equally weighted measures, made it difficult for shareholders to determine how these measures clearly linked to the Group’s strategy and performance. Providing equal weighting to all measures was criticised, with the view that some measures, in particular the core financial measures, should have greater influence on reward outcomes. We have thought hard about the right choice and balance of measures for 2021 and have consulted with a large proportion of shareholders and other stakeholders to get input into the design. As a result, we have significantly reduced the number of measures and rebalanced the scorecard to ensure there is a clear weighting between financial and non-financial metrics while appropriately capturing ESG and customer dimensions. In addition all measures are subject to consideration of risk and conduct.
Launched the Group’s Race Action plan to ensure greater representation of ethnic minorities amongst our colleague and senior leadership populations
He received a payment of £45,188 in lieu of unused annual leave entitlement up to the Retirement Date.
Juan did not receive an Executive Group Ownership Share for 2020.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 125
Statutory economic profit1 Set relative to 2022 targets Threshold: £1,965m Maximum: £2,948m
The peer comparator group for the ROTE underpin is set at Barclays Group PLC, HSBC Holdings PLC, Natwest Group PLC, Santander UK PLC and Virgin Money UK PLC. ROTE will be measured on the new basis adopted from 2021 and will take into account adjustments (as appropriate) for methodology differences between peers and any other factors the Remuneration Committee considers should reasonably be reflected, including relative under or outperformance or change in business mix.
The measures and targets are set annually by the Remuneration Committee to reflect the strategic priorities of the Group and take into account both the annual financial plan and operating plan against the backdrop of the rapidly evolving external economic and societal landscape.
When assessing performance, the Committee can exercise its judgment to determine the appropriate outcome. This helps to avoid any potential unintended outcomes that might arise from the application of formulaic performance criteria.
When determining and reviewing the level of benefits provided, the Committee ensures that decisions are made within the following two parameters: An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective job-sizing methodologies.
Where an award or a deferred award is in shares or other share-linked instrument, the number of shares to be awarded may be calculated using a fair value or based on discount to market value, as appropriate. The Committee applies its judgement to determine the payout level commensurate with business and/or individual performance or other factors as determined by the Committee. The Committee may reduce the level of award (including to zero), apply additional conditions to the vesting, or delay the vesting of deferred awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate. Awards may be subject to malus and clawback for a period of up to seven years after the date of award which may be extended to 10 years where there is an ongoing internal or regulatory investigation.
Governance and risk management An essential component of the approach to remuneration is the governance process that underpins it. This ensures that the policy is robustly applied and risk is managed appropriately. In addition to setting the overall remuneration policy and philosophy for the Group, the Remuneration Committee ensures that colleagues who could have a material impact on the Group’s risk profile are provided with appropriate incentives and reward to encourage them to enhance the performance of the Group and that they are recognised for their individual contribution to the success of the organisation, whilst ensuring that there is no reward for excessive risk taking. The Remuneration Committee works closely with the Risk Committee in ensuring the Group Performance Share (GPS) plan outcome is moderated. The two Committees determine whether the proposed GPS outcome and performance assessments adequately reflect the risk appetite and framework of the Group; whether it took account of current and future risks; and whether any further adjustment is required or merited. The Group and the Remuneration Committee are determined to ensure that the aggregate of the variable remuneration for all colleagues is appropriate and balanced with the interests of shareholders and all other stakeholders.
The Group applies deferral arrangements to GPS and variable pay awards made to colleagues. GPS awards for MRTs are subject to deferral and a holding period in line with regulatory requirements and market practice.
Benefits Core benefits for UK-based colleagues include pension, private medical insurance, life insurance and other benefits that may be selected through the Group’s flexible benefits plan. Further information on benefits and allemployee share plans can be found on page 116 of the DRP. Benefits can be amended or withdrawn in the following circumstances: – to reflect a change to colleague contractual terms; – to reflect a change of grade; – termination of employment with the Group; – to reflect a change of Reward Strategy/
benefit provision; – if the award would be inconsistent with any statutory or tax requirements.
– Approved Persons performing SIFs and/ or all colleagues performing a Senior Management Function1
One Risk and Control Self-Assessment (One RCSA) is part of the Group’s Risk and Control Strategy to deliver a stronger risk culture and simplified risk and control environment. The three lines of defence have worked together to identify improvements to the Group’s approach to risk management. Following pilot activity, this new approach (One RCSA) is being adopted across the Group through a phased implemented plan. All aspects of the 2020 Plan for implementation of One RCSA have been delivered. The 2021 plans capture the remaining highest risks to customers and the business, and the Board will continue to review progress with embedding the cultural change and improving the risk and control environment.
Technology: The rapid pace of technology in the financial services industry creates a challenge for complex organisations with ageing systems. With the slower adoption of new technologies there is a risk that the Group is less able to compete with new entrants to attract customers with innovative future products, and participate in emerging business models.
– The Group continues to engage across all stakeholder groups to understand current and emerging areas of concern and priority. Technology risks, including those related to machine learning, and data ethics are escalated and discussed through governance to ensure ongoing monitoring of any emerging unintended consequences
The FCA has signalled possible concerns around the impact of new products and business models, and the conduct of providers, and is investigating these issues further as part of the Unsecured Credit Review.
Regulatory rules and laws from both the UK and overseas are likely to impact the Group’s operation, placing pressure on expert resource and investment priorities.
– The Chief Resilience and Security Office (CRSO) develops and maintains a framework for external incidents, including financial stability, to ensure the incident response team convenes and acts rapidly during an external crisis. In conjunction CRSO also maintain an operational resilience framework to embed resilience activities across the Group and limit the impact of internal or external events
Group Financial Risk Committee Responsible for overseeing, reviewing, challenging and recommending to GEC / Board Risk Committee / Board for the Group and Ring-Fenced Bank (i) Annual Internal Stress Tests, (ii) All Prudential Regulation Authority (PRA) / European Banking Authority (EBA) and any other regulatory stress tests, (iii) Annual Liquidity Stress Tests, (iv) Reverse Stress Tests, (v) Individual Liquidity Adequacy Assessment (ILAA), (vi) Internal Capital Adequacy Assessment Process (ICAAP), (vii) Pillar 3, (viii) Recovery / Resolution Plans, and (ix) relevant ad hoc Stress Tests or other analysis as and when required by the Committee.
The Group ensures that it has adequate cash and balances at central banks and stocks of high quality liquid assets (e.g. gilts or US Treasury securities) that can be converted easily into cash to meet liquidity requirements. The majority of these assets are asset swapped and held at fair value through other comprehensive income with the remainder held as financial assets at fair value through profit and loss. Further information on these balances can be found under funding and liquidity risk on page 183.
Credit spread risk Credit spread risk arises largely from (i) the liquid asset portfolio held in the management of Group liquidity, comprising of government, supranational and other eligible assets; (ii) the Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA) sensitivity to credit spreads; (iii) a number of the Group’s structured medium-term notes where the Group has elected to fair value the notes through the profit and loss account; and (iv) banking book assets in Commercial Banking held at fair value under IFRS 9.
The Group has an integrated Asset and Liability Management (ALM) system which supports non-traded asset and liability management of the Group. This provides a single consolidated tool to measure and manage interest rate repricing profiles (including behavioural assumptions), perform stress testing and produce forecast outputs. The Group is aware that any assumptions based model is open to challenge. A full behavioural review is performed annually, or in response to changing market conditions, to ensure the assumptions remain appropriate and the model itself is subject to annual re-validation, as required under the Group Model Governance Policy. The key behavioural assumptions are: embedded optionality within products the duration of balances that are contractually repayable on demand, such as current accounts and overdrafts, together with net free reserves of the Group the re-pricing behaviour of managed rate liabilities, such as variable rate savings
The table below shows supplementary value sensitivity to a steepening and flattening (c.100 basis points around the 3 year point) in the yield curve. This ensures there are no unintended consequences to managing risk to parallel shifts in rates.
Models The performance of all models used in credit risk is monitored in line with the Group’s model governance framework - see model risk on page 203.
The Group’s treatment of loan renegotiations is included in the impairment policy in note 2(H) on page 226.
2 UK Motor Finance for Stages 1 and 2 include £192 million relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.
Group loans and advances to customers and expected credit loss allowances (underlying basis)
Stage 2 loans and advances increased to 12.8 per cent of the portfolio (31 December 2019: 9.3 per cent) which has contributed to a slight reduction in Stage 2 ECL coverage to 2.1 per cent (31 December 2019: 2.3 per cent) given a greater proportion of Stage 2 balances from lower risk up to date accounts, transferred into Stage 2 based on the forward-looking view of their credit performance
In line with regulatory guidance, the Group has suspended all repossession activity on mortgage accounts from March 2020. As a consequence of this, the volume of cases in late stage arrears has increased.
Retail forbearance The basis of disclosure for forbearance is aligned to definitions used in the European Banking Authority’s FINREP reporting. On an underlying basis, total forbearance for the major retail portfolios has improved by £286 million to £6.2 billion driven primarily by a reduction in customers where arrears are written on to the loan balance (capitalisations). On a statutory basis the equivalent total forbearance position improved by £259million to £5.9 billion.
The main customer treatments included are: repair, where arrears are written on to the loan balance and the arrears position cancelled; instances where there are suspensions of interest and/or capital repayments; past term interest-only mortgages; and refinance personal loans.
The Group has also been a signatory to the UN Principles for Responsible Investment (UNPRI) since 2012, which incorporate environmental, social and governance (ESG) risk considerations in asset management. Scottish Widows is responsible for the annual UNPRI reporting process.
The Group’s liquidity coverage ratio (LCR) was 136 per cent (based on a monthly rolling average over the previous 12 months) as at 31 December 2020 (31 December 2019: 137 per cent) calculated on a consolidated basis based on the EU Delegated Act. Net liquidity outflows increased as a result of a higher volume of short notice customer deposits and higher derivative margin volatility. Following the implementation of structural reform, liquidity risk is managed at a legal entity level with the Group consolidated LCR representing the composite of the Ring-Fenced Bank and Non Ring-Fenced Bank entities.
Cash and balances at central bank – non-LCR eligible4 6.4 5.7 12
Nine months to one year One to two years Two to five years More than five years
This scenario includes a two notch downgrade of the Group’s current long-term debt rating and accompanying one notch short-term downgrade implemented instantaneously by all major rating agencies.
The Group measures both its capital requirements and the amount of capital resources it holds to meet those requirements through applying the regulatory framework defined by the Capital Requirements Directive and Regulation (CRD IV), as amended by revisions to the Capital Requirements Directive implemented in December 2020 (CRD V) and by those provisions of the revised Capital Requirements Regulation (CRR II) that came into force in June 2019 and December 2020. The requirements are implemented in the UK by the Prudential Regulation Authority (PRA) and supplemented through additional regulation under the PRA Rulebook. Further details of the regulatory capital and leverage frameworks that the Group is subject to, including the means by which its capital and leverage requirements and capital resources are calculated, will be provided in the Group’s Pillar 3 Report.
The Group monitors early warning indicators and maintains a Capital Contingency Framework as part of a Recovery Plan which are designed to identify emerging capital concerns at an early stage, so that mitigating actions can be taken, if needed. The Recovery Plan sets out a range of potential mitigating actions that could be taken in response to a stress. For example, the Group is able to accumulate additional capital through the retention of profits over time, which can be enhanced through reducing or cancelling proposed dividend payments and share buybacks, by raising new equity via, for example, a rights issue or debt exchange and by raising additional tier 1 or tier 2 capital securities. The cost and availability of additional capital is dependent upon market conditions and perceptions at the time. This type of activity was demonstrated in Q3 2019 with the cancellation of the remaining share buy-back programme and more recently in Q1 2020 with the announcement to cancel the planned 2019 year-end dividend.
The accrual for foreseeable dividends reflects the recommended final ordinary dividend of 0.57 pence per share.
An analysis of the Group’s current transitional MREL position is provided below. Transitional1
G-SIB indicators Although the Group is not currently classified as a Global Systemically Important Bank (G-SIB), by virtue of the Group’s leverage exposure measure exceeding €200 billion the Group is required to report G-SIB indicator metrics to the PRA. The Group’s indicator metrics used within the 2020 Basel G-SIBs annual exercise will be disclosed from April 2021 and the results are expected to be made available by the Basel Committee later this year.
Exposure limits by risk type are assessed through the business planning process and used as a control mechanism to ensure risks are taken within risk appetite
Ongoing engagement with third-parties involved in serving the Group’s customers to ensure consistent delivery
A number of activities support the close monitoring of data risk including: Implementation of the data risk and control library to ensure greater coverage and insight of data risk, and ensuring data risks are managed within appetite
Failure to manage operational resilience effectively could impact the following other risk categories: Regulatory compliance: non-compliance with new/existing operational resilience regulations, for example, through failure to identify emerging regulation or not embedding regulatory requirements within the Group’s policies, processes and procedures
Definition People risk is defined as the risk that the Group fails to provide an appropriate colleague and customer-centric culture, supported by robust reward and wellbeing policies and processes; effective leadership to manage colleague resources; effective talent and succession management; and robust control to ensure all colleague-related requirements are met.
Monitoring A review of the Group’s ERMF, which includes the status of the Group’s principles and policy framework, and the design and operational effectiveness of key governance committees, is undertaken on an annual basis and the findings are reported to the Group Risk Committee, Board Risk Committee and the Board.
Property: the Group's property portfolio remains a key focus in ensuring resilience requirements are appropriately maintained. Processes are in place to identify key buildings where a critical business process is performed. Depending on criticality, a number of mitigating controls are in place to manage the risk of severe critical business process disruption. The Group remains committed to investment in the upkeep of the property portfolio, primarily through the Group Property upkeep investment programme.
Strategic risks can manifest themselves in existing principal risks or as new exposures which could adversely impact the Group and its businesses.
Sharon Tyrer Steven Butt 18. Financial assets at amortised cost 259 19. Finance lease receivables 265 20. Financial assets at fair value through other comprehensive income 265 21. Investments in joint ventures and associates 266 23. Value of in-force business 267 24. Other intangible assets 269 25. Property, plant and equipment 270 26. Other assets 271 27. Financial liabilities at fair value through profit or 271 28. Debt securities in issue 271 29. Securitisations and covered 272 30. Liabilities arising from insurance contracts and participating investment contracts 273 31. Life insurance sensitivity analysis 276 32. Liabilities arising from non-participating investment contracts 277 33. Other liabilities 277 34. Retirement benefit obligations 277 35. Deferred tax 283 36. Other provisions 284 37. Subordinated liabilities 286 38. Share capital 287 39. Share premium account 287 40. Other reserves 288 41. Retained profits 290 42. Other equity instruments 290 43. Dividends on ordinary shares 291 44. Share-based payments 291 45. Related party transactions 294
– Evaluation and testing of the operating effectiveness of management’s entity level controls designed to prevent and detect irregularities, in particular their code of conduct and whistleblowing helpline. – Assessment of matters reported on the Group’s whistleblowing helpline and the results of management’s investigation of such matters.
Based on the evidence assessed, we found the assumptions to be materially appropriate, and the economic scenarios adopted to reflect an unbiased, probability weighted view, that appropriately captures the impact of non-linearity. We considered that the use of a central adjustment was an appropriate approach.
– We tested a risk based sample of Stage 1 and 2 loans, utilising industry specialists to support the audit team in identifying sectors or types of borrowers with a heightened risk of weaker financial performance or distress.
For a sample of Stage 3 credit impaired loans, we: – Evaluated the basis on which the allowance was determined, and the evidence supporting the analysis performed by management; – We independently challenged whether the key assumptions used, such as the recovery strategies, collateral rights and ranges of potential outcomes, were appropriate, given the borrower’s circumstances; – Re-performed management’s allowance calculation, assessing supporting evidence in relation to key inputs on a case by case basis, that included expected future cash flows, discount rates, valuations of collateral held, and the weightings applied to scenario outcomes; and
Based on the evidence assessed, we found the methodologies, modelled assumptions and data used within the allowance for ECL assessment to be materially appropriate and in line with the requirements of IFRS 9.
Whilst there has been automation of hedging accounting processes in the period, the Group’s application of hedge accounting in the year still relied upon a significant degree of manual processing, which increases the risk of operational errors and hence the risk that financial reporting is not compliant with IFRS requirements.
Based on the evidence obtained, we determined the application of hedge accounting to be appropriate.
The Group is structured into three segments being Retail, Commercial Banking, and Insurance and Wealth. Each of the segments comprises a number of components. The consolidated financial statements are a consolidation of the components. In establishing the overall approach to the Group audit, we determined the type of work that is required to be performed over the components by us, as the Group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction (‘component auditors’). Almost all of our audit work is undertaken by PwC UK component auditors.
In determining the performance materiality, we considered a number of factors - the history of misstatements, risk assessment and aggregation risk and the effectiveness of controls - and concluded that an amount at the upper end of our normal range was appropriate.
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: Gains and losses attributable to own credit risk, net of tax — — (55) (55) — — (55)
Redemptions of other equity instruments (note 42) — — — — (1,481) — (1,481)
Currency translation differences (tax: £nil) — (8) — (8) — — (8)
(C) Other intangible assets Intangible assets which have been determined to have a finite useful life are amortised on a straight line basis over their estimated useful life as follows: up to 7 years for capitalised software; 10 to 15 years for brands and other intangible assets.
(H) Impairment of financial assets The impairment charge in the income statement includes the change in expected credit losses and including those arising from fraud. Expected credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income, and certain loan commitments and financial guarantee contracts. Expected credit losses are calculated as an unbiased and probability-weighted estimate using an appropriate probability of default, adjusted to take into account a range of possible future economic scenarios, and applying this to the estimated exposure of the Group at the point of default after taking into account the value of any collateral held, repayments, or other mitigants of loss and including the impact of discounting using the effective interest rate.
The Group has accommodated the latest available information at the reporting date in defining its base case scenario and generating the MES. The scenarios include forecasts for key variables in the fourth quarter of 2020, for which actuals may have since emerged prior to publication.
Upside Base case Downside Severe downside Upside Base case Downside Severe downside £m £m £m £m £m £m £m £m
The use of payment holidays along with subdued levels of consumer spending is judged to have temporarily reduced the flow of accounts into arrears and default and to have also improved average credit scores across portfolios. Management believes that the resulting position does not fully reflect the underlying credit risk in the portfolios. Adjustments have therefore been made to increase expected future rates of default and remove the impact of the observed improvement in average credit scores.
The current definition of default used in the UK mortgages impairment model excludes past term interest-only accounts that continue to make interest payments but have missed their capital payment upon maturity of the loan. This adjustment therefore mitigates the risk that the model understates the credit losses associated with interest-only accounts which have missed, or will potentially miss, their final capital payment. For those accounts that have reached end of term this adjustment manually overwrites PDs to 70 per cent or 100 per cent, thereby moving them into Stage 2, or Stage 3, depending on whether they are deemed performing, or non-performing respectively. For interest-only accounts with six years or less to maturity an appropriate incremental PD uplift is made to PDs based on the probability of missing a future capital payment, assessed through segmentation of behaviour score, debt-to-value and worst ever arrears status. The increase in the judgement in 2020 is primarily driven by an increase in the stock of long-term defaults following COVID-19 related litigation suspension.
The accounting valuation of the Group’s defined benefit pension schemes’ liabilities requires management to make a number of assumptions. The key areas of estimation uncertainty are the discount rate applied to future cash flows and the expected lifetime of the schemes’ members.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 241
Fee and commission income: Credit and debit card fees 748 982 993
Income recognised during the year included £22 million (31 December 2019: £54 million) in respect of amounts included in the contract liability balance at the start of the year and £13 million (31 December 2019: £9 million) in respect of amounts from performance obligations satisfied in previous years.
Note 12: Auditors’ remuneration Fees payable to the Company’s auditors by the Group are as follows: £m £m £m
Tax effect of share of results of joint ventures (3) — —
Assets Liabilities Assets Liabilities Continuing hedges Discontinued hedges At 31 December 2019 £m £m £m £m £m £m £m
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 259
Provisions in relation to loan commitments and financial guarantees 212 234 13 — 459
Exchange and other adjustments (218) — — — (218) — — — — —
Additions (repayments) 400 — — — 400 — — — — —
Later than 4 years and not later than 5 years 118 208
Note 23: Value of in-force business Key assumptions The impact of reasonably possible changes in the key assumptions made in respect of the Group's life insurance business, which include the impact on the value of in-force business, are disclosed in note 31.
Risk-free rate (value of in-force annuity business)1 0.41 to 4.53 0.91 to 4.81
Balance sheet amount at 31 December 2020 380 — 451 — 3,309 4,140
Cash deposits of £3,930 million (2019: £4,703 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations are held by the Group. Additionally, the Group has certain contractual arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2020 these obligations had not been triggered; the maximum exposure under these facilities was £52 million (2019: £56 million).
(ii) Method of calculation of liabilities With-profit liabilities are stated at their realistic value, the main components of which are: – With-profit benefit reserve, the total asset shares for with-profit policies; – Cost of options and guarantees (including guaranteed annuity options); – Deductions levied against asset shares; – Planned enhancements to with-profits benefits reserve; and
Annuities The policyholder is entitled to payments for the duration of their life and is therefore insured against surviving longer than expected.
Total other liabilities 20,347 20,333 1 Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported at fair value in other liabilities.
The total amounts recognised in the balance sheet relate to: £m £m
The Group has also established three private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final Salary Pension Scheme, a section of the Lloyds Bank Pension Scheme No. 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2020 these held assets of approximately £4.7 billion in aggregate. The private limited companies are consolidated fully in the Group’s balance sheet. The terms of these arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed to the relevant Group pension schemes. The Group has satisfied this requirement during 2020.
Maturity profile of defined benefit obligation The following table provides information on the weighted average duration of the defined benefit pension obligation and the distribution and timing of benefit payments: Years Years
Other credit to equity — — — — 7 — — — 7
The 2020 charge of £159 million, and lifetime cost of £435 million, includes both compensation payments and operational costs.
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income
Issue costs of other equity instruments (net of tax) (note 42) — (3) (5)
Interim dividend paid in the year — 1.12 1.07 — 789 765
Note 44: Share-based payments Charge to the income statement The charge to the income statement is set out below: £m £m £m
Deposits from banks — — — — — 28,179 — 28,179
Notes in circulation — — — — — 1,079 — 1,079
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, such as brands and acquired credit card relationships; premises 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.
Loans and advances to customers: POCI 12,250 12,250 — — 12,250
Interest Rate Benchmark Reform For the purposes of determining whether: – a forecast transaction is highly probable; – hedged future cash flows are expected to occur; – a hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged risk; and
Debt securities, treasury and other bills 46,701 — 46,701 40,925 — 40,925
Irrevocable commitments and guarantees 73,962 — 73,962 63,504 — 63,504 1 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.
(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, Risk management on page 160.
CMS 15-18 — — — — — — — — — —
In respect of: Total loans and advances to customers 449,975 28,543 6,015 13,714 498,247 675 995 1,447 142 3,259 1 Principally comprises reverse repurchase agreement balances.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 323
Total financial assets at fair value through other comprehensive income 27,204 233 27,437 24,776 89 24,865 1 Credit ratings equal to or better than ‘BBB’.
Trading assets: Asset-backed securities: Corporate and other debt securities 225 21 246 232 1 233
Loans and advances to banks 4,953 1,017 265 124 91 26 — 3,299 9,775
Further information on the Group’s liquidity exposures is provided on pages 183 to 187.
Accretion of discounts and amortisation of premiums and issue costs (82) 445 1,947
Share of post-tax results of associates and joint ventures 13 (6) (9)
Payments in respect of payment protection insurance provision (1,703) (2,461) (2,104)
Less: amounts with a maturity of three months or more (3,983) (3,805) (3,169)
With the exception of IFRS 17 Insurance Contracts and certain other minor amendments, as at 23 February 2021 these pronouncements have been endorsed for use in the United Kingdom.
Value of employee services: Share option schemes — — — 71 71 — 71
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 337
Parent company cash flow statement for the year ended 31 December £ million £ million £ million
Movements in the capital redemption reserve were as follows: £m £m £m
Foreign exchange and other movements 81 — 129 210 1 The redemption in 2019 resulted in cash outflows of £3 million.
Other related party transactions Related party information in respect of other related party transactions is given in note 45 to the consolidated financial statements.
Financial liabilities at fair value through profit or loss 35 39 127 8,614 — 8,815
Q3 interim management statement Oct 1 To be published on the Group’s website by 29 July 2021 in accordance with the Capital Requirements (Country-by-Country Reporting) Regulations 2013.
By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future.
Bank of Scotland plc 5 i v Bank of Scotland Structured Asset Finance Ltd 1 i Bank of Scotland Transport Finance 1 Ltd (in liquidation)
Black Horse (TRF) Ltd 1 i Black Horse Finance Holdings Ltd 1 ii xxix Black Horse Finance Management Ltd 1 i Black Horse Group Ltd 1 i v Black Horse Ltd 1 i Black Horse Offshore Ltd 60 i Black Horse Property Services Ltd 1 i Boltro Nominees Ltd 1 i BOS (Ireland) Property Services 2 Ltd 16 i BOS (Ireland) Property Services Ltd 16 i BOS (Shared Appreciation Mortgages (Scotland) No. 2) Ltd 4 i
Kingsway North, Team Valley Trading Estate, Gateshead, NE11 0EG ii xviii xvii xxi &
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ ii & v Onapp (Topco) Ltd 82.5%