HBoS plc was acquired by lloyds Banking Group plc on 16 January 2009 and, accordingly, is dealt with in the accounts only as a post balance sheet event (see note 52, page 181). The 2008 report and accounts for HBoS plc therefore do not form part of this publication.
The unprecedented market conditions which i sketched out at the start of this review have continued into 2009. At the same time, the economy is continuing to deteriorate; the debating point now is how deep the recession will be and how long will it take for it to end. one thing is certain – we are facing a prolonged period of economic difficulty for many households and companies up and down the country. As a bank with a strong focus on customer relationships, we are committed to helping our customers wherever possible to manage their way through these challenging times.
on a continuing business basis we saw income rise by 2 per cent, as the ongoing market dislocation impacted on an otherwise good performance. Costs rose by 5 per cent, reflecting good cost control in our day-to-day operations which allowed us to further invest in our plans to support the growth of the franchise, with additional relationship staff and improvements to our systems and product range. impairments were up 68 per cent, reflecting the general slowdown in the economy and a number of specific losses related to the financial crisis and economic downturn.
Following completion of the HBOS acquisition in January 2009, all of the major rating agencies have updated their ratings for the enlarged Group. Each agency has issued the Group the highest possible short-term rating, and a long-term deposit rating in the ‘double A’ range. This provides the Group with a strong overall suite of credit ratings.
Impact on new business profit before tax £m £m 2008 eev/new business profit before tax 100 basis points reduction in risk-free rate1 186 6 10 per cent reduction in market values of equity assets2 (170) n/a 10 per cent reduction in market values of property assets3 (25) n/a 10 per cent reduction in expenses4 84 31 10 per cent reduction in lapses5 70 17 5 per cent reduction in annuitant mortality6 (56) (2)
During 2008, we have introduced a number of initiatives aimed at increasing customer advocacy. These include: better and more direct information to branch managers on their teams’ performance; net promoter scores built in to reward and recognition criteria; the mapping of customer experience across a wide range of our activities; quality assurance programmes in telephone banking; and identification of the most critical impacts on customer perception.
We run a wide range of generalist and specialist development programmes to support career progression into management. In 2008, we recruited 125 people into our graduate trainee programme, offered 44 internships and 110 student placements. Following the launch of the new Graduate Programme for 2009, our focus is now on attracting top talent into the organisation who will become senior business leaders of the future. We have also introduced a ‘customer facing’ element to the main programme so that all our graduates gain core banking ‘front-line’ experience. We are consistently identified in The Times Top 100 organisations for graduate recruitment. We also ran numerous programmes across our more senior populations to develop our pipeline of leaders for the future.
We actively track and manage retention of our highest performers, retaining 96.7 per cent of top performers in 2008 (up from 96 per cent in 2007).
The group business risk committee and the group asset and liability committee are chaired by the group chief executive and include all members of the group executive committee. The aggregate groupwide risk profile and portfolio appetite are discussed at their respective monthly meetings. This is a key component of the Lloyds TSB approach to risk management and provides oversight on behalf of the board to line management in specific business areas and activities. It is supported by the chief risk officer being a full member of the group executive committee and reporting to the group chief executive with direct access to the chairman and the risk oversight committee.
Based upon projections by management, which take into account the acquisition on the 16 January 2009 of HBOS plc, and assume the availability of the existing and announced Government Funding Package, the Group believes it has adequate resources to continue in business for the foreseeable future.
The Group assesses the probability of default of individual counterparties using internal rating models tailored to the various categories of counterparty. For its retail lending, and a growing number of wholesale lending portfolios, exposure at default and loss given default models are also in use. All material rating models are authorised by executive management. They have been developed internally and use statistical analysis, combined, where appropriate, with external data and subject matter expert judgement. Each rating model is subject to a rigorous validation process, undertaken by independent risk teams, which includes benchmarking to externally available data, where possible.
This statement of the Group’s overall appetite for market risk is reviewed and approved annually by the board. With the support of the group asset and liability committee, the group chief executive allocates this risk appetite across the Group. Individual members of the group executive committee ensure that market risk appetite is further delegated to an appropriate level within their areas of responsibility.
A key element of the control framework is the consideration of insurance risk by a suitable combination of high level committees/boards. For the life assurance businesses the key control body is the board of Scottish Widows Group Limited with the more significant risks also being subject to approval by the group executive committee and/or Lloyds TSB Group board. For the general insurance businesses the key control body is the Lloyds TSB General Insurance Limited board with the more significant risks again being subject to group executive committee and/ or Lloyds TSB Group board approval. All Group staff pension schemes issues are covered by the group asset and liability committee and the group business risk committee.
The capital model outputs are used to determine the internal capital charge for the Group which is then allocated to the businesses within the Group. Following review and approval of the operational risk management framework and capital model, the FSA has granted the banking businesses within the Group an Advanced Measurement Approach (AMA) Waiver which recognises the embedding of the operational risk framework across Lloyds TSB Group plc. The waiver allowed the Group to calculate its own regulatory capital charge for operational risk from its capital model with effect from 1 January 2008.
Liquidity and funding risk appetite for the banking businesses is set by the board and reviewed on an annual basis. It is reported through various metrics that enable the Group to manage liquidity and funding constraints. The chief executive, assisted by the group asset and liability committee and its sub-committee the senior asset and liability committee, regularly reviews performance against risk appetite. The board reviews liquidity and funding risk on a quarterly basis.
Joined the Group in 2006 as deputy group finance director, before being appointed acting group finance director in April 2008. Appointed to the board in October 2008 as group finance director. Previously finance director for the UK and Europe at Prudential from 2002 to 2006 and group finance director of Heath Lambert Group from 1996 to 2002. Prior to that, he spent 11 years at KPMG. Aged 46
Mr M A Scicluna, Ms C J McCall and Mr T J W Tookey joined the board on 1 September 2008, 1 October 2008 and 30 October 2008, respectively, and Mr T T Ryan and Mr Anthony Watson have been appointed directors from 1 March 2009 and 2 April 2009, respectively. In accordance with the articles of association, they offer themselves for election at the annual general meeting.
The audit committee comprises Mr du Plessis (chairman), Mr Brown, Mr Green, Lord Leitch, Mr Ryan (from 1 March 2009) and Mr Scicluna. The committee’s terms of reference are available from the company secretary and are displayed on our website, www.lloydsbankinggroup.com.
The approximate make-up of the main components of our new package for executive directors on an expected value basis is shown below.
The committee met on nine occasions during 2008, and the members were as follows: – Dr Wolfgang Berndt (chairman) – Sir Victor Blank – Mr Philip Green – Sir Julian Horn-Smith – Sir David Manning (from 1 May 2008)
The committee retains independent consultants to provide advice on specific matters according to their particular expertise. Towers Perrin, Hewitt New Bridge Street and Kepler Associates were retained by the committee during 2008 to advise on various matters relating to executive remuneration. In addition, PricewaterhouseCoopers LLP (PwC) were also retained in 2008 specifically to support the committee with a one-off project to review executive remuneration arrangements in light of the acquisition of HBOS, given their particular expertise in relation to the remuneration aspects of transactions. In recognition that PwC are also the auditors to the Lloyds Banking Group and to mitigate any threat to audit independence, Kepler Associates continue to be retained as the remuneration committee’s primary independent advisers, and were commissioned to provide comment on PwC’s advice.
The setting of the definitive performance targets for 2009 will be completed in time for publication prior to the Annual General Meeting. The committee will continue to engage with shareholders during this time and will share the detail of the performance targets once they are finalised.
sir victor blank J eric daniels Tim J w Tookey Chairman Group Chief Executive Group Finance Director
Disposal of businesses, net of cash disposed 50(G) – 1,476 net cash used in investing activities (35,086) (1,083)
At 31 December 2008 the Group’s activities were organised into three segments: UK Retail Banking, Insurance and Investments and Wholesale and International Banking. Services provided by UK Retail Banking encompass the provision of banking and other financial services to personal customers, private banking and mortgages. Insurance and Investments offers life assurance, pensions and savings products, general insurance and asset management services. Wholesale and International Banking provides banking and related services for major UK and multinational companies, banks and financial institutions, and small and medium-sized UK businesses. It also provides asset finance to personal and corporate customers, manages the Group’s activities in financial markets through its treasury function and provides banking and financial services in some overseas locations.
As part of its transition to Basel II on 1 January 2008, the Group has updated its capital and liquidity pricing methodology. The main difference in this approach is to allocate a greater share of certain funding costs, previously allocated to the Central group items segment, to individual divisions. To enable a meaningful period-on-period comparison, the segmental analysis for the year ended 31 December 2007 has been restated to reflect these changes.
Other segment items: Movement in value of in-force business – – (93) (93) – – – (93)
Movement in value of in-force business taken to income statement (note 9) (325) (93)
Gross non-life insurance contract liabilities are analysed by line of business as follows: £m £m
There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and: – certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws); – pursuant to the UK Listing Authority’s listing rules where directors and certain employees of the Company require the approval of the Company to deal in the Company’s shares; and – pursuant to the rules of some of the Company’s employee share plans where certain restrictions may apply while the shares are subject to the plans.
Subject to any rights or restrictions attached to any shares, on a show of hands at a general meeting of the Company every holder of shares present in person or by proxy and entitled to vote has one vote and on a poll every member present and entitled to vote has one vote for every share held. further details regarding voting at the annual general meeting can be found in the notes to the notice of the annual general meeting.
Premium arising on issue of shares under share option schemes 109 32 43 other reserves £m £m other reserves comprise: merger reserve 343 343
During the year ended 31 December 2008 the Group operated the following share based payment schemes, all of which are equity settled.
The weighted average fair value of SAYE options granted during the year was £0.61 (2007: £1.07). The values for the SAYE options have been determined using a standard Black-Scholes model.
Lloyds Banking Group Annual Report and Accounts 2008 noTES To THE ConSoLIDATED fInAnCIAL STATEmEnTS continued liquidity risK
Cash flows for undated subordinated liabilities whose terms give the Group the option to redeem at a future date are included within the table on the basis that the Group will exercise its option to redeem.
other provision movements 16 2 net charge in respect of defined benefit schemes 164 175
Revises the overall requirements for the presentation of financial statements, guidance for their structure and minimum content requirements. The revised standard requires the presentation of all nonowner changes in equity within a statement of comprehensive income.
Lloyds Banking Group Annual Report and Accounts 2008 noTES To THE PAREnT ComPAnY fInAnCIAL STATEmEnTS continued 8 related party transaCtions continued
Critical accounting estimates and judgements 111 notes to the consolidated financial statements 122 inCome statement