At the heart of our success is our purpose to Help Britain Prosper and we are playing a vital role in supporting people, businesses and communities across the UK. Lord Blackwell Chairman
There is of course much more to do, but I know we will do even greater good in the year ahead.
Communities £56 million to help communities in 2018 More than 200,000 hours volunteered
#1 branch network, serving complex needs Customers continue to prefer face-to-face contact for more complex needs. We therefore remain committed to maintaining the UK’s largest branch network as part of our multi-channel proposition, while tailoring it to continue meeting these complex needs effectively. Highlights include the opening of our flagship Halifax branch in London’s Oxford Street, 16 additional routes for our mobile branch fleet, which now serves over 210 locations, the roll-out of remote advice functionality, with 270 branches now linking directly to dedicated mortgage advisers, and enhancements that have enabled branch colleagues to spend more time meeting customers’ complex needs.
Our strategic priorities Transforming ways of working of colleagues are now in co-located teams, moving from 39 locations to 6 strategic hubs
The Board participated in the transforming ways of working labs, providing them with the opportunity to see first hand the activity underway in support of changing the way we work and improving the colleague experience
The Board reviewed the results from annual surveys; Banking Standards Board (BSB) survey and cultural assessment colleague engagement survery, and agreed specific actions as a result
In 2019, we will lend up to £18 billion to businesses across the UK. During these uncertain times, it is important that our customers have financial support and expert guidance to navigate the challenges they may face. Whatever the future brings, we will continue to support UK businesses as part of our commitment to Help Britain Prosper.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 19
We are working with thought leaders to build our understanding of operating responsibly, and to help drive change across industry, in how responsible business is considered. The Centre for Responsible Business (CFRB) is a unique joint venture between Lloyds Banking Group and the University of Birmingham’s Business School. This initiative combines research with business, exploring how all businesses can work in an ever more responsible and ethical manner. The outputs of this approach will have impacts across a range of industries, benefitting the entire economy.
Sexual Orientation Percentage of colleagues who disclose they are lesbian, gay, bisexual or transgender 2.0% 1.7%
Vehicles: be a leading UK provider of low emission/green vehicle fleets
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 31
The Group drives a culture of compliance through its Data Privacy policy and control framework and has implemented robust governance to oversee compliance with GDPR, as well as enhanced staff training. During 2019 the Group will continue to drive enhancements to the maturity of our data control environment.
Sustainability The Group has been developing its sustainability strategy, to address more broadly the opportunities and threats related to climate change, and the need for the UK to transition to a sustainable, lower carbon economy. This is in line with our commitment to implement the Task Force for Climate-related Financial Disclosures’ recommendations. For risk management, addressing the potential impacts of climate change plays a key role in our approach to sustainability, and this year we have identified climate change as a top emerging risk.
Principal risks and uncertainties are reviewed and reported regularly. As part of a review of the Group’s risk categories, the secondary risk categories of Change, Data management and Operational resilience have been elevated to primary risk categories, and Strategic risk has been included as a new primary risk category, in the Group’s Risk Management Framework. These changes will be embedded during 2019 and reflected within the Group’s principal risks.
We have senior committees that ensure our focus on embedding a customer-centric culture and delivering fair outcomes across the Group. Further enhancements to our conduct risk framework continue to support this through robust and effective management of conduct risk. Together these support our vision of being the best bank for customers, enabling the delivery of a leading customer experience through effective root cause analysis and learning from customer feedback.
Underlying profit was £8,066 million, 6 per cent higher than 2017, with higher net income and lower total costs partly offset by the expected increase in the impairment charge. The underlying return on tangible equity increased to 15.5 per cent (2017: 14.0 per cent).
The Group expects an asset quality ratio of less than 30 basis points in 2019 and through the plan period reflecting continued strong asset quality and further reductions in releases and write-backs.
Restructuring costs were £879 million, with £267 million incurred in the fourth quarter, and included severance costs relating to the Group’s strategic investment plans as well as the expected costs of the integration of MBNA and Zurich’s UK workplace pensions and savings business, ring-fencing and the rationalisation of the non-branch property portfolio. The fourth quarter charge included £57 million of severance costs, making £247 million for the year. Restructuring costs are expected to reduce significantly in 2019 with ring-fencing and the integration of MBNA now substantially complete.
3 Excludes repos of £1.8 billion (1 January 2018: £2.6 billion).
5 Excludes repos of £1.8 billion (1 January 2018: £2.6 billion).
Tangible net assets per share 53.0p 51.7p 1 Adjusted to reflect the implementation of IFRS 9 and IFRS 15.
Making banking easier for people 100+ people opened bank accounts that they have been refused before
2. Anita Frew Deputy Chairman and Senior Independent Director Appointed: December 2010 (Board), May 2014 (Deputy Chairman), May 2017 (Senior Independent Director) Skills and experience: Significant board, financial and general management experience
7. Nick Prettejohn Independent Director and Chairman of Scottish Widows Group Appointed: June 2014 Skills and experience: Deep financial services experience, particularly in insurance In-depth regulatory knowledge and experience Governance experience and strong leadership qualities Significant experience in strategic planning and implementation Nick has served as Chief Executive of Lloyd’s of London, Prudential UK and Europe and Chairman of Brit Insurance. He is a former NonExecutive Director of the Prudential Regulation Authority and of Legal & General Group Plc as well as Chairman of the Financial Services Practitioner Panel and the Financial Conduct Authority’s Financial Advice Working Group. He was previously a Member of the BBC Trust and Chairman of the Britten-Pears Foundation. External appointments: Chairman of Reach plc (formerly Trinity Mirror plc) and of their Nomination Committee. He is also Chairman of the Royal Northern College of Music and a member of the Board of Opera Ventures.
Juan joined the Group as Chief Risk Officer in January 2011 and joined the Board as an Executive Director in November 2013. He became Chief Operating Officer in September 2017. Read his full biography on page 53.
Progress in providing a ‘single customer view’ of Group products and supporting Open Banking developments
The Board recognises the need to be adaptable and flexible to respond to changing circumstances and emerging business priorities, whilst ensuring the continuing monitoring and oversight of core issues.
Further streamlining of meeting papers and agendas to enable more expansive discussion; The increase in the number of Directors attending aligned Board meetings may require different disciplines in the conduct of meetings; Large attendance of Committee meetings could inhibit debate.
1 At the time of the 2018 review Egon Zehnder provided certain Board and senior management level services from time to time, including in respect of succession planning as detailed on page 67, otherwise Egon Zehnder has no other connection with the Group.
Major change management; finance; accounting and data experience to be considered for future recruitment of Directors.
The Board Risk Committee is responsible for the review of the risk culture of the Group, setting the tone from the top in respect of risk management. Further information can be found on pages 74 to 77.
Lloyds Banking Group Annual Report and Accounts 2018 67 Strateg ic rep ort
Q: What are your first impressions of how the Board functions and the Group’s governance framework?
The Committee assisted the Board in performing its assessment of the viability of the Company and the Group with input from management. The viability assessment, which was based on the Group’s operating, capital and funding plans, included consideration of the principal and emerging risks which could impact the performance of the Group, and the liquidity and capital projections over the period.
Speak Up (the Group’s whistleblowing service) The Committee received and considered reports from management on the Group’s whistleblowing arrangements. The Committee reviewed the reports to ensure there are arrangements in place which colleagues can use in confidence to report concerns about possible improprieties in financial reporting or other matters, and that there is proportionate and independent investigation of such matters or appropriate follow up. Of the reports submitted, the Committee was satisfied with the actions which had been taken.
During the year the Committee has increased consideration of macroeconomic risks impacting the Group’s central economics forecast incorporated into the Group’s Four-Year Operating Plan. The Committee has focused on economic and geo-political risks such as EU Exit and wider global economic risks, including US monetary policy, the impact of the US currency on emerging markets, trade wars, UK property markets and UK productivity.
In d iv id ua l p er fo rm an ce d et er m in es 9 aw ar d
The Group has standardised the majority of its customer journeys with little progress to optimise.
Key considerations factored into assessing performance and overall rating include, but are not limited to, the following: The Group Chief Executive’s performance assessment for 2018 reflected the Group’s objectives, assessed as Strong.
Notes: J E Daniels served as GCE until 28 February 2011; António Horta-Osório was appointed GCE from 1 March 2011. António Horta-Osório declined to take a bonus in 2011.
The 2019 scorecard will provide a balanced view across financial, operational and strategic measures. This will be equally weighted between financial, customer and conduct measures. Each measure will be assigned a target assessed against a rating scale of 1 to 5.
The 2018 base salary for the colleagues identified at P25, P50 and P75 are as follows: £21,560, £30,364, £45,230.
An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective sizing methodologies.
Risk appetite We define our risk appetite as ‘the amount and type of risk that the Group is prepared to seek, accept or tolerate’ in delivering our Group strategy.
Rigorous stress testing exercises are carried out to assess the impact of a range of adverse scenarios with different probabilities and severities to inform strategic planning.
Basis of presentation For the Group and Retail lending portfolios, the analyses which follow have been presented on two bases; the ‘statutory basis’ which is consistent with the presentation in the Group’s accounts and the ‘underlying basis’ which is used for internal management purposes. Reconciliations between the two bases have been provided. For Commercial Banking there is no difference between the statutory and the underlying basis.
Buy-to-let 51,322 52,834 1 The balances include the impact of HBOS related acquisition adjustments.
The stock of repossessions decreased to 763 cases at 31 December 2018 compared to 777 cases at 31 December 2017.
Stage 3 gross charges included the impact of IFRS 9 model refinements and were broadly flat year on year. Stage 3 net charges increased, driven by lower impairment releases and write-backs.
Monitoring Material risks are managed through the relevant divisional level committees, with review and escalation through Group level committees where appropriate, including the escalation of any material regulatory breaches or material legal incidents.
Although the Group is not currently classified as a global systemically important institution (G-SII) under the Capital Requirements Directive, it has been classified as an ‘other’ systemically important institution (O-SII) by the PRA. The O-SII buffer is set to zero in the UK.
The systemic risk buffer (SRB) will come into force for UK ring-fenced banks during 2019, with the PRA expected to announce both the SRB rate and date of application for the Group’s Ring-Fenced Bank (RFB) sub-group in the first half of 2019. The size of buffer applied to the RFB sub-group will be dependent upon its total assets. Although the SRB will apply to the RFB sub-group, the PRA has indicated that they will include in the Group’s PRA Buffer an amount equivalent to the RFB sub-group’s SRB. As a percentage of risk-weighted assets, the amount included in the Group's PRA Buffer is expected to be lower reflecting the risk-weighted assets of the Group that are not held in the RFB sub-group and for which the SRB will not apply.
the capital conservation buffer (CCB) requirement of 1.875 per cent of risk-weighted assets, increasing to 2.5 per cent of risk-weighted assets from 1 January 2019.
the Group’s PRA stress buffer, which the PRA sets after taking account of the results of the PRA stress tests and other information, as well as outputs from the Group’s internal stress tests. The PRA requires the PRA Buffer itself to remain confidential between the Group and the PRA.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At 31 December 2018 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £8.5 billion. Substantially all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009.
The accrual for foreseeable dividends reflects the recommended final ordinary dividend of 2.14 pence per share.
Derivative assets and liabilities are held by the Group for three main purposes; to provide risk management solutions for clients, to manage portfolio risks arising from client business and to manage and hedge the Group’s own risks. Insurance business assets and liabilities relate to policyholder funds, as well as shareholder invested assets, including annuity funds. The Group recognises the value of in-force business in respect of Insurance’s long-term life assurance contracts as an asset in the balance sheet (see note 24, page 210).
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 165
With respect to the Strategic Report and Directors’ Report, we also considered whether the disclosures required by the UK Companies Act 2006 have been included.
– The directors’ explanation on page 80 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Share of other comprehensive income of associates and joint ventures 8 – –
Items that may subsequently be reclassified to profit or loss: Movements in revaluation reserve in respect of debt securities held at fair value through other comprehensive income: Change in fair value (37)
Profit for the year – – 3,457 3,457 – 90 3,547
IFRS 15 has replaced IAS 18 Revenue and IAS 11 Construction Contracts. The core principle of IFRS 15 is that revenue reflects the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled. The recognition of such revenue is in accordance with five steps to: identify the contract; identify the performance obligations; determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when the performance obligations are satisfied.
(1) Financial instruments measured at amortised cost Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Where the contractual cash flows introduce exposure to risks or volatility unrelated to a basic lending arrangement such as changes in equity prices or commodity prices, the payments do not comprise solely principal and interest. Financial assets measured at amortised cost are predominantly loans and advances to customers and banks together with certain debt securities. Loans and advances are initially recognised when cash is advanced to the borrower at fair value inclusive of transaction costs. Interest income is accounted for using the effective interest method (see (D) above).
Total operating expenses 11,729 12,696 12,277 1 In 2016, regulatory provisions of £61 million were charged against income.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 199
Methodology changes Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; either as changes to the model inputs (risk parameters) or to the underlying assumptions.
Expected credit loss in respect of financial assets at fair value through other comprehensive income (memorandum item) 1 – – – 1 1 Reflects the sale of the Group's Irish mortgage portfolio.
Expenditure on investment properties (see below) 209 – – – 209
The Group has not voluntarily offered to repurchase assets from any of its public securitisation programmes during 2018 (2017: none).
Key changes in assumptions A detailed review of the Group’s assumptions in 2018 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£135 million decrease) .
Assumptions have been flexed on the basis used to calculate the value of in‑force business and the realistic and statutory reserving bases. 1 This sensitivity shows the impact of reducing mortality and morbidity rates on non‑annuity business to 95 per cent of the expected rate.
Note 36: Deferred tax continued Movements in deferred tax liabilities and assets (before taking into consideration the offsetting of balances within the same taxing jurisdiction) can be summarised as follows: Deferred tax assets Tax losses £m
2 During 2017 the Group derecognised, on redemption, financial liabilities on which cumulative fair value movements relating to own credit of £3 million net of tax, had been recognised directly in retained profits (2018: £nil).
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2018 237
The Group considers itself the sponsor of a structured entity where it is primarily involved in the design and establishment of the structured entity; and further where the Group transfers assets to the structured entity; market products associated with the structured entity in its own name and/or provide guarantees regarding the structured entity’s performance.
(i) Uncollateralised derivative valuation adjustments, excluding monoline counterparties The following table summarises the movement on this valuation adjustment account during 2017 and 2018: £m 2017 £m
Note 49: Financial instruments continued A one per cent rise in the CDS spread would lead to an increase in the DVA of £67 million to £146 million.
Loans and advances to customers: impaired 4,828 4,809 – – 4,809
4 Includes assets within the Group’s unit‑linked funds for which credit risk is borne by the policyholders and assets within the Group’s With‑Profits funds for which credit risk is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.
Below standard, but not credit‑impaired – – 4 – – 4
Below standard, but not credit‑impaired – 36 147 64 – 247
Deposits from banks Included in deposits from banks are balances arising from repurchase transactions of £21,170 million (2017: £23,175 million); the fair value of the collateral provided under these agreements at 31 December 2018 was £19,615 million (2017: £23,082 million).
Parent company cash flow statement for the year ended 31 December
Financial assets: Cash and cash equivalents – – – 57 57
Lex Autolease (VC) Ltd 1 Lex Autolease Carselect Ltd 1 Lex Autolease Ltd 1 Lex Vehicle Finance 2 Ltd (In liquidation) 13 Lex Vehicle Finance 3 Ltd (In liquidation) 13 Lex Vehicle Leasing (Holdings) Ltd 2 i ii x
Aceso Healthcare Group Holdings Ltd 89% Sherwood House, Cartwright Way, Forest Business Park, Brandon Hill, Coalville, LE67 1UB ii & Addo Food Group (Holdings) Limited 76.85% Queens Drive, Nottingham, NG2 1LU i & Addison Social Housing Ltd 20% 35 Great St Helen's, London, EC3A 6AP Adler & Allan Group Ltd 89% 80 Station Parade, Harrogate, HG1 1HQ i & Aghoco 1472 Limited 89.25% 58 Evans Road, Liverpool, L24 9PB i & Aghoco 1476 Limited 89.25% 100-102 King Street, Knutsford, Cheshire, WA16 6HQ i & Airline Services And Components Group Ltd 94.45% Canberra House, Robeson Way, Sharston Green Business Park, Manchester, M22 4SX i & Allan Water Homes (Heartlands) Limited 50% 24B Kenilworth Road, Bridge Of Allan, Stirling, Scotland, FK9 4DU i Angus International Safety Group Ltd 88.9% Station Road, High Bentham, Near Lancaster, LA2 7NA i & Applied Composites Group Ltd 85.76% Victoria Works, Thrumpton Lane, Retford, DN22 6HH xx & Aqualisa Holdings (International) Ltd 89.25% Westerham Trade Centre, The Flyers Way, Westerham, TN16 1DE xx & 86.45% xxi Aspire Oil Services Ltd 28.4% Bishop's Court, 29 Albyn Place, Aberdeen, AB10 1YL, United Kingdom & Asset Solutions Group Ltd 89.25% Osprey House Crayfields Business Park, New Mills Road, Orpington, Kent, BR5 3QJ, United Kingdom xx & Australand Apartments No.6 Pty Ltd 50% Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia Australand Residential Investments Pty Ltd 50% Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia Australand Residential Trust 50% Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia Babble Cloud Holdings Limited 89.25% Bury House, 31 Bury Street, London, EC3A 5AR i & Bacchus Newco Ltd 89.25% Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, Wigan, WN4 0BZ,
Port Coogee Unincorporated JV 50% Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia * Potter Topco Limited 89.25% Lakelovers House, Victoria Street, Windermere, Cumbria, United Kingdom, LA23 1AB i & Prestbury 1 Limited Partnership n/a Cavendish House, 18 Cavendish Square, London, W1G 0PJ * & Project Belize Ltd 89.25% Sawley Marina, Long Eaton, Nottinghamshire, NG10 3AE i & Project Chicago Newco Ltd 89.25% Church Lane, Church Lane, Norton, Worcester, WR5 2PR i & Project Polka Bidco Limited 89.25% Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham, DL3 0UR, United Kingdom ii & Project Sketch Ltd 88.30% 11 Vantage Way, Erdington, Birmingham, B24 9GZ i & Quantum (Flimwell) Limited 50% Kings Parade, Lower Coombe Street, Croydon, CR0 1AA i Ramco Acquisition Ltd 89.45% Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU xxii & 89.45% xxvii