This Annual Report and Accounts contains forward looking statements with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the forward looking statements on page 335.
For more on our Retail division’s financial performance go to page 44 or visit www.lloydsbankinggroup.com
Commercial Banking provides lending, deposits and transaction banking services to corporate clients as well as offering expertise in capital markets (private placements, bonds and syndicated loans), financial markets (foreign exchange, interest rate management, money markets and credit) and private equity.
Highlights 2014 was a year of continued delivery for the Group, with the achievement of the key objectives set out in our 2011 strategic plan resulting in a significant transformation of the business and improvement in performance. Strategically, we are now a low risk bank, with a strong balance sheet and funding position and industry cost leadership, all of which provide competitive differentiation.
In Insurance, we have seen good momentum in our corporate pensions business where we are a market leader, serving over 11,500 employers and 1.4 million employees who have invested a total of £27 billion of assets with us. In 2014, the number of employees covered by these schemes increased by 40 per cent, principally reflecting our ongoing support for employers through the auto-enrolment process.
Most recently this has been demonstrated by the Group exceeding the minimum thresholds set in the recent stress tests conducted by the EBA and the PRA, despite the heavy weighting of the stress parameters against a UK retail and commercial banking business model such as ours.
We have seen an influx of new entrants to the market, with a variety of business models. These new entrants are likely to have expertise and experience in digital product offerings, with strong funding positions, credible challenger brands, and in some cases pre-existing customer bases and branch networks. In addition, non-banks such as technology firms and supermarkets have the potential to disrupt the banking industry.
– Customer needs: our differentiated customer focused strategy along with our comprehensive multi-channel distribution network, and in particular our evolving digital capability, mean we are well positioned to address changing customer needs.
Our net promoter score, which is the measure of customer service at key touch points and the likelihood of customers recommending us, improved in the year from 55 to 59.
Initiatives – Re-engineer and simplify processes to deliver efficiency in a digital world
Our policies and procedures support colleagues working in our relationship management and risk teams in understanding how to approach, assess and manage social, environmental and ethical risks. We are signatories to the Equator Principles, which provide a framework for determining, assessing and managing environmental and social risk in project finance transactions. We recognise the importance of climate change, biodiversity and human rights. We believe that we should avoid the negative impacts on ecosystems, communities and the environment but where impacts are unavoidable they must be appropriately minimised, mitigated or offset.
The Responsible Business Committee is chaired by Non-Executive Director Sara Weller and attended by senior leaders from every part of the business including a number of Group Executive Committee members. The Committee oversees responsible business issues as well as reaching out to external stakeholders to understand their perspective then bringing this understanding back into the Group.
How it all fits together Operating sustainably and responsibly is integral to our business model and strategy. We aim to make it a day-to-day reality by ensuring that we do business in line with our Group Values, Codes of Responsibility and Group Policies. Together with our ‘Boardroom to Branch’ governance system, these elements comprise a robust, all-encompassing Responsible Business Framework.
For many customers, helping them to open a basic bank account is the first step away from financial exclusion and into better money management. In 2014, we provided 269,000 new basic bank accounts and also helped 126,000 customers upgrade from basic to more mainstream products. You can read more about financial inclusion and financial education online.
Government We’re working directly with the UK government, members of Parliament and other stakeholders to improve ethical and quality standards in the banking industry. To help rebuild trust in banking, we must do, and be seen to be doing, the right thing – helping Britain prosper through our business activities in line with our strategy to become the best bank for customers.
We recognise the global challenge posed by these wider issues, and our responsibility to reduce the environmental impacts of our business operations. We are committed to managing our direct environmental impacts in a responsible manner and reducing our greenhouse gas emissions. We do this through our Environmental Action Plan, through which we aim to maximise the opportunity to create business value and minimise business risk in relation to our direct environmental impact.
Effective risk management, governance and control Managing risk effectively is important for any bank and is fundamental to our strategy. We are now a low cost, low risk, UK focused retail and commercial bank. This has been achieved by maintaining a conservative business model which embodies a risk culture founded on a prudent appetite for risk.
IT service availability improved on 2013 with 99.96 per cent availability across our key IT systems. We continue to invest in improving the resilience of our systems to avoid outages and minimise any customer impact.
– Continue to meet all current regulatory ratios and ensure we meet all future regulatory ratios.
We continue to build constructive relationships with our regulators in order to effectively manage the regulatory change agenda.
Stress tests During the year, the Group was subject to stress testing exercises carried out by both the European Banking Authority (EBA) and the PRA. As announced in October and December respectively, the Group exceeded the capital thresholds set for both these tests and was not required to take any action as a result of these exercises.
Basic earnings (loss) per ordinary share 1.7p (1.2)p (2.1)p (4.3)p (0.5)p
The Insurance business generated £737 million of operating cash in 2014, £55 million higher than the prior year. The growth in cash generated from existing business resulted from increased yields on assets backing the annuity business and increased returns on shareholder free assets. In Pensions and investments, cash invested in new business has reduced due to lower volumes of corporate and individual pensions and reduced commission costs, partially offset by increased reserves for auto‑enrolment business (these reserves are expected to unwind over the next few years as contribution levels increase). In Protection and retirement, cash invested in new business is greater than 2013, reflecting lower profitability of standard annuities.
Senior Independent Director Anthony Watson was appointed Senior Independent Director on 17 May 2012. The Senior Independent Director: – helps resolve shareholders’ concerns; – acts as a sounding board for the Chairman and Group Chief Executive on Board and shareholder matters; – is a conduit, as required, for the views of other Non-Executive Directors on the performance of the Chairman; – is available to shareholders if they have concerns which contact through the normal channels has failed to resolve or for which such contact is inappropriate; – attends sufficient meetings with major shareholders and financial analysts to understand issues and concerns; and
In some cases, PwC are selected over another service provider due to their detailed knowledge and understanding of the business. Any allowable non-audit services with a value above a defined fee limit require prior approval from the Audit Committee Chairman. The total amount paid to the auditor in 2014 is shown in note 11 to the financial statements on pages 212 to 214. The increase against the prior year largely relates to assurance services provided by PwC ahead of the Initial Public Offering of TSB in June 2014.
Executive Directors are eligible to participate in HMRC approved all-employee schemes which encourage share ownership.
Loss of office payments (audited) There were no payments for the loss of office made to former Directors during 2014.
Values are based on the 31 December 2014 closing price of 75.82 pence.
Financial risk management objectives and policies in relation to the use of financial instruments 107 to 170 (and in note 54 on pages 293 to 317)
RISK DECISION MAKING AND REPORTING – Taking risks which are well understood, consistent with strategy and with appropriate margin is a key driver of shareholder value.
Principal risks The Group’s principal risks are shown in the risk overview (pages 30 to 33). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk drivers are on pages 116 to 170.
– Continued progress following close and detailed liaison and engagement with Prudential Regulation Authority (PRA), Bank of England and all relevant regulatory bodies to deliver required Resolution and Ring Fencing obligations. – Extensive resources mobilised to deliver on requirements.
The Insurance Division, as a separate regulated entity, has its own Board and governance structure. The Insurance Board, assisted by a Risk Oversight Committee and Audit Committee, approves the governance, risk and control frameworks for the Insurance business and the Insurance business risk appetite, ensuring it aligns with the Group’s framework and risk appetite.
Daily settlement limits: Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each counterparty to cover the aggregate of all settlement risk arising from the Group’s market transactions on any single day.
A detailed assessment is undertaken by the specialist risk team for cases in BSU and to assist in reducing and minimising risk exposure and to also highlight potential strategic options. A range of information is required to fully appraise and understand the customer’s business, cashflow (and therefore debt serviceability) and will involve the Group, in addition to using its own internal sector experts, engaging professional advisers to perform asset valuations, strategic reviews and where applicable independent business reviews. The assessment may also involve: – critically assessing customer’s ability to successfully manage the business effectively in a distressed situation where turnaround is required; – analysis of market sector factors, i.e. products, customers, suppliers, pricing and margin issues; – performance review of operational areas that should be considered in terms of current effectiveness and efficiency and scope for improvements; – financial analysis to model plans and factor in potential sensitivities, vulnerabilities and upsides; and – determining the most appropriate corporate and capital structure suitable for the work-out strategy concerned.
Corporate real estate and other corporate – This portfolio predominantly consists of UK real estate loans together with other Corporate loans relating to real estate sectors, supported by trading activities (such as hotels, housebuilders and care homes). – Net loans and advances reduced by £5.2 billion from £8.2 billion to £3.0 billion. The book continues to reduce significantly ahead of expectations.
Insurance portfolios Investment holdings are diversified across markets and, within markets, across sectors. Holdings are diversified to reduce specific risk and the relative size of large individual exposures is monitored closely. For assets held outside unit-linked funds, investments are only permitted in countries and markets which are sufficiently regulated and liquid. Where considered appropriate, hedges are in place to reduce exposure to market risk, principally equity, interest rate risk and foreign currency.
– Reputation: The Group manages its external profile effectively. The Group will manage and mitigate any prominent negative sentiment. – Financial loss: The Group does not expect to experience cumulative fraud or operational losses above a defined level of budgeted Group income, or individual losses above a defined amount. – Management time and resources: The Group does not expect internal events that divert excessive senior management time from running the business or have extensive impact on colleague time and/or morale. – Cyber: The Group minimises the impact from cyber attacks and information breaches that result in a significant loss of customer confidence or undermine the financial stability of the Group. – Risk culture: All colleagues are responsible for risk within their individual roles. The Group sets a strong tone from the top and embraces a risk culture across the business which is aligned to its strategy, vision, values and codes of responsibility. The Group encourages an open dialogue and rapid escalation of potential threats and events.
– Operational resilience measures and recovery planning defined in the Group’s Business Continuity Management policy ensure an appropriate and consistent approach to the management of continuity risks, including potential interruptions from a range of internal and external incidents or threats including environmental and climatic issues, terrorism, cyber, economic instability, pandemic planning and operational incidents. – The Group has adopted policies and procedures to detect and prevent the use of its banking network for money laundering, bribery and activities prohibited by legal and regulatory sanctions. The Group regularly reviews and assesses these policies to keep them current, effective and consistent across markets. The Group requires mandatory training on these topics for all employees. Specifically, the Anti-money-laundering procedures include ‘know-your-customer’ requirements, transaction monitoring technologies and reporting of suspicions of money laundering to the applicable regulatory authorities and the Anti-Bribery Policy prohibits the payment, offer, acceptance or request of a bribe, including ‘ facilitation payments’ by any employee or agent and provides a confidential reporting service for anonymous reporting for suspected or actual bribery activity. The Sanctions and the Related Prohibitions Policy sets out a framework of controls for compliance with legal and regulatory sanctions.
Primary liquid assets/money market funding less than one year maturity (x) 5.8 4.2 38
The following sub analyses have been provided for unencumbered assets: Unencumbered – Readily realisable: Assets regarded by the Group to be readily realisable in the normal course of business, to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.
Unencumbered – Other realisable: Assets where there are no restrictions on their use to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, but are not readily realisable in the normal course of business in their current form.
The Group provides collateralised security financing services to its clients, providing them with cash financing or specific securities. Collateralised security financing is also used to manage the Group’s own short-term cash and collateral needs. For securities accepted as collateral the reverse repo, margin and bond borrowing mandate is credit rating driven with appropriate notional limits per rating, asset and individual bond concentration. All securities are investment grade. With regard to repo and stock lending agreements the Group only trades with regulated entities. Many factors are taken into consideration the main being, the credit worthiness of the counterpart, pricing transparency, underlying bond liquidity, central bank eligibility, credit rating, concentration and country risk. The vast majority of collateral the Group uses in repo/reverse repo and stock lending/stock borrowing transactions is investment grade Government issued, primarily UK Government debt. The majority of repo/reverse repo and stock lending/stock borrowing transactions are short-term, having a residual maturity of less than three months.
As part of the capital planning process, forecast capital positions are subjected to extensive stress analyses to determine the adequacy of the Group’s capital resources against the minimum requirements, including ICG. Under Pillar 2B the PRA uses the outputs from some of these stress analyses to inform the setting of the Group’s Capital Planning Buffer (CPB), defining a minimum level of capital over and above the minimum regulatory requirements that should be maintained in non-stressed conditions as mitigation against potential future periods of stress. The PRA requires the CPB to remain confidential between the Group and the PRA.
On 12 January 2014 the Basel Committee issued a revised Basel III leverage ratio framework that included a number of amendments to the original calculation of the exposure measure, in particular the methodologies applied in determining the exposure measures for derivatives, securities financing transactions (SFTs) and off-balance sheet items. In addition the scope of consolidation has been fully aligned to that applied to the risk-based capital framework, thereby requiring all on-balance sheet assets and off-balance sheet items of the Insurance division to be excluded from the Group’s total exposure measure and replaced by a measure of the banking group’s investment in Insurance.
In January 2015 the existing CRD IV rules on the calculation of the leverage ratio were amended to align with the European Commission’s interpretation of the revised Basel III leverage ratio framework. Although there remain some minor differences between the framework and the amended CRD IV rules, the Group does not consider these to be material and has therefore elected, in accordance with PRA guidance, to disclose on the basis of the revised Basel III leverage ratio framework, in keeping with the interim 2014 disclosures.
Held within the long-term funds – – 5,855 – 189 6,044
Other restrictions in the Non-Participating Fund: In addition to the policies which existed at the date of demutualisation, the With-Profit Fund includes policies which have been written since that date. As a result of statements made to policyholders that investment policy will usually be the same for both types of business, there is an implicit requirement to hold additional regulatory assets in respect of the business written after demutualisation. The estimated amount required to provide such support at 31 December 2014 is £147 million (2013: £156 million). Scottish Widows has obtained from the PRA permission to include the value of this support in assessing the realistic value of assets available to the With-Profit Fund. There is a further test requiring that no amounts can be transferred from the Non-Participating Fund of Scottish Widows unless there are sufficient assets within the Long-Term Fund to meet both policyholders’ reasonable expectations in light of liabilities in force at a year-end and the new business expected to be written over the following year.
Companies Act 2006 opinions In our opinion: – the information given in the Strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the information given in the Corporate governance report set out on pages 62 to 72 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.
The profit after tax attributable to other equity holders of £287 million (2013: £nil; 2012: £nil) is partly offset in reserves by a tax credit attributable to ordinary shareholders of £62 million (2013: £nil; 2012: £nil).
Other income, net of insurance claims 12,799 (1,691) (304) (2,760) 50 (43) 8,051
Total fees payable to the Company’s auditors by the Group 32.1 32.5 27.0
Derivatives designated as cash flow hedges: Interest rate swaps 559,690 1,670 3,017
Hedged forecast cash flows expected to occur: Hedged forecast cash flows affect profit or loss: 0‑1 years £m 1‑2 years £m 2‑3 years £m 3‑4 years £m 4‑5 years £m 5‑10 years £m 10‑20 years £m
Amount credited (charged) to equity: Post‑retirement defined benefit scheme remeasurements (135) 28
d The interest rate payable on this security was reset from 6.305 per cent fixed to 3‑month LIBOR plus 1.2 per cent with effect from 18 October 2012.
(3) SHARE CAPITAL AND CONTROL 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.
Limited voting ordinary shares The limited voting ordinary shares are held by the Lloyds Bank Foundations (the Foundations). The holders of the limited voting ordinary shares, who held 0.1 per cent of the total ordinary share capital at 31 December 2014, are entitled to receive copies of every circular or other document sent out by the Company to the holders of other ordinary shares. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. In the event of an offer for more than 50 per cent of the issued ordinary share capital of the
NOTE 44: OTHER RESERVES (CONTINUED) Movements in other reserves were as follows: 2014 £m 2013 £m 2012 £m
Foreign currency gains (losses) on net investment hedges (tax: £nil) 22 149 55
The trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but have chosen to waive their entitlement to the dividends on those shares as indicated: the Lloyds Banking Group Share Incentive Plan (holding at 31 December 2014: 21,158,651 shares, 31 December 2013: 16,857,069 shares, waived rights to all dividends), the Lloyds Banking Group Employee Share Ownership Trust (holding at 31 December 2014: 18,704,412 shares, 31 December 2013: 52,150,441 shares, on which it waived rights to all dividends), Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2014: 42,846 shares, 31 December 2013: 42,846 shares, waived rights to all but a nominal amount of one penny in total) and the Lloyds Banking Group Qualifying Employee Share Ownership Trust (holding at 31 December 2014: 1,398 shares, 31 December 2013: 1,398 shares, waived rights to all but a nominal amount of one penny in total).
If there is a 14 per cent increase in net lending, 25 per cent of this element will vest.
If there is an 18 per cent increase in net lending, 100 per cent of this element will vest.
Level 1 Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 predominantly comprise equity shares, treasury bills and other government securities.
Total financial liabilities carried at fair value, excluding derivatives 6,473 37,113 89 43,675
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and capital can be found on pages 107 to 170. The following additional disclosures, which provide quantitative information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.
Customers in financial difficulty receiving support under other schemes The Group measures the success of a forbearance scheme based upon the proportion of customers maintaining or improving their arrears position over the 24 months following the exit from a forbearance treatment. For temporary treatments, 90 per cent of customers who have accepted temporary interest‑only concessions and 76 per cent of customers accepting reduced payment arrangements have maintained or improved their arrears position. For permanent treatments, 80 per cent of customers who have accepted capitalisations of arrears and 84 per cent of customers who have accepted term extensions have maintained or improved their arrears position.
Any event that causes concern over future payments from the customer is likely to result in the asset being assessed for impairment and, if required, an impairment allowance recognised. If impairment is identified, the customer is immediately transferred to Business Support Unit (if not already managed there) and the lending will be treated as an impaired asset.
Less: amounts with a maturity of three months or more (10,520) (7,546) (11,417)
Lord Blackwell António Horta-Osório George Culmer Chairman Group Chief Executive Chief Financial Officer
Parent company cash flow statement £ million £ million £ million
To be published on the Group’s website by 1 July 2015 in accordance with the Capital Requirements (country-by-country) Regulations 2013.
CRD IV On 27 June 2013, the European Commission published, through the Official Journal of the European Union, its legislation for a Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), which together form the CRD IV package. Amendments published on 30 November 2013 were made to the Regulation. The package implements the Basel III reforms in addition to the inclusion of new proposals on sanctions for non-compliance with prudential rules, corporate governance and remuneration. CRD IV rules apply from 1 January 2014 onwards, with certain requirements set to be phased in.
10 Main components of capital and a reconciliation of the accounting balance sheet to the regulatory balance sheet. 155, Pillar 3 11 Flow statement of movements since the prior reporting date in regulatory capital, including changes in common equity tier 1, tier 1 and tier 2 capital. 156 12 Discuss capital planning, including a description of management’s view of the required or targeted level of capital and how this will be established.