Customer relationships are key to our strategy and we specifically measure customer satisfaction and complaint levels. We also track our performance against the targets of our Helping Britain Prosper Plan, about which you can read more on page 13.
Executive management are also eligible to participate in a long-term incentive plan (LTIP), which encourages delivery on long-term financial objectives, including total shareholder return, and the Group’s strategic objectives of becoming the best bank for customers and helping Britain prosper.
Doing business responsibly starts with our colleagues. We must continue to build a culture in which they are empowered, inspired and rewarded to do the right thing for customers. Our three Group Values: putting customers first, keeping it simple and making a difference together, provide inspiration and guidance. To help us live up to these values, as individuals, as a business or as suppliers, we operate in line with our Codes of Responsibility.
Help for homebuyers Buying a property is the biggest financial commitment many people ever make. We want to help more people get onto and move up the housing ladder. We made a public target to provide 1 in 4 of all new first-time buyers’ mortgage loans completed in the UK in 2015, and we have fulfilled that commitment. Across all our customer brands, our gross new mortgage lending totalled £39 billion in 2015, and our support for home-buyers represented over 60 per cent of this lending.
Impairments Through effective risk management our impairment charge has fallen to £568 million, while the impairment ratio fell to 0.14 per cent. Reduction in run-off assets and the sustained improvement in asset quality across the Group reflects our robust risk management framework which is ingrained across the entire business, as detailed on page 29.
Examples: – Increased regulatory oversight and Prudential regulatory requirements. – Increased legislative requirements, such as ring-fencing legislation.
Total loans and advances to customers were £455 billion compared with £456 billion (excluding TSB) at 31 December 2014. Mortgage lending increased by 1 per cent, slightly below market growth of 2.5 per cent, reflecting our focus on protecting margin in a highly competitive low growth environment. UK loan growth in Consumer Finance was strong at 17 per cent and SME lending growth was 5 per cent, both outperforming the market. This growth was offset by further reductions in run-off and other lending portfolios which are closed to new business.
Financial performance – Underlying profit increased 9 per cent to £3,514 million. – Net interest income increased 4 per cent. Margin has increased 11 basis points to 2.40 per cent, driven by improved deposit margin and mix, more than offsetting reduced lending rates. – Other income down 7 per cent driven by current account transaction related income and regulatory changes, in particular, impacting the Wealth business. – Total costs increased 2 per cent to £4,573 million, reflecting continued business investment and simplification to improve customer experiences and enable staff numbers to be reduced by 7 per cent in 2015. – Impairment reduced 28 per cent to £432 million, reflecting continued low risk underwriting discipline, strong portfolio management and a favourable credit environment. – Return on risk-weighted assets increased 70 basis points driven by the 9 per cent increase to underlying profit and a 3 per cent decrease in risk-weighted assets.
This report sets out our approach to governance in practice, the work of the Board during 2015 and includes reports from the Nomination & Governance Committee, the newly established Responsible Business Committee, the Audit Committee and the Board Risk Committee. Information about the work of the Remuneration Committee is included in the Directors’ remuneration report on pages 82 to 106.
KEY ROLES AND RESPONSIBILITIES Chairman – Lord Blackwell – Leads the Board – Promotes the highest standards of corporate governance – Sets the Board’s agenda – Builds an effective and complementary Board – Leads Board succession planning – Ensures effective communication with shareholders
Dyfrig John, an independent Non-Executive Director, has notified the Board that he does not intend to seek re-election at the 2016 AGM. Mr John is currently a member of the Risk and Remuneration Committees.
Also, the Board’s approach to succession planning, led by the Chairman, helps ensure the Board is well placed to address future technology and market risks across the full range of business areas in which the Group operates. Read more on succession planning and Board appointments on page 73.
STATEMENT OF COMPLIANCE UK Corporate Governance Code The UK Corporate Governance Code 2014 (Code) applied to the 2015 financial year. The Group confirms that it applied the main principles and complied with all provisions of the Code throughout the year. The Code is publicly available at www.frc.org.uk
Diversity policy The Board places great emphasis on ensuring that its membership reflects diversity in the broadest sense. For information on the diversity policy, please refer to page 66.
– The Committee continued to challenge the assumptions made by management to determine the provision for PPI redress and administration costs. It also reviewed management’s assessment of (i) the scope of the reviews required by the regulator; (ii) claims management company activity; and (iii) the potential impact of a consultation paper by the Financial Conduct Authority on setting a deadline by which consumers would need to make their PPI complaints and on the potential impact of Plevin, all of which have significant impact on redress and administration costs. – The Committee oversaw continued use of sensitivities reflecting the uncertainty that remains around the ultimate cost of PPI. – Group Audit has reviewed the process used by management to calculate the PPI provision and has provided assurance to the Committee that the process uses reasonable, consistent and supportable assumptions and inputs. – The Committee concluded that the processes followed by management in determining the provision for PPI redress continued to be appropriate and that the provisions and the Group’s external disclosures were appropriate. – The disclosures relating to PPI are set out in note 39: ‘Other provisions’ on page 234 of the financial statements.
– The Committee challenged the level of provisions made and the assumptions used to calculate the impairment provisions held by the Group. – Group Audit has assessed the effectiveness of impairment governance processes and reported their findings to the Committee. – The Committee was satisfied that the impairment provisions were appropriate. The disclosures relating to impairment provisions are set out in note 53: ‘Financial risk management’ on page 265 of the financial statements.
As part of this review, certain risks were identified which required further detailed consideration. Set out below is a summary of these risks, with an outline of the material factors considered by the Committee, and the conclusions which were ultimately reached.
In reviewing the material lending portfolios, consideration was given to the quality and size of the lending books, with additional review of the quality of new lending, potential levels of impairments and overall levels of sector concentration. The performance of these portfolios in ‘stressed’ situations was also considered, in order to determine their resilience in a wide range of adverse conditions.
Low risk bank Considerable time was devoted to reviewing progress with the Group’s stated aim of operating as a simple, low risk, customer focused bank, generating stable and sustainable earnings.
Remuneration policy table for Chairman and Non-Executive Directors The table below sets out the remuneration policy that has been applied to Non-Executive Directors (NEDs) from the date of the AGM in 2014.
– The resilience of our capital position was demonstrated again in 2015 when we comfortably exceeded the threshold for the latest PRA stress test. – Building the best team – employee engagement up 11 points and best bank for customers index up 6 points highlighting increased customer focus in the business. – Delivering a consistent and relentless approach under the Group conduct strategy to ensure we deliver customer needs with an open and transparent culture.
4 2014 taxable benefits are made up of car allowance of £3,136, private medical benefit of £608, and transportation of £6,693.
3 The Board will continue to review its risk appetite and to the extent that this results in changes to the acceptable level of uphold, consideration will be given to bringing the metric in line with revised appetite. The metric will be no easier to achieve.
Principal risks and uncertainties Funding and liquidity 32 and 153 to 159 Capital position 160 to 165
Going concern The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the Directors have considered a number of key dependencies which are set out in the risk management section under principal risks and uncertainties: funding and liquidity on page 32 and pages 153 to 159 and capital position on pages 160 to 165 and additionally have considered projections for the Group’s capital and funding position. Accordingly, the Directors conclude that it is appropriate to continue to adopt the going concern basis in preparing the accounts over the next 12 months.
Malcolm Wood Company Secretary 24 February 2016 Lloyds Banking Group plc Registered in Scotland Company number SC95000
The review and challenge of the detailed stress forecasts, the key assumptions behind these, and the methodology used to translate the economic assumptions into stressed outputs are finalised by the divisional Finance Director’s, appropriate Risk Director’s and Managing Director’s sign-off. The outputs are then presented to GFRC, Group Risk Committee/ Group Executive Committee and Board Risk Committee for Group-level executive review and challenge, before being approved by the Board.
Impairment charge as a % of average advances1 0.01% 0.08% (7)bps 1 In respect of loans and advances to customers.
Unimpaired forborne loans and advances were £9 million at 31 December 2015 (31 December 2014: £86 million).
Monitoring GALCO and the GMRC regularly review high level market risk exposure, as part of the wider risk management framework. They also make recommendations to the Group Chief Executive concerning overall market risk appetite and Group Market Risk Policy. Exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. Levels of exposures compared to approved limits and triggers are monitored by Risk Division and where appropriate, escalation procedures are in place.
Further stresses that show the effect of reasonably possible changes in key assumptions, including the risk-free rate, equity investment volatility, widening of credit default spreads on corporate bonds and an increase in illiquidity premia, as applied to profit before tax are set out in note 34.
Mitigation Equity and credit spread risks are inherent within Insurance products and are closely monitored to ensure they remain within risk appetite. A hedging strategy is in place to reduce exposure from the with-profit funds.
Exposures A capital risk exposure arises when the Group has insufficient capital resources to support its strategic objectives and plans, and to meet external stakeholder requirements and expectations. This could arise due to a depletion of the Group’s capital resources as a result of the crystallisation of any of the risks to which it is exposed. Alternatively a shortage of capital could arise from an increase in the amount of capital that is needed to be held. The Group’s capital management approach is focused on maintaining sufficient capital resources to prevent such exposures while optimising value for shareholders.
Additional measures to manage the Group’s capital position include seeking to optimise the generation of capital demand within the Group’s businesses to strike an appropriate balance of capital held within the Group’s Insurance and banking subsidiaries and through improving the quality of its capital through liability management exercises.
3 Differences may arise between transitional and fully loaded threshold risk-weighted assets where deferred tax assets reliant on future profitability and arising from temporary timing differences and significant investments exceed the fully loaded threshold limit, resulting in an increase in amounts deducted from CET1 capital rather than being risk-weighted. At 31 December 2014 the fully loaded threshold was not exceeded and therefore no further adjustment was applied to the transitional threshold risk-weighted assets.
2 Deconsolidation adjustments predominantly reflect the deconsolidation of assets related to Group subsidiaries that fall outside the scope of the Group’s regulatory consolidation (primarily the Group’s insurance entities).
Materiality Overall Group materiality: £300 million which represents 5 per cent of the 3 year average of adjusted profit before tax. Profit was adjusted to remove the effect of certain items which were considered to have a disproportionate impact.
For a sample of individually impaired loans we understood the latest developments at the borrower and the basis of measuring the impairment provisions and considered whether key judgments were appropriate given the borrowers’ circumstances. We also re-performed management’s impairment calculation. In addition, we tested key inputs to the impairment calculation including the expected future cash flows and valuation of collateral held, and challenged management to demonstrate that the valuations were up to date, consistent with the strategy being followed in respect of the particular borrower and appropriate for the purpose. We further challenged management on the value of the provisions held by comparing the gains or losses crystallised when impaired loans have been sold. This provided evidence that provisions held were appropriate. From the testing performed we determined that sufficient specific impairment provisions had been made in respect of incurred losses in the Commercial Banking loan portfolios.
Based on the results of our audit work we concluded that the data and assumptions used by management were reasonable.
These are highly judgemental and complex calculations dependent on market data, and models developed by management. For CVA and DVA, the adjustments are sensitive to factors such as the value of the uncollateralised derivative financial instruments, their expected future market volatility and credit risks. For FVA, the adjustment is sensitive to funding rates observed in market transactions which are difficult to isolate from other elements of pricing.
The disposal of the entire shareholding in TSB Banking Group plc had a material impact on the financial statements.
Liabilities arising from insurance contracts and participating investment contracts 33 80,294 86,918
Individual assessment In respect of individually significant financial assets in the Group’s commercial lending portfolios, assets are reviewed on a regular basis and those showing potential or actual vulnerability are placed on a watchlist where greater monitoring is undertaken and any adverse or potentially adverse impact on ability to repay is used in assessing whether an asset should be transferred to a dedicated Business Support Unit. Specific examples of trigger events that could lead to the initial recognition of impairment allowances against lending to corporate borrowers (or the recognition of additional impairment allowances) include (i) trading losses, loss of business or major customer of a borrower; (ii) material breaches of the terms and conditions of a loan facility, including non-payment of interest or principal, or a fall in the value of security such that it is no longer considered adequate; (iii) disappearance of an active market because of financial difficulties; or (iv) restructuring a facility with preferential terms to aid recovery of the lending (such as a debt for equity swap).
Following the disposal of TSB in 2015, the Group’s activities are organised into four financial reporting segments: Retail; Commercial Banking; Consumer Finance and Insurance. The results of TSB up to the point of disposal are included in Other.
Total underlying income, net of insurance claims 8,291 4,436 2,654 1,594 467 17,442
Loans and advances to banks 0.42 0.52 0.45 397 406 457
For the calculation of diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares that arise in respect of share options and awards granted to employees. The number of shares that could have been acquired at the average annual share price of the Company’s shares based on the monetary value of the subscription rights attached to outstanding share options and awards is determined. This is deducted from the number of shares issuable under such options and awards to leave a residual bonus amount of shares which are added to the weighted-average number of ordinary shares in issue, but no adjustment is made to the profit attributable to equity shareholders.
The principal amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. Further details are provided in note 53 Credit risk.
NOTE 19: SECURITISATIONS AND COVERED BONDS Securitisation programmes Loans and advances to customers and debt securities classified as loans and receivables include loans securitised under the Group’s securitisation programmes, the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. As the structured entities are funded by the issue of debt on terms whereby the majority of the risks and rewards of the portfolio are retained by the subsidiary, the structured entities are consolidated fully and all of these loans are retained on the Group’s balance sheet, with the related notes in issue included within debt securities in issue.
Life insurance – The policyholder is insured against death or permanent disability, usually for predetermined amounts. Such business includes whole of life and term assurance and long-term creditor policies.
Loans and receivables: Loans and advances to customers1 58,090 7,763 75,970 11,908 1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £29,303 million (31 December 2014: £38,149 million).
At 31 December 2015 the aggregate notional principal of interest rate swaps designated as fair value hedges was £121,063 million (2014: £115,394 million) with a net fair value asset of £848 million (2014: asset of £1,511 million) (note 16). The losses on the hedging instruments were £618 million (2014: losses of £2,866 million). The gains on the hedged items attributable to the hedged risk were £511 million (2014: gains of £2,720 million).
The Group has an established IFRS 9 programme to ensure a high quality implementation in compliance with the standard and regulatory guidance. The programme involves Finance and Risk functions across the Group with Divisional and Group steering committees providing oversight. The key responsibilities of the programme include defining IFRS 9 methodology and accounting policy, identifying data and system requirements, and establishing an appropriate operating model and governance framework. The impairment workstreams have developed methodologies for many of the IFRS 9 requirements, although additional validation of these decisions will be on-going to reflect the uncertainty around regulatory and audit expectations. Some risk model build has started and detailed plans, including resource needs, are in place. We expect the majority of model build to be completed in 2016 to allow robust testing and the development of management information to take place in 2017.
29 Provide analysis of the bank’s counterparty credit risk that arises from its derivatives transactions. 129, 271 30 Discuss credit risk mitigation, including collateral held for all sources of credit risk. 122-124
UK Growth Fund 62% HBOS UK & FIXED INTEREST INVESTMENT FUNDS ICVC ii