Since we launched the Plan in 2014 we have made strong progress. In 2017, we achieved 21 out of 22 targets to help people, businesses and communities. Find out more about our Plan on page 20.
The priorities identified by the Board were subsequently developed into detailed strategic plans with measurable operating and financial metrics and targets which support our strategic aspirations for the next three years and beyond.
Leading customer experience Driving stronger customer relationships through best-in-class propositions while continuing to provide our customers with brilliant servicing and a seamless experience across all channels.
Given 260,000 hours of colleague volunteering to help good causes £58 million given to help communities, including more than £20 million given to our independent charitable Foundations
Through our partnership with Mental Health UK, we’re promoting awareness of the link between mental health and money problems. This year we exceeded our target and raised £4.8 million thanks to the efforts of our colleagues and customers. This fundraising enabled Mental Health UK to launch Mental Health and Money Advice – the UK’s first service dedicated to helping people understand, manage and improve their financial and mental health.
Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2017 Annual Responsible Business Reporting. Deloitte’s 2017 assurance statement and the 2017 Reporting Criteria are available online at lloydsbankinggroup.com/RBdownloads
Partners As a direct and indirect economic contributor to the UK economy, we value our relationships with external stakeholders and partners, including suppliers, government bodies and legislators.
In September, a group of 62 colleagues completed the Fourtitude Challenge and raised over £317,000 for our charity partner Mental Health UK. Our ‘Fourtituders’ tackled a mental agility challenge, hiked up the highest peak in their home nation, cycled 100 miles through the Peak District and completed a half marathon. An additional 250 colleagues took part as day participants and Mental Health UK’s Chief Executive, Brian Dow, also participated, running the half marathon.
Direct and indirect economic contribution We make significant direct and indirect contributions to the economy. We employ approximately 68,000 colleagues (full time equivalent) and are helping to create additional jobs and bring talented people into our business through our Graduate and Apprenticeship schemes. We’ve created more than 5,500 apprenticeships since 2012. In 2017, 38 per cent of our new apprenticeships were offered to external candidates.
We will address a number of these and will disclose further information on our work in this important area.
Following the acquisition the combined business is now the largest prime credit card issuer in the UK.
Income increased by 3 per cent to £4,847 million with broad based franchise growth.
Delivering sustainable growth Announced the acquisition of Zurich’s UK workplace pensions and savings business, which has customer funds of £21 billion and c.595,000 customers. The acquisition will enhance Scottish Widows’ current offering, giving a strong platform on which to develop the next stage of its strategy in financial planning and retirement.
Helping Britain prosper by funding £670 million of long duration loans in the year to finance affordable housing, infrastructure and commercial real estate projects whilst supporting a growing annuitant portfolio.
Risks are identified, managed and mitigated using our comprehensive Risk Management Framework (see below), and our well articulated risk appetite provides a clear framework for effective decision making. The principal risks we face, which could significantly impact the delivery of our strategy, are discussed on pages 34–37.
Setting risk appetite and strategy. Approval of the Risk Management Framework and Group-wide risk principles
António previously worked for Citibank, Goldman Sachs and held various senior management positions at Grupo Santander before becoming its Executive Vice President and member of the
Board meeting Board meetings have certain standing items, such as a report from the Group Chief Executive and Chief Financial Officer on Group performance, reports from Committee Chairmen and updates from GEC members.
Lloyds Banking Group Annual Report and Accounts 2017 65 Risk m anag em ent Financial statem ents O
The Committee recognises the risks associated with an extensive discretionary and regulatory change agenda. Assessments have been performed to establish achievability of its plans whilst new metrics will be introduced for ongoing risk monitoring and management.
At its meetings, the RBC oversaw a wide range of responsible business activities, which included our substantial investments to provide opportunities for those starting out, whether as first time home buyers, small business start-ups, social entrepreneurs or apprentices.
The planning process is also underpinned by a robust capital and funding stress testing framework. This framework allows the Group to assess compliance of the operating plan with the Group’s risk appetite. The scenarios used for stress testing are designed to be severe but plausible, and take account of the availability and likely effectiveness of mitigating actions that could be taken by management to avoid or reduce the impact or occurrence of the underlying risks. In considering the likely effectiveness of such actions, the conclusions of the Board’s regular monitoring and review of risk and internal control systems, as discussed on page 67, is taken into account. Further information on stress testing and reverse stress testing is provided on page 111.
The approach to determining individual Group Performance Share awards for Executive Directors is consistent with other colleagues. The Committee determined that awards of between 77 per cent and 80 per cent of maximum should be made to the Executive Directors. These awards reflect individual performance assessed on the basis of whole job contribution, both what was achieved and how it was delivered. The average annual Group Performance Share award for colleagues increased by 9.3 per cent relative to 2016, which compares favourably to the average increase in individual awards for Executive Directors of 4 per cent, excluding the Group Chief Executive. The award for the Group Chief Executive increased by 8.4 per cent relative to 2016, reflecting the increase in the base salary against which the award level is determined. The 2017 award is the same percentage of salary as 2016.
The regulatory bodies (FCA and PRA) are concerned about the Group’s approach to regulatory matters.
The Group has not managed to improve its operational and strategic processes through simplification initiatives and delivered below target savings.
The individual GPS awards for Executive Directors are determined in the same way as for colleagues across the Group, based on individual performance and the level of GPS outcome determined by the Committee following consideration of the factors set out on pages 89–90. Individual performance is assessed on the basis of ‘whole job’ contribution, both ‘what’ has been achieved against BSC objectives, role requirements and personal objectives and ‘how’ it has been delivered. Judgement is applied in reaching the overall assessment. Awards are approved by the Committee, which has discretion to adjust outcomes for any reason.
Mercer (part of the MMC group of companies) is the appointed advisor to the Remuneration Committee. Mercer is a founding member and signatory of the Code of Conduct for Remuneration Consultants. For more detail, please refer to the website www.remunerationconsultantsgroup.com. Mercer was appointed by the Committee in 2016 following a competitive tender process and was retained during the year. The Committee is of the view that Mercer provides independent remuneration advice to the Committee and does not have any connections with the Group that may impair its independence, and, other than advice on remuneration, no other services were provided to the Company. The broader Mercer company provides unrelated advice on accounting.
Risk culture The Board ensures that senior management implements risk policies and risk appetite that either limit or, where appropriate, prohibit activities, relationships and situations that could be detrimental to the Group’s risk profile.
The Group’s strategy operates in tandem with the Group risk appetite and business planning is undertaken with a view to meeting the requirements of the Group risk appetite. Performance is optimised by allowing business units to operate within approved risk appetite and limits.
Group risk appetite includes the following areas: Credit – the Group has a conservative and well balanced credit portfolio through the economic cycle, generating an appropriate return on equity, in line with the Group’s target return on equity in aggregate.
For existing interest only mortgages, a contact strategy is in place throughout the term of the mortgage to ensure that customers are aware of their obligations to repay the principal upon maturity of the loan.
Mitigation The Group has a capital management framework including policies and procedures that are designed to ensure that it operates within its risk appetite, uses its capital resources efficiently and continues to comply with regulatory requirements.
Target capital ratios The Board’s view of the level of CET1 capital required is c.13 per cent plus a management buffer of around 1 per cent.
Risk-weighted assets as at 31 December 2016 147,665 18,956 166,621 9,623 3,147 25,292 204,683
Market risk, risk-weighted assets reduced by £0.1 billion largely due to a decrease in interest rate risk exposure, offset by an increase in the VaR multiplier, an increase in exposure to corporate bonds and refinements to internal models.
The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives adjustments, reduced by £2.1 billion during the year, primarily driven by market movements and a reduction in position levels.
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 2017 Basel G-SIBs annual exercise will be disclosed in April 2018 and the results are expected to be made available by the Basel Committee later this year.
Exposures There are over 300 models in the Group performing a variety of functions including: – capital calculation; – credit decisioning, including fraud; – pricing models; – impairment calculation; – stress testing and forecasting; and – market risk measurement.
The above ensures models, including those involved in regulatory capital calculation, are developed consistently and are of sufficient quality to support business decisions and meet regulatory requirements.
Given the number and volume of products sold by the Group historically, and the continued regulatory and public focus on the banking industry, there is a continuing risk that new conduct issues will emerge. Therefore, there is a financial reporting risk that such emerging risks and exposures are not appropriately identified, for which financial statement disclosure and, or, provision may be required.
We tested the consensus and employee data used in calculating the obligation. Where material, we also considered the treatment of curtailments, settlements, past service costs and measurements, contributions and benefits paid, and any other amendments made to obligations during the year.
The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty in these financial statements, which together are deemed critical to the Group’s results and financial position, are as follows: – Allowance for impairment losses on loans and receivables (note 20); – Valuation of assets and liabilities arising from insurance business (notes 24 and 31); – Defined benefit pension scheme obligations (note 35); – Recoverability of deferred tax assets (note 36); – Payment protection insurance and other regulatory provisions (note 37); and – Fair value of financial instruments (note 48).
3 Includes £50 million (2016: £51 million; 2015: £nil) of interest expense on assets with negative interest rates.
Total net gains arising on assets and liabilities held at fair value through profit or loss 10,840 17,151 2,849
It is the Group’s policy to use the auditors on assignments in cases where their knowledge of the Group means that it is neither efficient nor cost effective to employ another firm of accountants. Such assignments typically relate to assistance in transactions involving the acquisition and disposal of businesses and accounting advice.
For amounts included above which are subject to reverse repurchase agreements see note 51.
Income statement transfers: Deferred tax – – 8 2017 £m 2016 £m 2015 £m
The payment of dividends by subsidiaries and the ability of members of the Group to lend money to other members of the Group may be subject to regulatory or legal restrictions, the availability of reserves and the financial and operating performance of the entity. Details of such restrictions and the methods adopted by the Group to manage the capital of its subsidiaries are provided under Capital Risk on page 139.
Cash and balances at central banks – – – – – 58,521 – 58,521
Note 48: Financial instruments continued (5) Reclassifications of financial assets There have been no reclassifications of financial assets in 2017.
2 Other comprises sub-investment grade (2017: £331 million; 2016: £485 million) and not rated (2017: £1,972 million; 2016: £2,006 million).
Past due but not impaired £m Impaired £m Gross £m 70 per cent to 80 per cent 43,045 787 595 44,427 39,789 1,004 648 41,441 80 per cent to 90 per cent 25,497 500 436 26,433 23,589 621 495 24,705 90 per cent to 100 per cent 7,085 177 245 7,507 7,983 223 355 8,561
Reverse repurchase transactions At 31 December 2017 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £16,832 million (2016: £8,304 million), against which the Group held collateral with a fair value of £17,122 million (2016: £7,490 million), all of which the Group was able to repledge. Included in these amounts were collateral balances in the form of cash provided in respect of reverse repurchase agreements of £nil (2016: £8 million). These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Note 52: Consolidated cash flow statement continued (C) Non-cash and other items 2017 £m 2016 £m 2015 £m
For all material portfolios, IFRS 9 ECL calculation will leverage the systems, data and methodology used to calculate regulatory ‘expected losses’. The definition of default for IFRS 9 purposes will be aligned to the Basel definition of default to ensure consistency across the Group. IFRS 9 models will use three key input parameters for the computation of expected loss, being probability of default (‘PD’), loss given default (‘LGD’) and exposure at default (‘EAD’). However, given the conservatism inherent in the regulatory expected losses calculation and some differences in the period over which risk parameters are measured, some adjustments to these components have been made to ensure compliance with IFRS 9.
HBOS ACTIVELY MANAGED PORTFOLIO FUNDS ICVC 1 Diversified Return Fund 94.47% Absolute Return Fund 92.49% Dynamic Return Fund 96.56%
HBOS SPECIALISED INVESTMENT FUNDS ICVC 1 Cautious Managed Fund 52.61% Ethical Fund 83.59% Fund of Investment Trusts 40.57% Smaller Companies Fund 66.86% Special Situations Fund 51.67%