Navigation buttons. Click on the buttons at the top left of the page to return to this ‘Home’ page, search for content, print, go back or forward a page, or return to the previous view.
Key product markets – Secured lending – mortgages – Unsecured lending – credit cards, loans and overdrafts – Internet and telephone banking – Current accounts – Savings accounts
John joined Lloyds TSB in 2007 as Managing Director, Commercial and was appointed to the Group Executive Committee in September 2011. He has over 20 years experience of delivering business growth, transformation, IPOs, acquisitions and divestments in multi‑national and specialist Financial Services organisations and was previously CEO Kensington Group Plc.
Remuneration is an important issue for our stakeholders and the Group. We are keen to ensure we recruit and retain the right employees to drive our business forward and deliver on our strategy while ensuring that there is alignment between remuneration and results. Variable pay is reflective of the performance of the business and total discretionary bonus awards are approximately 30 per cent lower than last year with bonuses above £2,000 subject to deferral and adjustment. In addition, given the continued challenging economic conditions salary awards have been limited, especially at more senior levels.
Divisional results 54 Retail 54 Wholesale 59 Commercial 66 Wealth and International 70 Insurance 77 Group Operations 84
The Government has announced that it will be producing a formal White Paper in the spring and we would anticipate that this paper will provide additional clarity, while still leaving some issues open to consultation. The Group continues to work to assess the impact that the reforms may have on its business and continues to play a constructive role in the debate with the Government and other stakeholders.
Retaining our talent through difficult times continues to be a priority and we have launched well-being initiatives across several teams this year which have proved popular and useful resources for colleagues at all levels.
our gender strategy is led by members of our Group executive Committee and sir Win bischoff, our Chairman, and supports the recommendations of the lord davies Review whereby we aim to increase our female representation on the board by 25 per cent by 2015. in december we launched breakthrough; our new women’s network which has over 600 members and we have established a series of development interventions, specifically targeted at women at various stages of their career to ensure they are equipped with the necessary skills and experience to successfully compete for senior positions.
The students became accustomed to being physically active and made a pledge about their future level of physical activity, which will be monitored by the school’s Young Ambassadors. And, links forged with community sports clubs should encourage a higher uptake of sports outside of school hours.
Other operating income decreased by 6 per cent to £9,307 million. The decrease of 6 per cent reflected the targeted reduction in non-core assets, lower core new lending volumes and lower income in Treasury and Trading as a result of market conditions.
Key balance sheet and other items 31 December 2010 £bn £bn £bn £bn £bn £bn £bn
Retail continues to make a significant contribution to Group funding both through customer deposit growth and the supply of assets supporting over £64.0 billion of debt securities in external issue. During the year Retail contributed to £16.4 billion of new issuance. The majority of these securitisations are backed by mortgages and have a fixed repayment schedule and as such provide a stable source of funding for the Group.
Investing in customer franchise The Strategic Review in June confirmed Wholesale’s commitment to meet more fully the range of needs of Wholesale’s customer base. In 2011, product capability has been enhanced through the further development of our debt capital markets business and the implementation of Bloomberg e-trading to support trading of bonds and gilts with financial institution clients. In addition Arena, a scalable online portal for foreign exchange, interest rate management and money market deposits, is now fully operational, and providing efficient, cost effective, market access for customers. Lloyds TSB also achieved Gilt-Edged Market Maker status, becoming a primary dealer in UK government bonds, creating opportunities to further service a wider group of Financial Institutions.
Customer deposits grew by 28 per cent, primarily due to continued strong inflows in the on-line deposit business. The funding gap has reduced by £20.7 billion to £1.8 billion reflecting continued focus within International on de-risking and right-sizing the balance sheet together with continued strong deposit inflows.
Risk-weighted assets decreased by £11.4 billion to £47.3 billion, reflecting lower asset balances and increased impairment provisions, particularly in the non-core portfolios.
As required under IFRS, products are split between insurance and investment contracts depending on the level of insurance risk contained. For insurance contracts, the new business profit includes the net present value of profits expected to emerge over the lifetime of the contract, including profits anticipated in periods after the year of sale; for investment contracts the figure reflects the profit in the year of sale only, after allowing for the deferral of income and expenses. Consequently the recognition of profit from investment contracts is deferred relative to insurance contracts.
Other movements in funds under management incorporates alignment changes and the inclusion of managed pension funds.
The net outflow of business is primarily a result of the move in sales away from savings products which generate large single premiums, caused in part by more difficult economic conditions for long-term savings and the run-off of the in-force book.
Total income for home insurance was broadly unchanged from 2010 at £857 million and reflects the maturity and competitiveness of the market.
sourcing: we will optimise our demand management, simplify specifications and further strengthen our supplier relationships, reducing the number of suppliers to the group from around 18,000 to under 10,000, and further focus on a core group of lead suppliers to achieve approximately a 15 per cent saving on addressable spend.
Core net interest income 10,916 11,745 effects of liability management, volatile items and asset sales 603 51 insurance claims (343) (542)
impairment as a % of average advances 0.59% 3.35% 0.41% 8.39% 4.60%
– Board-level engagement, coupled with the direct involvement of senior management in group wide risk issues at group executive Committee level, ensures that issues are promptly escalated and remediation plans are initiated.
– the focus has been and remains on building and sustaining long-term relationships with customers, through good and bad economic times.
Decision Making – the Risk Committee, chaired by a non-executive Director, comprises other non-executive Directors and oversees the group’s risk exposures. the Chief Risk Officer regularly informs the Risk Committee of the aggregate risk profile and has direct access to the Chairman and members of the Risk Committee.
Accountability – Risk is included as one of the five principal criteria within the group’s balanced scorecard on which business area and individual’s performance is judged.
During 2011, the group’s Policy Framework has been reviewed with a view to simplification, which will be implemented over the coming year.
Mitigating Actions the group takes many mitigating actions with respect to this principal risk, key examples include: Independent Commission on Banking We continue to play a constructive role in the debate with the government and other stakeholders on all issues under consideration in relation to the iCB’s recommendations.
the group has enhanced its internal compliance processes including those associated with payment screening, colleague training and hospitality.
Market Risk Principal Risks the group has a number of market risks, the principal ones being: – there is a risk to the group’s banking income arising from the level of interest rates and the margin of interbank rates over central bank rates. A further banking risk arises from competitive pressures on product terms in existing loans and deposits, which sometimes restrict the group in its ability to change interest rates applying to customers in response to changes in interbank and central bank rates.
– secondly, the group has a contingency funding plan embedded within the group Liquidity Policy which has been designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing.
Available capital resources Available capital resources represent the excess of assets over liabilities calculated in accordance with detailed regulatory rules issued by the FsA.
Statutory basis. Assets are generally valued on a basis consistent with that used for accounting purposes (with the exception that, in certain cases, the value attributed to assets is limited) and which follows a market value approach where possible. if the market is not active, the group establishes a fair value by using valuation techniques. Liabilities are calculated using a projection of future cash flows after making prudent assumptions about matters such as investment return, expenses and mortality. Discount rates used to value the liabilities are set with reference to the risk adjusted yields on the underlying assets in accordance with the FsA rules. Other assumptions are based on recent actual experience, supplemented by industry information where appropriate. the assessment of liabilities does not include future bonuses for with-profits policies that are at the discretion of management, but does include a value for policyholder options likely to be exercised.
Credit risk can also arise from debt securities, private equity investments, derivatives and foreign exchange activities. note 19 to the financial statements on page 251 shows the total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2011. the notional principal amount does not, however, represent the group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the group. such amounts are reflected in note 56 to the financial statements on page 322.
– Commercial continues to operate rigorous processes to enhance control and monitoring activities which play a crucial role in identifying customers showing early signs of financial distress and bringing them into our support model.
the following tables summarise exposures to the selected eurozone countries by type of counterparty: table 1.48: Eurozone exposure – by counterparty (unaudited)
italy and Portugal – exposures comprise lending to corporates, including a small amount of commercial real estate exposure.
A limit structure exists to ensure that risks stemming from residual and temporary positions or from changes in assumptions about customer behaviour remain within the group’s risk appetite.
in setting operational risk appetite, the group looks at both impact on solvency and the group’s reputation.
Exposures the major sources of insurance risk within the group are the insurance businesses and the group’s defined benefit staff pension schemes. the nature of insurance business involves the accepting of insurance risks which relate primarily to mortality, longevity, morbidity, persistency, expenses, property damage and unemployment. the prime insurance risk of the group’s staff pension schemes is related to longevity.
Definition Business risk is defined as the risk that the group’s earnings are adversely impacted by a sub optimal business strategy or the sub optimal implementation of the strategy. in assessing business risk, consideration is given to internal and external factors.
As at the date of this report a notification had been received that The Solicitor for the Affairs of Her Majesty’s Treasury had a direct interest of 40.56 per cent in the issued share capital with rights to vote in all circumstances at general meetings. No other notification has been received that anyone has an interest of 3 per cent or more in the issued ordinary share capital.
The Board is committed to achieving long term success for the Company by being the best bank for customers and generating strong, stable and sustainable returns for shareholders. The Board’s strategy is underpinned by high standards of corporate governance designed to ensure consistency and rigour in its decision making. This report explains how those standards, in particular, those laid down in the Financial Reporting Council’s UK Corporate Governance Code (the Code), apply in practice to ensure that the Board and management work together for the long term benefit of the Company and its shareholders. The Code can be accessed at www.frc.org.uk
The Chairman, with the support of the Company Secretary, ensures that Directors receive timely and relevant information and are kept advised of key developments, both during and between formal meetings. During 2011, the timeliness of Board communications has been enhanced by the introduction of a secure board portal which enables Directors to access papers electronically as they become available. A weekly Board dashboard ensures that Directors are kept informed of key developments and emerging issues.
It is expected that all directors, but particularly the Non-Executive Directors, constructively challenge proposals that come to the Board for decision. Facilitating an open culture is key to achieving this. During 2011, the Board, led by the Deputy Chairman, developed a charter of values aimed at encouraging strong individual and independent views to broaden the Board’s outlook and strengthen its collective judgement.
Board evaluation and performance Having conducted thorough and rigorous externally facilitated evaluations in 2009 and 2010 (as well as in earlier years), the Board accepted the recommendation of the Nomination & Governance Committee that the 2011 evaluation should be facilitated internally, reverting to an external review for 2012.
An overview of the Remuneration Committee is set out on page 184. The work of the Remuneration Committee is explained in the Directors’ remuneration report on pages 187 to 204.
Annual awards of 275 per cent of salary for the Group Chief Executive and 225 per cent for other Executive Directors. Vesting based on financial measures comprising Absolute Total Shareholder Return, Economic Profit and strategic financial objectives. Details of the performance conditions are as follows: Motivation and retention of executives Alignment with sound risk management Alignment with long-term shareholder interests
EXECUTIVE PLANS (5% OF THE ISSUED ORDINARY SHARE CAPITAL OF THE GROUP IN ANY CONSECUTIVE 10 YEARS)
f Lapsed on 10th anniversary of date of grant as the performance conditions had not been met.
g Not exercisable as the option has not been held for the period required by the relevant scheme.
Monthly 4,420 2011 Share Incentive Plan purchase and matching shares 23/8/11 175,746 Purchase
Opinion on financial statements In our opinion the group financial statements: – give a true and fair view of the state of the group’s affairs as at 31 December 2011 and of its loss and cash flows for the year then ended; – have been properly prepared in accordance with IFRSs as adopted by the European Union; and
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December £ million £ million £ million
Note 1: Basis of preparation The consolidated financial statements of Lloyds Banking Group plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued by the IASB.
The Group recognises the effect of material changes to the terms of its defined benefit pension plans which reduce future benefits as curtailments; gains and losses are recognised in the income statement when the curtailments occur.
Investments in joint ventures and associates at end of year 139 127 – 158 – 5 429
Fee and commission income: Credit and debit card fees 877 812 765
Other non‑audit fees cover a variety of services and in 2009 and 2010 included the costs associated with the Group’s preparations for ensuring that the heritage HBOS businesses complied fully with the requirements of the Sarbanes‑Oxley Act by 31 December 2010.
Share of net assets at 31 December 309 326 370 25 103 109 334 429 479
Note 18: Trading and other financial assets at fair value through profit or loss These assets are comprised as follows: Trading assets £m
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £10,990 million (2010: £12,211 million). Collateral is held with a fair value of £15,765 million (2010: £14,299 million), all of which the Group is able to repledge. At 31 December 2011, £3,740 million had been repledged (2010: £3,161 million).
Debt securities: Other public sector securities – 27 27 – 29 29
The movement in the acquired value of in‑force non‑participating investment contracts over the year is as follows: 2011 £m 2010 £m
The movement in the value of in‑force insurance and participating investment contracts over the year is as follows: 2011 £m 2010 £m
Non-economic assumptions Future mortality, morbidity, expenses, lapse and paid‑up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience.
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2011 and 2010 no contingent rentals in respect of operating leases were recognised in the income statement.
The impairment charge in 2011 relates to integration activities; the impairment charge of £202 million in 2010 comprised £150 million relating to oil drilling rigs under construction acquired from a previous lending relationship in Wholesale (note 15) and £52 million relating to integration activities (note 11).
(ii) Method of calculation of liabilities With‑profit liabilities are stated at their realistic value, the main components of which are: – With‑profit benefit reserve, the total asset shares for with‑profit policies; – Cost of options and guarantees (including guaranteed annuity options); – Deductions levied against asset shares; – Planned enhancements to with‑profits benefits reserve; and
(2) Non-life insurance Gross non‑life insurance contract liabilities are analysed by line of business as follows: £m £m
Experience gains (losses) on scheme liabilities (277) 496 31 (39) (185) (50)
The deferred tax credit (charge) in the income statement comprises the following temporary differences: £m £m £m
Preferred securities 6.90% Perpetual Capital Securities (US$1,000 million) b 247 249 6.85% Non‑cumulative Perpetual Preferred Securities (US$1,000 million) b 316 107 8.117% Non‑cumulative Perpetual Preferred Securities (Class A) (£250 million) b, c 260 253 7.627% Fixed to Floating Rate Guaranteed Non‑voting Non‑cumulative Preferred Securities (e415 million) b, d 340 308 7.375% Euro Step‑up Non‑voting Non‑cumulative Preferred Securities callable 2012 (e430 million) a 16 16 6.35% Step‑up Perpetual Capital Securities callable 2013 (e500 million) 239 241 6.071% Non‑cumulative Perpetual Preferred Securities (US$750 million) 389 336 7.834% Sterling Step‑up Non‑voting Non‑cumulative Preferred Securities callable 2015 (£250 million) a 5 4 4.939% Non‑voting Non‑cumulative Perpetual Preferred Securities (e750 million) a 20 17 7.286% Perpetual Regulatory Tier One Securities (Series A) (£150 million) 112 119 4.385% Step‑up Perpetual Capital Securities callable 2017 (e750 million) a 88 85 6.461% Guaranteed Non‑voting Non‑cumulative Perpetual Preferred Securities (£600 million) 444 421 13% Step‑up Perpetual Capital Securities callable 2019 (£785 million) a 12 10 13% Step‑up Perpetual Capital Securities callable 2019 (e532 million) a 47 56 7.754% Non‑cumulative Perpetual Preferred Securities (Class B) (£150 million) 104 98 12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (US$2,000 million) 1,301 1,288 7.281% Perpetual Regulatory Tier One Securities (Series B) (£150 million) 113 95 13% Step‑up Perpetual Capital Securities callable 2029 (£700 million) a 612 662 7.881% Guaranteed Non‑voting Non‑cumulative Preferred Securities (£245 million) 228 173
Total preferred securities 4,893 4,538 a In November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from 31 January 2010 to 31 January 2012.
In January 2010, the Company repurchased and cancelled certain preference shares amounting to £14 million. This resulted in a transfer of £3 million from the merger reserve to the capital redemption reserve and a transfer of £11 million from the merger reserve to the share premium account. Details of the preference shares repurchased are set out in note 46. In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of Enhanced Capital Notes. This resulted in a transfer of £26 million from the merger reserve to the capital redemption reserve and a transfer of £2,684 million from the merger reserve to the share premium account.
No provisions have been recognised in respect of loans given to key management personnel (2010 and 2009: £nil).
At 31 December 2011 70 per cent to 80 per cent 60,236 1,894 843 62,973 80 per cent to 90 per cent 53,113 2,250 1,103 56,466 90 per cent to 100 per cent 40,236 2,182 1,196 43,614
Total UK and Irish retail secured loans and advances 339,121 348,433 0.8 0.6
Collective impairment assessment of UK retail unsecured loans and advances subject to forbearance and similar treatments Credit risk provisioning for the UK retail unsecured portfolio is undertaken on a purely collective basis. The approach used is based on segmented cash flow models, divided into two primary streams for loans judged to be impaired and those that are not. Accounts subject to repayment plans and collections refinance loans are among those considered to be impaired.
Liabilities arising from insurance and investment contracts 11,723 1,786 5,568 19,971 89,879 128,927
Change in derivative financial instruments, trading and other financial assets at fair value through profit or loss 5,867 (7,378) 12,063
Tier 1 capital ratio Tier 1 capital as a percentage of risk-weighted assets.