This will offer more to our customers, as well as delivering strong, stable and sustainable returns for our shareholders.
– Strong initial progress on delivery of simplification initiatives, using our proven capabilities from Integration
Invest to be the best bank for our customers: creating new opportunities for growth
Trading and other financial assets at fair value through profit or loss 139,510 156,191
Glen Moreno, our Senior Independent Director and Deputy Chairman, will not be seeking re-election at the annual general meeting. He has been a tower of strength on our Board and his wide knowledge of banking and financial services developed over many years in senior executive positions has been of great benefit to our strategy and operations. His constructive and informed contribution will be missed by all.
We also committed to reduce the level of FSA reportable complaints we receive, excluding PPI complaints, by 20 per cent in 2011 compared to 2010. We achieved a 24 per cent reduction, and reduced our banking complaints per 1,000 accounts to 1.5. We achieved this through initiatives such as our Phone a Friend service, training of our 40,000 front line colleagues, and the roll out in the second half of an externally accredited complaint handling qualification. This makes us the first financial services organisation to have professionally qualified complaint handlers. To enable our customers get the right outcome faster, we are extending the opening hours of our specialist complaints teams to 24 hours a day, 7 days a week. As a result of these initiatives, we are now resolving over 90 per cent of complaints at first touch. In 2012, we have committed to improving this performance further, by reducing banking complaints to just 1.3 per 1,000 current accounts, and in 2014 to 1.0 per 1,000 current accounts.
Future economic developments in the UK and Ireland are highly contingent on how successful political leaders are at stemming the Eurozone crisis, to what extent the private sector can offset shrinking of the public sector, and how the implementation of new regulation on banks impacts their ability to supply credit whilst meeting tighter capital and liquidity criteria. The recent weakening in the Eurozone economy and the balance of risks make double-dip recession there in early 2012 the most likely scenario – indeed this is now the consensus view (Chart 2).
our customer focus is increasingly driving key business decisions and the responsible position we took on ppi and our commitment to keep our branch network at the same level for the next three years (excluding Verde) and not to close a branch if it is the last in the community demonstrates our commitment to do the right thing for customers.
Customer service and simplification by putting customers at the heart of our business, and listening to their needs we have managed to simplify and enhance our systems and processes to help serve our customers more quickly and efficiently. the integration programme has given us a single set of integrated systems which provides a great base for further development but we have also rolled out a number of initiatives to help make banking quicker and easier for customers. in fact we have made over 100 changes to simplify our systems and processes including the introduction of immediate deposit Machines and slip free transactions. We have also reviewed branch roles and opening times to ensure we can meet our customers’ needs and are open when they expect them to be.
A strong focus has been to support colleagues through the changes needed to successfully complete our integration programme, the largest one in european banking history. this has included providing training to over 16,000 colleagues in our branches, to ensure they are fully prepared to work with new customer systems.
Simon is 32 and from Morley, West Yorkshire. In 2006 he was shot in the face saving the lives of six of his colleagues in Iraq. Following months of rehabilitation and dozens of operations to rebuild his face Simon began to help young people come to terms with their own loss of sight at St Dunstan’s charity in Sheffield.
Operating expenses During 2011, operating expenses reduced by 6 per cent to £10,253 million. Total costs decreased by 4 per cent to £10,621 million, mainly as a result of further integration-related savings and a lower bonus accrual, partially offset by increased employers’ National Insurance contributions, the bank levy, and Financial Services Compensation Scheme costs. The bank levy of £189 million was accrued in the final quarter and was lower than initially anticipated due to the improvement in the Group’s funding profile. In the fourth quarter we recognised a charge relating to Financial Services Compensation Scheme costs of £115 million.
Retail continues to simplify its sourcing arrangements and flatten its management structure. Retail is making good progress at reducing the number of suppliers and improving its demand management. Reducing the layers of management is delivering stronger and more effective functions and empowering managers and colleagues.
Loans and advances to customers (excluding reverse repos) 123.3 141.5 (13)
Operating expenses have decreased £44 million, 4 per cent, primarily as a result of integration cost saving programmes delivering positive results, including lower back office staffing requirements.
– Banking net interest margin reduced by 20 basis points reflecting the increased strains of lost earnings on higher impaired asset balances and higher funding costs. This was offset by stronger deposit margins in the Wealth businesses and higher deposit balances and margins in our International on-line deposit business, which drove the banking net interest margin in our core business up by 85 basis points to 4.16 per cent.
Insurance has focused on removing duplication to simplify the business and is improving customer insight to support responsiveness to changing customer needs 5-star rated Three of LP&I’s flagship intermediary products, the retirement account, the investment bond and the global investor have received a Defaqto 5-star rating for the second year running.
Investing in growth There is a focus on growth across the Insurance business to support our multi-brand strategy and to deliver sustainable growth in key markets.
Group £m effects of liability management, volatile items and asset sales – (114) – – 15 150 51 insurance claims – – – – (542) – (542)
in 2011 the Group’s statutory result before tax included negative insurance and policyholder interests volatility totalling £838 million compared to positive volatility of £306 million in 2010.
Volatility comprises the following: Policyholder interests volatility1 (283) 216 insurance hedging arrangements 2 (10)
the sustainable run-rate synergies achieved as at 31 December 2011 totalled £2,054 million, excluding a number of one-off savings. the table below analyses the run-rate synergies as at 31 December 2011 by division.
Risk Division oversees the effective implementation of policy, and group Audit provides independent assurance to the Board about the effectiveness of the group’s internal control framework and adherence to policy.
the overall effectiveness of the risk management framework depends on the people undertaking these activities and the quality of the supporting systems and tools. the risk transformation programme has initiated a significant investment in risk infrastructure to strengthen the group’s risk management capability.
Liquidity and funding Principal Risks Liquidity and funding continues to remain a key area of focus for the group and the industry as a whole. Like all major banks, the group is dependent on confidence in the short and long term wholesale funding markets. should the group, due to exceptional circumstances, be unable to continue to source sustainable funding, its ability to fund its financial obligations could be impacted.
the ratio of customer loans to deposits improved to 135 per cent compared with 154 per cent at 31 December 2010. Loans and advances reduced by £41 billion and customer deposits increased by £23 billion, representing growth of 6 per cent in 2011.
– Credit spread risk arises in the life assurance companies, pension schemes and banking businesses.
the second half of 2011 has seen more difficult funding markets as investor confidence was impacted by concerns over the Us debt ceiling and subsequent downgrade. this was followed by increased fears over eurozone sovereign debt levels, downgrades and possible defaults, and concerns are ongoing over the potential downside effects from financial market volatility. Despite this, the group continued to fund adequately, maintaining a broadly stable stock of primary liquid assets during the year and meeting its regulatory liquidity ratios at all times.
total wholesale funding reduced by £47 billion to £251 billion, with the volume with a residual maturity less than one year falling £35 billion to £113 billion. term wholesale funding for the year totalled £35 billion, in excess of plan, representing £2 billion pre-funding of the requirement for 2012. the group term funding ratio (wholesale funding with a remaining life of over one year as a percentage of total wholesale funding) improved to 55 per cent (50 per cent at 31 December 2010) due to good progress in new term issuance and a reduction in short term money market funding.
excludes £21.8 billion (31 December 2010: £15.6 billion) of loans and advances to banks within the insurance businesses and £0.5 billion (31 December 2010: £4.2 billion) of reverse repurchase agreements.
Less: deductions from tier 1 50% of material holdings (94) (69)
Unit-linked business (excluding that accounted for as non-participating investment contracts) – – 38,474 7,801 46,275
Counterparty limits: Limits are set against all types of exposure in a counterparty name, in accordance with an agreed methodology for each exposure type. this includes credit risk exposure on individual derivative transactions, which incorporates potential future exposures from market movements. Aggregate facility levels by counterparty are set and limit breaches are subject to escalation procedures.
Concentration risk: Credit risk management includes portfolio controls on certain industries, sectors and product lines to reflect risk appetite. Credit policy is aligned to the group’s risk appetite and restricts exposure to certain high risk countries and more vulnerable sectors and segments. note 21 to the financial statements on page 255, provides an analysis of loans and advances to customers by industry (for wholesale customers) and product (for retail customers). exposures are monitored to prevent an excessive concentration of risk. these concentration risk controls are not necessarily in the form of a maximum limit on lending, but may instead require new business in concentrated sectors to fulfil additional hurdle requirements. the group’s large exposures are reported in accordance with regulatory reporting requirements.
Wholesale Assets (including Commercial) in order to support wholesale customers that encounter difficulties during the current economic downturn, the group increased the size of its dedicated Business support Unit (BsU) to cover all its Uk and international portfolios.
£m £m Change total impairment losses on loans and advances to customers 9,712 12,958 25
Core: non-core: impaired loans and provisions Retail impaired loans decreased by £0.9 billion to £8.8 billion compared with 31 December 2010 and, as a percentage of closing loans and advances to customers, decreased to 2.5 per cent from 2.6 per cent at 31 December 2010. impairment provisions, as a percentage of impaired loans, reduced to 30.8 per cent from 31.8 per cent at 31 December 2010.
Secured loan to value analysis the average indexed loan-to-value (LtV) on the mortgage portfolio at 31 December 2011 was 55.9 per cent compared with 55.6 per cent at 31 December 2010. the average LtV for new mortgages and further advances written in 2011 was 62.1 per cent compared with 60.9 per cent for 2010. the tables below show LtVs across the principal mortgage portfolios.
impairment provisions as a percentage of impaired loans increased to 60.6 per cent from 52.5 per cent at 31 December 2010. the coverage ratio in the group’s irish Portfolio has increased further reflecting continuing weakness in real estate markets where further vulnerability exists.
Regulatory exposure is driven by the significant volume of current legislation and regulation within the Uk and overseas with which the group has to comply, along with new or proposed legislation and regulation which needs to be reviewed, assessed and embedded into day-to-day operational and business practices across the group as a whole. this is particularly the case in the current market environment, which is witnessing increased levels of government and regulatory intervention in the banking sector.
Definition the risk of reductions in earnings capital and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/underwritten events and to fluctuations in the timing and amount of claim settlements. this includes fluctuations in profits due to customer behaviour.
To keep the Board’s governance arrangements under review and make appropriate recommendations to the Board to ensure that the Company’s arrangements are consistent with best practice corporate governance standards.
The Committee monitors the application of the authority delegated to the Group Chief Executive who in turn delegates to the Group Executive Committee, the Executive Compensation Committee and the divisional Remuneration Committees, to ensure that policies and principles are being fairly and consistently applied. The Committee liaises closely with the Risk Committee and the risk function in relation to risk-adjusted performance measures, including consideration of both current and future risk. Together the management of remuneration and risk form an integral part of the Board’s determination of Group corporate strategy.
Based on Group financial targets relating to profit before tax and economic profit as well as Balanced Scorecard measures covering divisional financial targets, customers (e.g. SME lending), people, risk and building the business
Independent Non-Executive Directors’ fees The fees of the Independent Non-Executive Directors are agreed by the Board within a total amount determined by the shareholders. NonExecutive Directors may also receive fees, agreed by the Board, for membership of Board Committees. The fees are designed to recognise the various responsibilities of a Non-Executive Director’s role and to attract individuals with relevant skills, knowledge and experience. The fees are neither performance related nor pensionable and are comparable with those paid by other companies. The annual fees were reviewed in 2011 and remain unchanged as listed below.
Generally, the impairment trigger used within the impairment calculation for a loan, or group of loans, is when they reach a pre‑defined level of delinquency or where the customer is bankrupt. Loans where the Group provides arrangements that forgive a portion of interest or principal are also deemed to be impaired and loans that are originated to refinance currently impaired assets are also defined as impaired.
The Group receives investment management fees in the form of an initial adjustment or charge to the amount invested. These fees are in respect of services rendered in conjunction with the issue and management of investment contracts where the Group actively manages the consideration received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the contract. These services comprise an indeterminate number of acts over the lives of the individual contracts and, therefore, the Group defers these fees and recognises them over the estimated lives of the contracts, in line with the provision of investment management services.
The provision represents management’s best estimate of the anticipated costs of related customer contact and/or redress, including administration expenses. However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of detailed implementation of the FSA Policy Statement of 10 August 2010 for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.
The provision requires significant judgement by management in determining appropriate assumptions, which include the level of complaints, uphold rates, proactive contact and response rates, Financial Ombudsman Service referral and uphold rates as well as redress costs for each of the many different populations of customers identified by the Group in its analyses used to determine the best estimate of the anticipated costs of redress. If the level of complaints had been one percentage point higher (lower) than estimated for all policies open within the last six years then the provision made in 2011 would have increased (decreased) by approximately £70 million. There are a large number of inter‑dependent assumptions under‑pinning the provision; the above sensitivity assumes that all assumptions, other than the level of complaints, remain constant. The sensitivity is, therefore, hypothetical and should be used with caution.
Other includes the costs of managing the Group’s technology platforms, branch and head office property estate, operations (including payments, banking operations and collections) and procurement services, the costs of which are predominantly recharged to the other divisions. It also reflects other items not recharged to the divisions, including hedge ineffectiveness, UK bank levy, Financial Services Compensation Scheme costs, gains on liability management, volatile items such as hedge accounting volatility managed centrally, and other gains from the structural hedging of interest rate risk.
Other income (net of fee and commission expense) 1,804 3,787 489 1,128 2,944 (69) 10,083
Total interest and similar income 3.58 3.95 3.39 26,316 29,340 28,238
Included in the amounts reported above in 2010 are collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £4 million.
Debt securities classified as loans and receivables (note 24): Asset‑backed securities 1,022 – 2,004 3,026
Note 30: Value of in-force business The gross value of in‑force business asset in the consolidated balance sheet is as follows: 2011 £m 2010 £m
Placing and Compensatory Open Offer of ordinary shares – – 1,303
In respect of government securities reclassified from available‑for‑sale financial assets to held‑to‑maturity investments, there was no change in the amounts recognised in the Group’s income statement as interest income (2011: £138 million; 2010: £23 million) and, for relevant securities, foreign exchange gains and losses (2011: £14 million loss; 2010: £39 million gain) as such items are recognised in profit or loss on the same basis.
The table below provides an analysis of the financial assets and liabilities of the Group that are carried at fair value in the Group’s consolidated balance sheet, grouped into levels 1 to 3 based on the degree to which the fair value is observable.
Bank and building society certificates of deposit – 3,248 – 3,248
In all cases the transferee has the right to sell or repledge the assets concerned.
Past due but not impaired 15 12,742 1,093 2,509 16,344 –
Total other assets held at fair value through profit or loss 25,766 3,341 5,826 3,711 1,351 1,951 41,946
Unimpaired secured wholesale lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of underlying collateral, although, for impaired lending, this will not always involve assessing it on a fair value basis. No aggregated collateral information for the entire unimpaired secured wholesale lending portfolio is provided to key management personnel.
Capital repayment holidays These allow customers who are currently on a capital and interest repayment basis to temporarily transfer their loan onto an interest‑only basis in order to reduce their contractual repayments and help them through their period of financial difficulty. During this period, the Group regularly reviews the customer’s situation and works with them to try to restore their position and return them to a full capital and interest repayment basis.
An analysis of the Wholesale division’s asset‑backed securities portfolio by credit rating is provided below.
The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.
Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s day‑to‑day operations.
Note 9: Related party transactions In January 2009 HM Treasury became a related party of the Company and has remained so during 2010 and 2011. From 1 January 2011, in accordance with IAS 24 (Revised), UK Government-controlled entities also became related parties of the Group. Further information on the relationship and transactions with HM Treasury and UK Government-controlled entities is given in note 53 to the consolidated financial statements.
Held at fair value through profit or loss Accounting policy 218