Outlook Investors have begun to value the simplicity and transparency of our uK focused retail and commercial banking business model, as set out in 2011. The perceptions of the Group among other influential stakeholders are also improving. Above all, despite some continuing setbacks, we are beginning to regain the trust of our customers and the Group is increasingly seen as a leader in the banking industry.
I am also delighted to have announced, as part of our Helping Britain Prosper Plan, that we are moving towards a target of 40 per cent of our most senior roles being held by women by 2020. We do recognise however, that there is more to be done on our journey to being the best bank for customers and amongst the best-rated companies in the uK by our colleagues.
The pro forma fully loaded CRD IV leverage ratio was 4.1 per cent including tier 1 instruments and 3.4 per cent excluding tier 1 instruments. The Group’s pro forma Basel III leverage ratio was 4.5 per cent including tier 1 capital and 3.8 per cent excluding tier 1 capital.
Strengthened the balance sheet and funding position by increasing the volume and quality of deposits within Transaction Banking and by reducing non-core assets by 50 per cent and non-core risk-weighted assets by 59 per cent.
4.2 number of start-up businesses we will help get off the ground 4.3 Increased amount of new lending provided to support uK manufacturing businesses per year 4.4 number of entrepreneurs supported through the lloyds Bank and Bank of Scotland Social entrepreneurs programmes 4.5 % of supplier invoices paid within 30 days (% payment within 60 days)
Customer complaints data for 2013 Our customer complaints fell year-on-year, with a 36 per cent reduction in complaints including PPI. We now receive fewer banking complaints per 1,000 accounts than any other major high street bank in Britain. In 2013, the Group received 1 complaint per 1,000 accounts (Halifax: 0.8, lloyds TSB: 1.1, Bank of Scotland 0.9). This is a reduction of 33 per cent compared with the second half of 2011, when the Group figure was 1.5 complaints per 1,000 accounts. We aim to reduce this further to 0.9 in 2014.
We want colleagues to live our values, to work in line with our Codes of Responsibility and to feel pride in their contributions to a successful customer-focused business.
Achievements in 2013 Invested £8 million in our Money for life programme since its launch to help young people manage their finances better.
Achievements in 2013 Impairment Our impairment charge improved by 47 per cent to £3,004 million, mainly driven by the reduction in non-core assets and the sustained improvement in Group asset quality.
Priorities for 2014 Deliver the strategic plan underpin the Group’s strategy to be the best bank for customers and support sustainable growth in the uK economy.
Commentary The primary and secondary liquidity assets provide a substantial buffer in the event of an extended market dislocation.
Statutory profit Statutory profit before tax was £415 million compared to a pre-tax loss of £606 million in 2012. Further detail on the reconciliation of underlying to statutory results is included on page 231.
Includes the full value of tier 1 instruments reported under the prevailing rules as at 31 December 2013.
Core risk-weighted assets decreased 4 per cent as a result of selective participation, specifically in Global Corporates, in addition to active portfolio management across all client segments to reduce risk-weighted assets in the lending and Financial Markets businesses.
Customer deposits reduced by 12 per cent, driven by reductions in our international footprint within Wealth, and attrition in customer balances within Online Deposits, mainly driven by deposit repricing.
Key balance sheet items loans and advances to customers2 24.2 33.4 (28)
Toby Strauss Group Director, Insurance Toby joined lloyds Banking Group in October 2011 as Group Director for Insurance and CeO of Scottish Widows. Before joining the Group, Toby was uK life CeO at Aviva and prior to this he was Chief Operating Officer for uK life, having joined Aviva in 2008. He previously worked at Charcol, becoming Managing Director, before moving to JS & P(now Towry) as Chief executive. Before that, Toby spent a number of years at McKinsey, specialising in the financial services and technology sectors. In April 2013 Toby was appointed as a Trustee of Macmillan Cancer Support.
Financial risk management objectives and policies in relation to the use of financial instruments 123 to 196 (and in note 54 on pages 327 to 349)
Additional mandatory carbon reporting includes Scope 1 and Scope 2 emissions as described below: 1 Scope 1 – emissions generated from the energy billed for gas and oil where the Group does not hold the supply contract directly with the energy supplier (shadow sites), fugitive emissions and emissions generated from non-uK sites.
Diversity policy The Board places great emphasis on ensuring that its membership reflects diversity in the broadest sense. The combination of personalities on the Board provides a good range of perspectives and challenge and improves the quality of decision making. In 2013, the Board continued to focus on improving diversity. The percentage of female representation on the Board meets its objective of 25 per cent by 2015 as recommended by the lord Davies Review. The following charts detail the percentage of women employed at various levels of seniority within the Group as at 31 December 2013 compared to prior years.
As the bank works towards achieving its goal of becoming the ‘best bank for customers’, the Board will need to devote more time to strategic and customer related issues.
Following the announcement of our half year results in August 2013 and our full year results in February 2014, the Group Chief executive wrote to shareholders outlining the progress made on our strategy to be the ‘best bank for customers’. He has undertaken to write to shareholders twice yearly with further progress updates.
effectiveness The nomination & Governance Committee developed an action plan to address the issues identified out of the 2012 external Board effectiveness review. Full details of this action plan, and the 2013 effectiveness review and outcomes are set out on page 86.
The key assumption that the Audit Committee focused on was future complaints volumes and associated operational costs. Management used a combination of analyses to forecast future complaint volumes, including statistical modelling and customer surveys. The Audit Committee challenged the appropriateness of these methods for forecasting complaint volumes, giving consideration to the total PPI policies sold by the Group.
For derivatives mis-sold to SMes, the Audit Committee understood the basis for determining forecast average redress payments based on experience to date, and the adequacy of provisions made for operational costs for the expected duration of the programme.
Tenure of the external auditor PwC has been the auditor of lloyds Banking Group plc since 1995. A tender has not been conducted since. Prior to that, PwC and its predecessor firms were also the auditors to certain of the Group’s predecessor companies.
Remuneration The Committee reviewed, ahead of the Remuneration Committee, the internal independent control function’s risk assessments of the Group and its Divisions, to ensure that the awards proposed clearly consider the observance of risk appetite and demonstration of strong risk management. The Committee also received updates on rewards and incentive schemes, to ensure they aligned with appropriate culture and sustainable performance.
Operational risk The Committee receives regular updates across the spectrum of operational risk from business areas and from Risk Division presentations, including incident management approaches, the advanced measurement approach, records management, and IT including cyber risk. The Committee also received reports from the Anti-Money laundering Officer, and regular divisional and second line oversight presentations.
Stress testing was conducted to assess the Group’s risk profile against approved risk appetite and acts as a discussion basis with the regulator for the setting of the capital planning buffer. The Committee reviewed the results of the ‘low interest rate’ and ‘high interest rate’ stress test scenarios designed by the regulator and of specific stress scenarios designed by management in conjunction with the Group’s Chief economist which included rating downgrades, together with management’s mitigating actions. The Committee was satisfied with the results and recommended to the Board that the indicative capital planning buffer was appropriate.
The Committee concluded that the Risk Division is adequately resourced and continues to have sufficient authority and standing within the Group. This outcome further reflects the importance of risk management in the Group. The Committee received six monthly progress updates from management detailing the Risk Division’s key achievements. Where activity deviates from the plan, actions are agreed to address any operational gaps. More information on the Group’s approach to risk management can be found on pages 123 to 196.
In addition to the responsibilities set out below, the Committee looked at TSB Bank remuneration strategy, policy and governance. This included the treatment of bonuses for colleagues transferred to TSB Bank and salaries for senior executives. external developments, principally through CRD IV and the Salz Review, were considered and factored into the annual review of Group incentive plans.
liaises as required with the Board Risk Committee and Risk Division in relation to risk-adjusted performance measures.
The Committee has striven to ensure that the remuneration policies and practices detailed in the remuneration policy and remuneration report are appropriate to supporting the delivery of the Group’s current and future strategy.
– An executive Director recruited at a time in the year when it would be inappropriate to provide a bonus or lTIP award for that year, for example, where there may be insufficient time to assess performance. In this situation the Committee may feel it appropriate to transfer the quantum in respect of the months employed during the year to the subsequent year so that reward is provided on a fair basis.
Resignation In the case of resignation to take up new employment, paid until date of termination (including any period of leave required by the Group). In the case of resignation for other reasons, base salary will be paid in monthly instalments for the notice period (or any balance of it), offset by earnings from new employment during this period.
António Horta-Osório George Culmerf Juan Colombásg Totals long-term incentived 3,128 – – – 41 – 3,169 –
Amounts shown reflect the period from 29 november 2013 when Juan Colombás was appointed as an executive Director. Total remuneration for 2013 was £3,193,000. under terms agreed when joining the Group, the CRO is entitled to a conditional lump sum benefit of £718,996 either (i) on reaching normal retirement age unless the CRO voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death.
Balanced scorecard outcomes are recorded through a rating, based on a rating scale ranging from ‘under performer’ (at the lowest level), through ‘Developing’, ‘Good’, ‘Strong’ and up to ‘Top’ which is the highest rating. each of these ratings may be further differentiated by the addition of ‘minus’ or ‘plus’.
Deferral Bonus awards for executive Directors are deferred into shares and subject to performance adjustment until at least March 2016. The GCe’s award is subject to deferral for five years and to performance adjustment and forfeiture provisions during the first three years. The GCe’s award is subject to an additional condition that the share price must remain above 73.6 pence on average for any 126 consecutive trading days in the five years following grant or the uK government sells at least 50 per cent of its shareholding during the three years following grant.
SAYe interests awarded in 2013 The executive Directors are eligible to participate in the Group’s ‘sharesave’ and ‘sharematch’ plans. In 2013, the GCe and CFO were each granted SAYe options over 22,156 shares (with an exercise price of 40.62 pence per share and a face value of £11,250). The share price used to calculate the face value is the price on grant (12 April 2013), which was 50.78 pence.
The Group Executive is supported by: Group Risk Committee Reviews and recommends the Group’s risk appetite and governance, risk and control frameworks, material Group policies and the allocation of risk appetite. The committee also regularly reviews risk exposures and risk/reward returns and approves material risk models.
Risk management in the business line management is directly accountable for identifying and managing any risks inherent or consequential in their individual businesses. A key objective is to ensure that business decisions strike an appropriate balance between risk and reward, consistent with the Group’s risk appetite.
– set risk appetite and oversight of the associated risk profile across the Group.
Wealth, Asset Finance and International 24,840 9,952 40.1 7,143 71.8 Reverse repos and other items – Total non-core gross lending 69,712 20,903 30.0 11,433 54.8 Impairment provisions (11,433)
The fair value adjustments relating to loans and advances were those required to reflect the HBOS assets in the Group’s consolidated financial records at their fair value and took into account both the expected losses and market liquidity at the date of acquisition. The unwind relating to future impairment losses requires significant management judgement to determine its timing which includes an assessment of whether the losses incurred in the current period were expected at the date of the acquisition and assessing whether the remaining losses expected at the date of the acquisition will still be incurred. The element relating to market liquidity unwinds to the income statement over the estimated expected lives of the related assets (until 2014 for wholesale loans and 2018 for retail loans) although if an asset is written-off or suffers previously unexpected impairment then this element of the fair value will no longer be considered a timing difference (liquidity) but permanent (impairment). The fair value unwind in respect of impairment losses incurred was £512 million for the period ended 31 December 2013. The fair value unwind in respect of loans and advances is expected to continue to decrease in future years as fixed-rate periods on mortgages expire, loans are repaid or written-off, and will reduce to zero over time.
– The Retail impairment charge, as an annualised percentage of average loans and advances to customers, improved to 0.32 per cent in 2013 from 0.36 per cent in 2012.
Includes collective unimpaired provisions of £894 million; core: £545 million; non-core: £349 million.
Interest rate risk in the Group’s divisional portfolios and in the Group’s capital and funding activities arises from the different repricing characteristics of the Group’s non-trading assets, liabilities (see loans and advances to customers and customer deposits in Table 1.26 above) and off balance sheet positions of the Group. Interest rate risk arises predominantly from the mismatch between interest rate sensitive assets and liabilities, but also to the investment term of capital and reserves, and the need to minimise income volatility.
– Annuities where policyholders’ future cashflows are guaranteed at retirement. exposure arises if the assets, predominantly fixed income, backing the liabilities do not perform in line with expectations.
Although an important market standard measure of risk, VaR has limitations. These arise from the use of limited historical data, an assumed distribution, defined holding periods, set confidence intervals and frequency of calculation. The exposure level at the confidence interval does not convey any information about potential losses which may arise if this level is exceeded. A 95 per cent confidence interval with a 1-day holding period is equivalent to an expected 1 in 20 day loss. The Group recognises these limitations and supplements the use of VaR with a variety of other techniques more suited to the nature of the business activity.
Exposure liquidity exposure represents the amount of potential stressed outflows in any future period less expected inflows. liquidity is considered from both an internal and a regulatory perspective.
Debt securities in issue: Medium-term notes include funding from the national Guarantee Scheme (31 December 2013: £1.4 billion; 31 December 2012: £1.4 billion).
Measurement The Group measures the amount of capital it holds using the regulatory framework. From 1 January 2014 this included the new Capital Requirements Directive and Regulation (CRD IV) as implemented in the uK by the Prudential Regulatory Authority (PRA) policy statement PS7/13. Prior to this date, and for the purposes of determining the Group’s capital resources and requirements at 31 December 2013, these have been based upon the modified Basel II framework as implemented by the PRA.
– Model and methodology changes include the movement in risk-weighted assets arising from new model implementation, model enhancement and changes in credit risk approach applied to certain portfolios. Model and methodology changes increased risk-weighted assets by £3.2 billion.
Requirement to maintain a Support Account: The Scheme requires the maintenance of a Support Account within the non-Participating Fund. The quantum of the Support Account is calculated with reference to the value of assets backing current with-profits policies which also existed at the date of demutualisation. under the Scheme assets can only be transferred from the non-Participating Fund if the value of the remaining assets in the fund exceeds the value of the Support Account. Scottish Widows has obtained from the PRA permission to include the value of the Support Account or, if greater, the excess of realistic liabilities for business written before demutualisation over the relevant assets (subject to the non-Participating Fund being able to cover this amount by its surplus admissible assets) in assessing the realistic value of assets available to the With-Profit Fund. At 31 December 2013 the estimated value of surplus admissible assets in the non-Participating Fund was £1,902 million (2012: £1,430 million) and the estimated value of the Support Account was £nil (2012: £nil). However, at 31 December 2013, the excess of realistic liabilities of with-profits business written before demutualisation over the relevant assets was £54 million (2012: £62 million) which, in accordance with the PRA’s permission, has been used to assess the estimated value of realistic assets available to the With-Profit Fund (and has therefore reduced the value of the non-Participating Fund’s surplus admissible assets by that amount).
Philip Rivett (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers llP Chartered Accountants and Statutory Auditors london 5 March 2014
Interest and similar income: loans and advances to customers 3.83 3.94 4.03 19,928 21,600 23,950 loans and advances to banks 0.45 0.54 0.78 457 603 628
Deferred tax (note 42): Origination and reversal of temporary differences (434) (329) 1,673
Argento and Grampian have no Commercial Paper in issue and no external liquidity providers. Any restriction on the use of the assets included in the table above by the Group is due to their use in repurchase transactions see note 20 and note 53.
Of the total allowance in respect of loans and advances to customers, £2,217 million (2012: £3,309 million) was assessed on a collective basis.
Included in the amounts reported above are collateral balances in the form of cash provided in respect of repurchase agreements amounting to £nil (2012: £4 million).
Lapse rates (persistency) lapse rates refer to the rate of policy termination or the rate at which policyholders stop paying regular premiums due under the contract.
– Re-review of previously handled cases – previously reviewed complaints are being assessed to ensure consistency with the current complaint handling policy. At 31 December 2012 the expected level of re-review was minimal. During 2013, and most notably in the fourth quarter, this has increased to approximately 590,000 cases at an estimated cost of £460 million.
c The fixed rate on this security was reset from 7.627 per cent to 3 month euribor plus 2.875 per cent with effect from 9 December 2011.
d The fixed rate on this security was reset from 6.35 per cent to 3 month euribor plus 2.50 per cent with effect from 25 February 2013.
The weighted average fair value of options granted in the year was £0.56 (2012: £0.30). The fair values of options granted have been determined using a standard Black-Scholes model. The weighted average share price at the time that the options were exercised during 2013 was £0.55 (2012: £0.33). The weighted average remaining contractual life of options outstanding at the end of the year was 3.6 years (2012: 3.7 years).
For awards made to executive Directors, a third performance condition was set, relating to Absolute Share Price, relevant to 28 per cent of the award. Performance was measured based on the Absolute Share Price on 26 March 2013, being the third anniversary of the award date. If the share price at the end of the performance period was 75 pence or less, none of this element of the award would vest. If the share price was 114 pence or higher, 100 per cent of this element would vest. Vesting between threshold and maximum would be on a straight line basis, provided that shares comprised in the Absolute Share Price element may only be released if both the ePS and eP performance measures had been satisfied at the threshold level or above. The ePS and eP performance conditions each relate to 36 per cent of the total award.
At the end of the performance period for the ePS and eP measures, it was assessed that neither of the performance conditions had been met and the awards did not vest.
(v) Customer satisfaction: relevant to 10 per cent of the award. Performance will be measured by reference to the total number of FCA reportable complaints per 1,000 customers over the three year period to 31 December 2015.
Trading and other financial liabilities at fair value through profit or loss liabilities held at fair value through profit or loss – 5,700 – 5,700
Where credit protection, usually in the form of credit default swaps, has been purchased or written on asset-backed securities, the security is referred to as a negative basis asset-backed security and the resulting derivative assets or liabilities have been classified as either level 2 or level 3 according to the classification of the underlying asset-backed security.
In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the wholesale business. note 18 shows when the hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2013 was £559,690 million (2012: £86,190 million) with a net fair value liability of £1,347 million (2012: asset of £215 million) (note 18). In 2013, ineffectiveness recognised in the income statement that arises from cash flow hedges was a loss of £60 million (2012: gain of £6 million).
Included in the total above: Temporary arrangements currently on treatment 265 388 262 383 45.0 51.6
Debt securities held as loans and receivables 153 – – 22 – 203 236 4,659 5,273
Trading and other assets at fair value through profit or loss 35,159 – 134 loans and advances to customers 2,612 15 24 loans and advances to banks 1,701 16 –
Lloyds Banking Group Annual Report and Accounts 2013 381Lloyds Banking Group Annual Report and Accounts 2013 381
Credit default swap A credit default swap is a type of credit derivative. It is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. The entity selling protection receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
The Financial Services Compensation Scheme (FSCS) is the uK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by management expenses levies and, where necessary, compensation levies on authorised firms.
First/Second lien A first lien gives the holder (usually the bank lending the funds) the first right to collect compensation from the sale of the underlying collateral in the event of a default on the loan. A second lien may be issued against the same collateral but in the case of default, compensation for this debt will only be received after the first lien has been repaid.
Funded/unfunded exposures exposures where the notional amount of the transaction is either funded or unfunded.
Other 31 Describe ‘other risk’ types and discuss how each one is identified, governed, measured and managed. 163, 169-170, 32 Discuss publicly known risk events related to other risks. 163, 169-170, 192-196 www.lloydsbankinggroup.com