Expanding our Environmental, Social and Governance (ESG) programme by issuing our second
Helping Britain prosper 2015 was also a milestone year for the Group as we marked the 250th anniversary of Lloyds Bank, the 200th anniversary of Scottish Widows and the 30th anniversary of the Lloyds Charitable Foundations. Our celebrations reinforced our commitment to sustain the traditional values of customer service and community support, the foundations on which the Group has been built.
Pre-tax statutory profit was £1,644 million in 2015 compared to £1,762 million in 2014 with the reduction driven by increased PPI charges.
We’ll help UK business to start up, scale up, and trade internationally to support the long term strength of the UK economy 6 l 5 We’ll help businesses and individuals to succeed with expert mentoring and training 5 l 6 We’ll be the banking Group that brings communities closer together to help them thrive 4 l 7 We’ll better represent the diversity of our customer base and our communities at all levels of the Group 5 l
Competition and conduct remain core elements of regulatory reform and regulators continue to undertake reviews into certain products and markets. For small business and personal current account customers, the Competition and Markets Authority (CMA) initiated a review in 2014 and has released a notice of possible remedies to improve transparency and the ease of switching having provisionally rejected structural remedies. Other competition reviews progressing include the FCA’s review into the credit card market, whilst in the Insurance business we have seen the introduction of a cap on corporate pensions. The Payment Systems Regulator is separately reviewing indirect access and infrastructure provision. From a conduct perspective, the most significant development for us was the FCA decision to consult on a deadline for PPI complaints, with the results expected in the first half of 2016. We continue to work to ensure we provide appropriate and fair products with clear, simple and relevant terms.
Key opportunities – Economic environment: significant progress in reducing the Group’s risk profile and strengthening the balance sheet along with strategic actions taken in the last few years means we are better positioned to benefit from the UK economic recovery. – Customer needs: our differentiated customer focused strategy along with our comprehensive multi-channel distribution network, and in particular our evolving digital capability, mean we are well positioned to address changing customer needs. – Regulatory environment: greater clarity emerging on regulatory requirements and our simple, low risk, UK focused strategy places us in a strong position. – Low cost position: this enables us to provide competitive differentiation for the benefit of customers and shareholders.
Low risk business: Being a low risk bank is central to our business model and to reducing earnings volatility. Our low risk appetite is reflected through the low level of non-performing loans and non-core assets and our credit default swap spread, which is amongst the best in the banking sector worldwide.
HOW WE RUN A RESPONSIBLE BUSINESS Operating responsibly requires running our business in ways that meet all relevant legal and regulatory requirements. In addition, we have a number of internal policies and procedures related to doing business responsibly. These include our Ethics, Speak Up and Anti-Bribery policies.
In building a culture in which colleagues are empowered, inspired and incentivised to do the right thing for customers, we assess our progress, along with colleagues’ pride in our Group through our ‘Best Bank for Customers’ and ‘Building the Best Team’ surveys. In 2015, 85 per cent of colleagues responded to the latter. A new statement was included in 2015 – ‘I understand how my team is supporting the Group’s purpose to Helping Britain Prosper’ where 81 per cent of colleagues agreed. This regular dialogue with colleagues provides rich data and a clear picture of how they’re feeling. Further information on engaging colleagues, which is incorporated by reference into the strategic report, is on page 109 of the Directors’ Report.
Dealing with customer complaints We continue to take all complaints seriously. Improvements to our products and services and understanding the root causes of customer dissatisfaction underpins our efforts to reduce complaints. Where things do go wrong, we aim to put them right as quickly as possible, operating a 24-hour, 7-days a week service. To help ensure customers are dealt with as efficiently as possible, front line colleagues can use a ‘phone-a-friend’ escalation service to talk to specialists about a complaint whilst with a customer. In our drive to continuously improve of our complaints handling service, we encourage and support colleagues to study for an externally accredited complaint handling qualification. This type of commitment and investment has helped us to resolve in excess of four out of five of our general complaints either on the day they are received or by the end of the following day.
Running our business even more responsibly Stakeholders require reassurance that we run our business responsibly, complying with laws and regulations, managing risk effectively, and targeting growth in a sustainable and ethical manner.
We closed down more than 2,353 fraudulent websites in 2015 and we are a strategic partner of Get Safe Online, a joint initiative between the government, the National Crime Agency, and public and private sector supporters from the technology, communication, retail and finance sectors. We monitor unusual activity on customer accounts and use state-of-the-art technology to detect potential criminal activity. If we spot anything suspicious we take immediate and appropriate action.
We support our business customers through our extensive network of customer facing staff. More than half a million business and commercial clients now bank digitally with us. We work with the Tinder Foundation and other partners such as the Government to improve digital skills for individuals, small businesses and charities.
Purchasing goods and services We are working together with our suppliers and others in our supply chain to ensure we source goods and services in ways that are responsible, sustainable and mutually beneficial. They must also provide best value for our customers and shareholders. In 2015, we spent around £5.8 billion on a diverse range of goods and services, with over 4,000 different suppliers. We continue to honour our commitment to pay our suppliers on time and are signatories to the Prompt Payment Code. In our Helping Britain Prosper Plan, we set a 2015 target to pay 96 per cent of our supplier invoices within 30 days and we exceeded this target.
Colleague well-being We aim to make Lloyds Banking Group a great place to work for all colleagues, with their health and well-being as top priorities. We provide comprehensive online tools to support common health topics, such as fitness, smoking, diet and mental health. We issue monthly colleague newsletters on relevant issues. Working in partnership with external, market leading specialists, we provide colleagues with access to an Occupational Health Service, an Employee Assistance Programme, and to private medical cover. In 2015, we extended the company paid private medical provision to include all permanent colleagues.
We believe effective risk management can be a strategic differentiator, in particular: Sustainable growth Embedding a risk culture that ensures proactive support and constructive challenge takes place across the business in order to deliver sustainable growth.
Operating lease depreciation increased 6 per cent to £764 million driven by the continued growth in the Lex Autolease business.
2 Excludes balances relating to margins of £2.5 billion (31 December 2014: £2.8 billion) and settlement accounts of £1.4 billion (31 December 2014: £1.4 billion).
Underlying basis In order to present a more meaningful view of business performance, the results are presented on an underlying basis excluding items that in management’s view would distort the comparison of performance between periods. Based on this principle the following items are excluded from underlying profit asset sales and other items, which includes the effects of certain asset sales, the impact of liability management actions, the volatility relating to the Group’s own debt and hedging arrangements as well as that arising in the insurance businesses, insurance gross up, the amortisation of purchased intangible assets and the unwind of acquisition-related fair value adjustments, and certain past service pensions credits or charges in respect of the Group’s defined benefit pension arrangements; Simplification costs, which for 2015 are limited to redundancy costs relating to the programme announced in October 2014. Costs in 2014 include severance, IT and business costs relating to the programme started in 2011; TSB build and dual running costs and the loss relating to the TSB sale; and payment protection insurance and other conduct provisions.
Volatility arising in insurance businesses The Group’s statutory result before tax included negative volatility totalling £105 million compared to negative volatility of £228 million in 2014.
Profit (loss) for the year attributable to ordinary shareholders 466 1,125 (838) (1,471) (2,963)
2 Annual dividends comprise both interim and estimated final dividend payments. Under IFRS, the total dividend for the year represents the interim dividend paid during the year and the final dividend which will be paid and accounted for during the following year.
This report explains how the Group applies the highest principles of corporate governance, in particular those laid down in the 2014 edition of the Financial Reporting Council (FRC)’s UK Corporate Governance Code (Code). The Code can be accessed at www.frc.org.uk
Approval of Group risk appetite and Risk Management Framework Review of internal control systems Investigations into PPI and LIBOR issues Investigations into packaged bank account complaints Review and approval of PRA stress testing results CMA investigation into retail banking
Induction plan – Deborah McWhinney and Stuart Sinclair Core programme – Strategic and corporate induction – Governance and Director responsibilities – Responsibilities of an FCA approved person – Senior Managers and Certification Regime – Detailed risk induction programme – Detailed briefings on each of the Group’s business divisions – Opportunity to meet with major shareholders as requested
The Company provides ample opportunities, support and resources for learning. A comprehensive programme, under the leadership of the Chairman, is in place throughout the year and comprises both formal and informal training and information sessions. ‘Deep dive’ sessions into specific topics play an important role and are delivered either at the end of Board meetings or at additional sessions held between Board meetings. The ‘deep dive’ sessions delivered in 2015 are described on page 65.
Anthony Watson, the Senior Independent Director, carried out the evaluation of the Chairman’s performance using a questionnaire and individual meetings with Directors other than the Chairman.
Deborah McWhinney and Stuart Sinclair, who joined the Board in December 2015 and January 2016 respectively, did not participate in the review but attended the presentation by JCA Group to the Board in January 2016.
The Group’s risk management and internal control systems are regularly reviewed by the Board and are consistent with the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting issued by the Financial Reporting Council and compliant with the requirements of the Capital Requirements Directive IV (CRD IV). They have been in place for the year under review and up to the date of the approval of the annual report. The Group has determined material compliance with BCBS 239 risk data aggregation and risk reporting requirements and continues to actively manage enhancements.
Value-In-Force (VIF) asset and insurance liabilities Determining the value of the VIF asset and insurance liabilities is judgemental and requires economic and non-economic actuarial assumptions.
Speak Up (the Group’s whistleblowing service) The Committee received and considered reports from management on the Group’s whistleblowing arrangements including summaries of cases and ongoing reviews of the Whistleblowing Governance Structure. On consideration of the reports submitted, the Committee was satisfied with the actions which had been taken, the reports first having been considered and approved by the Board’s Whistleblowing Champion, Anita Frew.
Fixed share award To ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for Executive Directors with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements.
Long-term incentive plan Incentivise and reward the achievement of the Group’s longer-term objectives, to align executive interests with those of shareholders and to retain key individuals.
Purpose and link to strategy The pension policy aims to support Executive Directors in building long-term retirement savings.
Purpose and link to strategy To provide suitable benefits as part of a competitive package.
Total remuneration less buy-outs and performance adjustment 8,539 10,828 4,698 5,504 4,458 5,080 17,695 21,412
Key performance factors considered by the Committee in arriving at the performance assessment for the Group included: – Improvements in financial results – net interest income increased by 5 per cent to £11,482 million, underlying profit increased by 5 per cent in the year to £8,112 million and there was a 48 per cent improvement in impairments.
– Rating upgrade from a median of A to A+ following positive engagement with the Credit Risk Agencies (CRAs).
Percentage change in remuneration of the Group Chief Executive versus the wider employee population Figures for ‘All Employees’ are calculated using figures for UK-based colleagues subject to the Group Annual Bonus Plan. This population is considered to be the most appropriate group of employees for these purposes because its remuneration structure is consistent with that of the GCE. For 2015, 46,474 colleagues were included in this category.
4 Share buy-out award granted on 30 March 2011 for the loss of deferred share awards forfeited on leaving the Santander Group. Awards are consistent with those forfeited and have a nil option price.
Directors’ interests – summary of awards vested, purchases and sales made by directors in 2015 (unaudited)
The application of malus will generally be considered when: – there is reasonable evidence of employee misbehaviour, misconduct or material error or that they participated in conduct which resulted in losses for the Group or failed to meet appropriate standards of fitness and propriety; – there is material failure of risk management at a Group, business area, division and/or business unit level; – the financial results at a Group, division or business unit level are re-stated or consideration is given to restatement; – the Committee determines that the financial results for a given year do not support the level of variable remuneration awarded; and/or
Variable 1 Includes members of the Group Executive Committee and Senior Executive level colleagues.
Qualifying pension scheme indemnities were also granted to the Trustees of the Group’s Pension Schemes.
In making this assessment, the Directors have considered a wide range of information, including the principal and emerging risks which could impact the performance of the Group, and the Group’s operating plan which comprises detailed customer, financial, capital and funding projections together with an assessment of relevant risk factors. In 2015, particular focus was given to the implications arising from the continuing interest rate environment, the impact of regulatory change requirements on investment plans, developing regulatory requirements and changes to tax legislation.
The Directors have specifically assessed the prospects of the Company and the Group over the first three years of the current plan. This period presents the Board with a reasonable degree of confidence given there is greater certainty over expected events and macroeconomic assumptions during the earlier years of the plan, whilst still providing an appropriate longer-term outlook. It is also well within the period covered by the Group’s future projections of profitability, cash flows, capital requirements and capital resources.
Risk appetite is embedded across the Group in the following ways: – Communication – Board Risk Appetite metrics developed and agreed with business and operational teams. In addition Board Risk Appetite cascaded down into more detailed metrics and limits within Functional and Divisional sub-Board Risk Appetite Statements along with additional supporting metrics which should be used to drive local decision making and behaviours. – Policies – Group policies are aligned with Risk Appetite Statement. – Reporting – Performance against Board Risk Appetite metrics reported to Divisional, Functional, and Group Risk Committees and the BRC and Board. – Performance Management – Group and Divisional Scorecards include adherence to risk appetite as a general measure and include more detailed risk appetite measures which are pertinent for that area of the Group. – Key Decision Making – Strategy operates in tandem with risk appetite and the Group’s annual Operating Plan is developed within the boundaries set by risk appetite.
Prudent, through the cycle credit principles, risk policies and appetite statements: The independent Risk Division sets out the credit principles, risk policies and risk appetite statements. Principles and policies are reviewed regularly, and any changes are subject to a review and approval process. Policies and risk appetite statements, where appropriate, are supported by procedures, which provide a disciplined and focused benchmark for credit decisions. Risk oversight teams monitor credit performance trends, review and challenge exceptions to planned outcomes, and test the adequacy of credit risk infrastructure and governance processes throughout the Group, which includes tracking portfolio performance against an agreed set of key appetite tolerances. Oversight and reviews are also undertaken by Group Audit and Credit Risk Assurance.
Limitations on concentration risk: Credit risk management includes portfolio controls on certain industries, sectors and product lines to reflect risk appetite as well as individual, customer and bank limit guidelines. Credit policies and appetite statements are aligned to the Group’s risk appetite and restricts exposure to higher risk countries and more vulnerable sectors and segments. Note 18 on page 214 provides an analysis of loans and advances to customers by industry (for commercial customers) and product (for retail customers). Exposures are monitored to prevent an excessive concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a maximum limit on exposure, but may instead require new business in concentrated sectors to fulfil additional certain minimum policy and/or guideline requirements. The Group’s large exposures are detailed to the Board and reported in accordance with regulatory reporting requirements.
Value of loans as at 31 December 20141 1.8 9.2 14.6 52.7 1 Excludes mortgage accounts which consist of partial interest only and partial capital repayment.
Table 1.20: LTV – UK Direct Real Estate At 31 December 20151 At 31 December 20141
Table 1.37 shows the key market risks for the Group’s banking, defined benefit pension schemes and trading, banking and Insurance and trading activities.
The Board risk appetite is cascaded first to GALCO where risk appetite is approved and monitored by risk type, and then to Group Market Risk Committee (GMRC) where risk appetite is sub allocated by Division. These levels of risk appetite comprise scenarios/stress based measures (single factor stresses), percentile based measures (e.g. VaR and Stressed VaR), and sensitivity based measures (e.g. sensitivity to 1 basis point move in interest rates), as well as stochastic measures within the Insurance business. These measures are reviewed regularly by senior management to inform effective decision making.
Table 1.40: Banking activities: net interest income sensitivity (audited) 2015 2014
The LCR became the Pillar 1 standard for liquidity in the UK in October 2015. The Group comfortably meets the requirements and has a robust and well governed reporting framework in place for both regulatory reporting and internal management information. The Net Stable Funding Ratio (NSFR) is due to become a minimum standard from January 2018. The Group continues to monitor the requirements and expects to meet the minimum requirements once these are confirmed by the PRA.
Risk-weighted assets at 31 December 2014 186,562 11,323 4,746 26,279 228,910
Credit risk-weighted assets reductions of £14.1 billion were driven by the following key movements: – Management of the balance sheet includes risk-weighted asset movements arising from new lending and asset run-off. During 2015, credit risk-weighted assets increased by £1.8 billion, primarily as a result of targeted net lending growth in core businesses, as well as an increase in risk-weighted assets for the Group’s strategic equity investments. – Disposals include risk-weighted asset reductions arising from the sale of assets, portfolios and businesses. Disposals reduced credit risk-weighted assets by £8.6 billion, primarily driven by the completion of the sale of TSB as well as disposals in the run-off business. – External economic factors capture movements driven by changes in the economic environment. The reduction in credit risk-weighted assets of £6.4 billion is mainly due to improvements in credit quality, which primarily impacted the Retail and Consumer Finance businesses, and favourable movements in HPI that benefited retail mortgage portfolios. – Model and methodology reductions of £0.9 billion include the movement in credit risk-weighted assets arising from model and methodology refinements and changes in credit risk approach applied to certain portfolios.
Counterparty credit risk and CVA risk reductions of £1.7 billion are principally driven by trading activity and compressions, hedging and yield curve movements.
Monitoring A review of the Group’s RMF, which includes the status of the Group’s Principles and Policy Framework, and the design and operational effectiveness of key governance committees, is undertaken on an annual basis and the findings are reported to the Group Risk Committee, Board Risk Committee and the Board.
We also focused on the measurement of impairment, including the assessment of whether historic experience is appropriate when assessing the likelihood of incurred losses in the portfolios (particularly given the prolonged period of low interest rates).
No additional material conduct issues that would require either provision or disclosure in the financial statements were identified as a result of the audit work performed.
Actuarial assumptions used in the valuation of insurance contracts (liabilities and assets representing the value of in-force business)
We also tested management’s basis for allocating forecast profits between legal entities and the related disclosures by testing the allocation methodology, challenging significant assumptions and using our experience of the Group’s activities.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
(1) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through the exercise of its power. This generally accompanies a shareholding of more than one half of the voting rights although in certain circumstances a holding of less than one half of the voting rights may still result in the ability of the Group to exercise control. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The Group reassesses whether or not it controls an entity if facts and circumstances indicate that there are changes to any of the above elements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are de-consolidated from the date that control ceases.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating to the issuance of debt instruments (see (E)(5) below) or share capital (see (Q)(1) below). Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair value at the acquisition date.
– Insurance and participating investment contracts which are unit-linked Liabilities for unit-linked insurance contracts and participating investment contracts are stated at the bid value of units plus an additional allowance where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Changes in the value of the liability are recognised in the income statement through insurance claims. Benefit claims in excess of the account balances incurred in the period are also charged through insurance claims. Revenue consists of fees deducted for mortality, policy administration and surrender charges.
NOTE 2: ACCOUNTING POLICIES continued Provision is made for irrevocable undrawn loan commitments if it is probable that the facility will be drawn and result in the recognition of an asset at an amount less than the amount advanced.
Other income (net of insurance claims) 1,122 2,066 1,358 1,827 (218) 6,155
Other income (net of insurance claims) 1,435 2,259 1,359 1,864 840 7,757
Loans and advances to customers 30,109 – 30,109 28,513 – 28,513
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Hedged cash flows For designated cash flow hedges the following table shows when the Group’s hedged cash flows are expected to occur and when they will affect income.
NOTE 35: LIABILITIES ARISING FROM NON-PARTICIPATING INVESTMENT CONTRACTS The movement in liabilities arising from non-participating investment contracts may be analysed as follows: 2015 £m 2014 £m
(3) Share capital and control There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and: – certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws); NOTE 40: SUBORDINATED LIABILITIES continued
Currency translation differences arising in the year (59) (25) (155) Foreign currency gains on net investment hedges (tax: £nil) 17 22 149
Interim dividend paid in the year 0.75 – – 535 – –
(3) Financial assets and liabilities carried at fair value (A) Financial assets, excluding derivatives Valuation hierarchy At 31 December 2015, the Group’s financial assets carried at fair value, excluding derivatives, totalled £173,568 million (31 December 2014: £208,424 million). The table below analyses these financial assets by balance sheet classification, asset type and valuation methodology (level 1, 2 or 3, as described on page 251). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
At 31 December 2014 Loans and receivables: Loans and advances to customers: unimpaired 473,947 472,036 – – 472,036 Loans and advances to customers: impaired 8,757 8,595 – – 8,595 Loans and advances to customers 482,704 480,631 – – 480,631 Loans and advances to banks 26,155 26,031 – – 26,031
Following the continuing reduction in the Group’s non-UK activities, an analysis of credit risk exposures by geographical region has not been provided.
The Group holds collateral in respect of loans and advances to banks and customers as set out below. The Group does not hold collateral against debt securities, comprising asset-backed securities and corporate and other debt securities, which are classified as loans and receivables.
Irrevocable loan commitments and other credit-related contingencies At 31 December 2015, the Group held irrevocable loan commitments and other credit-related contingencies of £65,719 million (2014: £57,711 million). Collateral is held as security, in the event that lending is drawn down, on £9,551 million (2014: £8,673 million) of these balances.
Share of post-tax results of associates and joint ventures 3 (32) (43)
At 31 December 2015, the Group held a £2,349 million interest in Cape Funding No.1 PLC, a securitisation funding vehicle set up by TSB.
IFRS 16 is effective for annual periods beginning on or after 1 January 2019.
Details of the Company’s dividends are as set out in note 46 to the consolidated financial statements.
Cost:income ratio Operating expenses compared to total income net of insurance claims. The Group calculates this ratio using the ‘underlying basis’ which is the basis on which financial information is reported internally to management.
Medium Term Notes Medium term notes are a form of corporate borrowing covering maturity periods ranging from nine months to 30 years. Details of the notes issued under the Group’s medium term notes programmes are given in note 32.
JP MORGAN FUND II ICVC JPM Balanced Managed Fund xi 69%