As a UK, customer-focused business, we recognise that our success and prospects are inextricably linked to the health of the UK economy. Our focus on helping to improve the prosperity of individuals, businesses and communities across the UK therefore not only makes commercial sense, but also represents a social responsibility for an organisation such as ours. In recent years, we have fully embraced this through our purpose of Helping Britain Prosper which continues to make a significant positive impact across the UK, while also giving our colleagues a real sense of pride and meaning.
Expectations on how companies engage with environment and societal issues are rising
Our response We have a strong track record in providing our customers with the products and services they value, while also offering convenience and choice in the channel they choose to interact with us.
We view our market leading efficiency position as a unique competitive advantage in this respect, as it creates capacity for further significant investment. This investment, such as in the increased use of intelligent systems and machine learning, is delivering improved processes and further productivity enhancements, and through this, is helping to future proof our business.
In response to changes to the competitive environment from the ongoing shift in digital usage and new entrants, our multi-channel and multi-brand offering enables us to continue to effectively meet the varying needs of our diverse customer base. Our digital channel is now our most prominent,
Our unique Single Customer View Our Single Customer View capability allows our customers to see all their financial needs in one place, from bank accounts to pension and insurance products. At the end of 2019, more than 5 million customers had access to this, with priorities for 2020 including extending this to around 9 million customers, while also increasing functionality.
The largest digital bank in the UK With 16.4 million digitally active users and 10.7 mobile app users, we are the largest digital bank in the UK, with 75 per cent of products now originated digitally. In line with this continued shift to digital channels, we are continuing to roll out new features for our customers, resulting in increased engagement as adoption increases.
Given our unique position within the UK, we are eager to play our part in tackling climate change, by working with our stakeholders to help reduce the carbon emissions we finance. We want to finance a green future together. We are developing longer-term broader social impact goals during 2020, as we develop our thinking around the Society of the Future.
The Board received regular reports and feedback on the progress of the transaction from senior management
Championing Britain’s diversity Percentage of senior roles to be held by women
For example: Utilities includes financing to entities that have both renewable energy and non-renewable energy generation. We have provided finance for more than 40 renewable energy projects, including supporting projects such as the Neart na Gaoithe offshore wind farm
Mental health We are passionate advocates for removing the stigma attached to mental ill-health, actively creating a culture of openness and support, while developing efforts to prevent mental health challenges.
Ethnic background Percentage of colleagues from a BAME background 10.2% 9.5%
Continued investment in capabilities and digital propositions enables the delivery of a leading customer experience, supported by increasingly productive relationship managers, with more time spent on value adding activity.
The framework ensures our risks are managed in line with our risk appetite.
Risk Appetite We have limited appetite for negative impacts on customers, colleagues, or the Group as a result of change activity.
Shareholder expectations continue to evolve potentially impacting the Group’s role in society
Mitigation Continued digitisation of customer journeys, thereby enabling the delivery of market leading customer experiences that are seamless, accessible and personal
The Insurance business is exposed indirectly to equity risk through the value of future management charges on policyholder funds. Credit spread and interest rate risk within the Insurance business primarily arises from bonds and loans used to back annuities
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 49
Restructuring costs of £471 million were down 46 per cent, primarily reflecting the completion of both the integration of MBNA and the ring-fencing programme, which were partially offset by costs associated with establishing the Schroders Personal Wealth joint venture.
Lloyds Banking Group Annual Report and Accounts 2019 51 Strateg ic rep ort
Top 50 Women in Engineering A second year apprentice training with the Coventry-based Lloyds Bank Advanced Manufacturing Training Centre has been named as one of the top 50 women in engineering in the UK.
Juan Colombás, Executive Director and Chief Operating Officer, announced that he plans to retire in July 2020 after many years as a senior executive in which he has made a major contribution to the transformation of the Group. In line with the UK Corporate Governance Code 2018 (the Code), I also announced that I plan to retire as Group Chairman at or before the AGM in 2021 as I will by then have served some nine years on the Group Board. The Board has initiated a search process to allow time to identify my successor and enable an orderly handover.
Considered updates on structural hedging strategy & Group Corporate Treasury’s regular management information report Link to stakeholder groups: Regulatory and Government
Considered cyber security updates Link to stakeholder groups: Colleagues; Customers; Suppliers
The Group is committed to Helping Britain Prosper by supporting a thriving low carbon economy. Sara Weller Non-Executive Director and Chairman, Responsible Business Committee
Highlights from the 2019 review The evaluation concluded that the performance of the Board, its Committees, the Chairman and each of the Directors continues to be effective. All Directors demonstrated commitment to their roles and contributed effectively. The Board is also regarded as very able, collegiate and well-run, with an open and supportive culture and strong governance relating to risks and controls.
Control effectiveness review An annual control effectiveness review (CER) is undertaken to evaluate the effectiveness of the Group’s control framework with regard to its material risks, and to ensure management actions are in place to address key gaps or weaknesses in the control framework. Business areas and head office functions assess the controls in place to address all material risk exposures across all risk types. The CER considers all material controls, including financial, operational and compliance controls. Senior management approve the CER findings which are reviewed and independently challenged by the Risk Division and Group Internal Audit and reported to the Board. Action plans are implemented to address any control deficiencies.
Q. The Remuneration Committee seeks to ensure all remuneration policy, including that relevant to executive remuneration, is fair and transparent. The work of the Remuneration Committee during the year, including its review of the Remuneration Policy, is discussed further in its report on page 114.
The Committee has concluded that the Group continues to have strong discipline in the management of both emerging and existing risks, and the Committee’s work continues to support the Group in achieving its core aim of operating as a digitised, simple, low risk provider of financial services.
What: – We are changing the effective date of increases from 1 January to 1 April for new Executive Directors (EDs). Why: – Provides alignment to the award timeline for other colleagues in the Group, meeting our alignment principle.
The Group’s approach to shareholding requirements The Group currently operates a shareholding policy, please see page 108 for further details.
Pre-grant performance assessment and sizing of award determined at Remuneration Committee’s discretion, taking into consideration the key questions outlined on page 101.
3 LTIP and dividend equivalent figures for 2018 have been adjusted to reflect the share price on the date of vesting (62.9679 pence) instead of the average price (56.04 pence) reported in the 2018 report.
Building the best team Employee engagement index Set relative to 2021 markets norms
Nomination and Governance Committee Membership £15,900 £15,600 1 New members only.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 113
An Executive Director recruited from a business or location where benefits are provided that do not fall into the definition of ‘variable remuneration forfeited’ but where the Committee considers it reasonable to buy-out these benefits
Risk division (second line) is a centralised function, headed by the Chief Risk Officer, providing oversight and independent constructive challenge
2 Central items include assets held outside the main operating divisions, including the assets of Group Corporate Treasury which holds the Group's liquidity portfolio, and other supporting functions.
– The Group’s strategy is to introduce advanced data management practices, based on Group-wide standards, data-first culture and modern enterprise data platforms, supported by a simplified modern IT architecture.
Further, there is a risk of systematic, unintended consequences within decision-making undertaken by machine learning which could occur on a large scale in a short period of time, creating new operational risks that affect financial and non-financial outcomes, for example credit portfolio anomalies or conduct impacts. This is relevant for the Group at present as the delivery of GSR3 utilises new technologies.
Mitigation The Group has a number of mitigating actions to manage strategic risk, including: Continued digitisation of customer journeys, thereby enabling the delivery of market leading customer experiences that are seamless, accessible and personal
Table 1.12: Group expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to customers (underlying basis)
Business units, with the support of divisional and Group-level teams, conduct ongoing horizon scanning to identify and address changes in regulatory and legal requirements
Senior Managers and Certification Regime (SM&CR) and additional regulatory constraints on remuneration structures may impact the Group’s ability to attract and retain talent
2 Counterparty credit risk includes movements in contributions to the default funds of central counterparties and movements in credit valuation adjustment risk.
The banking business also has a significant amount of non-LCR eligible liquid assets which are eligible for use in a range of central bank or similar facilities. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.
The provision is based on assumptions determined using management judgement with reference to historic experience. We understood and challenged the provisioning methodologies and underlying assumptions, including whether historic information was an appropriate indicator of future experience. For example, we challenged management on how many complaints eligible for redress would arise from the information requests which had been received.
We understood management’s process and evaluated and tested the key controls around the financial instrument’s valuation processes including the independent price verification and valuation governance controls.
Based on the evidence obtained, we determined the application of hedge accounting to be appropriate and compliant with the requirements of IFRS.
For the purposes of our audit, we validate the design, implementation and operating effectiveness of those automated and IT dependent controls that support the in-scope financial statement line items. We also review the supporting IT General Computer Controls (ITGCs) that provide assurance over the effective operation of these controls as well as those controls that manage the integrity of relevant data repositories for the full financial reporting period.
Any components which were considered individually financially significant in the context of the Group’s consolidated financial statements (defined as components that represent more than or equal to 10% of the total assets of the consolidated Group) were considered full scope components. We considered the individual financial significance of other components in relation to primary statement account balances. We considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). Any component which was not already included as a full scope component but was identified as being individually financially significant in respect of one of more account balances was subject to specific audit procedures over those account balances. Inconsequential components (defined as components which, in our judgement, did not present a reasonable possibility of a risk of material misstatement either individually or in aggregate) were eliminated from further consideration for specific audit procedures although they were subject to Group level analytical review procedures. All remaining components which were neither inconsequential nor individually financially significant were subject to procedures which addressed the risk of material misstatement including testing of entity level controls, information technology general controls and Group and component level analytical review procedures.
Financial assets at fair value through profit or loss 16 160,189 158,529
Financial assets at fair value through other comprehensive income 21 25,092 24,815
Realised gains and losses on equity shares held at fair value through other comprehensive income – 2 (2) – – – –
Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities. The coupon on these instruments is recognised in the income statement as interest expense. Securities which carry a discretionary coupon and have no fixed maturity or redemption date are classified as other equity instruments. Interest payments on these securities are recognised, net of tax, as distributions from equity in the period in which they are paid. An exchange of financial liabilities on substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the new financial liability is recognised in profit or loss together with any related costs or fees incurred.
Net income arising on assets and liabilities mandatorily held at fair value through profit or loss: Financial instruments held for trading 120 (8) 404
Fees payable for other services: Audit of the Company’s subsidiaries pursuant to legislation 20.2 19.1 18.6
Later than 2 years and not later than 3 years 130 353
Accumulated depreciation and impairment: Depreciation charge for the year – 121 715 1,016 1,852
Key changes in assumptions A detailed review of the Group’s assumptions in 2019 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£67 million decrease) .
(iv) Options and guarantees outside the With-Profit Funds A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (e.g. term assurance) or guaranteed income for life (e.g. annuities) . In addition, certain personal pension policyholders in Scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £64 million (2018: £39 million) in respect of those guarantees.
6 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
8 This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Swap curves, the risk-free rate and illiquidity premia are all assumed to be unchanged.
Share issuances In 2019, 776 million shares (2018: 769 million shares; 2017: 518 million shares) were issued in respect of employee share schemes.
Cash and balances at central banks – – – – – 55,130 – 55,130
Financial assets at fair value through profit or loss – 17,982 142,207 – – – – 160,189
Debt securities in issue – – – – – 97,689 – 97,689
The risk exposures that are used for the CVA and DVA calculations are strongly influenced by interest rates. Due to the nature of the Group’s business the CVA/DVA exposures tend to be on average the same way around such that the valuation adjustments fall when interest rates rise. A one per cent rise in interest rates would lead to a £63 million fall in the overall valuation adjustment to £188 million. The CVA model used by the Group does not assume any correlation between the level of interest rates and default rates.
Reverse repos included in above amounts: Loans and advances to customers 54,600 54,600 – 54,600 –
Total other assets held at fair value through profit or loss 31,790 2,088 33,878 30,719 1,937 32,656
Drawn balances 70 per cent to 80 per cent 44,384 2,343 181 1,751 48,659 41,827 1,802 190 1,884 45,703 80 per cent to 90 per cent 27,056 1,057 86 677 28,876 24,854 832 95 1,032 26,813 90 per cent to 100 per cent 5,663 199 34 207 6,103 4,957 164 39 302 5,462
Note 54: Consolidated cash flow statement (A) Change in operating assets 2019 £m 2018 £m £m
Note 54: Consolidated cash flow statement continued (C) Non-cash and other items 2019 £m 2018 £m 2017 £m
Valuation hierarchy The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1 (2018: none) .
Post-tax return on average shareholders’ equity 5.7 9.3 7.2 4.9 1.3
7 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; any impact of the transition from IBORs to alternative reference rates; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group’s credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; the ability to achieve strategic objectives; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; concentration of financial exposure; management and monitoring of conduct risk; instability in the global financial markets, including Eurozone instability, instability as a result of uncertainty surrounding the exit by the UK from the European Union (EU) and as a result of such exit and the potential for other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; political instability including as a result of any UK general election; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group’s control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; risks relating to climate change; changes in laws, regulations, practices and accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group’s control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation together with any resulting impact on the future structure of the Group; the ability to attract and retain senior management and other employees and meet its diversity objectives; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's postretirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report or Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission for a discussion of certain factors and risks together with examples of forward looking statements.
BOS (Shared Appreciation Mortgages) No. 1 plc 4 # BOS (Shared Appreciation Mortgages) No. 2 plc 4 # BOS (Shared Appreciation Mortgages) No. 3 plc 4 # BOS (Shared Appreciation Mortgages) No. 4 plc 4 # BOS (Shared Appreciation Mortgages) No. 5 plc 4 BOS (Shared Appreciation Mortgages) No. 6 plc 4 BOS (USA) Fund Investments Inc. 11 xiii BOS (USA) Inc. 11 BOS Edinburgh No 1 Ltd (In liquidation) 65 BOS Mistral Ltd 1 BOSSAF Rail Ltd 1 BOS Personal Lending Ltd 4 i ii British Linen Leasing (London) Ltd 5 British Linen Leasing Ltd 5 British Linen Shipping Ltd 5 C.T.S.B. Leasing Ltd (In liquidation) 13 Capital 1945 Ltd 2 Capital Bank Leasing 3 Ltd (in liquidation) 13 Capital Bank Leasing 5 Ltd 2 Capital Bank Leasing 9 Ltd (In liquidation) 13 Capital Bank Leasing 12 Ltd 5
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