The 2016 Annual Report and Accounts incorporates the strategic report and the consolidated financial statements, both of which have been approved by the Board of Directors.
Skilled and engaged people Our colleagues provide real advantage. We invest in skills and training while ensuring alignment to our customer focused strategy and commitment to build the best team.
Progressive and sustainable ordinary dividend 2.55p per share with an additional special dividend of 0.5p per share
The UK economic environment will also continue to be impacted by global uncertainties including the slowdown in China, European elections and the global trade environment, particularly in light of the recent US presidential election.
We held more than 1,100 meetings with investors in 2016. We regularly engage SRI/ESG investors as well as mainstream investors and investment analysts to provide them with information on our performance, strategic plans and how we do business responsibly. This year we held a number of responsible business webinars and roadshows with investors and analysts and undertook a governance lunch for major investors at which responsible business was actively discussed. We also briefed ratings agencies about our performance against our Conduct Risk Appetite Metrics. Read more on page 145.
We welcome the changes the Financial Conduct Authority has made to complaint classification and reporting, which came into effect from 30 June 2016. These changes ensure a transparent approach to complaints reporting, ensuring that businesses are clear on the root causes of customer dissatisfaction, and that the volume of complaints that businesses receive are contextualised to the size of the organisation.
Working in partnership with external, market leading specialists, we support colleagues’ health and wellbeing by providing access to an Occupational Health Service, an Employee Assistance Programme (EAP) and company paid private medical cover. Colleagues can obtain independent advice through the EAP and also have access to our award-winning Issue Resolution Scheme.
We have a conservative and well balanced UK credit portfolio, managed through the economic cycle and supported by strong credit portfolio management.
– Processes for underwriting, claims management, pricing and product design seek to control exposure. Longevity and bulk pricing experts support the bulk annuity proposition.
Capital risk The risk that we have a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.
Examples: – Earnings are impacted by our ability to forecast and model customer behaviour accurately and establish appropriate hedging strategies. – The Insurance business is exposed indirectly to equity through the value of future management charges on policyholder funds. Credit spread risk within the Insurance business primarily arises from bonds and loans used to back annuities. Credit spreads affect the value of the Group’s Defined Benefit Pension Schemes’ liabilities.
Ring-fencing will ensure we become safer and continue to create the best customer experience by providing further protection to core Retail and SME deposits, increasing transparency of our operations and facilitating the options available in resolution. Resolution planning is intended to reduce the probability of failure and, through ensuring continuity of critical banking services, the impact on customers should we fail. Our Governance framework and strong culture of ownership and accountability enabled effective, on time, compliance with the SM&CR requirements which came into force from March 2016 and preparation for the SM&CR Certification requirements effective from March 2017.
The return on required equity increased to 5.3 per cent (2015: 1.5 per cent) and the return on tangible equity increased to 6.6 per cent (2015: 2.6 per cent) both largely reflecting the lower PPI provision made in the year.
Creating the best customer experience – Awarded Business Bank of the Year at the FD’s Excellence Awards for the 12th consecutive year. – Increased net promoter scores across all client divisions surveyed in 2016. – Supported over 10,000 first time exporters which is helping the UK government achieve its ambition to deliver 100,000 new exporters by 2020.
Capital – The estimated pre dividend Solvency II ratio of 160 per cent (1 January 2016 pre dividend position: 160 per cent) represents the shareholder view of Solvency II surplus. Benefits from capital optimisation initiatives have been offset by adverse interest rate volatility and the payment of a £500 million dividend in February 2016. – Paid a further £500 million to the Group in February 2017, bringing total dividends paid since the formation of the Group in 2009, to £7.1 billion.
An outline of the induction programme is set out opposite and Deborah McWhinney and Stuart Sinclair share their experiences on joining the Board on page 71.
Board effectiveness The Chairman of the Board leads the annual review of the Board’s effectiveness and that of its Committees and individual Directors with the support of the Nomination and Governance Committee, which he also chairs. The annual evaluation is facilitated externally at least once every three years.
Outcome of 2016 Board effectiveness review The reviews 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.
– Maintain a proactive approach to succession planning for Executive and Non-Executive Directors and for senior management
Determining the appropriateness of impairment losses requires the Group to make assumptions based on management judgement.
Conclusion: Much has been achieved in respect of IT resilience and cyber security initiatives and the focus given by the Committee during 2016 has raised awareness across the Group. However, IT resilience and cyber security risk will remain a key area of focus for the Committee in 2017.
Conclusion: The Group’s management of model risk is robust with a strong control framework, consisting of specialist teams, regular performance monitoring, annual validation and appropriate escalation of issues. Model risk will continue to be an area of focus for the Committee via regular reporting, including risk appetite measures.
Appointment and retirement of Directors The appointment and retirement of Directors is governed by the Company’s articles of association, the UK Corporate Governance Code and the Companies Act 2006. The Company’s articles of association may only be amended by a special resolution of the shareholders in a general meeting.
to be reached over the longer-term viability of the Company and Group.
The Committee’s focus goes beyond executive pay to ensure that the interests of all colleagues and shareholders are considered fairly and consistently
On termination, the Executive Director will be entitled to payment for any accrued but untaken holiday calculated by reference to base salary and fixed share award.
A balanced scorecard approach with clearly identified performance descriptors is used to assess Group performance in key areas. Stretching objectives for each division and function were approved by the Committee around the start of the performance year. The objectives are aligned to the Group’s strategy and split across five categories: customer, people, control environment, building the business and finance.
Committee composition, skills and experience The Committee comprises Non-Executive Directors from a wide background to provide a balanced and independent view on remuneration matters. Stuart Sinclair was appointed as an independent Non-Executive Director and as a member of the Committee on 4 January 2016. Dyfrig John retired as an independent Non-Executive Director and as a member of the Committee on 11 May 2016.
Risk identification, measurement and control – the process for risk identification, measurement and control is integrated into the overall framework for risk governance. Risk identification processes are forward looking to ensure emerging risks are identified. Risks are captured in comprehensive risk logs/registers, and measured using robust and consistent quantification methodologies. The measurement of risks includes the application of stress testing and scenario analysis, and considers whether relevant controls are in place before risks are incurred.
The Group Risk Committee is supported through escalation and ongoing reporting by business area risk committees, cross-divisional committees addressing specific matters of Group-wide significance and the following Risk committees which ensure effective oversight of risk management: Credit Risk Committees Responsible for the development and effectiveness of the relevant credit risk management framework, clear description of the Group’s credit risk appetite, setting of credit policy, and compliance with regulatory credit requirements.
Group Fraud Committee Is responsible for ensuring that the development and application of fraud risk management complies with the Group’s strategic aims and risk appetite, and our broader corporate responsibilities. The committee provides direction and focus to priorities which enhance the Group’s fraud risk management capabilities in line with business and customer objectives, including engagement with external fraud detection and prevention bodies.
Group Financial Risk Committee Responsible for reviewing, challenging and recommending to GEC/GRC/GALCO, the Group Individual Liquidity Adequacy Assessment and Internal Capital Adequacy Assessment Process (ICAAP) submissions, the Group Recovery Plan, and the annual stress testing of the Group’s operating plan, PRA and EBA stress tests, and any other analysis as required.
1 Excludes £8.3 billion (31 December 2015: £nil) of reverse repurchase agreements.
Of which issued by Lloyds Banking Group plc2 – 3.8 1.2 0.4 5.4 1 Private placements include structured bonds and term repurchase agreements (repos).
INSURANCE RISK Definition Insurance risk is defined as the risk of adverse developments in the timing, frequency and severity of claims for insured/underwritten events and in customer behaviour, leading to reductions in earnings and/or value.
The Group has a Disclosure Committee which assists the Group Chief Executive and Chief Financial Officer in fulfilling their disclosure responsibilities under relevant listing and other regulatory and legal requirements. In addition, the Audit Committee reviews the quality and acceptability of the Group’s financial disclosures. For further information on the Audit Committee’s responsibilities relating to financial reporting see pages 72 to 75.
In considering the appropriateness of provisions, we have assessed whether higher risk concentrations (e.g. past term interest only loans, forborne loans) have been appropriately considered and captured in the modelled provision, and where not, whether overlays to modelled calculations appropriately reflected those risks. We challenged management over the completeness of overlays and to provide objective evidence to support the adjustments made to the modelled provision and performed substantive testing over certain overlays.
We made our own assessment of the likelihood of the tax exposures occurring based on our knowledge of tax legislation and applicable precedent. In making our assessment we considered the range of interpretation of the applicable tax legislation in the relevant jurisdictions. We also evaluated the calculation of the exposures and agreed these to the financial statements.
– the disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated.
The Group has entered into securitisation and similar transactions to finance certain loans and advances to customers. In cases where the securitisation vehicles are funded by the issue of debt, on terms whereby the majority of the risks and rewards of the portfolio of securitised lending are retained by the Group, these loans and advances continue to be recognised by the Group, together with a corresponding liability for the funding.
Insurance provides a range of protection, pension and investment products to meet the needs of its customers.
Fee and commission income: Credit and debit card fees 875 918 1,050
Premium income in 2015 was reduced by a charge of £1,959 million relating to the recapture by a third party insurer of a portfolio of policies previously reassured with the Group.
Benefits expected to be paid between 5 and 10 years 8,030 7,710
Asset at 31 December 2,706 3,977 Asset at 31 December 2,706 3,977
Preference shares The Company has in issue various classes of preference shares which are all classified as liabilities under IFRS which are included in note 39.
Issue costs of other equity instruments (net of tax) – – (21)
The number of shares awarded relating to matching shares in 2016 was 35,956,224 (2015: 18,001,413), with an average fair value of £0.61 (2015: £0.78), based on market prices at the date of award.
At 31 December 2016, the Group did not provide any guarantees in respect of key management personnel (2015 and 2014: none).
The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2016, customer deposits of £171 million (2015: £145 million) and investment and insurance contract liabilities of £406 million (2015: £694 million) related to the Group’s pension funds.
Total trading and other financial assets at fair value through profit or loss 79,450 55,970 5,116 140,536
– A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax, depreciation and amortisation. The particular multiple selected being appropriate for the type of business being valued and is derived by reference to the current market-based multiple. Consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting an appropriate multiple. – Discounted cash flow valuations use estimated future cash flows, usually based on management forecasts, with the application of appropriate exit yields or terminal multiples and discounted using rates appropriate to the specific investment, business sector or recent economic rates of return. Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference in deriving an appropriate multiple. – For fund investments the most recent capital account value calculated by the fund manager is used as the basis for the valuation and adjusted, if necessary, to align valuation techniques with the Group’s valuation policy.
Deposits from banks: Customer deposits: Repos – – – – – –
B. Concentrations of exposure The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall exposure to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation, Risk management on page 124.
Total loans and advances which are neither past due nor impaired 26,888 296,303 39,478 109,364 445,145 33,079
Total held at fair value through profit or loss 47,907 2,491 50,398 44,466 2,420 46,886 1 Credit ratings equal to or better than ‘BBB’.
Liabilities arising from non-participating investment contracts 20,112 – – – – 20,112
Under IAS 39, provisions are recognised for losses that have been incurred but may not have been separately identified. An assessment is made of the likelihood of assets being impaired at the balance sheet date and being identified subsequently; the length of time taken to identify that an impairment event has occurred is known as the loss emergence period. The Group has a range of emergence periods which are dependent upon the characteristics of the portfolios, but typically range between one month and 12 months based on historical experience. Unsecured portfolios tend to have shorter emergence periods than secured portfolios. Under IFRS 9, all loans in stage 1 will require a loss allowance measured at an amount equal to 12 months ECL and is therefore longer than current emergence periods for certain portfolios.
IFRS 9 requires the use of more forward looking information including reasonable and supportable forecasts of future economic conditions. The need to consider a range of economic scenarios and how they could impact the loss allowance is a subjective feature of the IFRS 9 ECL model. The Group is developing the capability to model a number of economic scenarios and capture the impact on credit losses to ensure the overall ECL represents a reasonable distribution of economic outcomes. Appropriate governance and oversight will be established around the process.
The directors approved the parent company financial statements on 21 February 2017.
Issue costs of other equity instruments, net of tax – – (21)
Liquidity risk The risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.
SCOTTISH WIDOWS MANAGED INVESTMENT FUNDS ICVC 2 International Equity Tracker Fund 98.50% Balanced Portfolio Fund 82.10% Progressive Portfolio Fund 73.17% Cautious Portfolio Fund 60.14% Cash Fund 98.68% Opportunities Portfolio Fund 92.61%