– extending reach and depth of customer relationships – enhancing product capabilities to build competitive advantage
in my review this year, i will cover three areas; first, the strategic rationale for the transaction and the benefits it will bring, second, the performance of lloyds TSB in 2008, and third the outlook for lloyds Banking Group.
The Group’s income statement includes income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These items have no impact upon the profit attributable to equity shareholders. In order to provide a clearer representation of the underlying trends within the Insurance and Investments segment, these items are shown within a separate column in the segmental analysis above.
Settlement of overdraft claims (76) – – – (76) – (76)
Continued effective cost management, with a clear focus on investing to improve service quality and processing efficiency. Operating expenses increased by only 2 per cent and there was an improvement in the cost:income ratio to 44.4 per cent.
– ABS CDO** 128 128 – – – – secondary loan trading* 310 310 15 – – – SIV capital notes – – 84 78 78 – SIV liquidity backup
REGULATION In the UK and elsewhere, there is continuing political and regulatory scrutiny of financial services. The Competition Commission launched an investigation into the supply of Payment Protection Insurance (PPI) services (except store card PPI) to non-business customers in the UK. Various members of the Group underwrite PPI, while other members of the Group distribute PPI, by offering it for sale with various of the credit products which they supply. On 5 June 2008, the Competition Commission issued its provisional findings, to the effect that there are market features which prevent, restrict or distort competition in the supply of PPI to non-business customers, with an adverse effect on competition and with resulting detriments to consumers. Following consultation, the Commission published its final report on 29 January 2009 setting out its remedies. The remedies include a prohibition on the sale of PPI within seven days of the distributor’s sale of credit, although the customer may initiate this after 24 hours, and a prohibition on a single premium product, together with wide information and reporting requirements. The Commission expects that the measures will come into force during 2010 (information remedies in April 2010 and other measures by October 2010). The adoption of statutory orders implementing the remedies could have a significant adverse impact on the level of sales and thus the revenue generation and profitability of the payment protection insurance products which the Group offers its customers. The ultimate impact will be determined by a number of factors including the extent to which it is able to mitigate the potentially adverse effects of such statutory changes through restructuring the payment protection products it offers its customers and developing alternative products or revenue streams. On 12 December 2008 the Group announced its commercial decision to sell only regular monthly premium PPI to its personal loan customers from January 2009.
All colleagues have a balanced scorecard of objectives that takes account of a range of business drivers rather than just pure financial measures.
In 2007, we set a stretching target to reduce our CO
Stonewall is a campaigning organisation that works to achieve equality and justice for lesbians, gay men and bisexual people.
The chief risk offi cer, a member of the group executive committee and reporting directly to the group chief executive, oversees and promotes the development and implementation of a consistent group wide risk management framework. The chief risk offi cer, supported by the group risk department and the divisional risk offi cers, provides objective challenge to the Group’s senior management. The chief risk offi cer also reports independently to the risk oversight committee (see page 72) that comprises non-executive directors and is chaired by the Group chairman.
Business risk is defined as the risk to economic profit in the Group’s budget and over the medium-term plan arising from a sub optimal business strategy or the sub optimal implementation of the plan as agreed by the board of directors. In assessing business risk, consideration is given to internal and external factors.
The Group also employs a statistically-based credit portfolio model, which models portfolio credit risk based on defaults and calculates the economic equity employed and credit value at risk for each portfolio.
The principal collateral types for loans and advances are: – mortgages over residential properties; – charges over business assets such as premises, inventory and accounts receivable; – charges over financial instruments such as debt securities and equities; and – guarantees received from third parties.
Lloyds Banking Group Annual Report and Accounts 2008 non- total with Profit Participating long term shareholder fund fund fund fund total £m £m £m £m £m as at 31 december 2008
Adjustment to replace ‘realistic’ liabilities with statutory liabilities 3,695 – 3,695 – 3,695
Total dividend for the year1 648 2,026 1,927 1,915 1,914 31 december 31 December 31 December 31 December 1 January
Joined the board in 2001 as group executive director, UK retail banking before his appointment as group chief executive in June 2003. Served with Citibank from 1975 and held a number of senior and general management appointments in the USA, South America and Europe before becoming chief operating officer of Citibank Consumer Bank in 1998. Following the Citibank/ Travelers merger in 1998, he was chairman and chief executive officer of Travelers Life and Annuity until 2000. Chairman and chief executive officer of Zona Financiera from 2000 to 2001. A non-executive director of BT Group. Aged 57
It is intended to issue ordinary shares by way of a capitalisation issue in May 2009, at the rate of one share for every 40 shares held.
The remuneration committee unanimously recommends that you vote to approve the remuneration report at the 2009 Annual General Meeting.
Based on a combination of performance targets comprising economic profit, earnings per share, synergy savings, and non-financial measures relating to the success of the integration 33% Paid in shares after three years
The detailed rationale for the proposed measures is set out below.
INTEGRATION BALANCED SCORECARD (APPLyING TO AWARD OF 40 PER CENT OF SALARy, BEING 50 PER CENT OF THE INTEGRATION AWARD)
b) Executive option granted between March 1998 and August 1999. c) Executive option granted between March 2000 and March 2001. d) Executive option granted between March 2004 and August 2004. e) Executive options granted from March 2005.
CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2008
Effects of exchange rate changes on cash and cash equivalents 1,440 82
Lloyds Banking Group Annual Report and Accounts 2008 2 accounTing poLicies continued
The Group is permitted to reclassify, at fair value at the date of transfer, non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the trading category if they are no longer held for the purpose of being sold or repurchased in the near term, as follows: – if the financial assets would have met the definition of loans and receivables (but for the fact that they had to be classified as held for trading at initial recognition), they may be reclassified into loans and receivables where the Group has the intention and ability to hold the assets for the foreseeable future or until maturity; – if the financial assets would not have met the definition of loans and receivables, they may be reclassified out of the held for trading category into available-for-sale financial assets in ‘rare circumstances’.
UK corporation tax: Current tax on profit for the year (667) (763)
A further £40,608 million of residential mortgages are subject to securitisation via a covered bond programme; the related bonds have been issued to Lloyds TSB Bank plc, and are available for use in connection with Lloyds TSB Bank plc’s participation in the Bank of England’s Special Liquidity Scheme.
Current estimate of cumulative claims 206 202 204 311 205 1,128
Financial calendar 2009 195 33 Life insurance sensiTiviTy anaLysis The following table demonstrates the effect of changes in key assumptions on profit before tax and equity disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical.
This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis points. This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
Change in unallocated surplus recognised in the income statement (note 10) (284) (114)
The Group has established a number of defined benefit pension schemes in the UK and overseas. The majority of the Group’s employees are members of the defined benefit sections of the Lloyds TSB Group Pension Schemes No’s 1 and 2. These schemes provide retirement benefits calculated as a percentage of final salary depending upon the length of service; the minimum retirement age under the rules of the schemes is 50.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued 37 reTiremenT benefiT obLigaTions continued
The Group has a number of associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2008, these companies had total assets of approximately £5,838 million (2007: £3,184 million ), total liabilities of approximately £5,780 million (2007: £3,182 million) and for the year ended 31 December 2008 had turnover of £2,088 million (2007: £2,136 million) and made a net loss of approximately £80 million (2007: net profit of £9 million). In addition, the Group has provided £825 million (2007: £609 million) of financing to these companies on which it received £46 million (2007: £23 million) of interest income in the year.
Greater than 90 per cent 23,342 5,320 49 finanCial risK management continued
Debt securities: other public sector securities – – – – – 12 12
The fair values of financial instruments quoted in active markets are based on quoted prices. The fair values of financial instruments that are not quoted in active markets are determined using valuation techniques including cash flow models which, to the extent practicable, use observable market inputs such as interest rate yield curves, equities and commodities prices, option volatilities and currency rates that are either directly 49 finanCial risK management continued
As discussed in note 46 to the consolidated financial statements, the Group provides share based compensation to employees through a number of schemes; these are all in relation to shares in the Company and the cost of providing those benefits is recharged to the employing companies in the Group on a cash basis.
Liquidity and funding risk 55, 174, 190 market risk 50 measurement basis of financial assets and liabilities 165, 189 five year finanCial summary 65 forward looKing statements contents page going ConCern
Critical accounting estimates and judgements 113 notes to the consolidated financial statements 122, 146 value at risK (var) 51 volatility