Our purpose is to help Britain prosper. We are creating a responsible business that better meets our customers’ needs and a culture where our colleagues put customers first. This is key to our long-term success and to fulfilling our aim to become the best bank for customers, colleagues and shareholders.
The 2017 Annual Report and Accounts incorporates the strategic report and the consolidated financial statements, both of which have been approved by the Board of Directors.
Find out more about our Helping Britain Prosper Plan on page 20 >708,000 individuals, charities and businesses trained in digital skills. This includes around 300 local people in Wolverhampton who have been helped by our Digital Champions to learn new skills and stay safe online.
>124,000 businesses of all kinds and sizes helped to start up. This includes Karen in Lowestoft who has opened her own hairdressing salon with support from Lloyds Bank.
Overview and strategy I am pleased to report that 2017 has been another successful year with significant progress both financially and strategically. We have continued to transform the Group to become a safer, more agile and customer focused organisation whilst increasing profitability. As a result of this progress, the UK government was able to conclude its share sale in May, more than recovering its initial investment and allowing the Group to return to full private ownership. This landmark event is a tribute to the hard work of all our colleagues in recent years.
Capital return As a result of the financial progress in the year, I am pleased to announce that the Board has recommended a final ordinary dividend of 2.05 pence per share, bringing the total ordinary dividend for 2017 to 3.05 pence per share, an increase of 20 per cent on last year. In addition the Board intends to implement a share buyback of up to £1 billion. This is in line with the Group’s policy to deliver a progressive and sustainable ordinary dividend whilst distributing surplus capital when appropriate to do so.
The transformation now being undertaken will ensure we maintain the core values of the past while equipping us to succeed in the future. Lord Blackwell Chairman
Corporate culture The Board and senior management have a vital role to play in shaping and embedding a healthy corporate culture, and this continued to be a focus in 2017. Trust is the foundation for our customer franchise and I believe that our performance in the year has helped to rebuild trust not just in the Group but in the future stability and sustainability of the banking sector.
As announced previously, two of our Non-Executive Directors, Anthony Watson and Nick Luff, stepped down following the AGM in May. Anthony was succeeded as Senior Independent Director by Anita Frew and Nick as Audit Committee Chairman by Simon Henry.
In June Lord Lupton joined the Board as an independent Non-Executive Director and Chairman of the non ring-fenced bank. James brings not just his experience of UK banking and capital markets, but also extensive corporate advisory experience which will be of particular value to our overall Commercial Banking activities.
As a result, the Group’s total Group Performance Share (GPS) outcome has increased to £414.7 million (an increase of approximately 5.5 per cent on 2016). This is after a 21 per cent collective performance adjustment, and reflects both strong performance against stretching Group strategic objectives and issues impacting negatively on profitability and shareholder returns, customers, conduct and the Group’s reputation.
Total GPS outcome remains a small proportion of underlying profit at 4.7 per cent. Cash GPS awards are capped at £2,000 with additional amounts paid in shares and subject to deferral and performance adjustment. More information on how we ensure our approach to remuneration supports our new strategy can be found in the Directors’ remuneration report on page 97.
Helping Britain Prosper and our contribution to the UK As the UK’s leading financial services provider we are making a significant impact on the UK economy
Creating the best customer experience We have been committed to meeting customers’ evolving needs through our multi-brand and multi-channel approach and as a result customer satisfaction, as measured by net promoter score (NPS), has increased to 62.0 from 58.6 in 2014 and from 42.5 in 2011. We operate the UK’s largest branch network and the largest digital bank with 13.4 million active online users, of which 9.3 million are on mobile. We have focused on transforming key customer journeys and have made significant improvements, including faster processing of new mortgage applications and simpler processes for account opening. In addition we have developed an open banking platform in line with regulatory timescales.
Delivering sustainable growth When we outlined our strategic vision in October 2014, we targeted sustainable growth in line with our low risk appetite, committing to grow in areas where we were under-represented. We have increased net lending to SME clients by £3 billion since 2014, significantly ahead of the market, while also increasing UK consumer assets by over £6 billion and acquiring the £8 billion MBNA credit card portfolio. In the competitive low growth mortgage market we have focused on protecting margin rather than achieving volume growth over the last couple of years though the open mortgage book returned to growth in 2017. The Group also announced the acquisition of Zurich’s workplace pensions and savings business in late 2017.
We remain committed to building the best team, creating an inclusive and diverse workforce that represents a changing Britain. Colleague engagement is at an all-time high, and in line with top performing corporates. In 2017 we were awarded number one employer for lesbian, gay, bisexual and transgender people at the Stonewall Awards and named the world’s best bank for diversity and inclusion by Euromoney magazine.
The strategy outlined will enable the Group to deliver strong statutory profit growth supported by targeted asset growth in key segments, a resilient net interest margin, lower operating costs, strong asset quality and lower remediation costs, whilst delivering strong capital generation and sustainable and superior shareholder returns.
Costs will continue to be a competitive advantage as we deliver market leading efficiency. We expect operating costs to be less than £8 billion in 2020. We also expect to achieve a cost:income ratio in the low 40s as we exit 2020, including future remediation costs. We continue to expect improvements in the cost:income ratio every year.
Increased ordinary dividend of 3.05 pence per share with an additional share buyback of up to £1 billion
Delivering for all our stakeholders Our key performance indicators have been considered by the Board and identify the most effective output measures for assessing financial and non-financial performance and progress towards becoming the best bank for customers, colleagues and shareholders.
Underlying profit increased in 2017, largely due to higher income, positive operating jaws and strong asset quality.
Pre-tax statutory profit increased significantly, largely driven by strong underlying performance and lower charges below the line.
Colleague engagement remains at its highest ever level with our employee engagement index 5 points higher than 2016. Our performance excellence index also improved, indicating our colleagues strongly believe we are committed to delivering great products and services for customers.
Despite near-term uncertainties about the future relationship with the EU, the UK economy is expected to remain resilient in 2018, growing at a similar pace to 2017. Longer term growth potential is still expected to be faster than the Eurozone and similar to the US
Interest rates are expected to remain low, with gradual rises beneficial to our savings customers and the Group
Overview As a UK focused financial services provider, our prospects are closely aligned to the strength of and outlook for the UK economy. In the period following the decision to leave the EU, the UK economy has remained resilient. Growth has slowed only a little below its trend rate, unemployment has continued to fall to a 40-year low, and property prices have continued to rise slowly. In the absence of any sudden shocks to business or consumer confidence, this recent resilience is expected to continue in 2018 and the next few years. In common with many other countries, the biggest uncertainty for longer term growth is the degree to which productivity growth improves from its weak rate of the past decade.
Business investment is likely to have been impacted by the uncertainty around the UK’s future trading relationship with the EU but as negotiations progress and that relationship becomes clearer, investment spending should be supported. Operational impacts of the UK’s exit from the EU present risks for some of our customers’ businesses, although the UK’s continued competitive advantages in innovation and high value services, and the flexible labour market should enable the economy to prosper longer term in growing world markets.
Outlook Barring unexpected sudden shocks to consumer or business confidence, the near-term outlook for both the UK economy and the Group remains relatively benign. A tight labour market and gradual productivity improvements should over time underpin quickening wage growth, whilst inflation is expected to start falling through 2018, the combination gradually ending the squeeze on households’ spending power. With unemployment remaining close to its current 40-year lows, Bank Rate is expected to continue to rise, but only slowly. House prices are expected to rise marginally, with the affordability impact of slightly higher interest rates offset by improving disposable incomes.
The Group is not immune to the challenges facing the near-term and medium-term economic outlook, but our UK focus means that the current benign conditions and resilience of the UK economy will be supportive to the Group’s performance through the delivery of the next chapter our strategy. Direct operational impacts from EU exit are also limited.
Other Over the next three years a number of other regulations will be introduced or take effect including the effectiveness of competition and customer choice and the deadline for customers to claim compensation for mis-sold PPI.
Evolving demographics and life patterns are changing the financial needs of our customers, in particular increasing focus on the ability to plan for retirement
Our multi-channel offering, including the largest branch network and digital bank in the UK, enables customers to interact with us in whichever way they prefer. In addition, our customer data provides the Group with a wealth of information that can be utilised to facilitate greater personalisation, while ensuring we meet all of our customers’ evolving banking and insurance needs.
The competitive landscape is changing with new entrants such as FinTechs and tech giants increasing disruption through innovation, while incumbent banks continue to re-focus on the UK
Due to the nature of our business as a large, UK focused financial services provider, we face a number of external and internal challenges.
As previously discussed on pages 8–9, the main external challenges we face are: Evolving and uncertain economic environment
We also face a number of internal challenges, which are being addressed as part of the next phase of our strategy: Operating as efficiently as possible while remaining the best bank for customers
Running a responsible business for all our stakeholders See pages 21–27
Doing the right thing for our customers, colleagues and shareholders by meeting their financial needs, helping them succeed, improving our service proposition and creating value for them, is fundamental to our business model and the long-term sustainability of the business.
We have demonstrated our ability to actively respond to changes in the operating environment, accelerating cost delivery and achieving significant efficiency savings
We have made progress towards building a business our colleagues are proud to work for by creating the best environment for our colleagues to succeed
Performance highlights 68 per cent of customer needs met via digital (versus forecast range of 50-70 per cent set out in 2014)
Lloyds Banking Group Annual Report and Accounts 2017 13 Strategic report
Finalisation of strategy and communication A number of changes to the Group’s operating structure and executive management were announced in July to put in place the right team and structure to lead the development and delivery of the strategy.
Why the change? Since 2011, we have significantly transformed our business for the benefit of our customers and other stakeholders. However we are not complacent and recognise that unprecedented change in customer expectations, technology, the competitive environment and regulation require a bold response for the next chapter of our strategy.
Stages in the process up to June 2016 up to June 2017 up to February 2018 2018–2020
Our next chapter Transforming the Group for success in a digital world Our new strategy will enable us to seize new opportunities by building on our existing competitive advantages. The transformation planned will ensure we become a digitised, simple, low risk, customer focused, UK financial services provider.
Personalising our customer propositions As the UK’s largest banking franchise, we will invest in developing our data capabilities, with the aim of delivering more personalised and data-driven propositions and services for our customers.
Broadening the digital transformation of our processes Over the past three years we have transformed a number of key customer journeys on an end-to-end basis. This has led to significant improvements in the experience of our customers, as well as delivering significant operational efficiencies. Looking ahead, we will materially scale-up our transformation, going deeper in the transformation of the customer journeys we have already addressed to cover additional brands and segments, as well as more activities along the value chain.
Meeting our customers’ growing financial planning and retirement needs The ageing population and recent regulatory changes are leading to greater customer demand for long-term savings and investment products as well as for high quality, low cost advice and personalised solutions.
Transforming our approach to people To develop the new set of skills and capabilities we will need our colleagues to have in the future, we will launch a significant upskilling programme, using new technologies and tailored content to deliver appropriate training in the most efficient way. For certain skills, we will need to recruit externally, with a number of these future requirements relating to very specific technical capabilities that are in short supply in the market, and for which there will be intense competition. We will therefore transform our recruitment and onboarding processes, while also developing a compelling colleague proposition and building on the strength of the Group’s brands to attract future employees.
Adopting new ways of working and an agile approach to change In order to deliver the digital transformation of the Group more effectively and efficiently, we will embrace new ways of working, including automated software engineering processes and agile change methodologies that will improve our responsiveness to innovation and customer feedback. To foster greater collaboration and innovation, we will also co-locate our change teams where appropriate.
Key objectives for 2020 By maximising the Group’s capabilities and sources of competitive advantage more effectively, we expect to deepen customer relationships and grow in targeted segments.
Transforming our Commercial Banking proposition We will strengthen our simple, low risk and relationship-led Commercial Banking offering to reflect our clients’ evolving expectations as a result of the continued innovation in our business.
At the same time, the role of our relationship managers will evolve, with better access to data, new digital tools and analytics. These will enable them to create more value in strategic conversations with their clients.
Doing business responsibly Supporting our strategic priorities and our purpose to help Britain prosper
We actively support major national and international codes and conventions related to responsible business, including the UN Global Compact.
Our governance structure extends from our Group Board and Board level Responsible Business Committee, through the executive level Responsible Business Management Committee, which implements our responsible business strategy. At the end of 2017, this executive level committee became our Sustainability Committee. The Committee will increase its focus on the implementation of our Group-wide sustainability strategy as well as overseeing material responsible business issues. Our responsible approach then extends onwards through the efforts of managers and colleagues at all levels.
Our fundraising enabled Mental Health UK to launch the UK’s first Mental Health and Money Advice Service
More than 5 million sq. ft. of real estate helped to become energy efficient
Our businesses have roots going back 250 years and have stood the test of time. Our purpose, to help Britain prosper, is more important than ever to the UK’s successful transformation into a digitally enabled low carbon economy. Sara Weller Independent Director and Chairman, Responsible Business Committee
Helping Britain Prosper Through our products and services we have been serving Britain for more than 250 years, but our Helping Britain Prosper Plan takes us beyond business as usual and is an important investment in our long-term success. We launched the Plan in 2014, drawing on advice from our senior leaders and many external partners, including our independent stakeholder panel and charitable Foundations. Since its launch we have achieved a lot for Britain, meeting 20 of our 25 targets in 2014, 27 of our 28 targets in 2015 and 20 of our of 24 targets in 2016.
Through our four independent charitable Foundations we helped more than 2,800 charities and supported colleagues to volunteer their expertise, including their mentoring skills, to help these charities become more effective and financially sustainable. This year, colleagues gave almost 260,000 volunteering hours to support local communities.
We made further progress towards our target of women holding 40 per cent of our senior roles by 2020, with 34 per cent of these roles now held by women. You can read more about inclusion and diversity on page 21. We also met our 2020 colleague engagement targets, three years ahead of schedule, and reached engagement levels of 70 per cent amongst Black, Asian and Minority Ethnic (BAME) and Lesbian, Gay, Bisexual (LGB) colleagues as well as colleagues with disabilities. We will continue to promote inclusion with our business but have now retired these targets from our Plan.
We’re helping people with the issues that really matter to them, whether that is buying a home, saving for later life, or finding a rewarding job.
Helping Britain get a home Amount of lending committed to help people buy their first home £10bn £30bn Helping save for the future Growth in assets that we hold on behalf of customers in retirement and investment products2 £8bn £50bn
Doing business responsibly continued 2018 Helping Britain Prosper Plan We have developed the Plan for 2018 and beyond, to ensure it supports the next phase of our strategy and focuses on the areas where we believe we can make the biggest difference: addressing Britain’s housing needs, saving for the future, building digital skills, helping businesses start up and grow, championing Britain’s diversity and tackling disadvantage.
Colleagues Our colleagues take pride in working for an inclusive and diverse bank and with their support we’re building a culture in which everyone feels included, empowered and inspired to do the right thing for customers.
Equality, inclusion and diversity We continued to make good progress against our inclusion and diversity (I&D) strategy. The proportion of colleagues who agree that the Group is an inclusive place to work increased to 89 per cent, 3 per cent more than in 2016, and almost half of our colleagues are members or supporters of one of our five diversity networks. We met our target to increase the engagement levels of Black, Asian and Minority Ethnic colleagues, colleagues with disabilities and Lesbian, Gay and Bisexual colleagues above 70 per cent, three years earlier than our target date of 2020.
Ethnic background Percentage of colleagues from a BAME background 8.3% 7.9%
Sexual orientation Percentage of colleagues who disclose they are lesbian, gay, bisexual or transgender 1.7% 1.5% 1 Restated to include International and parental leave colleagues comparable with other gender reporting. Includes subsidiary Non-Executive Directors. 2 Reporting scope: payroll headcount includes established and fixed term contract colleagues, parental leavers and
Gender pay gap We recognise that supporting gender equality and diversity more broadly supports the success of the UK as a whole. We regularly review our pay levels to ensure that men and women are paid equally for doing equivalent roles across the Group. We support the government’s requirement for all large companies to publish their gender pay gap information. We remain committed to increasing the proportion of women in senior roles and building a diverse senior management team.
Human rights We aspire to conduct business in a way that values and respects the human rights of all the stakeholders we work with. We respect and support the United Nations Universal Declaration of Human Rights, together with the International Labour Organisation (ILO) Fundamental Conventions, covering freedom of association, the abolition of forced labour, equality and the elimination of child labour. We comply with all relevant legislation, including the UK Modern Slavery Act. We also support relevant voluntary standards, such as the UN Guiding Principles on Business and Human Rights and take steps to make sure colleagues understand our position on these issues and can help us live up to the standards they demand. You can read our Anti-Slavery and Trafficking statement online.
We improved our digital offer, enhancing our Skillsoft resource, which won a Gold International Brandon Hall Excellence Award, and adding a video library, Lynda. com, to resources.
Supporting colleagues’ mental health We worked with Mental Health UK to develop and deliver mental health awareness training to over 28,000 colleagues and we estimate that more than 25 per cent of colleagues discussed mental health this year. This included our Group Chief Executive António Horta-Osório, who shared his story about executive stress. We have improved the mental health support colleagues receive through our third-party healthcare suppliers and are supporting our top 120 leaders to develop their mental resilience.
Agile working To respond to the changing business environment and in recognition of the changing ways colleagues live and work, we encourage our colleagues to embrace agile working. Approximately 41 per cent of them are now working in a flexible way compared to 33 per cent two years ago. In 2017 we launched a workforce agility Line Manager toolkit to help teams implement new ways of working.
of colleagues believe the Group is committed to being a responsible business (2016: 86%).
Supporting customers with disabilities Digital access can transform banking for vulnerable customers, particularly for those with health conditions and disabilities that make it difficult to get to a branch. Following a review in 2016, the charity Abilitynet accredited our Halifax and Lloyds Bank digital platforms based on their accessibility for disabled customers.
Support for Britain’s businesses and entrepreneurs We helped 6,800 clients to export for the first time in 2017, as part of a wider commitment to help 25,000 businesses trade overseas for the first time by 2020. We also supported more than 124,000 start-up businesses. In 2017, we handled over 54 million payments totalling in excess of £1.4 trillion in digital transactions for our commercial clients.
Through our partnership with the School for Social Entrepreneurs, we’ve helped more than 1,500 social entrepreneurs to start-up or grow their businesses since 2012. Our colleagues have worked with more than 250 social entrepreneurs as mentors to help them build sustainable social businesses. In 2017 the Group became the first financial services company to partner the pioneering Match Trading™ initiative; a new funding model which incentivises social entrepreneurs to grow their business through trading.
Widening financial inclusion and supporting customers in vulnerable circumstances Through our financial inclusion strategy and financial education programmes we focus on improving access to financial services and building skills. Read more about financial education on page 25. This year we opened almost 271,000 new basic bank accounts and helped 99,700 customers upgrade from basic to mainstream products. We also simplified our unplanned overdraft approach. More than 9 in 10 personal current account customers of Lloyds Bank, Bank of Scotland and Halifax are now better off or unaffected financially by the changes.
Responsible and ethical lending As a lender and pension provider we play an important role in promoting responsible lending and investment decisions that take into account a broad range of environmental, social and governance factors. The Group remains a signatory to the Equator Principles, the Stewardship Code and the UN Principles of Responsible Investment. As an active and responsible asset owner, we consider our obligations during the selection, appointment, monitoring and retention of our fund managers. The management of risk for investment funds offered to customers by Scottish Widows is effected through a robust and comprehensive process, including our Responsible Investment Governance Framework. In 2017 we completed an initial assessment of the responsible investment capabilities of our lead asset managers and the majority of external fund managers, and we launched a social bond fund in addition to the ethical and environmental funds in our range.
Our approach to tax is governed by our Tax Policy which is part of our Board-approved Group Risk Management Framework. We have discussed this Policy with HMRC and we comply with their Code of Practice on Taxation for Banks and the Confederation of British Industry’s Statement of Tax Principles. We do not interpret tax laws in a way that we believe is contrary to the intention of Parliament, and we do not promote tax avoidance products to our customers. You can read more about our Tax Strategy online.
Community investment Our support for local communities focuses on education, employability and enterprise. Our total community investment in 2017 was around £58 million . This includes our colleagues’ time, direct donations, and the money we give to our independent charitable Foundations, which receive a share of the
Group’s profits annually. Through the Group’s Foundations, we reach and help some of the most disadvantaged communities in Britain, giving more than £20 million in 2017.
Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2017 Annual Responsible Business Reporting. Deloitte’s 2017 assurance statement and the 2017 Reporting Criteria are available online at lloydsbankinggroup.com/ RBdownloads
You can read more about environmental risk management on page 133
Metrics and targets We are working to develop strategic commitments and targets in response to climate-related risks and opportunities, with different parts of the business feeding into this target setting process. This builds on our work to reduce the environmental impact of our own operations.
Policy embedding2, due diligence and outcomes Risk overview, pages 32–33 Risk management, pages 107–156
External environment, pages 8–9 Creating value for our stakeholders, page 11 Addressing the issues that matter most, page 21
Description of the business model Our business model, pages 10–11 Our next chapter, page 14
Non-financial key performance indicators Key performance indicators, page 7 What we have achieved over the past three years, page 12 Doing business responsibly, page 18 Helping Britain Prosper, pages 19–20
2 The policies mentioned above form part of the Group’s Policy Framework which is founded on key risk management principles. The policies which underpin the principles define mandatory requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2017.
Retail offers a broad range of financial service products, including current accounts, savings, mortgages, credit cards, motor finance and unsecured loans to personal and business banking customers.
Delivered a new approach to current account overdrafts that is simple, clear and puts customers in control as well as redesigning the account opening journey to reduce account opening times.
Largest UK digital bank with 13.4 million active online users including 9.3 million mobile users.
Supported over 124,000 start-up businesses, exceeding the commitment to support 100,000.
1 Proportion of Group underlying profit excluding run-off and central items.
UK’s largest digital bank Active online users (m) Mobile users (m)
Impairment charges increased 10 per cent to £717 million. Excluding MBNA, impairments were £55 million lower than in 2016, reflecting the resilient economic environment. Asset quality ratio excluding MBNA was down 2 basis points.
Loans and advances to customers were up 3 per cent to £339.7 billion (including MBNA £8 billion) driven by the Black Horse business and growth in the open mortgage book, up £1.0 billion to £267.1 billion.
Risk-weighted assets increased by £6.2 billion to £90.8 billion following the acquisition of MBNA.
Strengthening our retail offer In June 2017 we completed our acquisition of MBNA, a specialist credit card provider which serves around 2.5 million UK customers and provides around £8 billion of UK prime credit card lending. MBNA facilitates 480,000 transactions per day and is accepted and used all around the world.
MBNA is a strong, profitable and prime credit card business, with an experienced management team and an advanced data analytics capability, which will benefit the wider Group. This is the largest integration of a credit card business ever undertaken in Europe. The integration is progressing well and will be completed by the end of the first quarter of 2019.
Return on risk-weighted assets of 2.82 per cent, reflecting proactive portfolio optimisation and increased profit.
Other income resilient at £1,761 million (2016: £1,756 million), with fewer significant transactions in the second half and reduced client activity compared to 2016.
Deposits increased by 4 per cent to £147.6 billion, with continued momentum in attracting high quality transactional banking deposits.
Creating the best customer experience Scottish Widows won ‘Company of the Year’ and 5 star service awards in individual categories of Life and Pensions and Investments at the Financial Adviser Service Awards 2017.
Following its launch in 2016, the employer digital service now reaches all eligible workplace schemes, significantly reducing processing time for monthly pension scheme management.
Annualised annuity payments to customers in retirement £m 1 Proportion of Group underlying profit excluding run-off and central items.
Our prudent risk culture and appetite, along with close collaboration between Risk division and the business, supports effective decision making and has enabled us to continue to deliver against our strategic priorities in 2017, simplifying and strengthening the business whilst growing in targeted areas. We have created a strong foundation to enable this progress, ensuring we react appropriately to the ever changing macroeconomic and regulatory environment.
Group strategy and risk appetite are developed together to ensure one informs the other to deliver on our purpose to help Britain prosper whilst becoming the best bank for customers, colleagues and shareholders.
We believe effective risk management can be a strategic differentiator, in particular: Prudent approach to risk Implementing a prudent approach to risk across the Group and embedding a strong risk culture ensures alignment to our strategy.
Effective risk analysis, management and reporting Continuing to deliver regular close monitoring and stringent reporting to all levels of management and the Board ensures appetite limits are maintained and subject to stressed analysis at a risk type and portfolio level.
In line with our code of responsibility. Culture ensures performance, risk and reward are aligned
Risk and potential impact The availability and delivery of services through digital channels is becoming increasingly important for customer satisfaction. Accelerated change in customer behaviour and expectations may require increased agility to accommodate the pace and scale of change and could lead to customer detriment if this change is poorly executed.
Risk and potential impact New technologies such as public cloud and artificial intelligence along with growing interconnectivity between the Group, customers, and third parties create new risks.
Increasing capabilities of cyber-attackers and higher volumes of connected devices increases the potential for cyber-enabled fraud and other crime, including attacks that could disrupt service for customers.
Risk and potential impact Technological change is driving an increase in the number, and changing the nature of competitors in the UK financial services industry, opening up opportunities for consumers even as levels of regulatory focus rise.
We will continue to address this through innovation and developing new products that respond to market trends and meet customer changing needs.
Extensive and thorough credit processes and controls to ensure effective risk identification, management and oversight.
Investing in enhanced cyber controls to protect against external threats to the confidentiality or integrity of electronic data, or the availability of systems, and to ensure effective third party assurance.
Enhancing the resilience of systems that support critical business processes with independent verification of progress on an annual basis.
We recognise that resilient and secure technology, and appropriate use of data, is critical to delivering a leading customer experience and maintaining trust across the wider industry.
The availability and resilience of IT systems remains a key strategic priority and the Cyber Programme continues to focus on enhancing cyber security controls. Internal programmes ensure that data is used correctly, and the control environment is regularly assessed through both internal and third party testing.
Conduct risk appetite metrics provide a granular view of how our products and services are performing for customers.
A comprehensive capital management framework that includes setting of capital risk appetite and dividend policy.
Equity and credit spread risks are closely monitored and, where appropriate, asset and liability matching is undertaken.
Examples Inadequate or complex governance arrangements to address ring-fencing requirements could result in a weaker control environment, delays in decision making and lack of clear accountability.
Non-compliance with or breaches of SM&CR requirements could result in lack of clear accountability and legal and regulatory consequences.
Ring-fencing will ensure we become safer and continue to deliver a leading customer experience by providing further protection to core retail and SME deposits, increasing transparency of our operations and facilitating the options available in resolution.
Examples Examples of the consequences of inadequate models include: Inappropriate levels of capital or impairments.
>5m square feet of real estate we've helped to become energy efficient in 2017
Underlying profit was £8,493 million, 8 per cent higher than 2016 with higher income and positive operating jaws. The underlying return on tangible equity increased to 15.6 per cent. Underlying profit in the fourth quarter was £1,926 million, 7 per cent higher than the same period in 2016 with a 5 per cent increase in net income.
Given the strong capital generation in the year, the Board has recommended a final ordinary dividend of 2.05 pence per share, making a total ordinary dividend of 3.05 pence per share, an increase of 20 per cent on 2016 and in line with our progressive and sustainable ordinary dividend policy. In addition, the Board intends to implement a share buyback of up to £1 billion, equivalent to up to 1.4 pence per share.
Net income of £17,472 million was 5 per cent higher than in 2016 with an 8 per cent increase in net interest income, which included £430 million from MBNA, and a 2 per cent increase in other income, while operating lease depreciation increased 18 per cent reflecting fleet growth in Lex Autolease.
Net interest income increased by £885 million to £12,320 million. The net interest margin increased by 15 basis points to 2.86 per cent reflecting lower deposit and wholesale funding costs, which more than offset continued pressure on asset margins and also included a 7 basis points benefit from MBNA. Average interest-earning assets were broadly unchanged with reductions in run-off, global corporates and the closed mortgage book offset by MBNA.
The Group expects the net interest margin for 2018 to be around 2.90 per cent, in line with the margin of 2.90 per cent in the fourth quarter of 2017.
The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. These liabilities include certain current account and savings balances, together with the Group’s equity. As at 31 December 2017 the Group’s hedge had a nominal balance of £165 billion (31 December 2016: £111 billion), broadly in line with the underlying hedgeable balances. The hedge had an average duration of around 3 years and a fixed earnings rate of approximately 1.1 per cent over LIBOR (2016: 1.6 per cent). The benefit from the hedge in the year was £1.9 billion over LIBOR (2016: £1.7 billion).
Operating costs at £8,184 million increased slightly during the year, but excluding MBNA costs of £135 million fell 1 per cent. Savings from Simplification more than offset increased investment in the business and inflation.
Asset quality remains strong with portfolios continuing to benefit from the Group’s proactive approach to risk management, continued low interest rates and a resilient UK economy.
The charge of £790 million for Enhanced Capital Notes in 2016 represented the write-off of the embedded derivative and premium paid on redemption of the remaining notes.
3 Excludes balances relating to margins of £2.1 billion (31 December 2016: £3.2 billion) and settlement accounts of £1.5 billion (31 December 2016: £1.8 billion).
Tangible net assets per share5 53.3p 54.8p (1.5)p 1 The CET1 and leverage ratios at 31 December 2017 and 2016 are reported on a pro forma basis, reflecting the dividends paid by the Insurance business in February 2018 and February 2017, respectively, in relation to prior year earnings. In addition the CET1 ratios at 31 December 2016 have been adjusted for the acquisition of MBNA.
3 Calculated in accordance with the UK Leverage Ratio Framework. Excludes qualifying central bank claims.
Dividend The Board has recommended a final ordinary dividend of 2.05 pence per share. This is in addition to the interim ordinary dividend of 1.0 pence per share that was announced at the 2017 half year results. The total ordinary dividend per share for 2017 of 3.05 pence per share has increased by 20 per cent from 2.55 pence per share in 2016.
The Group intends to maintain a progressive and sustainable ordinary dividend policy. The rate of growth of the ordinary dividend will be decided by the Board in light of circumstances at the time and, having grown very significantly in the last three years, going forward the ordinary dividend is likely to grow at a more normalised rate, whilst being supplemented by buybacks or special dividends.
Due to the Group’s UK retail and commercial focus, the vast majority of the Group’s business will continue to be held by Lloyds Bank plc and its subsidiaries (together the ring-fenced bank) and as a result these transfers will not have a material impact on the financial strength of Lloyds Bank plc.
Alternative performance measures The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. Further information is provided on page 267.
4 Equivalent regulatory view of ratio (including With Profits funds) is 154 per cent at 31 December 2017 (31 December 2016: 154 per cent).
The table below shows the reconciliation between the statutory net interest income and the underlying net interest income.
Insurance volatility The Group’s insurance business has policyholder liabilities that are supported by substantial holdings of investments. IFRS requires that the changes in both the value of the liabilities and investments are reflected within the income statement. The value of the liabilities does not move exactly in line with changes in the value of the investments. As the investments are substantial, movements in their value can have a significant impact on the profitability of the Group. Management believes that it is appropriate to disclose the Insurance and Wealth division’s results on the basis of an expected return in addition to results based on the actual return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.
They include Nikki Markham of Battling On, who trains armed forces veterans across Cornwall to become mentors and instructors for vulnerable young people from disadvantaged backgrounds and adults with disabilities. Battling On offers nationally recognised vocational training, numeracy and literacy support and work experience on community projects. Nikki was a finalist in the 2017 Social Entrepreneur of the Year Awards.
Dear Shareholders I am pleased to present our corporate governance report for 2017. This report sets out our approach to governance in practice, how the Board works, how it has spent its time during the year, how it has evaluated its performance, and includes reports from each of the Board’s Committees.
Board changes The Nomination and Governance Committee is responsible for reviewing the composition of the Board and its Committees and assessing whether the balance of skills, experience, knowledge and independence is appropriate to enable them to operate effectively. It went through a rigorous process leading to the appointment of Lord Lupton as a new independent Non-Executive Director with the additional role of chairing our new non ring-fenced bank. Lord Lupton joined the Board on 1 June 2017, bringing with him extensive international corporate experience (see page 55 for further details). Both Nick Luff and Anthony Watson stepped down from the Board in May 2017, having made significant contributions to the Group. As a result of the two retirements, our Deputy Chairman Anita Frew was appointed as the new Senior Independent Director, and Simon Henry succeeded Nick Luff as the Audit Committee Chairman. The names and biographies of current Directors are set out on pages 54–55. The roles and responsibilities of the Board members are set out on page 68.
As a Group, we have committed to maintaining at least three female Board members, and recognise the Davies/Hampton-Alexander target for FTSE companies to move towards 33 per cent female representation. We are looking to take opportunities to increase the number of female Board members over time where that is consistent with other skills and diversity requirements. The Group has also made the public commitment to increase the proportion of senior roles held by women to 40 per cent by 2020. For more information on current levels of diversity and inclusion see page 21.
Regulatory and public policy experience gained from senior positions in Downing Street, Regulators and a wide range of industries
External appointments: Chairman of Croda International Plc and a Non-Executive Director of BHP Billiton.
Alan has 37 years’ experience with the Royal Bank of Scotland, most notably as Chief Executive of RBS UK. More recently, Alan was a Non-Executive Director of Willis Limited and Chairman of its Risk Committee. He was formerly Chairman of Brown, Shipley & Co. Limited and a Non-Executive Director of Nationwide Building Society where he was Chairman of its Risk Committee. He is a Fellow of the Chartered Institute of Bankers and the Royal
Statistical Society and has an MBA from the Manchester Business School and a BSc from the University of Birmingham.
Until recently Simon was Chief Financial Officer and Executive Director of Royal Dutch Shell plc. He was previously Chair of the European Round Table CFO Taskforce and a Member of the Main Committee of the 100 Group of UK FTSE CFOs. He has a BA in Mathematics, an MA from the University of Cambridge and is a fellow of the Chartered Institute of Management Accountants (CIMA).
overnance Financial results 5. Lord Lupton CBE Independent Director and Chairman of Lloyds Bank Corporate Markets plc
Nick has served as Chief Executive of Lloyd’s of London, Prudential UK and Europe and Chairman of Brit Insurance. He is a former Non-Executive Director of the Prudential Regulation Authority and of Legal & General Group Plc as well as Chairman of the Financial Services Practitioner Panel and the Financial Conduct Authority’s Financial Advice Working Group. He was previously a Member of the BBC Trust and Chairman of the Britten-Pears Foundation. Nick has a First Class Degree in Philosophy, Politics and Economics from Balliol College, University of Oxford.
Sara’s previous appointments include Managing Director of Argos, various senior positions at J Sainsbury including Deputy Managing Director, Chairman of the Planning Inspectorate, Lead Non-Executive Director at the Department of Communities and Local Government, a NonExecutive Director of Mitchells & Butlers as well as a number of senior management roles for Abbey National and Mars Confectionery. She has an MA in Chemistry from Oxford University.
Group’s Management Committee. He was a Non-Executive Director of Santander UK and subsequently its Chief Executive. He is also a former Non-Executive Director of the Court of the Bank of England. António has a Degree in Management & Business Administration from the Universidade Católica Portuguesa, an MBA from INSEAD and has completed the Advanced Management Program at Harvard Business School.
Group Executive Committee Delivering our vision and managing a more agile organisation The depth of diverse experience and complementary skills in our management team strengthens our ability to adjust to changing market environments and deliver our strategy to become the best bank for customers, colleagues and shareholders.
António joined the Board as an Executive Director in January 2011 and became Group Chief Executive in March 2011. Read his full biography on page 55.
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Kate was appointed Group General Counsel in January 2015. In this role she advises the Board and Senior Executives on legal matters, leads the Group’s legal team and oversees management of the Group’s external legal suppliers. Kate joined the Group in 2005 from Linklaters, where she was a corporate lawyer specialising in M&A transactions. Before her current role, Kate held a number of senior positions including Deputy Group General Counsel and General Counsel for Group Legal. Kate is co-chair of Breakthrough, LBG’s women’s network, a trustee of the Lloyds Bank Foundation for England and Wales and sponsor of ‘Legal in the Community’, the legal function’s Responsible Business programme.
David was appointed as Group Director for the Commercial Banking division in September 2017 responsible for supporting corporate clients from SMEs through Mid Markets to Global Corporates and Financial Institutions. David started his career with Lloyds Bank 31 years ago on the graduate entrant programme and has held a number of key leadership roles across all Divisions of the Group since that time. Immediately prior to his current role he was Group Director Retail and Consumer Finance, responsible for the Lloyds, Halifax, Bank of Scotland, Lex Autolease and Black Horse Brands including the retail branch networks, customer products and telephone banking, in addition to Retail Business Banking and UK Wealth businesses. David is a Fellow of the Chartered Institute of Bankers. He is also Group Executive Sponsor for Disability.
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Below are details of the main topics discussed by the Board during the year.
Two strategy away days to review progress in implementing the Group’s strategy (see page 13 for further details)
Review and approval of various Group policies including the Code of Responsibilities, Signing Authorities, Group Statement on Modern Slavery, and Board and GEC Members’ Dealing Policy
In readiness for Completion on 1 June 2017, many activities were completed to support a smooth transition of ownership from Bank of America, such as a review of some 470 IT applications to ensure services could continue, critical policy changes in MBNA to align to the Group and the introduction of a management structure and governance approach which was aligned to the Group’s organisational design and risk management framework.
The ‘Legal Day 1’ Event completed seamlessly on 1 June 2017 with no operational issues. Since then, we have completed a detailed operating model review to identify how best we integrate the MBNA and existing Lloyds Banking Group Cards businesses to ensure we preserve and enhance areas of value creation and opportunities to improve the customer experience for all of our 8 million credit card customers.
Our first, and surely the most important task, was to appoint a Board and senior management team to LBCM. The Board comprises eight Directors, three of whom are independent Non-Executive Directors recruited from outside the Group and all of whom have wide experience of banking, two Directors Designate (Group executives serving in a non-executive capacity and subject to regulatory approval), the Chief Executive, Chief Financial Officer, and myself as Chairman. This composition supports LBCM’s legal and regulatory requirements for independent decision making within the overall framework of Group policies and controls. At the same time we have made good progress in appointing the rest of the senior management team of LBCM, such as the Chief Risk Officer, Chief Operating Officer, Chief Internal Auditor and Treasurer from both within and outside the Group. The bank received authorisation from the PRA and FCA in July 2017, subject to conditions. Our current plans are to operationalise the bank, and receive full authorisation for it to commence trading during 2018, leaving us good time to complete the process before the ring-fencing regulations come into force on 1 January 2019.
In November the Board debated the detailed strategic priorities, associated delivery plans and financial projections. The collective experience and expertise of the Board was brought to life in challenging and scrutinising our plans ensuring we can further transform the Group and deliver sustainable value to our stakeholders over the course of the plan. The Board’s focus on continuing to put the customer at the heart of everything we do, whilst recognising the increasing and critical role of technology, aligned well with the team’s proposals and reinforced our aim to become the best bank for customers, colleagues and shareholders.
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The Company Secretary has a team dedicated to engaging with retail shareholders who, with support from the Company’s registrar Equiniti Limited, deliver the Group’s shareholder service strategy, including the AGM. Group Secretariat provide feedback to the Board and appropriate Committees to ensure the views of retail shareholders are received and considered. Important shareholder information, including details on the arrangements for the 2018 AGM, can be found on pages 263–264.
The Board receives regular investor feedback and engages with shareholders, this includes: – meetings between the Chairman, Senior
The Board receives regular updates and reports detailing the findings of the ongoing customer surveys and feedback programme.
The Chairman hosts regular colleague breakfast meetings which are also attended by Non-Executive Directors.
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Colleagues took the opportunity to present details of how they are implementing strategic priorities; an update on the apprenticeship training programme; how fraud is managed; and the impact on customers. Lord Blackwell also met representatives from the local PPI team, who discussed the end-to-end PPI complaint handling process, focusing on the key parts undertaken in Speke and Chester.
As part of our Helping Britain Prosper Plan, we have committed to supporting the communities in which we serve and it is a matter of great personal pride that the Lloyds Bank Foundation is able to support this worthy cause.
Members of the Board also participate in the Bank Governance Leadership Network, which addresses key issues facing global banks and provides opportunities for discussions between leading global banks, and other stakeholders across a range of activities throughout the year. Core themes include regulation and supervision of banks risk governance and oversight, the future of the banking industry, rebuilding trust and culture and changing business models and strategic challenges.
Start of the year A yearly planner is prepared by the Company Secretary to map out the flow of key items of business to the Board.
The draft Board agenda is discussed between the Chairman and the Group Chief Executive and reviewed at GEC meetings.
Non-Executive Directors regularly meet with senior management and spend time increasing their understanding of the business through site visits, formal briefing sessions or more informal events including breakfast meetings with senior staff. These informal meetings allow Directors greater time to discuss business in an informal setting, ensuring that there is sufficient time for the Board to discuss matters of a material nature at Board meetings.
IT resilience and the dynamic threat posed by cyber risk are recognised as key risks and are a central area of focus for the Board Risk Committee.
If Directors have concerns about the Company or a proposed action which cannot be resolved, it is recorded in the Board minutes. Also on resignation, Non-Executive Directors are encouraged to provide a written statement of any concerns to the Chairman, for circulation to the Board. No such concerns were raised in 2017 and up to the date of this report.
Some Directors mentioned the importance of maintaining, and enhancing, gender diversity in the Board.
Report prepared by the Company Secretary based on the questionnaire results and matters raised in individual meetings.
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Under the leadership of the Group Chief Executive, George Culmer and Juan Colombás make and implement decisions in all matters affecting operations, performance and strategy. They provide specialist knowledge and experience to the Board. Together with António Horta-Osório, George Culmer and Juan Colombás design, develop and implement strategic plans and deal with day-to-day operations of the Group. During the year Juan Colombás was appointed to the role of Chief Operating Officer in September 2017. Prior to this he served as the Group’s Chief Risk Officer.
As Senior Independent Director, Anita Frew is also a sounding board for the Chairman and Chief Executive. She acts as a conduit for the views of other Non-Executive Directors and conducts the Chairman’s annual performance appraisal. She is available to help resolve shareholders’ concerns and attend meetings with major shareholders and financial analysts to understand issues and concerns.
1 Nick Luff and Anthony Watson resigned from the board with effect from 10 May and 11 May 2017, respectively.
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Further information on meeting arrangements and the responsibilities of the Directors are given on pages 64–65 and 68 respectively.
B. Effectiveness B1. The Board’s composition The balance of skills, experience, independence, and knowledge on the Board is the responsibility of the Nomination and Governance Committee, and is reviewed annually, or whenever appointments are considered.
B2. Board appointments The process for Board appointments is led by the Nomination and Governance Committee, which then makes a recommendation to the Board.
B3. Time commitments The time commitments of the Directors are considered by the Board on appointment and annually.
The Chairman is committed to this being his primary role, limiting his other commitments to ensure he can spend as much time as the role requires.
B4. Training and development The Chairman leads the learning and development of Directors and the Board generally and regularly reviews and agrees with each Director their individual and combined training and development needs.
B6. Board and Committee performance and evaluation An externally facilitated performance evaluation was completed in 2015, with internally facilitated evaluations having taken place in 2016 and 2017. More information can be found on pages 66–67, along with the findings, actions, and progress made during the year.
Information on the Company’s business model and strategy can be found on pages 1–37.
The Board Risk Committee is responsible for the review of the risk culture of the Group, setting the tone from the top in respect of risk management. Further information can be found on pages 77–79.
The Directors’ viability statement and confirmation that the business is a going concern can be found on page 82.
C3. Role and responsibilities of the Audit Committee The Audit Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board. Full information on the Audit Committee can be found on pages 73–76.
D. Remuneration D1. Level and elements of remuneration The Directors’ Remuneration Report on pages 84–102 explains the work of the Remuneration Committee and provides full details regarding the remuneration of Directors. The Remuneration Policy can be found in the 2016 Annual Report and Accounts.
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From the ongoing assessment of the Board members, the Chairman creates a skills matrix which the Committee uses to track the Board’s strengths and identify gaps in the desired collective skills profile of Board members, giving due weight to diversity in its broadest sense. Recommendations are made to the Board as appropriate.
In addition to the appointment of Lord Lupton as Chairman of the new bank, the Committee also oversaw the selection of the Board members. This involved shortlisting external candidates for the position of independent non-executive directors with the help of an external recruitment provider, Russell Reynolds1, meeting with the candidates on a one-to-one basis and reviewing both the individuals and overall composition of the new board before making recommendations to the Group Board. In addition to the composition of the board, the Committee has also reviewed the governance framework, including the Terms of Reference of the preparatory board. The preparatory board preceded the formation of the operating board, and was established by the Group board to oversee the establishment of the company, board and structure.
During the year, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review. Full details of the review can be found on pages 66–67.
Governance The Committee oversees various aspects of corporate governance, and during the year, the key activities included the following: Annual review of the Corporate Governance Framework
In addition to the existing methods of training for the Directors, the Board accepted a recommendation from the Committee that Non-Executive Directors should be provided with a mandatory training programme, ideally available online, based on relevant core modules which are part of the mandatory training programme undertaken by all colleagues. Members of the Committee are currently testing training modules and will feedback comments to the Committee in spring 2018 before it is considered for roll-out to the rest of the Board.
The Company continues to review and identify potential future executive talent and during the year the following activities were undertaken to develop the talent pipeline further: Assessment of potential candidates for senior management positions undertaken by the Group Chief Executive with the Chairman, using a range of criteria and benchmarking (facilitated by executive search and board consulting firm Egon Zehnder1). Details of assessment criteria are provided below. External candidates were identified by executive search firm, JCA Group to provide a reference benchmark and identify where recruitment might be required.
Assessments were discussed by the Committee, also taking into consideration discussions with the Non-Executive Directors.
Over half of the Committee’s time is typically spent on financial reporting and integrity of information provided to external parties. In 2017 we focused on assessing judgements and outcomes relating to conduct issues, credit performance and various material accounting issues and changes. The latter included the completion and integration of the acquisition of the MBNA credit card business.
In particular we reviewed provisions for payment protection insurance (PPI), costs and provisions which had exceeded £18 billion by the end of the year. While PPI itself will be finalised as an issue by mid-2019, the Committee will continue to focus on both legacy and emerging conduct issues as a matter of priority.
The Committee continues to deliver on its key responsibilities, ensuring focus is maintained on the Group’s control environment.
The Committee concluded that the provision for PPI redress and the Group’s external disclosures were appropriate. The disclosures relating to PPI are set out in note 37: ‘Other provisions’ on page 213 of the financial statements.
The Committee has understood the basis for determining the provision in respect of the Group’s secured and unsecured arrears handling activities. The provision includes the cost of both identifying and rectifying the customers affected.
The Committee has reviewed management’s assessment of the compensation expected to be paid to a number of customers of the HBOS Impaired Assets Office based in Reading for economic losses, ex-gratia payments and distress and inconvenience following the conviction of two former HBOS employees.
The Committee discussed the accounting considerations for the planned transfer of assets and liabilities from Lloyds Bank plc and its subsidiaries to the Group’s non ring-fenced bank. The issues considered included the effect of transactions between entities under common control, hedge accounting and the impact of applying the ‘hold to collect’ business model under IFRS 9. The Committee also considered specific financial control risks associated with the implementation of ring-fencing and the risk management framework being implemented to mitigate these risks.
A deferred tax asset can be recognised only to the extent that it is recoverable. The recoverability of the deferred tax asset in respect of carry forward losses requires consideration of the future levels of taxable profit in the Group.
The Committee agreed with management’s judgement that the deferred tax assets were appropriately supported by forecast taxable profits, taking into account the Group’s long-term financial and strategic plans. The disclosures relating to deferred tax are set out in note 36: ‘Deferred tax’ on page 211 of the financial statements. The Group’s deferred tax asset at 31 December 2017 was £2,284 million (31 December 2016: £2,706 million).
Determining the appropriate accounting for certain one-off transactions requires management to assess the facts and circumstances specific to each transaction.
The sale of Vocalink was considered by the Committee during the year. The Committee reviewed the accounting proposed by management and was satisfied that it was appropriate.
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The Committee was satisfied that the viability statement could be provided and advised the Board that three years was a suitable period of review.
Auditor independence and remuneration Both the Board and the external auditor have safeguards in place to protect the independence and objectivity of the external auditor. The Committee continues to operate a policy approved during 2016, and amended in 2017 to regulate the use of the auditor for non-audit services to ensure compliance with the revised Ethical Standards for Auditors from the Financial Reporting Council (FRC).
In order to ensure the objectivity and independence of the external auditor, the policy sets a financial threshold above which all non-audit services provided by the external auditor must be approved in advance by the Committee, with additional provision made for the approval of non-material services which are below the threshold by certain members of senior management. The policy further formalises within the Group the restriction on the provision of non-audit services by the external auditor which the FRC considers to be prohibited.
External auditor The Committee oversees the relationship with the external auditor. During the year, the Committee considered the auditor’s terms of engagement (including remuneration), its independence and objectivity and approved the audit plan (including methodology and risk identification processes). Mark Hannam has been PwC’s senior statutory audit partner for the Group and the Company since the beginning of 2016, and attends all meetings of the Committee.
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The Committee has continued to give detailed consideration to existing and emerging risks, through a balanced agenda which ensures sufficient focus on standing areas of risk management, together with specific attention being given to those emerging risks which are considered to be of ongoing importance to the Group and its customers. During the year, the Committee continued to make use of dedicated sub-committees to focus on particular areas, such as IT resilience and cyber security, where the dynamic nature and significance of related risks and challenges continues to evolve.
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 help support the Group in achieving its core aim of operating as a safe, low risk bank.
Committee purpose and responsibilities The purpose of the Committee is to review the risk culture of the Group, setting the tone from the top in respect of risk management. The Committee is also responsible for ensuring the risk culture is fully embedded and supports at all times the Group’s agreed risk appetite, covering the extent and categories of risk which the Board considers as acceptable for the Company.
As the most senior risk committee in the Group, the Committee interacts with other related risk committees, including the Group Risk Committee. Such interaction assists with the agenda planning process, where in addition to annual agenda planning, matters considered by the Group Risk Committee are reviewed to ensure escalation of all relevant matters to the Board Risk Committee.
In order to maintain and enhance the Group’s strategic position, it continues to invest in new initiatives and programmes. The Group acknowledges the challenges faced with delivering this strategy alongside the extensive regulatory and legal change agenda whilst additionally enhancing systems and controls. In the development of the strategy, the Group considers these demands against the capacity of the organisation to ensure successful delivery for both customers and shareholders.
Conduct risk The Committee continues to focus closely on the Group’s management of conduct risk.
Throughout 2017, the Committee has considered reports on the proactive identification and resolution of conduct issues which directly impact customers (customer conduct risks) and those which can undermine market integrity (market conduct risks). The pace and quality of remediation remained a focus, including root cause analysis to establish lessons learned and help prevent similar issues in the future. Consideration was also given to the conduct risks associated with the treatment of customers in vulnerable circumstances, with a particular focus on those in financial difficulties. In addition the Committee continues to consider developments in the Group’s conduct culture as well as reports on rectification programmes, complaints and conduct risk appetite metric performance.
EU exit Negotiations are on-going to determine the terms of the UK’s exit from the EU. The uncertainty regarding the timing and the process itself could affect the outlook for both the UK and global economy.
Conclusion: The EU exit plans continue to be closely monitored by the Committee via a suite of early warning indicators and risk mitigation plans, including the possible loss of passporting arrangements into Europe.
Consideration was given to new car registrations, used vehicle prices and provision adequacy in the context of Group exposure to residual value risk in the growing motor finance businesses. The Committee also monitored exposure to residual value risk via risk appetite. Conclusion: Residual value risk exposure continues to perform in line with appetite and the Committee will continue to closely monitor trends in the used car market and automotive sector as a whole.
Model risk The Committee recognises the importance of the Group Executive and the Board holding a strong understanding of the Group’s models, their associated risks and performance.
Conclusion: Whilst good progress was made in 2017, the demand for models and model related activity is expected to increase, with key drivers being the Group strategy and the need for increased automation and analytics as well as increasing regulatory demands. There will be an increased focus by the Committee in 2018 on model risk management to address these challenges.
Doing business responsibly is central to our purpose to Help Britain Prosper, and supports our strategy to be a low risk, customer focused bank.
How the Committee spent its time in 2017 The Chairman of the Committee reviews the forward agenda regularly to ensure that the appropriate topics are considered and adequate time is allocated for members to provide input to proposals at meetings.
Lord Lupton has been appointed to the Board since the 2017 AGM and will therefore stand for election at the forthcoming AGM. In the interests of good governance and in accordance with the provisions of the UK Corporate Governance Code, all other Directors will retire, and those wishing to serve again will submit themselves for re-election at the forthcoming AGM.
Directors’ and Officers’ liability insurance Throughout 2017 the Group had appropriate insurance cover in place to protect Directors, including the Directors who retired or resigned during the year, from liabilities that may arise against them personally in connection with the performance of their role.
Future developments Greenhouse gas emissions (additional information) Inclusion and diversity Engaging colleagues 2–37 21–22
Share capital and restrictions on the transfer of shares or voting rights Special rights with regard to the control of the Company Employee share schemes – exercise of voting rights 1 Nick Luff and Anthony Watson also served as directors during the year, retiring from the
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; the 2017 Group Strategic Review, which sets out the Group’s customer and business strategy for the three year period from 2018 to 2020; and the Group’s five year operating plan which comprises detailed customer, financial, capital and funding projections together with an assessment of relevant risk factors. In particular in 2017, the assessment included consideration of the impact of Structural Reform (ring-fencing), the effects of the continuing low interest rate environment, the ongoing impact of the implementation of IFRS 9 ‘Financial Instruments’ and the continuing uncertainty over the transitional arrangements to be agreed as part of the UK’s exit from the EU.
The Group’s annual planning process comprises the following key stages: The Board reviews and revises the Group’s strategy, risk appetite and objectives in the context of the operating environment and external market commitments.
The final five year operating plan, Risk Division assessment and the results of the stress testing are presented to the Board for approval. Once approved, the operating plan drives detailed divisional and Group targets for the following year.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the Directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
I am very grateful for the continued support and engagement we have had with shareholders, their representative bodies and our wider stakeholder group. I believe this is reflected in the positive voting outcome we received at the AGM in 2017 for our new remuneration policy. No changes are proposed to that policy.
The Committee remains mindful of the relationship between pay for Executive Directors and all other colleagues. To ensure that the Committee understands wider stakeholder views, I have engaged directly with the Group’s recognised unions (Accord
Weighting Measure Threshold Maximum Actual Vesting 30% Absolute total shareholder return (TSR) 8% p.a. 16% p.a. (1.7%) 0%
The maximum annual Group Ownership Share award for Executive Directors is 300 per cent of salary (no change).
Awards in 2018, based on individual performance in 2017, are made as follows: GCE: 300 per cent of base salary
2 The LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 19 February 2018. The average share price between 1 October 2017 and 31 December 2017 (66.75 pence) has been used to indicate the value. The shares were awarded in 2015 based on a share price of 79.93 pence.
3 Juan Colombás took up the role of Chief Operating Officer on 4 September 2017.
Under terms agreed when joining the Group, Juan Colombás is entitled to a conditional lump sum benefit of £718,996 either (i) on reaching normal retirement age of 65 unless he voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death.
The Committee determined that the share of underlying profit should be 5.1 per cent. In reaching this decision, the Committee took into account the Group’s actual performance against budget where outperformance was 8.2 per cent and distributions to shareholders which have increased by 46.9 per cent. Due consideration was also given to market levels of variable remuneration on both an individual basis and for the total GPS outcome overall.
The Group has performed below expectations in terms of customer perception of brand, service, products and complaints.
The Group has not improved the operation and/or service of its key customer journeys.
The Group has not managed its key risk measures to ensure the safe guarding of the Group.
Reputation with external stakeholders – composite (excluding regulators) Poor relationships with key external stakeholders. Strong relationships with key external stakeholders.
Passed the annual Prudential Regulation Authority (PRA) stress test with a strong capital position and very positive feedback on quality of submissions and ranked highly against peers.
The individual rating of Strong Plus results in a GPS award of £599,000 (78 per cent of maximum).
The GCE’s individual performance assessment for 2017 reflected the Group’s objectives, assessed as Strong Plus as outlined on page 90 and a number of other considerations, including: Successful delivery of the second Group Strategic Review, with improved customer service, market leading digital proposition, targeted lending growth and simplification savings ahead of target. Completed acquisition of MBNA’s prime credit card business.
Increase in ordinary dividend to 3.05 pence per share (2016: 2.55 pence plus special dividend 0.5 pence per share), in line with the Group’s progressive and sustainable dividend policy, with a share buyback of up to £1 billion.
The CFO’s individual performance assessment for 2017 reflected the Finance division’s objectives. During 2017, the Group undertook a significant structural change with the responsibility for Legal and Strategy transferring to the CFO from September 2017. The individual performance assessment of the CFO was Strong Plus for full year 2017, informed by the rating for the Finance, Legal and Strategy division at Q4 2017 and a number of other considerations, including: Strong financial performance delivered in challenging environment with low interest rates and Brexit uncertainty creating downward pressure on the UK economy. Improvements in profit and returns.
Continued improvement in the Group’s market leading cost:income ratio to 46.8 per cent (2016: 48.7 per cent).
Continued to build strong relationships with key external stakeholders, including debt and equity investors, regulators, and credit rating agencies.
Established the new Finance, Legal and Strategy division effectively, with excellent employee engagement scores and retention of talent.
The individual rating of Strong Plus results in a GPS award of £1,322,520 (108 per cent of salary and 77 per cent of maximum).
The individual rating of Strong Plus results in a GPS award of £599,000 (80 per cent of maximum).
The COO’s individual performance assessment for 2017 reflected the Risk division’s objectives and the newly created Chief Operating Office from September 2017. The individual performance assessment of the COO was Strong Plus for full year 2017, informed by the rating for the Risk division at Q3 2017 and a number of other considerations, including: The Group continues to remain comfortably within the risk appetite set by the Board. Continued to drive a prudent risk culture and control framework to ensure low risk model maintained, positioning the Group well for market developments and uncertainties. Moody’s upgraded Lloyds Bank’s credit rating to Aa3 and S&P improved outlook to ‘positive’.
Further strengthening of operational risk management through enhanced reporting framework. Material reductions in operational losses and events.
Support to the business in development of frameworks and controls to mitigate emerging and evolving risks, such as cyber risks.
Fully supported successful transition to revised Group organisation structure and mobilisation of the new Chief Operating Office function.
The Group’s malus and clawback provisions cover all material risk takers, in line with regulatory requirements. Vested variable remuneration can be recovered from employees for a period of up to seven years after the date of award which may be extended to 10 years where there is an ongoing internal or regulatory investigation. The Committee reserves the right to exercise its discretion in reducing any payment to be made, if it deems appropriate as a result of a risk matter coming to light before vesting.
1 2017: Ordinary dividend in respect of the financial year ended 31 December 2017, partly paid in 2017 and partly to be paid in 2018 and intended share buyback. 2016: Ordinary and special dividend in respect of the financial year ended 31 December 2016, partly paid in 2016 and partly paid in 2017.
Loss of office payments and payments within the reporting year to past Directors (audited) There were no payments for the loss of office or any other payments made to former Directors during 2017.
Lloyds return index FTSE 100 return index Rebased to 100 on 31 December 2008. Source: Mercer Kepler
In addition to the Group’s shareholding requirements, shares vesting are subject to holding periods, in line with regulatory requirements.
Juan Colombás 1 Calculated using the average share price for the period 1 January 2017 to 31 December 2017 (66.85 pence). Includes shares owned outright reduced by forfeitable ‘matching’ shares under the Share Incentive Plan.
The Committee considers the targets that apply to these measures to be commercially sensitive but will provide information on the level of payout relative to the performance achieved in next year’s annual report on remuneration.
The Committee applies its judgement to determine the payout level commensurate with Group, business and/or individual performance.
Building the best team Employee engagement index Set relative to 2019 targets Threshold: 67 Maximum: 73 1 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
Digital net promoter score Set relative to 2020 targets Threshold: 64 Maximum: 67 7.5%
The maximum Group Ownership Share award for Executive Directors is 300 per cent of salary (unchanged from 2017).
The following table sets out the total remuneration of the eight highest paid senior executives (excluding Executive Directors) in respect of the 2017 performance year.
Variable 1 Includes members of the Group Executive Committee and Senior Executive level colleagues, employed by the Group as at 31 December 2017 (excluding colleagues on garden leave or subject to notice of termination).
The purpose of the Committee is to set the remuneration for all Executive Directors and the Chairman, including pension rights and any compensation payments. It recommends and monitors the level and structure of remuneration for senior management and material risk takers. It also considers, agrees and recommends to the Board an overall remuneration policy and philosophy for the Group that is aligned with its long-term business strategy, its business objectives, its risk appetite, values and the long-term interests of the Group that recognises the interests of relevant stakeholders.
– Consideration of the BEIS Corporate Governance Report and PRA Policy and supervisory statements
Fees payable for the provision of Remuneration Committee services in 2017 were £98,020, based on time and materials.
Operation Base salaries are typically reviewed annually with any increases normally taking effect from 1 January. When determining and reviewing base salary levels, the Committee takes into account base salary increases for employees throughout the Group and ensures that decisions are made within the following two parameters: – An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective job-sizing methodologies. – Pay for comparable roles in comparable publicly listed financial services groups of a similar size.
All future appointments as Executive Directors will attract a maximum allowance of 25 per cent of base salary.
Performance measures Measures and targets are set annually by the Committee in line with the Group’s strategic business plan and further details are set out in the annual report on remuneration for the relevant year.
Maximum potential The maximum annual award for Executive Directors will normally be 300 per cent of salary. Under the plan rules, awards can be made up to 400 per cent of salary in exceptional circumstances.
The Chairman receives an all-inclusive fee, which is reviewed periodically plus benefits including life insurance, car allowance, medical insurance and transportation. The Committee retains the right to provide additional benefits depending on individual circumstances. NEDs are paid a basic fee plus additional fees for the chairmanship/ membership of committees and for membership of Group companies/ boards/non-board level committees.
The Group has applied the EBA Delegated Regulation (EU) No 604/2014 to determine which colleagues should be identified as MRTs. MRTs are colleagues who are considered to have a material impact on the Group’s risk profile, and include, but are not limited to: Senior management, Executive Directors, members and attendees of the Group Executive Committee (GEC) and their respective executive level direct reports; Non-Executive Directors; Approved persons performing significant influence functions (SIFs) and/or all colleagues performing a senior management function; and
Governance and risk management An essential component of the approach to remuneration is the governance process that underpins it. This ensures that the policy is robustly applied and risk is managed appropriately.
Link between pay and performance The Group’s approach to reward is intended to provide a clear link between remuneration and delivery of its key strategic objectives, supporting the aim of becoming the best bank for customers, and through that, for shareholders. To this end, the performance management process has been developed, with the close participation of the Group’s Risk team, to embed performance measures across the Group’s reward structure which are challenging and reflect Group and divisional achievement in addition to personal contribution.
Remuneration is delivered via a combination of fixed and variable remuneration. Fixed remuneration reflects the role, responsibility and experience of a colleague. Variable remuneration is based on an assessment of individual, business area and Group performance. The mix of variable and fixed remuneration is driven by seniority, grade and role. Taking into account the expected value of awards, the performance-related elements of pay make up a considerable proportion of the total remuneration package for MRTs, whilst maintaining an appropriate balance between the fixed and variable elements. The maximum ratio of fixed to variable remuneration for MRTs is 200 per cent, which has been approved by shareholders (98.77 per cent of votes cast) at the AGM on 15 May 2014.
Further information on the GPS plan can be found on pages 96–97 and 101–102 of the DRR.
Total £m 1 The Group undertook a reorganisation during 2017. As a result, a number of reporting lines have changed.
Other Material Risk Takers 46.7 46.7 – 36.0 1 Deferred in this context refers only to any unvested remuneration.
2 Retained refers to any variable remuneration for which the deferral period has ended but which is still subject to a holding period before release.
The Group’s approach to risk 108 Emerging risks 110 Capital stress testing 111 How risk is managed 111 Risk governance 113 Full analysis of risk categories 115
As part of a conservative business model that embodies a risk culture founded on a prudent approach to managing risk, the Group reviewed its code of responsibility in 2017, reinforcing its approach under which colleagues are accountable for the risks they take and for prioritising their customers’ needs.
Framework including its risk appetite, to ensure these are in line with emerging regulatory, corporate governance and industry best practice.
Operational – the Group has robust controls in place to manage operational losses, reputational events and regulatory breaches.
Governance – the Group has governance arrangements that support the effective long-term operation of the business, maximise shareholder value and meet regulatory and societal expectations.
As separate regulated entities with their own Boards, the Insurance business and Lloyds Bank Corporate Markets each maintain their own risk appetite and framework, which are aligned to the Group risk appetite framework.
Governance is maintained through delegation of authority from the Board down to individuals through the management hierarchy. Senior executives are supported by a committee based structure which is designed to ensure open challenge and support effective decision making.
Financial reporting risk management systems and internal controls The Group maintains risk management systems and internal controls relating to the financial reporting process, which are designed to: – ensure that accounting policies are consistently applied, transactions are recorded and undertaken in accordance with delegated authorities, that assets are safeguarded and liabilities are properly recorded; – enable the calculation, preparation and reporting of financial, prudential regulatory and tax outcomes in accordance with applicable International Financial Reporting Standards, statutory and regulatory requirements; – ensure that disclosures are made on a timely basis in accordance with statutory and regulatory requirements and as far as possible are consistent with best practice and in compliance with the UK Finance Code for Financial Reporting Disclosure.
2 Central items include assets held outside the main operating divisions, including assets relating to Group Corporate Treasury which holds the Group's liquidity portfolio, and Group Operations.
Principal risks The Group’s principal risks are shown in the risk overview (pages 34–37). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk categories is on pages 115–156.
– We continue to embed the regulatory and legal agenda across all areas of the Group ensuring that the customer is at the heart of our business planning. – We work closely with regulatory authorities and industry bodies to ensure that the Group can identify and respond to the evolving regulatory and legal landscape. – We actively implement programmes to deliver regulatory and legal change requirements.
Macroeconomic headwinds and political uncertainties: Uncertainty over the UK’s eventual relationship with the EU, and the implications of a minority UK government, create a more uncertain outlook for the UK economy. A rise in global protectionism led by the US, fuelled by growing income inequality and an accompanying rise in political populism, and the recent indecisive German election, generate heightened risks to the global political and macroeconomic environment.
– Continued investment in IT and to improve the effectiveness of the Group’s IT resilience. – Continued investment in the Group’s Cyber Programme to ensure confidentiality and integrity of data and availability of key systems. – Collaboration with regulators and law enforcement agencies.
Geopolitical shocks: Current uncertainties could further impede the global economic recovery. Events in North Korea, Russia, the Middle-East, as well as terrorist activity, have the potential to trigger changes in the economic outlook, market risk pricing and funding conditions.
The review and challenge of the detailed stress forecasts, the key assumptions behind these, and the methodology used to translate the economic assumptions into stressed outputs conclude with the divisional Finance Directors’, appropriate Risk Directors’ and Managing Directors’ sign-off. The outputs are then presented to GFRC, Group Asset and Liability Committee/Group Risk Committee/Group Executive Committee and Board Risk Committee for Group level executive and non-executive review and challenge, before being approved by the Board.
How risk is managed in Lloyds Banking Group The Group’s Risk Management Framework (RMF) (see risk overview, page 32), is structured around the following components which meet and align with the industry-accepted internal control framework issued by the Committee of Sponsoring Organisations of the Treadway Commission.
Risk division provides oversight and independent constructive challenge to the effectiveness of risk decisions taken by business management, providing proactive advice and guidance, reviewing, challenging and reporting on the risk profile of the Group and ensuring that mitigating actions are appropriate.
It also has a key role in promoting the implementation of a strategic approach to risk management reflecting the risk appetite and RMF agreed by the Board that encompasses: – embedded effective risk management processes; – transparent, focused risk monitoring and reporting; – provision of expert and high quality advice and guidance to the Board, executives and management on strategic issues and horizon scanning, including pending regulatory changes; and – a constructive dialogue with the first line through provision of advice, development of common methodologies, understanding, education, training, and development of new tools.
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 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.
Risk resources and capabilities Appropriate mechanisms are in place to avoid over-reliance on key personnel or system/technical expertise within the Group. Adequate resources are in place to serve customers both under normal working conditions and in times of stress, and monitoring procedures are in place to ensure that the level of available resource can be increased if required. Colleagues undertake appropriate training to ensure they have the skills and knowledge necessary to enable them to deliver fair outcomes for customers, being mindful of the Group’s strategic conduct agenda, customer treatment policy/standards and Financial Conduct Authority requirements.
Group Executive Committee (GEC) Supports the Group Chief Executive in exercising his authority in relation to material matters having strategic, cross-business area or Group-wide implications.
Group Risk Committee (GRC) Reviews and recommends the Group’s risk appetite and governance, risk and control frameworks, and material Group policies. The committee also regularly reviews risk exposures and risk/reward returns and approves models that are material at Group level.
Group Asset and Liability Committee (GALCO) Responsible for the strategic management of the Group’s assets and liabilities and the profit and loss implications of balance sheet management actions. It is also responsible for the risk management framework for market risk, liquidity risk, capital risk and earnings volatility.
In terms of loans and advances, (for example loans and overdrafts) and contingent liabilities (for example credit instruments such as guarantees and standby, documentary and commercial letters of credit), credit risk arises both from amounts advanced and commitments to extend credit to a customer or bank. With respect to commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most retail commitments to extend credit may be cancelled and the creditworthiness of customers is monitored regularly. Most commercial term commitments to extend credit are contingent upon customers maintaining specific credit standards, which together with the creditworthiness of customers are monitored regularly.
Credit risk also arises from debt securities and derivatives. The total notional principal amount of interest rate, exchange rate, credit derivative and other contracts outstanding at 31 December 2017 is shown on page 122. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 51 on page 240.
Specialist expertise: Credit quality is managed and controlled by a number of specialist units within the business and Risk division providing, for example: intensive management and control (see overleaf for Intensive care of customers in financial difficulty); security perfection, maintenance and retention; expertise in documentation for lending and associated products; sector specific expertise; and legal services applicable to the particular market place and product range offered by the business.
Collateral values are assessed at the time of loan origination. The Group requires collateral to be realistically valued by an appropriately qualified source, independent of both the credit decision process and the customer, at the time of borrowing. In certain circumstances, for Retail residential mortgages this may include the use of automated valuation models based on market data, subject to accuracy criteria and LTV limits. Collateral values are reviewed on a regular basis which will vary according to the type of lending, collateral involved and account performance. Such reviews are undertaken to confirm that the value recorded in the Bank’s systems remains appropriate and whether revaluation is required, considering for example, account performance, market conditions and any information available that may indicate that the value of the collateral has materially declined. In such instances, the Group may seek additional collateral. For Retail, the Group adjusts open market values to take account of the costs of realisation and any discount associated with the realisation of the collateral when estimating credit losses.
Monitoring In conjunction with Risk division, businesses identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed and monitored in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by senior management. Risk division in turn produces an aggregated review of credit risk throughout the Group, including reports on significant credit exposures, which are presented to the divisional risk committees, Group Risk Committee and the Board Risk Committee.
Those customers deemed higher risk where there is cause for concern over future repayment capability or where there is a risk of the asset becoming impaired will be transferred to the BSU at an early stage. The decision to transfer rests with the Credit teams and not the relationship team. On transfer, the BSU will take over the ‘credit’ responsibility for the customer relationship whilst the ‘servicing’ responsibility remains with the original relationship manager. The over-arching aim of the BSU is to provide support and work consensually with each customer to try and resolve the issues, restore the business to a financially viable position and thereby bring about a business turnaround. This may involve a combination of restructuring, work out strategies and other types of forbearance.
The above assessment, monitoring and control processes continue throughout the period the case is managed within the BSU. All the analysis performed around cash flows is used to determine appropriate impairment provisions.
All of a customer’s impaired loans are treated as forborne as they are considered to have been (or will be) granted some form of forbearance. Most impaired loans and advances exist only in the BSU within Commercial Banking and Run-off divisions.
Upon exit from forbearance the customer may be returned to the mainstream good classification. It is important to note that such a decision can be made only by the independent Risk division.
– The net impairment charge increased to £795 million in 2017 compared to £645 million in 2016, reflecting expected lower provision releases and write-backs and the acquisition of MBNA (£118 million). The net asset quality ratio for 2017 was 18 basis points (2016: 15 basis points).
– Run-off net external assets stood at £9.1 billion at 31 December 2017, down from £11.3 billion at 31 December 2016. The portfolio represents only 1.8 per cent of the overall Group’s loans and advances (31 December 2016: 2.1 per cent).
Impact of disposal of business and asset sales (8) – – (20) (28) (492)
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries in Retail (31 December 2017: £291 million; 31 December 2016: £365 million).
3 Includes £6.9 billion (December 2016: £6.7 billion) of lower risk loans sold by Commercial Banking and Retail to Insurance and Wealth to back annuitant liabilities.
4 The Group made adjustments to reflect the HBOS and MBNA loans and advances at fair value on acquisition. At 31 December 2017, the remaining fair value adjustment was £186 million comprising a positive adjustment of £270 million in respect of the MBNA assets and a negative adjustment of £84 million in respect of the HBOS assets. The fair value unwind in respect of impairment losses incurred was £85 million for the year ended 31 December 2017 (31 December 2016: £70 million). The fair value adjustment in respect of loans and advances is expected to continue to decrease in future years and will reduce to zero over time.
– The average indexed LTV of the portfolio improved to 43.6 per cent (31 December 2016: 44.0 per cent). – The value of lending with an indexed LTV of greater than 80 per cent fell to £30,680 million (31 December 2016: £32,395 million). – The percentage of loans and advances with an indexed LTV in excess of 100 per cent fell to 0.6 per cent (31 December 2016: 0.7 per cent). – The average LTV for new mortgages written in 2017 was 63.0 per cent (31 December 2016: 64.4 per cent).
Interest only mortgages The Group provides interest only mortgages to owner occupier mortgage customers whereby only payments of interest are made for the term of the mortgage with the customer responsible for repaying the principal outstanding at the end of the loan term. At 31 December 2017, owner occupier interest only balances as a proportion of total owner occupier balances had reduced to 29.2 per cent (31 December 2016: 31.8 per cent). The average indexed loan to value improved to 41.7 per cent (31 December 2016: 42.6 per cent).
Credit cards – Loans and advances increased by 84.2 per cent to £18,134 million (31 December 2016: £9,843 million), of which £8,003 million relates to MBNA. The MBNA portfolio is performing broadly in line with both the Group’s expectations and the existing credit card portfolio. – Impaired loans increased by £106 million to £413 million (31 December 2016: £307 million), of which £151 million related to MBNA. Impaired loans as a percentage of closing loans and advances improved to 2.3 per cent (31 December 2016: 3.1 per cent), reflecting good credit performance and the continued sale of debt in recoveries. – The impairment charge increased to £254 million (2016: £136 million), driven by the acquisition of MBNA (£118 million).
Loans – Loans and advances increased by 3.1 per cent to £8,010 million (31 December 2016: £7,767 million). – Impaired loans decreased by £23 million to £254 million (31 December 2016: £277 million), largely due to the sale of debt in recoveries. Impaired loans as a percentage of closing loans and advances improved to 3.2 per cent (31 December 2016: 3.6 per cent). – The impairment charge increased to £111 million (2016: £70 million), reflecting a one-off change relating to policy alignment across brands for franchised customers, and reducing cash flows due to previous sales of debt in recoveries.
Overdrafts – Loans and advances decreased to £1,595 million (31 December 2016: £1,952 million). – Impaired loans increased by £18 million to £197 million (31 December 2016: £179 million), and impaired loans as a percentage of closing advances increased to 12.4 per cent (31 December 2016: 9.2 per cent), reflecting a one-off impact relating to changes in overdraft fees and charges. – The impairment charge decreased by 5.8 per cent to £227 million (2016: £241 million), largely due to increased sale of debt in recoveries and improved underlying performance.
UK Motor Finance – Loans and advances increased by £2,183 million to £13,738 million (31 December 2016: £11,555 million), with 49.7 per cent of growth from Jaguar Land Rover business. The book continues to benefit from conservative residual values and prudent provisioning with stable credit quality and flows into arrears. – Impaired loans increased by £14 million to £134 million (31 December 2016: £120 million), reflecting growth in the portfolio. Impaired loans as a percentage of closing loans and advances were stable at 1.0 per cent. – The impairment charge increased by £36 million to £111 million (2016: £75 million), driven by portfolio growth and increased provisions for residual value risks reflecting a more conservative outlook on used car prices.
Within the other portfolios, movements were seen in the level of forborne loans and advances in relation to one off changes for 2017. This included the acquisition of MBNA in the Credit cards portfolio (with forborne loans and advances of £112 million and impaired forborne loans and advances of £90 million), and improved customer views and the reclassification of some treatments across the Loans and UK Motor Finance portfolios.
2 Balances where all interest only elements have moved past term. Some may subsequently have had a term extension, so are no longer classed as due.
UK Exposures > £5m 1 Excludes Islands Commercial UK Direct Real Estate of £0.4 billion (31 December 2016: £0.5 billion).
Impairment provisions as a % of loans and advances which are forborne £m £m
Asset quality ratio¹ (0.32%) (0.15%) (17)bp 1 In respect of loans and advances to customers.
Eurozone exposures The following section summarises the Group’s direct exposure to Eurozone countries at 31 December 2017. The exposures comprise on balance sheet exposures based on their balance sheet carrying values net of provisions and off-balance sheet exposures, and are based on the country of domicile of the counterparty unless otherwise indicated.
Conduct risks can impact directly or indirectly on our customers and can materialise from a number of areas across the Group, including: sales processes resulting in poor customer outcomes; products and services not meeting the customers’ needs; failing to deal with customers’ complaints effectively; failing to promote effective competition in the interest of customers and failing to identify and report behaviour which could undermine the integrity of the market.
The Group may also be liable for damages to third parties harmed by the conduct of its business.
Conduct risk appetite metrics (CRAMs) have been designed for all product families offered by the Group; a set of common metrics supports a consistent approach across products and services. These contain a range of product design, sales and service metrics (such as sales volume, usage and customer outcome testing) to provide a more holistic view of conduct risks; each product also has additional bespoke metrics.
Measurements in relation to market integrity continued to evolve in 2017, including additional business unit level risk control metrics to enhance the established suite of metrics (which already cover key topics such as the management of conflicts of interest and the handling of market sensitive information).
Mitigation The Group takes a range of mitigating actions with respect to conduct risk. The Group’s ongoing commitment to good customer outcomes sets the tone from the top and supports the development of the right customer centric culture – strengthening links between actions to support conduct, culture and customer and enabling more effective control management. Actions to enable good conduct include: – Conduct risk appetite established at Group and business area level, with metrics included in the Group risk appetite to ensure ongoing focus; – Customer needs explicitly considered within business and product level planning and strategy, through divisional customer and culture plans, with integral conduct lens, reviewed and challenged by Group Customer First Committee (GCFC); – Cultural transformation, supported by strong direction and tone from senior executives and the Board. This is underpinned by the Group’s values and codes of responsibility, to deliver the best bank for customers; – Further embedding of the customer vulnerability framework. The Customer Vulnerability Cross Divisional Committee operates at a senior level to prioritise change, drive implementation and ensure consistency across the Group. Significant partnership established with Macmillan to support customers with cancer; – Embedding and evolving the Group’s customer journey strategy and framework to support our focus on conduct from an end-to-end customer perspective; – Enhanced product governance framework to ensure products continue to offer customers fair value, and consistently meet their needs throughout their product life cycle; – Enhanced complaints management through effectively responding to, and learning from, root causes to reduce complaint volumes and the Financial Ombudsman Service change rate; – Enhanced recruitment and training, with a focus on how the Group manages colleagues’ performance with clearer customer accountabilities; and – Ongoing focus on the strategic conduct agenda in our interactions with third parties involved in serving the Group’s customers to ensure consistent delivery.
The Group’s leadership team, through GCFC, support the development of the conduct agenda and priorities. The Board and Group Risk Committee receive regular qualitative and quantitative reports to track progress on how the Group is meeting customer needs and minimising conduct risk across all areas of the business.
Definition Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events, which can lead to adverse customer impact, reputational damage or financial loss.
Table 1.28 below shows high level loss and event trends for the Group using Basel II categories. Based on data captured on the Group’s Operational Risk System, in 2017 the highest frequency of events occurred in external fraud (64.37 per cent) and execution, delivery and process management (22.69 per cent). Clients, products and business practices accounted for 72.74 per cent of losses by value, driven by legacy issues where impacts materialised in 2017 (excluding PPI).
Definition The risk that the Group fails to provide an appropriate colleague and customer centric culture, supported by robust reward and wellbeing policies and processes; effective leadership to manage colleague resources; effective talent and succession management; and robust control to ensure all colleague-related requirements are met.
Property insurance risk is a key risk within the General Insurance business, through Home Insurance. Exposures can arise, for example, in extreme weather conditions, such as flooding, when property damage claims are higher than expected.
Exposures A capital risk exposure arises when the Group has insufficient capital resources to support its strategic objectives and plans, and to meet external stakeholder requirements and expectations. This could arise due to a depletion of the Group’s capital resources as a result of the crystallisation of any of the risks to which it is exposed. Alternatively a shortage of capital could arise from an increase in the amount of capital that needs to be held. The Group’s capital management approach is focused on maintaining sufficient capital resources to prevent such exposures while optimising value for shareholders.
All buffers are required to be met with CET1 capital. A breach of the PRA buffer would trigger a dialogue between the Group and the PRA to agree what action is required whereas a breach of the CRD IV combined buffer (all regulatory buffers excluding the PRA buffer) would give rise to automatic constraints upon any discretionary capital distributions by the Group.
Applying the Bank of England’s Minimum Requirement for Own Funds and Eligible Liabilities (MREL) policy to current capital requirements, the Group’s indicative MREL requirement, excluding regulatory capital buffers, is as follows: – From 2020, 2 times Pillar 1 plus Pillar 2A, equivalent to 21.4 per cent of risk-weighted assets – From 2022, 2 times Pillar 1 plus 2 times Pillar 2A, equivalent to 26.8 per cent of risk-weighted assets
Adjustment for own credit 109 87 109 87 less: deductions from common equity tier 1
3 The common equity tier 1 ratio is 14.4 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2018 in relation to its 2017 earnings (31 December 2016: 13.8 per cent pro forma).
Dividends in respect of 2016 earnings and 2017 interim earnings received from the Insurance business1 575 – – 575
Other movements 206 – – 206 1 Under the regulatory framework, profits made by Insurance are removed from CET1 capital. However, when dividends are paid to the Group by Insurance these are recognised through CET1 capital.
4 The average UK leverage ratio is based on the average of the month end tier 1 capital and exposure measures over the quarter (1 October 2017 to 31 December 2017). The average of 5.4 per cent compares to 5.4 per cent at the start and 5.3 per cent at the end of the quarter.
6 The UK leverage ratio is 5.4 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2018 in relation to its 2017 earnings (31 December 2016: 5.3 per cent pro forma).
Operational risk, risk-weighted assets are broadly in line with the prior year, with the increase following the acquisition of MBNA mostly offset by the annual update of the income based Standardised Approach operational risk calculation.
Leverage ratio The table below summarises the component parts of the Group’s leverage ratio. Further analysis will be provided in the Group’s Pillar 3 Report.
Key movements The Group’s fully loaded UK leverage ratio increased by 0.1 per cent to 5.3 per cent reflecting the impact of both the increase in tier 1 capital and the £8.4 billion reduction in the exposure measure, the latter largely reflecting the underlying reduction in balance sheet assets (net of qualifying central bank claims and deconsolidation adjustments) driven by the reductions in both available-for-sale financial assets and derivatives assets, partially offset by the increase in loans and advances following the acquisition of MBNA and an increase in securities financing transactions (SFT) activity.
Mitigation Group Corporate Treasury (GCT) is responsible for managing and monitoring liquidity risks on behalf of the Group and ensuring that liquidity risk management systems and arrangements are adequate with regard to the internal risk appetite and Group strategy. Liquidity policies and procedures are subject to independent internal oversight by Risk. Overseas branches and subsidiaries of the Group may also be required to meet the liquidity requirements of the entity’s domestic country. Management of liquidity requirements is performed by the overseas branch or subsidiary and overseen by GCT. Liquidity risk of the Insurance business is actively managed and monitored within the Insurance business. The Group plans funding requirements over the life of the funding plan, combining business as usual and stressed conditions. The Group manages its risk appetite and liquidity position with regard to its internal risk appetite and the Liquidity Coverage Ratio (LCR) required by the PRA and Capital Requirements Directive and Regulation (CRD IV) liquidity requirements.
Liquidity risk within the Insurance business may result from: the inability to sell financial assets quickly at their fair values; an insurance liability falling due for payment earlier than expected; the inability to generate cash inflows as anticipated; an unexpected large operational event; or from a general insurance catastrophe e.g. a significant weather event. Following the implementation of Solvency II, the annuity portfolio is ringfenced and assets held to match annuity liability cashflows are excluded from shareholder liquidity. In the event a liquidity shortfall arises on the annuity portfolio, shareholder liquidity will be required to support this. As a result, the shareholder’s exposure to liquidity risk is through Insurance’s non-annuity and surplus assets, any shortfall arising in the annuity portfolio and the investment portfolios within the general Insurance business. Liquidity risk is actively managed and monitored within the Insurance business to ensure that, even under stress conditions, there is sufficient liquidity to meet obligations and remain within approved risk appetite.
LCR eligible liquid assets/money market funding less than one year maturity (x)1 8.3 8.8 (6)
2 Excludes £1.7 billion (31 December 2016: £20.9 billion) of loans and advances to banks within the Insurance business and £0.8 billion (31 December 2016: £0.9 billion) of reverse repurchase agreements.
6 The Group’s definition of wholesale funding aligns with that used by other international market participants, including interbank deposits, debt securities in issue and subordinated liabilities.
Total LCR eligible assets 120.9 120.8 – 124.7 129.0 1 Designated multilateral development bank (MDB).
The banking business also has a significant amount of non-LCR eligible 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.
4 Other comprises: items in the course of collection from banks; investment properties; goodwill; value in-force business; other intangible assets; tangible fixed assets; current tax recoverable; deferred tax assets; retirement benefit assets; and other assets.
Exposures The internal and corporate governance arrangements of major financial institutions continue to be subject to a high level of regulatory and public scrutiny. The Group’s exposure to governance risk is also reflective of the significant volume of existing and proposed legislation and regulation, both within the UK and across the multiple jurisdictions within which it operates, with which it must comply. Risk governance and risk culture are mutually reinforcing.
The Ethics and Responsible Business Policy and supporting code of responsibility embody the Group’s values and reflect its commitment to operating responsibly and ethically both at a business and an individual level. All colleagues are required to adhere to the code in all aspects of their roles.
The Group ensures that it has adequate cash and balances at central banks and stocks of high quality liquid assets (e.g. gilts or US Treasury securities) that can be converted easily into cash to meet liquidity requirements. The majority of these assets are held as available-for-sale with the remainder held as financial assets at fair value through profit and loss. Further information on these balances can be found under Funding and liquidity risk on page 146. Interest rate risk in the asset portfolios is swapped into a floating rate.
The Group risk appetite is cascaded first to the Group Asset and Liability Committee (GALCO), chaired by the Chief Financial Officer, 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 metrics are reviewed regularly by senior management to inform effective decision making.
Mitigation GALCO is responsible for approving and monitoring Group market risks, management techniques, market risk measures, behavioural assumptions, and the market risk policy. Various mitigation activities are assessed and undertaken across the Group to manage portfolios and seek to ensure they remain within approved limits. The mitigation actions will vary dependent on exposure, but will, in general, look to reduce risk in a cost effective manner, by offsetting balance sheet exposures and externalising through to the financial markets dependent on market liquidity. The market risk policy is owned by Group Corporate Treasury (GCT) and refreshed annually. The policy is underpinned by supplementary market risk procedures, which define specific market risk management and oversight requirements.
Optionality risk arises predominantly from embedded optionality within assets, liabilities or off-balance sheet items where either the Group or the customer can affect the size or timing of cash flows. One example of this risk is pipeline mortgage risk where the customer owns an option on a mortgage rate and changes in market rates can impact the take up of the committed offer. Mortgage prepayment risk is another example where the customer owns an option allowing them to prepay when it is economical to do so. This can result in customer balances amortising more quickly or slowly than anticipated due to economic conditions or customers’ response to changes in economic conditions.
Credit spread risk Credit spread risk arises largely from: (i) the liquid asset portfolio held in the management of Group liquidity, comprising of government, supranational, and other eligible assets; (ii) the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA) sensitivity to credit spreads; and (iii) a number of the Group’s structured medium term notes where we have elected to fair value the notes through the profit and loss account.
Measurement Interest rate risk exposure is monitored monthly using, primarily: (i) Market value sensitivity: this methodology considers all repricing mismatches (behaviourally adjusted where appropriate) in the current balance sheet and calculates the change in market value that would result from an instantaneous 25, 100 and 200 basis points parallel rise or fall in the yield curve (subject to an appropriate floor). The market value sensitivities are calculated on a static balance sheet using principal cash flows excluding commercial margins and other spread components and are therefore discounted at the risk free zero-coupon rate.
(iv) Structural hedge limits: these metrics enhance understanding of assumption and duration risk taken within the behaviouralisation of this portfolio.
For further information on defined benefit pension scheme assets and liabilities please refer to note 35 on page 206.
Risk measures include 1-in-200 year stresses used for regulatory capital assessments and single factor stresses for profit before tax.
Further stresses that show the effect of reasonably possible changes in key assumptions, including the risk-free rate, equity investment volatility, widening of credit default spreads on corporate bonds and an increase in illiquidity premia, as applied to profit before tax are set out in note 32.
This provides the basis for the Group Model Governance Policy, which defines the mandatory requirements for models across the Group, including: – the scope of models covered by the policy; – model materiality; – roles and responsibilities, including ownership, independent oversight and approval; and – key principles and controls regarding data integrity, development, validation, implementation, ongoing maintenance and validation, monitoring, and the process for non-compliance.
The areas of focus for our audit which involved the greatest allocation of our resources and effort were: – Loan loss impairment provisions (Group) – Conduct risk and provisions (Group) – Insurance actuarial assumptions (Group) – Defined benefit obligation (Group) – Hedge accounting (Group and parent) – Significant transactions (Group and parent) – Privileged access to IT systems (Group and parent) – Disclosure of the impact of IFRS 9 (Group)
How we determined it 5 per cent of the 3 year average of adjusted profit before tax. Profit was adjusted to remove the effects of certain items which are exceptional and/or one off in nature.
Rationale for benchmark applied We have used a 3 year average of adjusted profit before tax in order to reduce the potential for volatility and large changes in materiality year-onyear. This is a generally accepted auditing practice. Statutory profits before tax for 2015, 2016 and 2017 were adjusted to remove the disproportionate impact of several items which are considered exceptional and/or one-off in nature. These adjustments included charges related to PPI and other conduct provisions, charges relating to redemptions of enhanced capital notes and the credit in relation to the Group’s disposal of its stake in Visa Europe Ltd.
In establishing the overall approach to the Group audit, we determined the type of work that is required to be performed over the components by us, as the Group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction (‘component auditors’). Almost all of our audit work is undertaken by PwC UK component auditors.
Impairment provisions relating to loans and advances in the Commercial Banking division are primarily determined on an individual basis. Judgement is required to determine when a loan is considered impaired, and then to estimate the expected future cash flows related to that loan. A collective provision is also calculated to cover unidentified impairment (i.e. losses which have been incurred but not yet identified). Management apply overlays to the modelled output to address risks not captured by the model.
– the review, challenge and approval processes that are in place to assess the outputs of the Group’s impairment models, and the overlays that are applied.
We understood and critically assessed the appropriateness of models used. This included challenging whether the portfolios were appropriately segmented and whether historical experience was representative of current circumstances. We also performed testing over the completeness and accuracy of data from underlying systems, assessed whether customer forbearance plans had been appropriately reflected in the impairment models and performed testing to obtain evidence over the existence and valuation of collateral.
We critically assessed the criteria for determining whether an impairment event had occurred and therefore whether there was a requirement to calculate an individual impairment provision. We tested a sample of performing loans with characteristics that might imply an impairment indicator existed (e.g. a customer experiencing financial difficulty or in breach of covenant) as well as an additional haphazardly selected sample of performing loans to assess whether these loans had any impairment indicators that management had not identified.
Provisions reflecting the Group’s best estimate of present obligations relating to anticipated customer redress payments, operational costs and regulatory fines as a result of past events, practices and conduct continue to be significant and therefore represent a key audit matter.
We understood and tested the key controls and management’s processes around: – identifying emerging conduct risk exposures and assessing whether provisions or disclosures were necessary; and
We understood the nature of customer complaints received, and assessed the trends. We used this analysis to understand whether there were indicators of more systemic issues being present for which provisions or disclosures may have needed to be made in the financial statements.
We reviewed the Group’s litigation reports, to identify potentially material cases which may require provision. We also communicated with the Group’s external legal representatives to confirm our understanding of significant cases.
Some of the economic and non-economic actuarial assumptions used in valuing insurance contracts are highly judgemental in nature, in particular persistency (the retention of policies over time), longevity (the expectation of how long an annuity policyholder will live and how that might change over time), maintenance expenses (future expenses incurred to maintain existing policies to maturity), credit default and illiquidity premium (adjustments made to the discount rate for the IFRS value of in-force business asset.
We understood and tested key controls and governance around the processes for setting economic and non-economic assumptions. We found that the key controls for the setting of assumptions, including those operating over the experience analysis data where applicable, were designed and operated effectively. Therefore we are able to place reliance on these controls for the purposes of our financial statement audit.
The assessment includes reference to our benchmarking data which considers each of these principal areas. For persistency, we considered the appropriateness of assumptions set by management in light of regulatory changes. In particular, we considered how the assumptions reflect expected persistency improvements from the removal of commission for qualifying pension schemes and greater outflows of funds expected as a result of increased options available to pension policyholders (Finance Act 2014).
For longevity, we have assessed the appropriateness of how own experience and industry data are used in setting future assumptions around longevity experience and future longevity trends and compared resulting life expectancies to benchmarking data.
The Group enters into derivative contracts in order to manage and hedge risks such as interest rate and foreign exchange rate risk. These arrangements create accounting mismatches which are addressed through hedge accounting, predominantly fair value hedge or cash flow hedges.
We understood and tested key controls over the designation and ongoing management of hedge accounting relationships, including testing of hedge effectiveness as well as the controls around the preparation and review of hedging strategy and related documentation prior to the implementation of new hedges. We found the key controls were designed, implemented and operated effectively, and therefore we determined that we could place reliance on these controls for the purposes of our audit.
We examined hedge documentation to assess whether the documentation complied with all IAS 39 requirements. We tested key year-end reconciliations between underlying source systems and spreadsheets used to manage hedging models, including testing of hedging capacity after considering the impact of structural reform, designation of hedges and the measurement and recording of hedge effectiveness adjustments. In monitoring hedging effectiveness against stresses, we noted that despite significant market uncertainty and volatility during the year, all significant hedge accounting relationships continued to be effective. We tested a sample of manual adjustments posted to hedge reserves relating to hedge ineffectiveness arising in cash flow hedging models. We found that hedge accounting methodology was appropriately applied.
The design of the initial accounting treatment may form the basis for subsequent periods for long dated transactions.
We have deemed the disclosure of the impact of IFRS 9 for impairment an area of focus because of the significant changes introduced by the standard. Under the new impairment model, losses are recognised on an expected credit loss basis. Expected credit losses ('ECLs') are required to incorporate forward-looking information, reflecting management’s view of potential future economic environments. The complexity involved requires management to develop new methodologies involving the use of significant judgements.
In order to meet the requirements of the new standard, significant changes have also been made to systems, processes and controls with effect from 1 January 2018.
We understood and tested key controls supporting management’s estimate of the transition adjustment focusing on: – model development, validation and approval to ensure compliance with IFRS 9 requirements; – review and approval of key assumptions, judgements and forward looking information prior to use in the models; – the integrity of data used as input to the models including the transfer of data between source systems and the impairment models; – review and approval of post model adjustments recorded by management; and
– review and approval of the output of IFRS 9 models and related transition impacts.
We assessed the reasonableness of forward looking information incorporated into the impairment calculations by using our experts and specialists to challenge the multiple economic scenarios chosen and the weighting applied to capture non-linear losses.
We tested the underlying disclosures related to the transition impact and reconciled the disclosed impact to underlying accounting records.
Going concern In accordance with ISAs (UK) we report as follows: Reporting obligation Outcome
In light of the knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic Report and Directors’ report. (CA06)
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: – The directors’ confirmation on page 83 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. – The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated. – The directors’ explanation on page 82 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Note 2: Accounting policies The Group’s accounting policies are set out below. These accounting policies have been applied consistently.
Revenue recognition policies specific to life insurance and general insurance business are detailed below (see (M) below); those relating to leases are set out in (J)(2) below.
Financial liabilities are derecognised when they are extinguished (i.e. when the obligation is discharged), cancelled or expire.
Note 2: Accounting policies continued – where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise need to be separately accounted for.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. Refer to note 48(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models.
Where such an event, including the identification of fraud, has had an impact on the estimated future cash flows of the financial asset or group of financial assets, an impairment allowance is recognised. The amount of impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. If the asset has a variable rate of interest, the discount rate used for measuring the impairment allowance is the current effective interest rate.
Impairment allowances are assessed individually for financial assets that are individually significant. Impairment allowances for portfolios of smaller balance homogenous loans such as most residential mortgages, personal loans and credit card balances that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis.
(2) Available-for-sale financial assets The Group assesses, at each balance sheet date, whether there is objective evidence that an available-for-sale financial asset is impaired. In addition to the criteria for financial assets accounted for at amortised cost set out above, this assessment involves reviewing the current financial circumstances (including creditworthiness) and future prospects of the issuer, assessing the future cash flows expected to be realised and, in the case of equity shares, considering whether there has been a significant or prolonged decline in the fair value of the asset below its cost. If an impairment loss has been incurred, the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and the current fair
Other includes certain assets previously reported as outside of the Group’s risk appetite and income and expenditure not attributed to divisions, including the costs of certain central and head office functions and the Group’s private equity business, Lloyds Development Capital. Inter-segment services are generally recharged at cost, with the exception of the internal commission arrangements between the UK branch and other distribution networks and the insurance product manufacturing businesses within the Group, where a profit margin is also charged. Inter-segment lending and deposits are generally entered into at market rates, except that non-interest bearing balances are priced at a rate that reflects the external yield that could be earned on such funds. For the majority of those derivative contracts entered into by business units for risk management purposes, the business unit recognises the net interest income or expense on an accrual accounting basis and transfers the remainder of the movement in the fair value of the derivative to the central group segment where the resulting accounting volatility is managed where possible through the establishment of hedge accounting relationships. Any change in fair value of the hedged instrument attributable to the hedged risk is also recorded within the central group segment. This allocation of the fair value of the derivative and change in fair value of the hedged instrument attributable to the hedged risk avoids accounting asymmetry in segmental results and leads to accounting volatility, which is managed centrally and reported within Other.
Other segment items reflected in income statement above: Increase in value of in-force business – – (165) – (165)
Other segment items: Investments in joint ventures and associates at end of year 9 – – 56 65 1 Net of profits on disposal of operating lease assets of £32 million.
Other segment items reflected in income statement above: Decrease in value of in-force business – – 472 – 472
Other segment items reflected in income statement above: Decrease in value of in-force business – – (162) – (162)
Interest payable on liabilities held at amortised cost 0.79 1.07 1.19 (3,659) (5,289) (6,053)
Amounts payable to unitholders in consolidated open-ended investment vehicles 9.15 10.85 1.16 (1,435) (2,057) (244)
Total net income arising on assets held at fair value through profit or loss 10,984 17,305 2,835
Amortisation of acquired value of in-force non-participating investment contracts (note 24) 34 37 41
Total operating expenses 12,696 12,277 15,387 1 In 2016, regulatory provisions of £61 million were charged against income.
Performance-based compensation expense comprises: Awards made in respect of the year ended 31 December 334 312 280
Performance-based awards expensed in 2017 include cash awards amounting to £102 million (2016: £116 million; 2015: £96 million).
Impairment losses on loans and receivables: Loans and advances to customers 697 592 443
1 In 2016 this included a £231 million write down of the deferred tax asset held within the life business, reflecting the Group’s utilisation estimate which has been restricted by the current economic environment.
Tax credit on distributions to other equity holders 102 91 80 2017 million 2016 million 2015 million
Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, which has been calculated after deducting 57 million (2016: 140 million; 2015: 101 million) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.
There were no anti-dilutive share options and awards excluded from the calculation of diluted earnings per share at 31 December 2017 (2016: weighted-average of 0.3 million; 2015: weighted-average of 1 million).
Other financial assets at fair value through profit or loss include the following assets designated into that category: (i) financial assets backing insurance contracts and investment contracts of £117,323 million (2016: £101,888 million) which are so designated because the related liabilities either have cash flows that are contractually based on the performance of the assets or are contracts whose measurement takes account of current market conditions and where significant measurement inconsistencies would otherwise arise. Included within these assets are investments in unconsolidated structured entities of £28,759 million (2016: £15,611 million), see note 19; and
(ii) private equity investments of £1,944 million (2016: £2,245 million) that are managed, and evaluated, on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.
Loans and advances to customers include finance lease receivables, which may be analysed as follows: 2017 £m 2016 £m
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements and the carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 30.
Cash deposits of £3,507 million (2016: £9,018 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations are held by the Group. Additionally, the Group had certain contractual arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2017 these obligations had not been triggered; the maximum exposure under these facilities was £95 million (2016: £373 million).
The Group has not voluntarily offered to repurchase assets from any of its public securitisation programmes during 2017 (2016: none).
Note 19: Structured entities The Group’s interests in structured entities are both consolidated and unconsolidated. Detail of the Group’s interests in consolidated structured entities are set out in: note 18 for securitisations and covered bond vehicles, note 35 for structured entities associated with the Group’s pension schemes, and below in part (A) and (B). Details of the Group’s interests in unconsolidated structured entities are included below in part (C).
All lending assets and debt securities held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary for standard lending activities in the normal course of the Group’s banking activities. During 2017 there have continued to be planned drawdowns on certain liquidity facilities for balance sheet management purposes, supporting the programme to provide funding alongside the proceeds of the asset-backed commercial paper issuance. The Group could be asked to provide support under the contractual terms of these arrangements including, for example, if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption.
Note 19: Structured entities continued (C) Unconsolidated collective investment vehicles and limited partnerships The Group’s direct interests in unconsolidated structured entities comprise investments in collective investment vehicles, such as Open-Ended Investment Companies, and limited partnerships with a total carrying value of £28,759 million at 31 December 2017 (2016: £15,611 million), included within financial assets designated at fair value through profit and loss (see note 15). These investments include both those entities managed by third parties and those managed by the Group. At 31 December 2017, the total asset value of these unconsolidated structured entities, including the portion in which the Group has no interest, was £2,338 billion (2016: £1,849 billion).
Individual impairment allowances are generally established against the Group’s commercial lending portfolios. Assets are reviewed on a regular basis and those showing potential or actual vulnerability are placed on a watchlist where greater monitoring is undertaken and any adverse or potentially adverse impact on ability to repay is used in assessing whether an asset should be transferred to a dedicated Business Support Unit. Specific examples of trigger events that could lead to the initial recognition of impairment allowances against lending to corporate borrowers (or the recognition of additional impairment allowances) include (i) trading losses, loss of business or major customer of a borrower; (ii) material breaches of the terms and conditions of a loan facility, including non-payment of interest or principal, or a fall in the value of security such that it is no longer considered adequate; (iii) disappearance of an active market because of financial difficulties; or (iv) restructuring a facility with preferential terms to aid recovery of the lending (such as a debt for equity swap).
For such individually identified financial assets, a review is undertaken of the expected future cash flows which requires significant management judgement as to the amount and timing of such cash flows. Where the debt is secured, the assessment reflects the expected cash flows from the realisation of the security, net of costs to realise, whether or not foreclosure or realisation of the collateral is probable. The determination of individual impairment allowances requires the exercise of considerable judgement by management involving matters such as local economic conditions and the resulting trading performance of the customer, and the value of the security held, for which there may not be a readily accessible market. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment allowances and consequently these allowances can be subject to variation as time progresses and the circumstances of the customer become clearer.
The value of collateral supporting the Group’s UK mortgage portfolio is estimated by applying changes in the house price indices to the original assessed value of the property. Given the relative size of the portfolio, this is a key variable in determining the Group’s impairment charge for loans and receivables. If average house prices were ten per cent lower than those estimated at 31 December 2017, the impairment charge would increase by approximately £200 million in respect of UK mortgages.
In addition, the collective provision also includes provision for losses that have been incurred but have not been separately identified at the balance sheet date. The loans that are not currently recognised as impaired are grouped into homogenous portfolios by key risk drivers. Risk drivers for secured retail lending include the current indexed loan-to-value, previous mortgage arrears, internal cross-product delinquency data and external credit bureau data; for unsecured retail lending they include whether the account is up-to-date and, if not, the number of payments that have been missed; and for commercial lending they include factors such as observed default rates and loss given default. 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 loss emergence period is determined by local management for each portfolio and the Group has a range of loss emergence periods which are dependent upon the characteristics of the portfolios. Loss emergence periods are reviewed regularly and updated when appropriate. In general the periods used across the Group vary between one month and 12 months based on historical experience. Unsecured portfolios tend to have shorter loss emergence periods than secured portfolios. This provision is sensitive to changes in the loss emergence period. Management use a significant level of judgement when determining the collective unidentified impairment provision, including the assessment of the level of overall risk existing within particular sectors and the impact of the low interest rate environment on loss emergence periods. In the Commercial Banking division, an increase of one month in the loss emergence period in respect of the loan portfolio assessed for collective unidentified impairment provisions would result in an increase in the collective unidentified impairment provision of approximately £25 million (2016: £33 million).
Recoveries of advances written off in previous years 482 – 482 861 1 862
Charge (release) to the income statement (note 12) 697 (6) 691 592 – 592
Note 22: Acquisition of MBNA Limited On 1 June 2017, following the receipt of competition and regulatory approval, the Group acquired 100 per cent of the ordinary share capital of MBNA Limited (MBNA), which together with its subsidiaries undertakes a UK consumer credit card business, from FIA Jersey Holdings Limited, a wholly-owned subsidiary of Bank of America. The acquisition will enable the Group to enhance its position and offering within the UK prime credit card market. The total fair value of the purchase consideration was £2,016 million, settled in cash. The acquisition is expected to result in a significant opportunity for cost synergies and goodwill of £302 million has been recognised on the transaction. None of the goodwill recognised is deductible for tax purposes.
Had the acquisition date of MBNA been 1 January 2017, the Group’s consolidated total income would have been £329 million higher at £34,566 million and the Group’s consolidated profit before tax would have been £112 million higher at £5,387 million.
The recoverable amount of the goodwill relating to Motor Finance has also been based on a value-in-use calculation using pre-tax cash flow projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 14 per cent. The cash flows beyond the five-year period are extrapolated using a growth rate of 0.5 per cent which does not exceed the long-term average growth rates for the markets in which Motor Finance participates. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Motor Finance to fall below the balance sheet carrying value.
The liabilities in respect of the Group’s UK annuity business are matched by a portfolio of fixed interest securities, including a large proportion of corporate bonds and illiquid loan assets. The value of the in-force business asset for UK annuity business has been calculated after taking into account an estimate of the market premium for illiquidity in respect of corporate bond holdings and relevant illiquid loan assets. In determining the market premium for illiquidity, a range of inputs are considered which reflect actual asset allocation and relevant observable market data. The illiquidity premium is estimated to be 114 basis points at 31 December 2017 (2016: 138 basis points).
Non-economic assumptions Future mortality, morbidity, expenses, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience. Further information on these assumptions is given in note 31 and the effect of changes in key assumptions is given in note 32.
The acquired value of in-force non-participating investment contracts includes £185 million (2016: £206 million) in relation to OEIC business.
Accumulated amortisation: Balance sheet amount at 31 December 2017 403 – 662 19 1,751 2,835
(ii) Method of calculation of liabilities With-profit liabilities are stated at their realistic value, the main components of which are: – With-profit benefit reserve, the total asset shares for with-profit policies; – Cost of options and guarantees (including guaranteed annuity options); – Deductions levied against asset shares; – Planned enhancements to with-profits benefits reserve; and – Impact of the smoothing policy.
Note 31: Liabilities arising from insurance contracts and participating investment contracts continued (iii) Assumptions Key assumptions used in the calculation of with-profit liabilities, and the processes for determining these, are: Investment returns and discount rates With-profit fund liabilities are valued on a market-consistent basis, achieved by the use of a valuation model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant swap curve, adjusted for credit risk. Further information on significant options and guarantees is given below.
(iii) Assumptions Generally, assumptions used to value non-profit fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This margin for adverse deviation is based on management’s judgement and reflects management’s views on the inherent level of uncertainty. The key assumptions used in the measurement of non-profit fund liabilities are:
(2) Non-life insurance For non-life insurance contracts, the methodology and assumptions used in relation to determining the bases of the earned premium and claims provisioning levels are derived for each individual underwritten product. Assumptions are intended to be neutral estimates of the most likely or expected outcome. There has been no significant change in the assumptions and methodologies used for setting reserves.
Note 33: Liabilities arising from non-participating investment contracts The movement in liabilities arising from non-participating investment contracts may be analysed as follows: 2017 £m 2016 £m
The balances above are shown gross of reinsurance. As at 31 December 2017, related reinsurance balances were £26 million (2016: £29 million); reinsurance balances are reported within other assets (note 27). Liabilities arising from non-participating investment contracts are categorised as level 2. See note 48 for details of levels in the fair value hierarchy.
(i) Characteristics of and risks associated with the Group’s schemes The Group has established a number of defined benefit pension schemes in the UK and overseas. All significant schemes are based in the UK, with the three most significant being the defined benefit sections of the Lloyds Bank Pension Schemes No’s 1 and 2 and the HBOS Final Salary Pension Scheme. At 31 December 2017, these schemes represented 95 per cent of the Group’s total gross defined benefit pension assets (2016: 94 per cent). These schemes provide retirement benefits calculated as a percentage of final pensionable salary depending upon the length of service; the minimum retirement age under the rules of the schemes at 31 December 2017 is generally 55 although certain categories of member are deemed to have a contractual right to retire at 50.
The most recent triennial funding valuation of the Group’s three main schemes, based on the position as at 31 December 2016, is substantially complete and the terms have been agreed in principle with the trustees. The valuation shows an aggregate funding deficit of £7.3 billion (a funding level of 85.6 per cent) compared to a £5.2 billion deficit (a funding level of 85.9 per cent) for the previous valuation as at 30 June 2014. In the light of this funding deficit, and in contemplation of the changes the Group expects to make as a result of its Structural Reform Programme, the Group has agreed in principle a recovery plan with the trustees. Under the plan, deficit contributions of £412 million are payable during 2018, rising to £618 million in 2019, £798 million in 2020, £1,287 million in 2021 and £1,305 million per annum from 2022 to 2024. Contributions in the later years will be subject to review and renegotiation at subsequent funding valuations. The next funding valuation is due to be completed by March 2021 with an effective date of 31 December 2019. The deficit contributions are in addition to the regular contributions to meet of benefits accruing over the year. The Group currently expects to pay contributions of approximately £750 million to its defined benefit schemes in 2018.
Weighted-average rate of increase for pensions in payment 2.73 2.74 2017 Years 2016 Years
The Group has recognised a deferred tax asset of £4,034 million (2016: £4,298 million) in respect of UK trading losses carried forward. Substantially all of these losses have arisen in Bank of Scotland plc and Lloyds Bank plc, and they will be utilised as taxable profits arise in those legal entities in future periods.
Under current law there is no expiry date for UK trading losses not yet utilised, although (since Finance Act 2016) banking losses that arose before 1 April 2015 can only be used against 25 per cent of taxable profits arising after 1 April 2016, and they cannot be used to reduce the surcharge on banking profits. This restriction in utilisation means that the value of the deferred tax asset is only expected to be fully recovered by 2034.
At 31 December 2017, a provision of £2,438 million remained unutilised relating to complaints and associated administration costs. Total cash payments were £1,470 million during the year to 31 December 2017.
The total amount provided for PPI represents the Group’s best estimate of the likely future cost. However a number of risks and uncertainties remain in particular with respect to future volumes. The cost could differ from the Group’s estimates and the assumptions underpinning them, and could result in a further provision being required. There is significant uncertainty around the impact of the regulatory changes, FCA media campaign and Claims Management Company and customer activity.
Payment protection insurance (MBNA) With regard to MBNA, as announced in December 2016, the Group’s exposure is capped at £240 million already provided for, through an indemnity received from Bank of America.
Other provisions for legal actions and regulatory matters In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental authorities on a range of matters. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of current and former employees, customers, investors and other third parties and is subject to legal proceedings and other legal actions. Where significant, provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the year ended 31 December 2017 the Group charged a further £865 million in respect of legal actions and other regulatory matters, the unutilised balance at 31 December 2017 was £1,292 million (31 December 2016: £1,339 million). The most significant items are as follows.
Arrears handling related activities The Group has provided an additional £245 million (bringing the total provided to date to £642 million), for the costs of identifying and rectifying certain arrears management fees and activities. Following a review of the Group’s arrears handling activities, the Group has put in place a number of actions to improve further its handling of customers in these areas and has made good progress in reimbursing mortgage arrears fees to the 590,000 impacted customers.
Other Following the sale of TSB Banking Group plc in 2015, the Group raised a provision of £665 million in relation to the Transitional Service Agreement entered into between Lloyds Bank plc and TSB and the contribution to be provided to TSB in moving to alternative IT provision; £622 million of this provision remained unutilised at 31 December 2017.
There were no repurchases of preference shares or undated subordinated liabilities during the year.
Preferred securities £m 4.939% Non-voting Non-cumulative Perpetual Preferred Securities 32 7.286% Perpetual Regulatory Tier One Securities (Series A) 150
Primary Capital Undated Floating Rate Notes3 353 5.125% Undated subordinated Step-up Notes callable 2016 2
Redesignation of limited voting ordinary shares (see below) 80,921,051 – – 8 – –
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 38.
Retained profits are stated after deducting £611 million (2016: £495 million; 2015: £740 million) representing 861 million (2016: 730 million; 2015: 943 million) treasury shares held.
The AT1 securities are Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities with no fixed maturity or redemption date.
Deferred bonus plans The Group operates a number of deferred bonus plans that are equity settled. Bonuses in respect of employee performance in 2017 have been recognised in the charge in line with the proportion of the deferral period completed.
For the 2015 and 2016 LTIPs participants may be entitled to any dividends paid during the vesting period if the performance conditions are met. An amount equal in value to any dividends paid between the award date and the date the Remuneration Committee determine that the performance conditions were met may be paid, based on the number of shares that vest. The Remuneration Committee will determine if any dividends are to be paid in cash or in shares. Details of the performance conditions for the plan are provided in the Directors’ remuneration report.
At the end of the performance period for the 2014 grant, the targets had not been fully met and therefore these awards vested in 2017 at a rate of 55 per cent.
Matching shares The Group undertakes to match shares purchased by employees up to the value of £45 per month; these matching shares are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition: if an employee leaves within this three year period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. Similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.
Granted, including certain adjustments (includes entitlements of appointed key management personnel) 37 29 37
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to other transactions between the Group and its key management personnel: 2017 £m 2016 £m 2015 £m
No provisions have been recognised in respect of loans given to key management personnel (2016 and 2015: £nil).
At 31 December 2017, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £0.01 million with three directors and two connected persons (2016: £0.4 million with five directors and two connected persons; 2015: £1 million with four directors and six connected persons).
Subsidiaries Details of the Group’s subsidiaries and related undertakings are provided on pages 268–274. In accordance with IFRS 10 Consolidated financial statements, transactions and balances with subsidiaries have been eliminated on consolidation.
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £60,126 million (2016: £63,203 million) was irrevocable.
Operating lease payments represent rental payable by the Group for certain of its properties. Some of these operating lease arrangements have renewal options and rent escalation clauses, although the effect of these is not material. No arrangements have been entered into for contingent rental payments.
Capital commitments Excluding commitments in respect of investment property (note 26), capital expenditure contracted but not provided for at 31 December 2017 amounted to £444 million (2016: £543 million). Of this amount, £440 million (2016: £541 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
Trading and other financial assets at fair value through profit or loss – 42,236 120,642 – – – – 162,878
Trading and other financial liabilities at fair value through profit or loss – 43,062 7,815 – – – – 50,877
(A) Financial assets, excluding derivatives Valuation hierarchy At 31 December 2017, the Group’s financial assets carried at fair value, excluding derivatives, totalled £204,976 million (31 December 2016: £207,698 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 228). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
Gains recognised in the income statement within other income 202 – 202 437 – 437
Unlisted equity investments and investments in property partnerships held in the life assurance funds are valued using third party valuations. Management take account of any pertinent information, such as recent transactions and information received on particular investments, to adjust the third party valuations where necessary.
At 31 December 2017, the own credit adjustment arising from the fair valuation of £7,812 million (2016: £9,423 million) of the Group’s debt securities in issue designated at fair value through profit or loss resulted in a loss of £55 million, recognised in other comprehensive income (2016: loss of £28 million, recognised in the income statement).
The combination of a one notch deterioration in the credit rating of derivative counterparties and a ten per cent increase in LGD increases the CVA by £82 million. Current market value is used to estimate the projected exposure for products not supported by the model, which are principally complex interest rate options that are traded in very low volumes. For these, the CVA is calculated on an add-on basis (although no such adjustment was required at 31 December 2017).
Underlying asset/net asset value (incl. property prices), broker quotes or discounted cash flows3 n/a
Trading and other financial liabilities at fair value through profit or loss – – – 2 – –
Derivatives Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer maturities. To derive reasonably possible alternative valuations these volatilities have been flexed within a range of 9 per cent to 94 per cent (2016: nil per cent to 115 per cent).
(4) Financial assets and liabilities carried at amortised cost (A) Financial assets Valuation hierarchy The table below analyses the fair values of the financial assets of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as described on page 228). Loans and receivables are mainly classified as level 3 due to significant unobservable inputs used in the valuation models. Where inputs are observable, debt securities are classified as level 1 or 2.
To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of techniques are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends, prevailing market interest rates and expected future cash flows. For retail exposures, fair value is usually estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair value of commercial loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk. No adjustment is made to put it in place by the Group to manage its interest rate exposure.
As set out in note 18, included within loans and receivables are loans transferred under the Group’s securitisation and covered bond programmes. As the Group retains all of a majority of the risks and rewards associated with these loans, including credit, interest rate, prepayment and liquidity risk, they remain on the Group’s balance sheet. Assets transferred into the Group’s securitisation and covered bond programmes are not available to be used by the Group whilst the assets are within the programmes. However, the Group retains the right to remove loans from the covered bond programmes where they are in excess of the programme’s requirements. In addition, where the Group has retained some of the notes issued by securitisation and covered bond programmes, the Group has the ability to sell or pledge these retained notes.
Note 50: Offsetting of financial assets and liabilities The following information relates to financial assets and liabilities which have been offset in the balance sheet and those which have not been offset but for which the Group has enforceable master netting agreements or collateral arrangements in place with counterparties.
Trading and other financial assets at fair value through profit or loss: Loans and advances to banks: Loans and advances to customers: Available-for-sale financial assets 42,098 – 42,098 – (16,751) 25,347
C. Credit quality of assets Loans and receivables The disclosures in the table below and those on page 243 are produced under the underlying basis used for the Group’s segmental reporting. The Group believes that, for reporting periods following a significant acquisition this underlying basis, which includes the allowance for loan losses at the acquisition date on a gross basis, more fairly reflects the underlying provisioning status of the loans. The remaining acquisition-related fair value adjustments in respect of this lending are therefore identified separately in this table.
Debt securities: Bank and building society certificates of deposit 167 – 167 142 – 142
2 Other comprises sub-investment grade (2017: £9 million; 2016: £5 million) and not rated (2017: £376 million; 2016: £nil).
Total debt securities held at fair value through profit or loss 32,396 2,144 34,540 35,722 2,488 38,210
In addition, securities held as collateral in the form of stock borrowed amounted to £61,469 million (2016: £47,816 million). Of this amount, £44,432 million (2016: £16,204 million) had been resold or repledged as collateral for the Group’s own transactions.
Derivative assets, after offsetting of amounts under master netting arrangements The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of £12,785 million (2016: £17,599 million), cash collateral of £5,419 million (2016: £6,472 million) was held.
Trading and other financial assets at fair value through profit or loss 6,622 6,991
Trading and other financial liabilities at fair value through profit or loss 21,286 14,424 6,499 4,251 13,044 59,504
The Group’s financial guarantee contracts are accounted for as financial instruments and measured at fair value, upon initial recognition, on the balance sheet. The majority of the Group’s financial guarantee contracts are callable on demand, were the guaranteed party to fail to meet its obligations. It is, however, expected that most guarantees will expire unused. The contractual nominal amounts of these guarantees totalled £5,820 million at 31 December 2017 (2016: £6,883 million) with £3,132 million expiring within one year; £627 million between one and three years; £1,471 million between three and five years; and £590 million over five years (2016: £3,815 million expiring within one year; £667 million between one and three years; £1,334 million between three and five years; and £1,067 million over five years).
Cash consideration received on losing control of group undertakings and businesses 129 5 972
Note 54: Future accounting developments The following pronouncements are not applicable for the year ending 31 December 2017 and have not been applied in preparing these financial statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be made at this stage.
Classification and measurement IFRS 9 requires financial assets to be classified into one of three measurement categories, fair value through profit or loss, fair value through other comprehensive income or amortised cost. Financial assets will be measured at amortised cost if they are held within a business model the objective of which is to hold financial assets in order to collect contractual cash flows, and their contractual cash flows represent solely payments of principal and interest. Financial assets will be measured at fair value through other comprehensive income if they are held within a business model the objective of which is achieved by both collecting contractual cash flows and selling financial assets and their contractual cash flows represent solely payments of principal and interest. Financial assets not meeting either of these two business models; and all equity instruments (unless designated at inception to fair value through other comprehensive income); and all derivatives are measured at fair value through profit or loss. An entity may, at initial recognition, designate a financial asset as measured at fair value through profit or loss if doing so eliminates or significantly reduces an accounting mismatch.
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 has developed the capability to model a number of economic scenarios and capture the impact on credit losses to ensure the overall ECL reflects an appropriate distribution of economic outcomes.
Hedge accounting The hedge accounting requirements of IFRS 9 are more closely aligned with risk management practices and follow a more principle-based approach than IAS 39. The standard does not address macro hedge accounting, which is being considered in a separate IASB project. There is an option to retain the existing IAS 39 hedge accounting requirements until the IASB completes its project on macro hedging. The Group expects to continue applying IAS 39 hedge accounting in accordance with this accounting policy choice.
IFRS 16 requires lessees to recognise a right of use asset and a liability for future payments arising from a lease contract. Lessees will recognise a finance charge on the liability and a depreciation charge on the asset which could affect the timing of the recognition of expenses on leased assets. This change will mainly impact the properties that the Group currently accounts for as operating leases. Finance systems will need to be changed to reflect the new accounting rules and disclosures. Lessor accounting requirements remain aligned to the current approach under IAS 17.
Distributions on other equity instruments, net of tax – – – (336) (336) – (336)
Note 1: Basis of preparation and accounting policies The Company has applied International Financial Reporting Standards as adopted by the European Union in its financial statements for the year ended 31 December 2017. IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the IFRS Interpretations Committee and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Company has not taken advantage of this relaxation, and therefore there is no difference in application to the Company between IFRS as adopted by the EU and IFRS as issued by the IASB.
There were no movements in the capital redemption reserve in 2015, 2016 or 2017.
Details of the Company’s dividends are as set out in note 44 to the consolidated financial statements.
Note 6: Debt securities in issue These comprise notes issued by the Company in a number of currencies, although predominantly Euros and US dollars, with maturity dates ranging up to 2028.
Note 7: Subordinated liabilities These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. Any repayments of subordinated liabilities require the consent of the Prudential Regulation Authority.
Repurchases and redemptions during the year: 6.267% Non-Cumulative Fixed to Floating Rate Preference Shares callable 2016 (US$1,000 million)1
Details of the subsidiaries and related undertakings are given on pages 268 to 274 and are incorporated by reference.
Note 9: Financial instruments continued Interest rate risk and currency risk The Company is exposed to interest rate risk and currency risk on its debt securities in issue and its subordinated debt.
Q3 interim management statement1 Oct 1 There is no longer a requirement to issue interim management statements and though we will continue to issue them going forward they will be much shorter.
Share dealing facilities We offer a choice of three share dealing services for our UK shareholders and customers. To see the full range of services available for each, please use the contact details below: Service Provider Telephone Dealing Internet Dealing
For details contact: BNY Mellon Shareowner Services, 462 South 4th Street, Suite 1600, Louisville KY 40202. Telephone: 1‑866‑259‑0336 (US toll free), international callers: +1 201‑680‑6825. Alternatively visit www.adrbnymellon.com or email shrrelations@cpushareownerservices.com
2 Dividends per ordinary share in 2016 include a recommended special dividend of 0.5 pence (2015: 0.5 pence).
Cost:income ratio Operating costs as a percentage of net income calculated on an underlying basis.
Impaired loans and advances to customers adjusted to exclude Retail and Consumer Finance loans in recoveries, expressed as a percentage of closing gross loans and advances to customers.
Loan to deposit ratio Loans and advances to customers net of allowance for impairment losses and excluding reverse repurchase agreements divided by customer deposits excluding repurchase agreements.
Operating jaws The difference between the period on period percentage change in net income and the period on period change in operating costs calculated on an underlying basis.
Tangible net assets per share Net assets excluding intangible assets such as goodwill and acquisition‑related intangibles divided by the weighted average number of ordinary shares in issue.
Bank of Wales Ltd 2 Barents Leasing Ltd 1 Barnwood Mortgages Ltd 12 Bedfont Lakes Business Park (No.2) LP 20 Birchcrown Finance Ltd 1 iv vi Birmingham Midshires Asset Management Ltd
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. 14 xiii BOS (USA) Inc. 14 BOS Edinburgh No 1 Ltd 5
BOS Mistral Ltd 2 BOSIC Inc. 18 BOSSAF Rail Ltd 1 Britannia Personal Lending Ltd 4 i # British Linen Leasing (London) Ltd 5 British Linen Leasing Ltd 5 British Linen Shipping Ltd 5 C & G Homes Ltd (In liquidation) 12 C&G Estate Agents Ltd 12 C.T.S.B. Leasing Ltd (In liquidation) 13 Capital 1945 Ltd 2 Capital Bank Insurance Services Ltd (In liquidation) 13 Capital Bank Leasing 1 Ltd 2 Capital Bank Leasing 2 Ltd 2 Capital Bank Leasing 3 Ltd 2 Capital Bank Leasing 4 Ltd 2 Capital Bank Leasing 5 Ltd 2 Capital Bank Leasing 6 Ltd 2 Capital Bank Leasing 7 Ltd 2 Capital Bank Leasing 8 Ltd 17 Capital Bank Leasing 9 Ltd 2 Capital Bank Leasing 10 Ltd 2 Capital Bank Leasing 11 Ltd 2 Capital Bank Leasing 12 Ltd 5 Capital Bank Property Investments (3) Ltd 2 Capital Bank Vehicle Management Ltd 2 Capital Leasing (Edinburgh) Ltd 17 Capital Leasing Ltd (In liquidation) 88 Capital Personal Finance Ltd 4 Car Ownership Finance Ltd (In liquidation) 13 Cardnet Merchant Services Ltd 1 ii, #
iii ̂ Carlease Ltd 1 Cartwright Finance Ltd 2 viii vii # Cashfriday Ltd 9 Cashpoint Ltd 1 Caveminster Ltd 1 CBRail S.A.R.L. 19 Cedar Holdings Ltd 1 Central Mortgage Finance Ltd 12 CF Asset Finance Ltd 2 Chariot Finance Ltd (In liquidation ) 13 Chartered Trust (Nominees) Ltd 1 Charterhall (No. 1) Ltd (In liquidation) 13 Charterhall (No. 2) Ltd (In liquidation) 13 Cheltenham & Gloucester plc 12 Chiswell Stockbrokers Ltd 1 Clerical Medical (Dartford Number 2) Ltd 20 Clerical Medical (Dartford Number 3) Ltd 20 Clerical Medical Finance plc 20 Clerical Medical Financial Services Ltd 20 Clerical Medical Forestry Ltd 20 Clerical Medical International Holdings B.V. 21 Clerical Medical Investment Fund Managers Ltd 4 Clerical Medical Managed Funds Ltd 20 Clerical Medical Non Sterling Property
Halifax Equitable Ltd 4 Halifax Financial Brokers Ltd 4 Halifax Financial Services (Holdings) Ltd 4
Halifax Financial Services Ltd 4 Halifax General Insurance Services Ltd 4 Halifax Group Ltd 4 Halifax Investment Services Ltd 4 Halifax Leasing (June) Ltd 1 Halifax Leasing (March No.2) Ltd 1 Halifax Leasing (September) Ltd 1 Halifax Life Ltd 4 Halifax Ltd 4 Halifax Loans Ltd 4 Halifax Mortgage Services (Holdings) Ltd 4 Halifax Mortgage Services Ltd 4 Halifax Nominees Ltd 4 Halifax Pension Nominees Ltd 29 Halifax Premises Ltd 1 Halifax Share Dealing Ltd 4 Halifax Vehicle Leasing (1998) Ltd 4 HBOS Canada Inc. 18 HBOS Capital Funding (Jersey) Ltd 10 HBOS Covered Bonds LLP 4 * HBOS Directors Ltd (In liquidation) 13 HBOS Final Salary Trust Ltd 5 HBOS Financial Services Ltd 20 HBOS Insurance & Investment Group Ltd 20 HBOS International Financial Services
Lloyds (Nimrod) Specialist Finance Ltd 1 Lloyds America Securities Corporation 14 Lloyds Asset Leasing Ltd 1 Lloyds Bank (BLSA) (In liquidation) 13 Lloyds Bank (Branches) Nominees Ltd 1 Lloyds Bank (Colonial & Foreign) Nominees Ltd 1 Lloyds Bank (Fountainbridge 1) Ltd 5 Lloyds Bank (Fountainbridge 2) Ltd 5 Lloyds Bank (Gibraltar) Ltd 42 Lloyds Bank (I.D.) Nominees Ltd 1 Lloyds Bank (PEP Nominees) Ltd 1 Lloyds Bank (Stock Exchange Branch)
Lloyds Bank Asset Finance Ltd 1 Lloyds Bank Commercial Finance Ltd 9 Lloyds Bank Commercial Finance Scotland Ltd 43 Lloyds Bank Corporate Asset Finance (HP) Ltd 1 Lloyds Bank Corporate Asset Finance (No.1) Ltd 1 Lloyds Bank Corporate Asset Finance (No. 2) Ltd 1 Lloyds Bank Corporate Asset Finance (No.3) Ltd 1 Lloyds Bank Corporate Asset Finance (No.4) Ltd 1 Lloyds Bank Corporate Markets plc 1 ̂ Lloyds Bank Covered Bonds LLP 44 * Lloyds Bank Equipment Leasing (No. 1) Ltd 1 Lloyds Bank Equipment Leasing (No. 5) Ltd
Lloyds Bank General Insurance Holdings Ltd 45 Lloyds Bank General Insurance Ltd 1 Lloyds Bank General Leasing (No. 1) Ltd
Lloyds Bank Maritime Leasing (No. 15) Ltd 1 Lloyds Bank Maritime Leasing (No.16) Ltd
Lloyds Bank Maritime Leasing Ltd (In liquidation) 13 Lloyds Bank MTCH Ltd 1 Lloyds Bank Nominees Ltd 1 Lloyds Bank Offshore Pension Trust Ltd 6 Lloyds Bank Pension ABCS (No. 1) LLP 1 * Lloyds Bank Pension ABCS (No. 2) LLP 1 * Lloyds Bank Pension Trust (No. 1) Ltd 1 Lloyds Bank Pension Trust (No. 2) Ltd 1 Lloyds Bank Pensions Property (Guernsey) Ltd 37 i ii Lloyds Bank plc 1 ̂
Permanent Mortgages Trustee Ltd 44 Permanent PECOH Holdings Ltd 44 Permanent PECOH Ltd 44 Salisbury Securities 2015 Ltd 61 Salisbury II Securities 2016 Ltd 61 Salisbury II‑A Securities 2017 Limited 61 Sandown 2012‑2 Holdings Ltd 44 Sandown 2012‑2 plc 44 Sandown Gold 2011‑1 Holdings Ltd 44 Sandown Gold 2011‑1 plc (in liquidation) 70 Sandown Gold 2012‑1 Holdings Ltd 44 Sandown Gold 2012‑1 plc 44 SARL Coliseum 75 SARL Fonciere De Rives 75 SARL Hiram 75 SAS Compagnie Fonciere De France, 75 SCI Astoria Invest 75 SCI De L’Horloge 75 SCI Equinoxe 75 SCI Mercury Invest 75 SCI Millenium AP1 75 SCI Norli 75 SCI Rambuteau CFF 75 Stichting Candide Financing Holdings 64 Swan Funding 2 Ltd 61 Thistle Investments (AMC) Ltd 44 Thistle Investments (ERM) Ltd 44 Trinity Financing Holdings Ltd 44 Trinity Financing plc 44 Wetherby Securities 2017 Limited 61 Lloyds Bank Foundation for England & Wales • 77 The Halifax Foundation for Northern Ireland • 15 Lloyds Bank Foundation for the Channel Islands• 77 Lloyds TSB Foundation for Scotland • 78 Bank of Scotland Foundation • 5 MBNA General Foundation 82
Port Coogee Unincorporated JV 50% Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia * Potter Topco Limited 89.25% Lakelovers House, Victoria Street, Windermere, Cumbria, United Kingdom, LA23 1AB i & Prestbury 1 Limited Partnership n/a Cavendish House, 18 Cavendish Square, London, W1G 0PJ * & Prestbury Hotel Holdings Ltd (In liquidation) 100% 15 Canada Square, London, E14 5GL vii & Project Polka Bidco Limited 89.25% Roundhouse Road, Faverdale Industrial Estate, Darlington, County Durham, DL3 0UR, United Kingdom ii & Prism Medical Healthcare Ltd 89% Unit 4, Jubilee Business Park, Jubilee Way, Grange Moor, West Yorkshire, WF4 4TD i & PW Growth Finance Limited 95.24% 140 Aldersgate Street, London, England, EC1A 4HY vii Quantel Holdings Ltd 100% Turnpike Road, Newbury, Berkshire, RG14 2NX i & Quantum (Flimwell) Limited 24.57% Kings Parade, Lower Coombe Street, Croydon, CR0 1AA Ramco Acquisition Ltd 89.45% Blackwood House, Union Grove Lane, Aberdeen, AB10 6XU i & 89.45% xix 89.45% xix
Rectory (Aston Clinton) Ltd 50% Rectory House, Thame Road, Haddenham, Aylesbury, Buckinghamshire, HP17 8DA i Rolls Development UK Ltd (In Liquidation) 50% 4th Floor , 4 Victoria Square, St Ablans, Hertfordhsire, AL1 3TF, United Kingdom√ ii Rush Hair Group Limited 89.25% 23 George Street, Croydon, Surrey, CR0 1LA i & Scenic Topco Limited 89.25% One Central Square, Cardiff, CF10 1FS i & Seaspray Unincorporated JV n/a Level 3, 1C Homebush Bay Drive, Rhodes NSW 2138, Australia * SHOO 788AA Ltd 89.25% 21‑22 Balena Close, Poole, Dorset, BH17 7DX i & SHOO 802AA Limited 89.25% Burleighfield House, London Road, Loudwater, Buckinghamshire, HP10 9RF i Specialist People Services Group Ltd 82.5% 7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ i & 82.5% iii 82.5% iv
ACS POOLED PROPERTY 2 Scottish Widows Pooled Property ACS Fund 100% Scottish Widows Pooled Property ACS Fund2 100%
BNY MELLON INVESTMENTS FUNDS ICVC 10 Insight Global Multi‑Strategy Fund 43.84% Insight Global Absolute Return Fund 73.62% Newton Multi‑Asset Growth Fund 29.15% Newton UK Opportunities Fund 42.36% Newton UK Income Fund 27.38%
Corporate Bond PPF Fund 100% SW Corporate Bond Tracker 100% Scottish Widows GTAA 1 84.39% Corporate Bond 1 Fund 100% Balanced Growth Fund 27.17% Adventurous Growth Fund 71.69%
UK Corporate Bond Fund 62.79% UK Growth Fund 62.02% Gilt Fund 95.99% High Income Bond Fund 25.77% Strategic Income Fund 63.23% Environmental Investor Fund 69.89% Ethical Fund 73.65%
THE TM LEVITAS FUNDS 21 TM Levitas A Fund 21.56% TM Levitas B Fund 26.39%
UBS INVESTMENT FUNDS ICVC 17 UBS Global Optimal Fund 25.42% UBS UK Opportunities Fund 44.79%
West Sussex PO19 1UP * The undertaking does not have share capital + The undertaking does not have a registered office # In relation to Subsidiary Undertakings, an undertaking external to the Group holds shares
Registered office addresses (1) 25 Gresham Street, London, EC2V 7HN (2) Charterhall House, Charterhall Drive, Chester, CH88 3AN (3) Port Hamilton, 69 Morrison Street, Edinburgh, EH3 8YF (4) Trinity Road, Halifax, HX1 2RG (5) The Mound, Edinburgh, EH1 1YZ (6) 25 New Street, St. Helier, Jersey, JE4 8RG (7) 116 Cockfosters Road, Barnet, Hertfordshire, EN4 0DY (8) Minter Ellison, Governor Macquire Tower, Level 40, 1 Farrer Place, Sydney, NSW 2000,
Grand Cayman, KY1‑1104, Cayman Islands (74) 106 Goring Road, Goring By Sea, Worthing, West Sussex, BN12 4AA (75) 8 Avenue Hoche, 75008, Paris, France (76) 10 George Street, Edinburgh, EH2 2DZ (77) Pentagon House, 52‑54 Southwark Street, London, SE1 1UN (78) Riverside House, 502 Gorgie Road, Edinburgh, EH11 3AF (79) St William House, Tresillian Terrace, Cardiff, CF10 5BH (80) Drake House, Gadbrook Park, Rudheath, Northwich, CW9 7TW, United Kingdom (81) Tower House, Charterhall Drive, Chester, CH88 3AN (82) Stansfield House, Chester Business Park, Chester, CH4 9QQ, United Kingdom (83) Glategny Court, Glategny Esplanade, St Peter Port, GY1 3HQ, Guernsey (84) The Residency, 7th Floor, 133/1 Residency Road, Bangalore, 560025, India (85) 1A Heienhaff, Senningerberg, L‑1736, Luxembourg (86) 30 Finsbury Square, London, EC2P 2YU, United Kingdom (87) Fifth Floor, 100 Wood Street, London, EC2V 7EX, United Kingdom (88) EY Atria One, 144 Morrison Street, Edinburgh, EH3 8EB (89) PO BOX 12757, 67 Morrison Street, Edinburgh, Lothian, EH3 8YJ (90) Sitz, Niederlassung, Inländische Geschäftsanschrift, Empfangsberechtigte Person,
Zweigniederlassungen, Berlin (91) 20 Rue de la Poste, L‑2346 Luxembourg (92) 106 Route d'Arlon, Mamer, L‑8210, Luxembourg