Our Group We are the largest UK retail and commercial financial services provider with around 26 million customers and a presence in nearly every community.
This Annual Report and Accounts contains forward looking statements with respect to the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the forward looking statements on page 330.
On behalf of the Board Lord Blackwell Chairman Lloyds Banking Group 19 February 2020
Financial statements Independent auditors’ report 189 Consolidated financial statements 198 Parent company financial statements 318
Overview and strategy During 2019, the Group has continued to make significant strategic progress and deliver solid financial performance in a challenging external environment. Much of the year was impacted by economic and political uncertainty, but our customer focus has remained strong and the cornerstone of our business.
At the same time we continue to invest in new growth opportunities. In 2019 we successfully launched Schroders Personal Wealth with the ambition of becoming a top three financial planning business by the end of 2023 as a complement to our growing pensions and retirement business in Scottish Widows. We also acquired Tesco Bank’s £3.5 billion UK prime residential mortgage portfolio.
With this in mind I am pleased to announce that the Board has recommended an increased final ordinary dividend of 2.25 pence per share, bringing the total ordinary dividend for 2019 to 3.37 pence per share, an increase of 5 per cent on last year and in line with the Group’s policy to deliver a progressive and sustainable ordinary dividend. While we concluded that we should be prudent in not distributing further capital this year, the Board will continue to assess this in future years.
I also want to recognise the great work that is done by all of our Charitable Foundations. This was illustrated by the award recently won by the Lloyds Bank Foundation for England and Wales, recognised as the leading grant maker in the Civil Society Charity Awards for its commitment to helping small and local charities thrive for the long-term.
The Board and senior management have a vital role to play in shaping and embedding a healthy corporate culture, and this has been a major focus of the Board’s attention over the last year. The values and standards of behaviour we set are an important influence and there are strong links between governance, strategy and establishing a culture that supports long-term success. Throughout 2019, the Board has continued to evolve the Group’s culture plan, focusing on our Group values; putting customers first, keeping it simple and making a difference together. Our aim is a culture where every colleague is encouraged to take responsibility for ensuring we do the right thing for every customer.
George Culmer, our Group Financial Officer retired in the third quarter of 2019. George played a vital role in helping the Group navigate its way through the aftermath of the financial crisis to return to full private ownership. I want to pay tribute to George’s tremendous contribution and to thank him on behalf of the Board, our colleagues and our shareholders.
Summary I would like to thank all of our colleagues for their significant contribution in 2019. It is the commitment, support and dedication from all of them that enables us to succeed and I believe the Group remains well positioned as a result of the transformation underway to continue delivering for customers and shareholders.
We recognise that society’s expectations of the Group as a major UK corporation are evolving
This recognised that, to continue to operate as a successful business, it will be increasingly important that we demonstrate the contribution we make to the communities in which we operate and the value we provide in Helping Britain Prosper, with an emphasis on demonstrating that acting responsibly and ethically and delivering good outcomes for customers, colleagues and shareholders should not come at the detriment of shareholder returns, but rather be an integral part of achieving them. This session provided a solid foundation for us to develop the next phase of our strategy during the course of 2020.
In addition to completing the third stage of our strategic plan, in 2020 we will also begin to consider the next phase of our journey. Work will begin at pace in the summer on the new strategic plan, which we expect to announce in February 2021, along with updated longer term financial targets. This work will take into account a wide range of factors, including the evolving external environment, emerging changes across society and changing expectations of how companies should respond to such challenges.
We have significantly increased the ‘skills of the future’ training delivered to our colleagues to a cumulative 3.2 million hours since 2018 and around 33 per cent of change is now delivered using Agile methodologies
The Group has hired over 1,200 colleagues in 2019 across critical areas such as engineering, data science and cyber security, in line with our plan to treble strategic hiring compared to 2018 and enabling the Group to reduce the use of external resource
Helping Britain Prosper Plan We are committed to the long-term success of the UK with our purpose of Helping Britain Prosper. This is why we launched our Helping Britain Prosper Plan in 2014 which also underpins our environmental, social and governance efforts. For 2019 we met 20 out of 22 objectives of the Plan, and some key achievements are outlined below.
The Group is committed to helping customers to buy a home. In 2019 we lent £13.8 billion to first time buyers across the UK including through innovative products like our Lloyds Bank Lend a Hand and Halifax Family Boost mortgages. We have also increased net lending to start-ups, SMEs and Mid Market customers to £3.4 billion since 2018 together with achieving our target of lending £18 billion to UK businesses in 2019.
This goal recognises the urgent need to tackle climate change, grow the green economy and promote green finance for the future prosperity of the UK. Read more on pages 28 to 31.
An increased ordinary dividend of 3.37 pence per share, in line with our progressive and sustainable ordinary dividend policy.
To ensure our colleagues act in the best interests of all our stakeholders, remuneration at all levels of the organisation is aligned to the strategic priorities and financial performance of the business and also takes into account specific risk management controls.
Within this year’s report we have updated our key performance indicators to reflect these priorities. All the key performance indicators directly impact remuneration outcomes and support the delivery of our reward principles.
Our net promoter score is the measure of customer service at key touch points and reflects the likelihood of customers recommending us. Customer satisfaction increased in 2019.
Reflecting the pace of digital adoption, the number of active digital customers increased in the year to 16.4 million, with 10.7 million mobile banking app customers and average customer logons at 23 times per month.
This year an additional key performance indicator has been included to reflect the work we’re doing to support the transition to a low carbon economy.
We have quantified the finance we provide through existing green finance products (Clean Growth Finance Initiative; Commercial Real Estate Green Loans Initiative; Renewable Energy Financing) and green bonds facilitation. Since 2016, this totalled more than £4.9 billion and we will continue to add to this activity in 2020.
Overview As a leading UK bank, our prospects are closely aligned to the outlook for the UK economy. Through 2019, the economy continued to show resilience to twin challenges from a slowing global economy and increasing domestic political uncertainty. Although growth of the UK economy has slowed to its weakest since the financial crisis a decade ago, and interest rates remain very low, unemployment has fallen further to a 44 year low and house prices have continued to grow. Barring any sudden shocks to business or consumer confidence, growth is expected to rise mildly in 2020, but international trade-protectionism, the current coronavirus outbreak in China, geo-political instability and the nature of the UK’s exit from the EU, all present risks to that outlook.
Market dynamics During 2019, there have been divergent trends between UK businesses and households. For businesses, uncertainty for the domestic political and economic outlook translated into a second consecutive year of reduced investment spending and commercial real estate prices fell slightly. Low productivity growth remains a key challenge for the UK economy, however, the flip-side has been buoyant employment. Households continued to increase spending in 2019 as low unemployment boosted pay growth whilst softening global growth reduced inflation.
Market dynamics Consistent with recent trends, customer expectations continue to be shaped by their experience outside of financial services, with speed and convenience and greater levels of choice and personalisation, based on richer data insight, becoming more important in an increasingly competitive market.
Uncertainty remains around the impact of the UK’s exit from the EU on the existing regulatory and legal framework
Market dynamics A number of regulatory changes have been implemented in the last 12 months including Open Banking, overdraft charging and the embedding of ring-fencing requirements with key areas of focus for 2020 as below: Customer treatment Fair treatment of customers remains a priority for the FCA, with particular focus on those in vulnerable circumstances as well as long standing customers.
Our response As a Group we always seek to comply with all related regulation.
Highlights The pace of digital adoption and disruption continues to surpass expectations and is likely to increase further in the coming years
In addition, as the sharing of data becomes increasingly important to both banks and customers, there is a growing onus on how this is safeguarded. For example, the shift towards cloud technologies from in-house data storage can deliver a number of benefits for customers. These include increasing levels of insight and faster rates of product innovation, but open up the financial services sector to new cyber-related risks which must be carefully managed. In a period in which competition from digital-only providers has grown significantly, trust remains a key differentiator for established banks and therefore security and resilience remain areas of great importance.
Technology spend up 14% year on year 19% 16% 19%Highest in peer-set: 1 Estimated. Regional averages based on a selection of peers where disclosure exists. Proxy for technology spend calculated based on available disclosure in prior annual reports or shareholder presentations and may not be like for like.
The competitive landscape also continues to evolve with growth across a number of digital-only providers, while we are also seeing emerging signs of participation from large technology companies
COMPETITION Our response We continue to respond effectively to the increasingly competitive environment, supported by our significant reach and proven track record of providing products and services that our customers value with this underpinned by significant investment capacity.
Comprehensive product range with all financial needs served in one place Our product range is driven by customer needs and is informed through comprehensive customer analysis and insight.
Market leading efficiency through tech-enabled productivity improvements Our simpler operating model and focus on efficiency provide a cost advantage, enabling us to invest more to the benefit of both customers and shareholders.
Rigorous execution and management discipline focusing on key skills of the future Experience of delivering change in recent years provides benefit as we further transform the business.
Our core values underpin our purpose to Help Britain Prosper Ensuring we create the right environment for our colleagues to deliver our aim to become the best bank for customers, colleagues and shareholders Putting customers first Keeping it simple Making a difference together Our culture on page 74
We identified four strategic priorities focused on the financial needs and behaviours of the customer of the future and are investing more than £3 billion in these strategic initiatives over the plan period.
The Group has a unique customer proposition enabling us to serve the financial needs of customers in one place. We operate multiple-brands through three core divisions; Retail, Commercial Banking and Insurance and Wealth.
Progress in 2019 In 2019, we have built on the strong progress delivered in 2018, with further improvements in our customer propositions supporting the continued growth of our franchise and improved measures of customer satisfaction.
Personalising our customer propositions We recognise that our diverse customer base want and expect different things and have continued to develop products and services that are more personalised to their specific needs. Among these, we have launched a range of smart tools that our customers can access digitally, including upcoming payment alerts and a ‘Save the Change’ feature, through which they can aim to achieve a range of financial goals through small behavioural changes.
Our market leading cost position and customer franchise are sources of competitive advantage. However, we must not be complacent and must further digitise the Group to drive additional operational efficiencies, improve the experience of our customers and colleagues and allow us to invest more for the future. In addition, we must continue to simplify and progressively transform our IT architecture in order to use data more efficiently, enhance our multichannel customer engagement and create a scalable and resilient infrastructure.
Increased fintech engagement As well as investing in technology capabilities, we recognise that we also need to embrace external innovation and work collaboratively to transform the Group for success in a digital world. Our Corporate Ventures Panel encourages colleagues from across the Group to propose opportunities to a panel of experts. This has already resulted in a number of exciting partnerships, such as with Thought Machine, Trov and OneUp, our most recent partnership which provides online financial management services for smaller businesses.
To better address our customers’ banking and insurance needs as an integrated financial services provider and improve their overall experience, we will make better use of our competitive strengths and unique business model.
+£6 billion of additional net lending to start-ups, SMEs and Mid Market customers £37 billion cumulative open book assets under administration growth >5m customers on Single Customer View >1m new pension customers, achieving target a year ahead of schedule £3.4bn net lending to start-ups, SMEs and Mid Market customers
Building on our progress in 2018, we have also rolled out a number of improvements to our long-term savings and pensions customer propositions, with our workplace pensions offering also benefiting from the close coordination of our Commercial Banking and Insurance & Wealth businesses. Taken together with further transfers from the acquired Zurich book, we have successfully grown our open book retirement and investment assets under administration by around £30 billion in the year, or £37 billion since 2017.
Our colleagues are crucial to the success of our business. In order to deliver our transformation during the current strategic plan and beyond, our colleagues will require new skills and capabilities to reflect the changing needs of the business as it adapts to the evolving operating environment. At the same time, colleagues’ expectations of their employers are changing. As a result, we are making our biggest ever investment in colleagues to ensure that we continue to attract, develop and retain these skills and capabilities, while fostering a culture that supports a way of working that is agile, trust based and reinforces the Group’s values.
Up to 30 per cent change efficiency improvement 3.2 million cumulative future skills training hours delivered of change delivered by Agile methodologies
Changing the way we work Consistent with our aim to embrace new ways of working, we have continued to make things easier than ever before for our colleagues to work in a more collaborative manner. 96 per cent of our colleagues are now based in one of our six strategic hub locations. We continue to invest in improving the working environment with 34,000 colleagues benefiting from refreshed workplaces in 2019. Our ongoing changes to working environments are helping create a hub of agile working, focusing on collaborative activity-based spaces which foster innovation and make it easier for our colleagues to focus on delivering better experiences for our customers. Moreover, by creating an environment where colleagues can collaborate more easily regardless of location, this will help us as an organisation significantly reduce our carbon footprint. The combination of these factors is resulting in a cultural shift across the Group, with over 33 per cent of change now delivered using Agile methodologies and we continue to expect this number to surpass 50 per cent by the end of 2020.
Colleague training and development As part of our largest ever investment in our people, we are rolling out 4.4 million cumulative additional training hours to develop key skills of the future. These skills are split across 10 categories ranging from leadership to data analytics and customer excellence and will ensure that we are well positioned to transform the Group for success in a digital world, while also providing growth opportunities for our colleagues.
Engaging, consulting and acting on the needs of different stakeholders is critical for the development of a culture and strategy that achieves long-term sustainable success.
We engage in many different ways and this section outlines our key stakeholder groups, how we are interacting with them and how they inform strategic decision making. It also provides examples of key strategic decisions made during the year and the Board engagement involved.
To ensure the Board truly understands the changing needs of customers and their views on the bank, various initiatives, direct and indirect have been implemented.
The Board receives regular updates and reports on progress of the Group strategy, including the development of the next strategic phase, ensuring the customer remains at the heart of our strategic investment.
Section 172(1) Statement and Statement of Engagement with Employees and Other Stakeholders In accordance with the Companies Act 2006 (the ‘Act’) (as amended by the Companies (Miscellaneous Reporting) Regulations 2018), the Directors provide this statement describing how they have had regard to the matters set out in section 172(1) of the Act, when performing their duty to promote the success of the Company, under section 172. Further details on key actions in this regard are also contained within the Corporate Governance Report on pages 65 to 94 and the Directors’ Report on pages 94 to 97.
We regularly engage with our shareholders about the information we provide to them and, where appropriate, incorporate their feedback to enhance our disclosure. In support of this, in February 2020, we published our first ESG focused presentation online: ‘Our approach to ESG’ www.lloydsbankinggroup.com/investors/ financial-performance/
We have a large footprint, with an important role in society and many different stakeholders to consider as we run the Group Lord Blackwell Chairman
The new approach will be to adopt three equal interim ordinary dividend payments for the first three quarters of the year followed by, subject to performance, a larger final dividend for the fourth quarter of the year.
The Chairman also held a number of Town Hall sessions in locations across the country, meeting with colleagues and answering their questions about the Group and its business, in addition to regular and informal lunches and breakfasts with members of the senior leadership team to discuss business issues.
Indirect engagement We held meetings throughout the year with our recognised unions, attended by the Chair of the Remuneration Committee and the Group Chief Executive. Key topics included the Living Wage, which applies to our whole workforce.
Our response to colleague priorities Improved employee engagement Fair and competitive pay and remuneration structure
Consultations with our recognised unions took place to discuss key changes to colleague pension provisions
Across the globe, action to combat climate change is needed. We support the Government's Clean Growth Strategy and are supporting our customers with a range of initiatives to help them become more sustainable and think about environmental impacts, including access to green finance.
In 2018 following a detailed review by the Board, we introduced a new sustainability metric to our Helping Britain Prosper Plan, signalling our intent and commitment and in January 2020, we announced an ambitious new goal to help reduce the carbon emissions we finance by more than 50 per cent by 2030. Read more about our ambitious goal and other commitments on pages 28 to 31 or in our approach to ESG presentation online www.lloydsbankinggroup.com/ investors/ financial-performance/
The Responsible Business Committee, a sub-committee of the Board, provides direction and oversight, whilst at Executive level, the Group Executive Sustainability Committee (GESC), supported by divisional Governance Forums and working groups, provide oversight
The Board were briefed on key climate related issues by external industry experts and also engaged on a number of external fronts
We have a strong, open and transparent relationship with our regulators and other government authorities including HMRC. We liaise with them regularly to ensure the business is aligned to the evolving regulatory framework.
The Board and senior management continue to engage with our regulators through proactive meetings to discuss various key themes, such as: customer-centric culture; transformation and change; operational and financial resilience; and credit risk.
In 2020, we will continue to adapt our engagement strategy, ensuring alignment with emerging areas of focus and the regulators' business plans.
Given our UK focus, our performance is inextricably linked to the health of the UK economy and throughout 2019 we continued to prepare for an EU exit.
We implemented a programme to assess the legal impacts and risks of an EU exit (including a no deal outcome) and to identify appropriate mitigants, such as establishing EU entities to ensure continuity of certain business activities.
Board approved governance has been established to ensure that the ordering processes for all expenditure: allow challenge to be made in line with our cost management processes; maximise the use of appropriately sourced third party suppliers; offer appropriate pre-commitment controls to minimise risks and unnecessary costs; give the opportunity to negotiate further savings with third party suppliers; facilitate third party suppliers being paid in a timely manner and avoid risk and costs associated with the use of non-approved channels.
Direct engagement We want to improve the experience of our suppliers. As such we regularly seek feedback on the Group’s on-site assurance process from suppliers in order to continually improve the process.
SUPPLIERS including joint ventures. This Policy has been designed to assist in managing the inherent risk in outsourcing services, and dealing with third party suppliers.
The acquisition of the Tesco mortgage book was proposed as it is expected to generate good returns to the Group, in excess of current organic market opportunities, while delivering open mortgage book growth within the Group’s low risk strategy. It will also provide additional flexibility in participation choices in the mortgage market
As a customer focused business the impact on the acquired customers was considered and we are working closely together with Tesco Bank to ensure a smooth transition for the 23,000 new customers
Our two way communication and partnership with our suppliers is vital to the success of our Group
Another example is the development of a domestic and financial abuse team, our contribution to a very complex issue that can impact a wide range of our customers. The Group has also signed up to the Financial Abuse Code of Practice, and we signpost the free-to-download Bright Sky app, that provides comprehensive support to people affected by domestic abuse.
Engaging with our stakeholders Engaging and responding to stakeholders is fundamental to being a responsible business. Each year we gather a wide range of views through our formal materiality assessment with our stakeholders, which guides both our strategy and reporting. Our key response to their needs is the Helping Britain Prosper Plan which focuses on critical issues including environmental sustainability on page 28, digital skills on page 33, and support for homeowners, savers, and businesses on page 32. Further topics highlighted by stakeholders, and discussed below, include responsible governance and accountability, support for colleagues, customer privacy and data security, and support for vulnerable customers.
Our Board level Responsible Business Committee (RBC) oversees the Group’s performance as a responsible business, and delivery of our sustainability strategy. Both the Board and RBC are supported by the Group Executive Committee, which is in turn supported by a dedicated Sustainability Committee.
Helping colleagues to do the right thing All of our colleagues must be equipped to make the right decisions. The Group supports this by consistently promoting and embedding our policies, processes and training. Each year as part of mandatory training, colleagues review our Code of Responsibility, which outlines Group values and behaviours, and our Anti-Bribery Policy.
Protecting our customers’ finances and data Customers trust us to keep their money and data safe, and the Group deploys sophisticated technology to protect both. In addition, we play a significant role in the Joint Fraud Taskforce, a collaboration between Government and industry, and champion the Banking Protocol, which enables colleagues to request immediate police support for at-risk customers.
While there’s much we can do, customers play a significant role in keeping their accounts secure. Public awareness campaigns are therefore crucial, and we support the Take Five campaign, while also training colleagues so that they can help protect our customers.
The Principles for Responsible Banking In September 2019, the Group became a founding signatory of the United Nations Environment Programme Finance Initiative (UNEP FI) Principles for Responsible Banking. This sets out a framework for a reformed banking system that will better meet the changing expectations of society. Through both our responsible business activities and the Helping Britain Prosper Plan, we are supporting the UN’s broader sustainable development agenda, and contributing towards reaching the UN Sustainable Development Goals (SDGs).
Supporting businesses to start up and grow Increased amount of net lending to start up, SME and Mid Market businesses £3.4bn2 £6bn
The UK is committed to the vision of a sustainable, low carbon future. Our unique position within the UK economy means that the successful transition to a more sustainable, low carbon economy is of strategic importance to us.
Our goal and approach As a signal of our commitment we have set an ambitious goal, working with customers, Government and the market to help reduce the emissions we finance by more than 50 per cent by 2030, supporting the UK’s ambition to be net zero by 2050 and the 2015 Paris Agreement. During the course of 2020, we intend to conduct a review of our portfolio to establish our current financed emissions and set appropriate metrics and targets for material sectors.
In order to meet our goal, we will: Identify new opportunities to support our customers and clients and finance the UK transition to a low carbon economy
Use our scale and reach to help drive progress towards a sustainable and resilient UK economy through engagement with customers, communities, industry, Government, shareholders and suppliers
Our ambition We have set ourselves seven leadership ambitions to support the UK’s transition to a sustainable future: Business: become a leading UK commercial bank for sustainable growth, supporting our clients to transition to sustainable business models and operations, and to pursue new clean growth opportunities
– The Group Executive Sustainability Committee (GESC) which provides oversight and recommends decisions to the Group Executive Committee (GEC)
– The Group Chief Risk Officer (CRO) has assumed responsibility for identifying and managing the risks arising from climate change, alongside the CROs for key legal entities
Other committees where issues are discussed as appropriate Audit Committee Board Risk Committee GEC Risk Committee Divisional Risk Committees
We continue to partner with the Cambridge Institute for Sustainability Leadership to provide high quality training to executives and colleagues in risk management, product development and client facing roles. In 2019, over 800 colleagues were trained, ensuring they are able to support clients on this journey
Since 2018 the Group has supported renewable energy projects that power the equivalent of 5.1 million homes, achieving our Helping Britain Prosper Plan 2020 target a year early
The Climate Group In 2019, we were one of the first businesses globally to sign up to all three of The Climate Group’s campaigns: RE100 – a commitment to source 100 per cent of our electricity from renewable sources by 2030 (which we achieved in 2019)
Helping Britain get a home As the largest lender to the UK housing sector, we recognise the importance of home ownership, and that a lack of affordable housing can lead to social disadvantage.
Our Clean Growth Finance Initiative (CGFI), which aims to offer the most inclusive UK green funding in the commercial banking market, provides the incentive of discounted borrowing to all types of businesses that invest in reducing their environmental impact. Since 2018, we helped 17.4 million sq. ft. of commercial real estate become more energy efficient, reducing greenhouse gas emissions in core business processes, properties and infrastructure.
Supporting social housing ambitions LiveWest own and manage over 36,000 homes from Cornwall to Gloucestershire, and plan to provide 7,000 new homes over the next 5 years and invest £2 billion in the regional economy over the next 10 years. In September they issued a £250 million bond. Lloyds Bank were delighted to support this finance package to deliver much needed new and affordable homes.
Lloyds Bank Academy The Group has developed the Lloyds Bank Academy to take on these challenges. Initially launched in Manchester in November 2018, the Academy teaches basic digital and workplace skills through online and face-toface courses. In November 2019 we launched the Bristol Academy, providing additional support for start ups and SMEs.
Working with a range of partner organisations, including our charitable Foundations, academia, industry and Government, the Academy has taught around 65,000 learners in Manchester and Bristol.
The charity’s work is delivered through its 2 full time and 2 part time staff and 44 volunteers. Last year, they were a winner of the Foundation’s Pitching 4 Pounds programme, seeing the charity successfully pitch for a grant of £15,000 to develop an innovative virtual reality app, which will help parents and professionals see the world through the eyes of a partially sighted child.
We recognise prevention is equally as important as support, and in September we launched a personal resilience portal, for colleagues to better understand preventative measures available for both mental and physical health.
Focus on ethnic diversity Encouraging ethnic diversity starts with talking to colleagues and communities about their experiences. We know that role models and understanding cultural difference are vital, which is why we delivered cultural capability training to all colleagues in 2019, building knowledge of identity, race, faith and background.
This year, we published our Ethnicity Role Models list, featuring 70 Black, Asian and Minority Ethnic (BAME) colleagues, and in June, two colleagues were named in the top 100 ethnic minority executives, and a further two colleagues in the 50 future ethnic minority leaders in the EMpower Ethnic Minority Role Model lists.
We remain on track to meet the voluntary 2020 target, set by the Hampton-Alexander Review, of having 33 per cent representation of women on, or reporting into, our Executive Committee, through a focus on dedicated succession planning and skills development. For the eighth year running the Group featured in the Times ‘Top 50 employers for women’ and the Bloomberg Gender Equality Index for the first time.
We are also creating an inclusive environment for our LGBT+ colleagues, being named Top Financial Employer, and seventh overall in 2019’s Stonewall Top 100 Employers. Our LGBT+ colleague network Rainbow, has over 5,000 members, one of the largest of its kind in the UK.
This section of the strategic report constitutes Lloyds Banking Group’s Non-Financial Information Statement, produced to comply with sections 414CA and 414CB of the Companies Act. The information listed is incorporated by cross-reference.
– Helping Britain get a home, Helping people save for the future, Supporting business to start up and grow, Building capability and digital skills, pages 32 to 33
– Key performance indicators, page 08 – Our strategic priorities, page 06 – Helping Britain Prosper Plan, page 27 – Global Reporting Initiative (GRI) standards www.lloydsbankinggroup.com/our-group/responsiblebusiness /reporting-centre/
Solid financial performance The Group’s statutory profit after tax was £3,006 million, 33 per cent lower than in 2018 with resilient underlying profit partly offset by the significant payment protection insurance (PPI) charge of £2,450 million taken in the year. The statutory return on tangible equity was 7.8 per cent.
– Push notification alerts helping to plan ahead with upcoming payment reminders and confirmations
Following the successful launch of the Lloyds Bank campaign, Lend a Hand, Halifax launched the Family Boost mortgage, to help first time buyers without a deposit onto the property ladder by using savings from family members to provide 10 per cent of the loan.
In Peterlee, County Durham, one customer visited his local Halifax branch to enquire about the Family Boost scheme. The customer was very reluctant to rent, as he wanted to make a home for his son and himself.
Within 48 hours of applying, the customer secured a mortgage offer meaning that now with the help of his brother, he has bought a home to put down roots in an area he wanted his son to grow up in. It also enabled the customer’s brother to get a better return on his savings whilst supporting a family member.
Over 900 manufacturing apprentices, graduates and engineers trained since 2018 as a result of the £1 million annual investment in the Lloyds Bank Advanced Manufacturing Centre
Continued progress in developing colleagues with the skills and capabilities needed for the future, with 210,000 colleague training hours completed in 2019, exceeding the year-end target
Financial performance In challenging market conditions, maintained a strong focus on risk-weighted asset (RWA) optimisation and actively addressed low returning client relationships, delivering a significant reduction in RWA of over £9 billion
Asset quality ratio of 30 basis points was 24 basis points higher, largely driven by material charges raised against two corporate cases, with stable underlying portfolio trends
SME lending balances up c.1 per cent, continuing to grow slightly ahead of the market
In a £4 million project supported by Bank of Scotland and the Scottish Government’s Low Carbon Infrastructure Programme, ice cream maker, Mackie’s of Scotland, is set to have one of the most sophisticated refrigeration systems in Europe. The results will see CO2 emissions cut by 80 per cent and energy costs by up to 80 per cent, supporting Mackie’s ambition of becoming the greenest company in the UK.
With Bank of Scotland’s support we are realising our green ambitions and, in the long run, we hope that our new system will set a precedent and make the energy-intensive food and drink sector more sustainable. Gerry Stephens, Finance Director, Mackie’s of Scotland 2019¹ 2.6
Successful migration of around 400,000 policies from a number of legacy systems to a single platform managed by the Group’s partner Diligenta, enabling customers to better manage their policies with Scottish Widows
Provided new functionality and customer choice in general insurance with full rollout in the last quarter of a flexible, multi-channel home insurance product offering to the branch network
New underwritten household premiums increased 19 per cent, resulting in number one market share for new business earlier than expected; total underwritten premiums decreased 3 per cent driven by a competitive renewal market
Life and pensions new business income up 19 per cent to £628 million. Lower existing business income due to equity hedging strategy to reduce capital and earnings volatility. Higher experience and other items includes one-off benefit from the change in investment management provider. General insurance benefitted from benign weather in 2019
Underlying profit increased by 19 per cent to £1,101 million. Net income increased by £145 million to £2,133 million, whilst operating costs decreased by £39 million with cost savings offsetting higher investment in the business
Insurance capital Estimated pre final dividend Solvency II ratio of 170 per cent. The rise in the ratio over 2019 includes the impact of an equity hedge partly offset by lower long term interest rates. A final dividend of £250 million and a special dividend of £185 million related to the gain on the establishment of the Schroders Personal Wealth joint venture were paid to the Group in February 2020, with total dividends paid in respect of 2019 performance of £535 million
Helping people save for the future is just one way in which we support the UK through our Helping Britain Prosper Plan.
A number of key components support the delivery of effective risk management, with four overarching objectives: Define a robust and consistent approach to risk governance to be applied across the Group and its legal entities
Our mission is to protect our customers, colleagues and the Group, whilst enabling sustainable growth in targeted segments. This is achieved through informed risk decision-making and robust risk management, supported by a consistent risk-focused culture.
Strong control framework Our enterprise risk management framework is the foundation for the delivery of effective risk control and ensures that the Group risk appetite is continually developed and controlled
Business focus and accountability Risk management is an integral feature of how we measure and manage performance – for individuals, businesses and the Group. In the first line of defence, business units are accountable for managing risk with oversight from a strong and independent second line of defence Risk division
Risk culture and the customer The effectiveness of our risk management approach relies upon a culture of transparency and openness that is encouraged by both the Board and senior management.
Tone from the top Senior leaders set a clear tone from the top and lead by example, reflecting our Group values; putting customers first, keeping it simple, and making a difference together, encouraging a culture of intellectual curiosity and proactive risk management amongst all colleagues.
Climate risk Climate change is a key global risk, impacting our customers, our investors and our business in making the required transition towards a low carbon economy. We are committed to delivering the Task Force for Climate-Related Financial Disclosures by 2022 and we are taking steps to fully integrate climate risk into our existing Enterprise Risk Management Framework, including our policies, risk appetite, controls and disclosures.
Our UK focus means our performance is inextricably linked to the health of the UK economy. Economic performance has remained resilient in recent years and whilst the near term outlook for the UK economy remains unclear given UK/EU trade agreement negotiations, we continue to monitor closely. We are also taking a prudent approach to our balance sheet, accelerating issuance where appropriate.
Example Ineffective change/execution risk management could lead to increased periods of time where we cannot serve our customers, and could lead to impacts associated with other risk types such as regulatory censure.
Mitigation Continued focus on strengthening the control environment, maturation of the change policy and associated policies and procedures, which set out the principles and key controls that apply across the business and are aligned to the Group risk appetite. Senior Management continue to drive improvements to Change and Execution Risk metrics, in particular those affecting customers and colleagues
Example The loss of trust from customers, colleagues, business partners or regulators arising from a failure to manage and control our data.
In addition to the General Data Protection programme which delivered the necessary infrastructure to achieve compliance with the new regulations in May 2018, a number of other large investments have been made
The quality of the data that the Group holds and the choices we make in how it is used is a key strategic enabler to future business growth, delivering a leading customer experience and Helping Britain Prosper
Risk Appetite We have a limited appetite for disruption to services to customers and stakeholders from significant unexpected events.
Data was elevated from a secondary risk to a principal risk as one of our most valuable assets. It is critical to our business and is the subject of significant regulatory oversight and media focus. Our Group is trusted with large volumes of data, and we must ensure that the information we hold is accurate, secure and managed appropriately
Operational resilience was elevated from a secondary risk to a principal risk as our ability to continue operations when subject to internal or external incidents, safeguarding our most critical processes and assets, protecting our colleagues, continuing to service our customers and minimising any impact on the banking systems is crucial
We seek to support sustainable growth in our targeted segments. We have a conservative and well-balanced credit portfolio, managed through the economic cycle and supported by strong credit portfolio management
Portfolios have benefited from relatively favourable economic conditions and a prolonged period of low interest rates. Underlying impairments remain below long-term levels, but are expected to increase as impairments normalise
The risk of financial penalties, regulatory censure, criminal or civil enforcement action or customer detriment as a result of failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements.
Risk Appetite We interpret and comply with all relevant regulation and all applicable laws (including codes of conduct which could have legal implications) and/or legal obligations.
Mitigation Group policies and procedures set out the principles and key controls that should apply across the business which are aligned to the Group risk appetite
We respond as appropriate to impending legislation, regulation and associated consultations and participate in industry bodies. We continue to be proactive in responding to significant ongoing and new legislation, regulation and court proceedings
Risk Appetite We have robust controls in place to manage operational losses, reputational events and regulatory breaches. We identify and assess emerging risks and act to mitigate these.
The Group continues to manage operational risk within the appetite articulated by the Board and in compliance with legal and regulatory requirements to insurance a robust control environment and a positive customer experience
Risk Appetite We lead responsibly and proficiently, manage people resource effectively, support and develop colleague talent, and meet legal and regulatory obligations related to our people.
Mitigation Focusing on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre people together with implementation of rigorous succession planning
Regulatory requirements relating to personal accountability and remuneration rules could affect our ability to attract and retain the calibre of colleagues required to meet changing customer needs. We recognise the challenges in delivering the Group’s strategic priorities and we will continue to invest in the development of colleague capabilities and agile working practices. This investment will deliver a leading customer experience and allow the Group to respond quickly to customers’ rapidly changing decision-making in a digital era
Mitigation Simplified and enhanced conduct policies and procedures in place to ensure appropriate controls and processes that deliver fair customer outcomes, and support market integrity and competition requirements
As we transform our business, minimising conduct risk is critical to achieving our strategic goals and meeting regulatory standards
The risk of adverse developments in the timing, frequency and severity of claims for insured/underwritten events and in customer behaviour, leading to reductions in earnings and/or value.
We are committed to meeting the changing needs of customers by working to provide a range of insurance products via multiple channels. The focus is on delivering a leading customer experience by helping customers protect themselves today whilst preparing for a secure financial future
Example A deterioration in either our or the UK’s credit rating, or a sudden and significant withdrawal of customer deposits, would adversely impact our funding and liquidity position.
Example A worsening macroeconomic environment could lead to adverse financial performance, which could deplete capital resources and/ or increase capital requirements due to a deterioration in customers’ creditworthiness
Ensuring we hold an appropriate level of capital to maintain financial resilience and market confidence underpins our strategic objectives of supporting the UK economy, and growth in targeted segments through the cycle
Key risk indicators 13.8%1 CET1 ratio 5.2%1 UK leveraged ratio 2018: 5.6%1 1 Pro forma basis 2 Incorporates the effects of the share buyback announced in February 2019.
Mitigation The model risk management framework, established by and with continued oversight from an independent team in the Risk division, provides the foundation for managing and mitigating model risk within the Group
The risk that our capital or earnings profile is affected by adverse market rates, in particular interest rates and credit spreads in the banking business, equity, credit spreads and interest rates in the Insurance business, and credit spreads in the Group’s defined benefit pension schemes.
Examples Earnings are impacted by our ability to forecast and model customer behaviour accurately and establish appropriate hedging strategies
Risk Appetite We have robust controls in place to manage our inherent market risk and do not engage in any proprietary trading, reflecting the customer focused nature of the Group’s activities
Examples Inadequate or complex governance arrangements to address ring-fencing requirements and the potential impact of EU exit could result in a weaker control environment, delays in decision making and lack of clear accountability
The Group is strongly capital generative and although this has been impacted by PPI in 2019, the Board has recommended a final ordinary dividend of 2.25 pence per share, making a total ordinary dividend of 3.37 pence per share, an increase of 5 per cent on 2018 and in line with our progressive and sustainable ordinary dividend policy.
Net interest income of £12,377 million was down 3 per cent with a slightly lower net interest margin and stable average interest-earning banking assets. Net interest margin reduced in line with guidance to 2.88 per cent, with the benefit of lower deposit costs, higher Retail current account balances and a benefit from aligning credit card terms, more than offset by continued pressure on asset margins, particularly in the mortgage market.
Average interest-earning banking assets at £434.7 billion were stable, with growth in targeted segments, in particular SME (£0.3 billion) and UK Motor Finance (£1.4 billion), more than offset by lower balances in the closed mortgage book (£2.5 billion) and the effect of the sale of the Irish mortgage portfolio in the first half of 2018 (£1.6 billion).
Other income at £5,732 million decreased by 5 per cent with healthy growth in new business in Insurance and Wealth more than offset by lower other income in Commercial Banking and Retail. Insurance and Wealth continued to perform well reflecting growth in workplace pensions new business from increased auto enrolment contributions in the first half of 2019 and higher general insurance income, net of claims. Insurance and Wealth other income also includes the benefit from the change in investment management provider taken in the first half of 2019 and longevity assumption change benefits. Commercial Banking was impacted by more subdued levels of client activity given challenging external conditions particularly in large corporate markets and Retail other income was impacted by a lower Lex fleet size. Other income includes a gain of £185 million on the sale of £8 billion of gilts and other liquid assets, compared with a £270 million gain on sale of such assets in 2018.
Stage 3 loans and advances to customers as a % of total 1.8 1.9 (0.1)pp
The Group’s outlook and IFRS 9 base case economic scenario used to calculate expected credit loss (ECL) have remained broadly stable throughout 2019, reflecting an orderly exit of the UK from the European Union. During 2019 the Group made small improvements to its economic scenario modelling. The Group’s ECL allowance continues to reflect a probability-weighted view of future economic scenarios including a 30 per cent weighting of downside and a 10 per cent weighting of severe downside.
Return on tangible equity 7.8% 11.7% (3.9)pp 1 Comparatives restated to reflect amendments to IAS12, see basis of presentation on page 206.
Further information on the reconciliation of underlying to statutory results is included on page 61.
The Group’s statutory profit after tax was £3,006 million, 33 per cent lower than in 2018 with resilient underlying profit partly offset by the PPI charge. The return on tangible equity was 7.8 per cent (2018: 11.7 per cent) and earnings per share was 3.5 pence (2018: 5.5 pence).
Market volatility and asset sales of £126 million included adverse movements in banking volatility, a gain on the establishment of the Schroders Personal Wealth joint venture as well as the one-off charge for exiting the Standard Life Aberdeen investment management agreement, taken in the first half of 2019. In 2018 market volatility and asset sales included a loss on sale of the Irish mortgage portfolio and an adjustment to past service pension liability.
The decrease in amortisation of purchased intangibles to £68 million (2018: £108 million) and fair value unwind and other items to £275 million (2018: £319 million) were driven by a number of assets fully amortising in 2018 and the run down of the subordinated liabilities acquired during the HBOS acquisition.
The Group continues to expect a medium term effective tax rate around 25 per cent, although this is likely to be lower in 2020 if the UK’s corporate tax rate remains unchanged, given a revaluation of the Group’s deferred tax assets.
Loans and advances to customers were £440 billion (31 December 2018: £444 billion). Growth in the open mortgage book and targeted segments including SME and Motor Finance, was more than offset by continued reductions in the closed mortgage book and lower balances in Mid Markets and Global Corporates. Commercial Banking has continued to optimise its portfolio in challenging market conditions, maintaining a strong focus on riskweighted asset reduction and actively addressing low risk-adjusted returning client relationships. In line with the Group’s expectations, the open mortgage book grew by £3.5 billion driven by the acquisition of Tesco Bank’s UK prime residential mortgage portfolio and was broadly flat excluding the acquisition.
Tangible net assets per share 50.8p 53.0p (2.2)p 1 Capital build is reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period and is also reported before accruing for ordinary dividends, the cancellation of the remaining 2019 share buyback and the acquisition of Tesco Bank’s UK prime residential mortgage portfolio.
A summary of the CET1 capital build is set out in the table below.
Given the solid financial performance in 2019, the Board has recommended a final ordinary dividend of 2.25 pence per share. This is in addition to the interim ordinary dividend of 1.12 pence per share that was announced in the 2019 half year results. The recommended total ordinary dividend per share for 2019 is therefore 3.37 pence per share and has increased by 5 per cent from 3.21 pence per share in 2018.
The key dates for the payment of the three interim dividends are: First interim dividend
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 331.
Net income includes the central recovery of the Group’s distributions on other equity instruments and gains and losses on the sale of gilts and other liquid assets.
4 The statutory basis figure is the aggregate of operating costs and operating lease depreciation.
Melissa came to the UK in 2012 and was the first female to complete the Foundation Gateway in the Advanced Manufacturing Training Centre's new Apprenticeship Engineering Standard programme.
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The Board recognises the importance of meeting the Group’s responsibilities and duties both to shareholders and the communities we serve across the UK. These are embedded into our processes and thinking. Our commitment to good governance and the directors’ duties, including under s.172 of the Companies Act 2006, make sure that we continually challenge our assumptions and risks. Our purpose to Help Britain Prosper reflects our understanding that a sustainable business organisation needs to continuously demonstrate its value as a responsible corporate citizen. Further details of how the Board takes account of shareholder and wider stakeholder interests in its strategic planning and decision making processes are set out on pages 20 to 25.
A major focus over the last year has been the continued implementation of our strategic transformation programme. This has required a substantial investment in colleague skills and culture to support the re-shaping of roles around the new ways of working. The Board has devoted considerable time to reviewing the way this is being implemented, including a two day joint Board and Executive offsite. We have paid particular attention to the management of the risks arising from the implementation of new technologies, the new ways of working and the overall pace of change. 2019 has also been the first year in which we have operated under the new ring-fencing governance requirements. Further details of the Group’s ring-fencing governance structure and the Board’s oversight of our strategic transformation programme are set out on pages 76 and 75 respectively.
ther inform ation 6. Lord Lupton CBE Independent Director and Chairman of Lloyds Bank Corporate Markets plc Appointed: June 2017 Skills, experience and contribution: Extensive international corporate experience, especially in financial markets Strong board governance experience, including investor relations and remuneration Regulatory and public policy experience Significant experience in strategic planning and implementation Lord Lupton was Deputy Chairman of Baring Brothers, co-founded the London office of Greenhill & Co., and was Chairman of Greenhill Europe. He was previously Chairman of Trustees of Dulwich Picture Gallery, a Trustee of the British Museum, Governor of Downe House School and a member of the International Advisory Board of Global Leadership Foundation. He became a Life Peer in October 2015 and is a former Treasurer of the Conservative Party. He served on the House of Lords Select Committee on Charities. External appointments: Senior Advisor to Greenhill Europe, Trustee of the Lovington Foundation and Chairman of the Board of Visitors of the Ashmolean Museum with effect from 1 January 2020.
8. Nick Prettejohn Independent Director and Chairman of Scottish Widows Group Appointed: June 2014 Skills, experience and contribution: Deep financial services experience, particularly in insurance In-depth regulatory knowledge and experience Governance experience and strong leadership qualities Significant experience in strategic planning and implementation 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
10. Sara Weller CBE Independent Director Appointed: February 2012 Skills, experience and contribution: Background in retail and associated sectors, including financial services Strong board governance experience, including investor relations and remuneration Passionate advocate of customers, the community, financial inclusion and the development of digital skills Considerable experience of boards at both executive and non-executive level 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 Board member at the Higher Education Funding Council, a Governing Council Member of Cambridge University, a Non-Executive Director of Mitchells & Butlers as well as a number of senior management roles for Abbey National and Mars Confectionery. External appointments: Non-Executive Director of United Utilities Group and Chair of their Remuneration Committee, Lead Non-Executive Director at the Department for Work and Pensions, Chair of the Remuneration Committee of New College, Oxford and Trustee of Lloyds Bank Foundation for England and Wales.
12. William Chalmers Executive Director and Chief Financial Officer Appointed: August 2019 Skills, experience and contribution: Significant board level strategic and financial leadership experience including strategic planning and development, mergers and acquisitions, equity and debt capital structuring and risk management Worked in financial services for over 25 years William was previously Co-Head of the Global Financial Institutions Group at Morgan Stanley. Prior to that, he held a number of senior roles at Morgan Stanley, including Head of EMEA Financial Institutions Group. Before joining Morgan Stanley, William worked for JP Morgan, again in the Financial Institutions Group. External appointments: None.
Juan Colombás Executive Director and Chief Operating Officer Juan joined the Group as Chief Risk Officer in January 2011 and joined the Board as an Executive Director in November 2013. He became Chief Operating Officer in September 2017. Read his full biography on page 67.
ther inform ation 5. Antonio Lorenzo Chief Executive, Scottish Widows and Group Director, Insurance and Wealth Appointed: March 2011 (GEC) Skills and experience: Antonio joined the Group as head of the Wealth and International division and Group Corporate Development, leading the Group’s strategic review and subsequent programme of reducing non-core assets and exiting international locations. From 2013, he assumed the role of Group Director, Consumer Finance and Group Corporate Development, leading the division’s growth strategy whilst completing the sale of TSB. At the end of 2015 he was appointed Chief Executive, Scottish Widows and Group Director, Insurance and during 2017 he also assumed responsibility for the Wealth division. Antonio is also Group Executive Sponsor for Emerging Talent. Antonio joined the Group from Santander, where he had worked in a number of different leadership roles and jurisdictions since 1998. He was part of the management team that completed the take-over of Alliance & Leicester and Bradford & Bingley and was Chief Financial Officer of Santander UK. Before Santander, Antonio spent over nine years at Arthur Andersen.
1 George Culmer retired from, and William Chalmers was appointed to, the Board on 1 August 2019.
Major change programmes 9 out of 10 6 out of 10 8 out of 10 5 out of 10 8 out of 10 10 out of 10
Beyond Board 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 colleagues. 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.
The Executive Directors make decisions within clearly defined parameters which are documented within the Corporate Governance Framework. However, where appropriate, any activities outside the ordinary course of business are brought to the full Board for their consideration, even if the matters fall within the agreed parameters. The Corporate Governance Framework helps to ensure that decisions are made by management with the correct authority. In the rare event of a Director being unable to attend a meeting, the Chairman of the respective meeting discusses the matters proposed with the Director concerned wherever possible, seeking their support and feedback accordingly. The Chairman subsequently represents those views at the meeting.
The process of escalating issues and agenda setting is reviewed at least annually as part of the Board effectiveness review with enhancements made to the process, where necessary, to ensure it remains effective. Details of the meeting process are provided below.
A full schedule of matters reserved for the Board and Terms of Reference for each of the principal Committees can be found at www.lloydsbankinggroup.com/our-group/ corporate-governance
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
Executive meetings are held ahead of all Board and Committee meetings to ensure matters being presented to the Board have been through a thorough discussion and escalation process
The Board has the chance to meet colleagues within the business and, if any additional meetings are required to provide more details, these are arranged
The agenda for each Board meeting is discussed in advance with the Chairman and Chief Executive Officer and reviewed at Group Executive Committee meetings and includes 30 minutes ‘free agenda’ discussion time. Regular updates are provided to the Board by the Chairmen of the Audit, Nomination and Governance, Remuneration, Responsible Business and Board Risk Committees as well as by the Chief Executive Officer, the Chief Financial Officer, the Chief Operating Officer and the Chairman and the chairmen of the Lloyds Bank Corporate Markets plc and Scottish Widows Group Limited boards.
Reviewed and approved income statement, draft results and presentations to analysts Link to stakeholder groups: Colleagues; Shareholders
Reviewed and approved Annual Report and Form 20-F Link to stakeholder groups: Regulatory and Government; Shareholders
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Considered an update on the implementation of the Group’s ring-fencing model Link to stakeholder groups: Customers; Regulatory and Government
Received updates on the Senior Manager and Certification Regime Link to stakeholder groups: Regulatory and Government
Approved annual review of Group ring-fencing policy Link to stakeholder groups: Customers; Regulatory and Government
Quarterly workforce engagement reports, which provide an update on culture initiatives and colleague feedback
An understanding of the impact of the management initiatives is developed by reviewing a wide range of data and metrics, including the outputs from our colleague engagement survey, the Banking Standards Board assessment and other business metrics. Please see page 9 for our employee engagement index for 2019.
As a result of this oversight, our culture plan and associated activities are regularly refined and tailored to incorporate insight into our progress. By doing this, we are able to recognise areas of positive progress and understand where we still have more work to do so that we can focus on areas for improvement.
Continued focus on developing the skills required for the future, with significant progress made towards achieving our commitment to deliver 4.4 million additional learning and development hours during 2018 to 2020
Building resilience through a range of interventions for colleagues throughout the organisation, including the launch of an online portal providing access to a wide range of resources
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How does the Board oversee the Group’s Remuneration Policy and get assurance that it has been designed to align to the Group’s purpose and values and is clearly linked to the successful delivery of the company’s long-term strategy? This year, we were given an opportunity to take a step back and think about the remuneration philosophy for the Group and focus on what our main stakeholders would like us to consider. I personally have spent considerable time listening to a wide cross-section of our investor base, as well as receiving the input of stakeholders such as our recognised unions, regulators and the Work and Pensions Select Committee. With the insights from these discussions in mind, the Remuneration Committee has been able to discuss a great deal of material with management and independent advisers to gain comfort that the final proposals we have recommended to the Board are suitable and align to the Group’s culture and values.
What has been your greatest challenge since becoming Remuneration Committee Chairman? The greatest challenge lay in crafting a new Remuneration Policy for the Group that would remain relevant for three years, while also being commercially sensible. To achieve this, Committee members spent time with a large cross section of investors and others (as noted in the Directors’ Remuneration Report), while, as ever, being mindful of the need to set pay at a level which will continue to attract candidates who can run large, complex organisations. In this remuneration period, the task is made all the more challenging by the need to find senior people who have appreciation for technology and innovation generally and how it can improve customer experience while helping the cost structure.
Operational Resilience receives significant attention from the Board, primarily through the Board Risk Committee. The Board approves the list of the Group’s most important business services annually, reviews a suite of operational resilience Board Risk Appetite Metrics on at least a quarterly basis and the operational resilience risk profile monthly, as it represents one of the Group’s most important non-financial risks. Please see page 91 for a summary of operational resilience matters considered by the Board Risk Committee.
Key Board decisions During the year, the Board covered a number of key focus areas and some examples of these decisions can be found on pages 21 to 25: Adopting a quarterly dividend
Risks affecting the Ring-Fenced Banks are considered and managed from the RingFenced Banks’ perspective – including maintenance of the capital adequacy and liquidity of the Ring-Fenced Banks
Across the two days António heard directly from colleagues about their work and their successes, passion, drive and commitment to improve the business for the benefit of customers and the Group.
How the Board performs and is evaluated The annual evaluation, which is facilitated externally at least once every three years, provides an opportunity to consider ways of identifying greater efficiencies, maximising strengths and highlighting areas of further development to enable the Board continuously to improve its own performance and the performance of the Group.
The Chairman of the Board, with the support of the Nomination and Governance Committee, leads the Board in considering and responding to the annual review of the Board’s effectiveness, which includes a review of its Committees and individual Directors. Performance evaluation of the Chairman is carried out by the Non-Executive Directors, led by the Senior Independent Director, taking into account the views of the Executive Directors.
The Board is in the second year of its three year evaluation cycle. An external evaluation was conducted in 2018, facilitated by EgonZehnder¹, an external board review specialist, with an internal evaluation having been carried out in respect of 2019. The current expectation is that the 2020 evaluation will be conducted internally.
The 2019 review sought the Directors’ views on a range of topics including: strategy; planning and performance; risk and control; Board composition and size; balance of skills, experience and knowledge; diversity; culture; how members work together, and with executive management, to achieve objectives; the Board’s calendar and agenda; the quality and timeliness of information; and support for Directors and Committees. The topics were selected by the Company Secretary and the Chairman of the Nomination and Governance Committee as being the most pertinent when considering the Board’s effectiveness.
If Directors have concerns about the Company or a proposed action which cannot be resolved, their concerns are 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 2019 and up to the date of this report.
Whilst ring-fencing governance has been embedded successfully, it is important to streamline governance processes further and ensure the Board’s and its Committees’ time is used to best effect
Strategy The Board’s detailed engagement in the formulation of strategy is seen as a key strength, with the strategy away days playing an important role in this
Continue to increase time allowed in Board meetings for expansive discussion of broader strategic issues and themes
Board deep dives into particular topics and the continued use of more informal Board sessions to facilitate greater depth of discussion continue to be appreciated
Whilst the quality of Board papers was seen to have improved, there remain concerns about the length of Board papers and the inclusion of unnecessary detail
Board and Committee papers to be shorter in length and the amount of time spent in Board meetings on presentations to be reduced, to allow more time for open discussion and debate
October 2019 to January 2020 Individual meetings held between each Director and the Company Secretary to discuss responses and opportunity for Directors to raise any other matters concerning the Board or its Committees.
June strategy session updated views of external environment (customer, technology, competition, society) to prepare for 2020 discussions on GSR4
Chairman to continue moving focus of agenda to give more time to business discussions
Continue to evolve Board skills and diversity Chairman continued to share succession timetables and skills matrix for discussion in Nomination and Governance Committee and wider Board
Chairman discussed and agreed potential focus areas with Non-Executive Directors during regular performance reviews
Individual Non-Executive Directors encouraged to communicate topics they are engaging with to other Non-Executive Directors
Board to ensure that they are satisfied with the overall risk profile, risk accountabilities and mitigating actions. The report and dashboard provide a monthly view of the Group’s overall risk profile, key risks and management actions, together with performance against risk appetite and an assessment of emerging risks which could affect the Group’s performance over the life of the operating plan. Information regarding the main features of the internal control and risk management systems in relation to the financial reporting process is provided within the risk management report on pages 129 to 187. The Board concluded that the Group’s risk management arrangements are adequate to provide assurance that the risk management systems put in place are suitable with regard to the Group’s profile and strategy.
Lord Blackwell and a number of NonExecutive Directors attended multiple Customer Insight sessions during 2019.
Our customers’ world is changing at pace so it is important to stay in touch with the reality of customers’ daily lives, their changing needs and priorities.
Customer insight sessions are held monthly in research labs and other locations across the country to hear directly from customers about their lives and what is important to them. The discussions cover topics such as life priorities and money management providing a rich insight into evolving needs, attitudes and behaviours.
As Senior Independent Director, Alan Dickinson is a sounding board for the Chairman and Group Chief Executive. He acts as a conduit for the views of other Non-Executive Directors and conducts the Chairman’s annual performance appraisal. He is available to help resolve shareholders’ concerns and attends meetings with major shareholders and financial analysts to understand issues and concerns.
Kate Cheetham was appointed Group Company Secretary during the course of the year, and in this role advises the Board on matters relating to governance, ensuring good information flows and comprehensive practical support is provided to Directors. She maintains the Group’s Corporate Governance Framework and organises Directors’ induction and training. The Company Secretary also communicates with shareholders as appropriate and ensures due regard is paid to their interests. Both the appointment and removal of the Group Company Secretary is a matter for the Board as a whole.
F. The Chairman has overall responsibility for the leadership of the Board and for ensuring its effectiveness in all aspects of its operation. The responsibilities of the Chairman in this regard are formalised within the Corporate Governance Framework. Lord Blackwell was independent on appointment.
J. The process for Board appointments is led by the Nomination and Governance Committee, which makes recommendations to the Board. A combination of open advertising and an external search consultancy is used for the appointment of the Chairman and Non-Executive Directors. More details about succession planning can be found on page 82 and 84. More information about the work of the Nomination and Governance Committee can be found on pages 82 to 84.
N. Requirements that the Annual Report is fair, balanced and understandable are considered throughout the drafting and reviewing process and the Board has concluded that the 2019 Annual Report meets this requirement. The Directors’ and Auditors’ Statements of Responsibility can be found on pages 97 and 196 respectively. Related information on the Company’s business model and strategy can be found on pages 2 to 46.
R. The Remuneration Policy seeks to ensure all remuneration decisions made by Directors fully consider the wider circumstances as relevant to that decision, including, but not limited to, individual performance. The Remuneration Committee’s decision making in respect of remuneration outcomes is discussed further in the Directors’ Remuneration Report on pages 98 to 128 which includes additional confirmation of the use of remuneration consultants, including where any such consultant has another connection to the Company.
Succession planning As can be seen from these changes, the Committee continued to focus on succession planning at both a Board and Executive level, building on work undertaken in previous years.
Board effectiveness and training As highlighted in my introduction to the Governance Report on page 65, an internal Board effectiveness review, undertaken by the Company Secretary, was overseen by the Committee. The Committee also considered, and recommended to the Board, actions arising from the previous externally facilitated review undertaken by Egon Zehnder. Full details are provided on pages 77 to 78.
In recommending Directors for re-election, the Committee reviews the performance of each Non-Executive Director and their ability to continue meeting the time commitments required, taking into consideration individual capabilities, skills and experiences and any relationships that have been disclosed. All Directors were considered to have appropriate roles. Details of conflicts of interest can be found on page 94.
As part of its broader governance responsibilities, the Committee also considered regular updates on developments in corporate governance, including the initiation of HM Treasury’s review of the financial services regulatory framework, provided ongoing oversight of the embedding of the ring-fenced banks’ governance structure and considered correspondence with shareholders.
UK Corporate Governance Code As highlighted in last year’s report and referred to in the Governance Report, the Financial Reporting Council’s amended UK Corporate Governance Code (the ‘Code’), came into effect from 1 January 2019, with requirements relating to the annual report applicable to the report and accounts for the year ended 31 December 2019. The Group applied the
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Code. Our statement of compliance with the Code and a summary of the requirements of the Code can be found on pages 80 and 81.
The Board diversity policy The Board Diversity Policy (the ‘Policy’) sets out the Board of Lloyds Banking Group’s approach to diversity and provides a high level indication of the Board’s approach to diversity in senior management roles which is governed in greater detail through the Group’s policies. The Board places great emphasis on ensuring that its membership reflects diversity in its broadest sense. Consideration is given to the combination of demographics, skills, experience, race, age, gender, educational and professional background and other relevant personal attributes on the Board to provide the range of perspectives, insights and challenge needed to support good decision making.
Objectives for achieving Board diversity may be set on a regular basis. In April (and then again in January 2020) the Board considered and approved updates to aspirations set out in the Board Diversity Policy relating to gender diversity and the number of senior roles held by Black, Asian and Minority Ethnic (BAME) executives.
A copy of the Policy is available on our website at www.lloydsbankinggroup. com/our-group/responsible-business and further information on the Board’s broader approach to diversity and inclusion as part of its strategic priorities, and continued investment in being a leading inclusive employer, can be found on page 34.
The Committee supports the Chairman in keeping the composition of the Board and its Committees under regular review and in leading the appointment process for nominations to the Board. This has been a particular area of focus during 2019, with a number of changes to Board Committee membership, and the appointment of two new Non-Executive Directors, discussed further below.
Interviews were then held between the candidates, the Chairman and the Senior Independent Director.
The potential for economic uncertainty arising from the exit of the UK from the European Union was considered in particular in respect of any potential impact on the Group’s credit impairment provision.
The Committee also oversaw the establishment of a sub-committee to consider improvements in the Group’s whistleblowing arrangements.
Looking ahead to 2020, beyond continued focus on financial reporting and related controls, the Committee will oversee the transition in January 2021 to Deloitte LLP as the Group’s external auditor.
During the year the Committee considered a number of issues relating to the Group’s financial reporting. These issues are summarised on the following pages, including discussion of the conclusions the Committee reached, and the key factors considered in reaching conclusions, including a continuing focus on the judgements and assumptions used by management in its models. In addition, the Committee considered a number of other issues not related directly to financial reporting, including internal controls, internal audit and external audit. These issues are also discussed in detail in the next section, including insight into the key factors considered by the Committee in reaching its conclusion.
Committee composition, skills, experience and operation The Committee acts independently of the executive to ensure the interests of the shareholders are properly protected in relation to financial reporting and internal control.
During the year, the Committee has challenged both the level of provision held by the Group, and the judgements and estimates used to calculate the provision. It regularly reviewed management’s analysis of the Group’s lending portfolios. As part of each of its reviews, the Committee considered management’s assessment of the potential impact of the UK leaving the European Union. The Committee has also considered the disclosure recommendations published by The Taskforce on Disclosures about Expected Credit Losses in December 2019.
The Committee reviewed management’s assessment of the Group’s uncertain tax positions which took into account the views of the relevant tax authorities and any external advice it received.
The Committee has discussed the requirement of IFRS 16 which the Group adopted on 1 January 2019.
IFRS 17 Insurance Contracts is expected to be effective for the year ending 31 December 2022.
In the lead up to the 29 August 2019 deadline for the submission of claims (the Industry Deadline), the Group received a significant number of PPI Information Requests (PIRs). Management determined that the rate at which these enquiries convert to valid claims was a significant judgement in 2019, with the quality of PIRs deteriorating as the Industry Deadline approached.
Risk weighted assets The Committee asked management to prepare a summary of the Group’s end-toend processes to calculate its risk-weighted assets, highlighting those areas that require management judgement and interpretation. Whilst no issues were identified, it was agreed further internal assurance work would be undertaken. The Committee also asked that a programme of targeted external assurance reviews be carried out; it will review the findings from both the internal and external reviews in 2020.
Climate-related financial disclosure The Committee has received updates on the Group’s plans to develop disclosures implementing the Taskforce on Climate-Related Financial Disclosure recommendations by 2022 and the Group’s proposed current year Annual Report disclosure. Climate change disclosure will remain an area of focus for the Committee and it will continue to monitor its development during the coming year.
Monitored the progress of internal audit’s coverage of key risk themes across the Group, including Transformation and Change, Cyber & Information Security, Data Management and IT, Business & Operational Resilience
Speak Up (the Group’s whistleblowing service) The Committee received and considered reports from management on the Group’s whistleblowing arrangements. The Committee reviewed the reports to ensure there are arrangements in place which colleagues can use in confidence to report concerns about inappropriate and unacceptable practices, and that there is proportionate and independent investigation of such matters or appropriate follow up. The Committee reported on its consideration of whistleblowing arrangements to the Board. The Committee also established an interim sub-committee to consider whistleblowing cases where allegations relate to Material Risk Takers or Senior Managers, and to oversee improvements being made to the Group’s whistleblowing arrangements.
External auditor The Committee oversees the relationship with the external auditor (PwC) including its terms of engagement and remuneration, and monitors its independence and objectivity. 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. During 2019, the Committee reviewed PwC’s audit plan, including the underlying methodology, and PwC’s risk identification processes. In its assessment of PwC’s performance and effectiveness, the Committee has considered: PwC’s interactions with the Committee; the responses to a questionnaire issued to the Group’s businesses, Finance, Risk and Internal Audit; and the FRC’s Audit Quality Inspection Report published in July 2019. The Committee concluded that it was satisfied with the auditor’s performance and recommended to the Board a proposal for the re-appointment of the auditor at the Company’s AGM.
In October 2018, the Board, following a tender exercise and formal review to choose a new auditor and the recommendation of the Committee, approved the proposed appointment of Deloitte LLP. Subject to shareholder approval, Deloitte LLP will undertake the Group audit for the year ending 31 December 2021. The Company and the Group have no plans therefore as at the date of this report to conduct a tender exercise for external audit services.
Committee composition, skills, experience and operation The Committee is composed of Non-Executive Directors, who provide core banking and risk knowledge, together with breadth of experience which brings knowledge from other sectors, and a clear awareness of the importance of putting the customer at the centre of all that the Group does.
Annually the Committee undertakes an effectiveness review. The review forms part of the Board evaluation process with Directors being asked to complete parts of the questionnaire relating to the Committees of which they were members. The findings of the review were considered by the Committee at its January 2020 meeting. On the basis of the evaluation, the feedback was that the performance of the Committee continues to be effective. Details of Committee membership and meeting attendance can be found on page 70.
During 2019, the Committee continued to utilise established sub-committees to provide additional focus on areas such as IT resilience and cyber, and stress testing and recovery planning. The Committee receives regular updates from the Lloyds Bank Corporate Markets and Insurance business sub-groups, which summarise the key discussions and decisions taken at the relevant entities’ risk committees. These sub-committees enable members of the Committee to dedicate additional time and resource to achieving a more in-depth understanding of the topics covered, and enable further review and challenge of the associated risks.
Rectifications The Committee continues to focus closely on the Group’s management of customer rectifications.
Throughout 2019 the Committee has considered reports on the Group’s Rectifications portfolio performance, with particular interest in reducing the number of customers with outstanding remediations. The Committee has noted continued progress in the pace and quality of remediations, delivering a reduction in the number of customers awaiting redress and improvements in customer outcomes. The Committee has remained close to progress on material rectifications, including HBOS Reading.
The Committee also noted the impact of a potential economic downturn and new regulatory requirements such as Persistent Debt.
Conclusion: Whilst progress has been made, further improvement in the Group’s treatment of customers in financial difficulty will be a key focus area in 2020.
Conclusion: The Group continues to make good progress in reducing the causes for customer complaints however focus needs to remain on reducing the time taken to resolve complaints in 2020 and to learn from root cause analysis.
The Group is committed to delivering Taskforce on Climate-related Financial Disclosure Recommendations (TCFD) and is working to ensure that regulatory expectations with regards to managing the financial risks arising from climate change are met. A proactive approach is required to continue to anticipate the sustainability impact on client’s business models.
The Committee continues to review the Commercial lending portfolio through regular credit quality update papers, including reviews of key portfolio and sector trends observed and external threats to portfolio performance.
The Committee also considered the Group’s approach to credit policies and individual transaction limits, and reviewed summary details of transactions and portfolio reviews that were assessed at the Group’s most senior credit committee.
Conclusion: The Committee was satisfied that the appropriate lending controls and monitoring are in place for affordability and indebtedness and noted progress made to strengthen these and improve visibility of customers’ debt positions.
Operational resilience is one of the Group’s most important non-financial risks. Key focus in 2019 has been to continue to enhance the existing approach to operational resilience and strengthen the control environment, to improve the Group’s ability to respond to incidents and continue delivering key services to our customers.
Key areas of focus for the Committee have included updates on the Group’s operational resilience programmes, progress against the operational resilience strategy and continued regulatory engagement in advance of the publication of Bank of England’s consultation paper.
Given the significance of the risk to the Group, the Committee is supported by the IT and Cyber Advisory Forum specifically focused on IT and cyber risks. The Committee has reviewed papers relating to Group operational resilience investment, proposals for considering Impact Tolerances and Advanced Intrusion Testing.
Conclusion: In 2019, operational resilience was classified as a primary risk. The Committee takes the operational resilience of its services very seriously and has drawn valuable insight from having independent advice and guidance. It has agreed risk appetite statements for critical services and will continue to strengthen these to reflect the increased focus on resilience. The Committee considers that governance of operational resilience risk is robust and that activities in plan will ensure the ongoing resilience of key services to the Group’s customers.
The Group continues to increase its use of agile delivery approaches and tools and our change oversight has been reviewed and refreshed to support this.
The Committee continues to consider key economic and political risks, particularly given the increasingly uncertain outlook.
Negotiations continue to determine the final terms of the UK’s exit from the EU.
Conclusion: The Committee noted the positive work undertaken in the detection and prevention of fraud and recognised the continuing efforts of the Group to protect the integrity of genuine customer journeys with strategic plans aimed at enhancing the fraud control environment of the Group which reflect the comprehensive nature of the challenge and require internal evolution and external engagements.
Managing regulatory risk continues to be a key focus within the Group due to the significant amount of highly complex and interdependent regulatory reform that we have managed in 2019, and will continue to manage in 2020.
Conclusion: The Group continues to place significant focus on implementing complex regulatory changes, as well as ensuring effective horizon scanning of upcoming trends. The Committee has discussed the topics raised, and will continue to closely monitor compliance with regulatory requirements, including ring-fencing in 2020. Regulatory risk will remain a priority area of focus for the Committee in 2020.
We have a responsibility to help address some of the challenges faced by the UK. We manage this through our Helping Britain Prosper Plan. Sara Weller CBE Chairman, Responsible Business Committee
In other activities, the Committee undertook an in-depth review of Inclusion and Diversity within the Group, focusing on BAME colleagues. This demonstrated some of the Group’s strengths and uniqueness but also identified opportunities to strengthen further its approach to attracting and developing talent. The Committee looked closely at progress on mental health and resilience in conjunction with the launch of a Resilience portal for colleagues. This highlighted scientific research into human behaviours provided by medical professionals based on clinical data.
At each meeting, updates have been provided on the performance against the metrics of the Helping Britain Prosper Plan on which a report is provided from page 27. This contains further information on the activities which the Committee keeps under review.
Committee composition, attendance at meetings and effectiveness review The Committee is composed of Non-Executive Directors.
William Chalmers and Sarah Legg have been appointed to the Board since the 2019 AGM and will therefore stand for election at the forthcoming AGM, together with Catherine Woods, who, as announced in October 2019, will join the Board on 1 March 2020. Anita Frew will retire at the 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.
Biographies of current Directors are set out on pages 66 to 67. Details of the Directors seeking election or re-election at the AGM are set out in the Notice of Meeting.
As well as insurance cover, the Group agrees to indemnify the Directors to the maximum extent permitted by law. Further information on the Group’s indemnity arrangements is provided in the Directors’ indemnities section.
Qualifying pension scheme indemnities have also been granted to the Trustees of the Group’s Pension Schemes, which were in force for the whole of the financial year and remain in force as at the date of this report.
Power of Directors in relation to shares The Board manages the business of the Company under the powers set out in the articles of association, which include the Directors’ ability to issue or buyback shares. The Directors were granted authorities to issue and allot shares and to buyback shares at the 2019 AGM. Shareholders will be asked to renew these authorities at the 2020 AGM. The authority in respect of purchase of the Company’s ordinary shares is limited to 7,124,228,884 ordinary shares, equivalent to 10 per cent of the issued ordinary share capital of the Company as at the latest practicable date prior to publication of the 2019 AGM circular.
As at 31 December 2019, the Company had been notified by its substantial shareholders under Rule 5 of the DTR of the following interests in the Company’s shares: Interest in shares
% of issued share capital with rights to vote in all circumstances at general meetings1
2 The most recent notification provided by BlackRock Inc. under Rule 5 of the DTR identifies (i) an indirect holding of 3,599,451,380 shares in the Company representing 5.04 per cent of the voting rights in the Company, and (ii) a holding of 69,305,385 in other financial instruments in respect of the Company representing 0.09 per cent of the voting rights of the Company. BlackRock Inc.’s holding most recently notified to the Company under Rule 5 of the DTR varies from the holding disclosed in BlackRock Inc.’s Schedule 13-G filing with the US Securities and Exchange Commission dated 5 February 2020, which identifies beneficial ownership of 4,698,292,748 shares in the Company representing 6.7 per cent of the issued share capital in the Company. This variance is attributable to different notification and disclosure requirements between these regulatory regimes.
No further notifications have been received under Rule 5 of the DTR as at the date of this report.
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
GHG emissions (CO2e) per £m of underlying income (Location Based) – expanded scope2 15.8 17.3 –
GHG emissions (CO2e) per £m of underlying income (Market Based) – expanded scope2 9.9 10.5 –
Scope 2 emissions have been calculated in accordance with GHG Protocol guidelines, in both Location and Market Based methodologies.
Indicator is subject to Limited ISAE 3000 (revised) and 3410 (ISAE 3410) assurance by Deloitte LLP for the 2019 Annual Responsible Business Reporting. Deloitte’s 2019 assurance statement and the 2019 Reporting Criteria are available online at www. lloydsbankinggroup.com/our-group/responsible-business
Independent auditor and audit information Each person who is a Director at the date of approval of this report confirms that, so far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware and each Director has taken all the steps that he or she ought to have taken as a Director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of the Companies Act 2006. Resolutions concerning the re-appointment of PricewaterhouseCoopers LLP as auditor and authorising the Audit Committee to set its remuneration will be proposed at the AGM.
Each of the current Directors who are in office as at the date of this report, and whose names and functions are listed on pages 66 to 67 of this annual report, confirm that, to the best of his or her knowledge: The Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and Group
The timing coincided with a great deal of public interest in matters of executive pay, fairness, employee engagement and the pay gap between those at the top of organisations compared to other colleagues. We have been active participants in these discussions, through meetings with shareholders, our unions, the Investment Association and some members of Parliament, as well as through an open dialogue with colleagues on a variety of topics related to their pay and benefits. These talks have had a material impact on the priorities and recommendations of the Remuneration Committee throughout the last year. In the pages which follow, the proposals which have emerged from these discussions are laid out in detail.
Behaviours Remuneration should reward and drive the right behaviours and outcomes and reflect both strategic (non-financial) and financial achievements
Given the feedback we have received, we hope you will support the aims and the methods we outline, and vote accordingly at the AGM in May.
In 2019 we have continued our commitment for pay progression with higher pay awards for lower paid colleagues and colleagues paid lower within their pay range
The Balanced Scorecard is made up of an appropriate balance of financial and non-financial measures. Targets are determined at the beginning of the year and my Committee and I discuss them thoroughly to ensure they are stretching
GPS award outcomes for 2019 show that award outcomes are truly variable and that the structure of the plan ensures that performance and conduct will have a direct impact on remuneration
We recognise that our process for determining short-term variable (GPS) outcomes has been perceived to be complex and the link between pay and performance is not easily understood
We have taken steps to reduce complexity through reducing the number of measures in our Group Balanced Scorecard from 20 to 15 grouped under three equally weighted areas for 2019 and 2020. We believe this provides the optimum breadth of measures for a large and complex Group
To support colleagues understanding of the approach to determine Group Performance Share awards across the Group, including for Executive Directors, we have used internal media channels to explain the process in a clear and transparent way and to emphasise the link between pay and performance
– Reflective of individual role, taking account of responsibilities, experience and pay in the wider Group.
– Simplifying the approach to target performance aligns the design structure to other colleagues and is clearer to articulate. The calibration of the 2020 scorecard has been set so that the payout outcome for achieving target performance is no less stretching.
What: – Introducing the Long Term Share Plan (LTSP), subject to approval at the 2020
Lower and less volatile potential reward outcomes aligned to a stable long-term business model We believe that a reward package that has less volatile outcomes is more reflective of our objective of delivering stable and sustainable returns and will incentivise stewardship over longer timeframes.
A simpler structure with one set of annual metrics In recent years we have received significant feedback on the complexity of our reward structures. Removing multiple scorecards and focusing on a single simplified Balanced Scorecard will give management clearer line of sight and greater alignment of interests to long-term company performance.
Promote fairness and consistency The structure supports reducing the gap between colleague and executive remuneration; the increase in certainty of award outcomes is offset by reduced opportunities.
Performance against strategic goals will be assessed and Committee discretion will play an important role The Committee will have four opportunities to test performance, using a mixture of clear metrics and discretion, applied against a pre-determined approach.
When considering the use of discretion in conjunction with the underpin assessment, the Committee will consider the following key questions: Do the Group’s financial results and capital position adequately reflect risk, conduct and any other non-financial considerations?
The Committee will explain its reasons for applying discretion in either direction, or for not doing so.
Under the Group Ownership Share Plan Executive Directors were eligible to receive a maximum award of 300 per cent. We wanted consistency in award maximum for all other Executive Directors. This therefore marks a discount of 33 per cent but we are confident this is appropriate for the business given the use of a pre-grant test, underpins and the Committee’s intention to use discretion where appropriate.
The Balanced Scorecard is considered by non-executives and management to be a transparent and effective tool to drive and assess performance while meeting regulatory requirements. Each measure has pre-set underlying objectives determined by the Remuneration Committee at the start of the performance year. In the interest of transparency, the Committee can confirm that for 2020 there is no change1 to the 15 measures in the 2019 Balanced Scorecard (fully disclosed on page 104) which the Committee consider provide sufficient breadth across the Group’s core business objectives and the optimum balance to measure our performance as a simple, low-risk, customer-focused UK financial services provider, as highlighted below: Customer measures (33%) Providing a leading customer experience sits at the core of our strategy. The Group customer dashboard provides an assessment of how effectively we are serving customers across all brands, products and services, while other measures focused on complaint handling, customer perception, and trust in the Group, measure how effectively we are at being the best bank for customers
Group CET1 ratio above the guided management target each year, including all regulatory buffers
Group Ownership Share/ Long Term Incentive (LTIP)2,3 1,821 2,490 1,011 1,355 – – 911 1,374 3,743 5,219
Defined benefit pension arrangements (audited) António Horta-Osório has a conditional unfunded pension commitment. This was a partial buy-out of a pension forfeited on joining from Santander Group. It is an Employer-Financed Retirement Benefits Scheme (EFRBS). The EFRBS provides benefits on a defined benefit basis at a normal retirement age of 65. The benefit in the EFRBS accrued during the six years following commencement of employment, therefore ceasing to accrue as of 31 December 2016.
The EFRBS was subject to performance conditions and it provided for a percentage of the GCE’s base salary or reference salary in the 12 months before retirement or leaving. No additional benefit is due in the event of early retirement. The rate of pension accrued in each year depended on share price conditions being met. In March 2019, the GCE asked that his defined benefit pension be based on a percentage of his pensionable salary in 2014. The total pension due is now fixed at 6 per cent of his 2014 reference salary of £1,220,000, or £73,200.
The threshold, below which no bonus is payable, remains set at 20 per cent below target UP For 2019, UP target was £8,637 million, actual UP was £8,349 million 1 Underlying profit of £7,531 million, adjusted by £21 million for year-on-year Prudential Value Adjustment in line with regulatory requirement, £445 million for conduct and costs, and £352 million for Group Performance Share expenses in 2019.
The Group Chief Executive’s Balanced Scorecard assessment for 2019 reflects the Group's scorecard for which he has overall accountability.
Executive Directors’ Group Performance Share outcome for 2019 (audited) STEP 1 STEP 2 STEP 3
Balanced Scorecard performance Individual awards for Executive Directors are determined through the assessment of individual performance using the Group or their divisional balanced scorecard. Awards will not be made if the Group does not meet threshold financial performance or if an individual receives a score below 2.6 out of 5.
Strong leadership and oversight of the Group’s strategic transformation programme, transforming the Group for success in a digital world
Acknowledged failures in the handling of those affected by the historic HBOS Reading fraud
Prior to his retirement at the end of July, George oversaw delivery of a good financial performance in H1, with market leading efficiency and returns
GPS award commensurate with performance determined Awards are initially based on pre-determined formulaic pay out ranges, commensurate with performance scores as follows: Individual Performance Score
The Group Chief Executive and Chief Operating Officer voluntarily requested to be withdrawn from consideration for a 2019 award.
External appointments António Horta-Osório – During the year ended 31 December 2019, the GCE served as a Non- Executive Director of Exor, Fundação Champalimaud, Stichting INPAR Management/Enable and Sociedade Francisco Manuel dos Santos. The Group Chief Executive is entitled to retain the fees, which were £349,303 in total.
Relative importance of spend on pay The graphs illustrate the total remuneration of all Group employees compared with returns of capital to shareholders in the form of dividends and share buyback.
4 Retired as Chief Financial Officer and an Executive Director with effect from 1 August 2019 and from the Group 2 August 2019. The number of shares in respect of which the GOS Awards (unvested subject to performance) vests, will be reduced to reflect the period from the start of the Performance Period to 2 August 2019, date of leaving, at the point of vest.
In addition to the Group’s shareholding requirements, shares vesting are subject to holding periods in line with regulatory requirements.
For the year ending 31 December 2019, the GCE and COO continued to meet their shareholding requirements, as detailed within the illustration below. William currently holds 52 per cent of his salary in shares and will have until 2 June 2022 to achieve the requirement. At the time of his departure in August 2019, George Culmer held 1,233 per cent of his salary in shares.
3. All GOS have performance periods ending 31 December at the end of the three-year period. Awards were made in the form of conditional rights to free shares.
4. Awards (in the form of conditional rights to free shares) in 2019 were made over shares with a value of 300 per cent of salary for António Horta-Osório (7,685,276 shares with a face value of £3,733,200) and 275 per cent for Juan Colombás (4,412,086 shares with a face value of £2,143,215). No award was made to George Culmer. The share price used to calculate face value is the average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence. As regulations prohibit the payment of dividend equivalents on awards in 2018 and subsequent years, the number of shares awarded has been determined by applying a discount factor to the share price on award. An adjustment of 29.8 per cent was applied. Performance conditions for this award are set out in the table on page 110.
9. Mr Culmer had six months from his date of retirement to exercise his Sharesave options. Options were exercised on 7 November 2019 and savings made to date were used to buy shares. The closing market price of the Group’s ordinary shares on that date was 57.20 pence.
2019 Group Ownership share performance measures (for awards made in March 2019) (audited) Meeting threshold performance will result in 25 per cent vesting of each metric, relative to each weighting.
Implementation of the policy in 2020 The 2020 Remuneration Policy is subject to approval at the Annual General Meeting in May 2020. We propose to implement the Policy in the following ways subject to shareholder approval. A final 2020 Group Ownership Share award will be granted under the existing Remuneration Policy prior to the AGM when the 2020 Remuneration Policy is intended to come into effect.
Benefits remain unchanged from 2019. Executive Directors receive a flexible benefit allowance in line with colleagues, (4 per cent of base salary). This can be used to select benefits including life assurance and critical illness cover. Other benefits include car allowance, transportation tax preparation and private medical cover.
The approach to determining the Group’s Group Performance Share outcome for 2020 will remain aligned to the approach from 2019. A fixed five per cent of adjusted Underlying Profit (UP) will be used as a starting position for the overall pool. This remains within the maximum plan limit of 10 per cent of UP and a financial performance threshold will be set at 20 per cent below the Group’s underlying profit target, at which no award will be payable.
The fixed 5 per cent of UP will be adjusted by a scorecard modifier commensurate with the Group Balanced Scorecard performance score. Adjustments for conduct and risk factors will also be considered when determining the final overall pool.
Individual maximum opportunities for Executive Directors remain unchanged from 2019 at 140 per cent of base salary for the GCE and 100 per cent of base salary for other Executive Directors.
The 2020 scorecards will provide a balanced view across 15 financial, operational and strategic measures equally weighted between Financial, Customer and Colleague and Conduct measures. Target will be assessed against a rating scale of 1 to 5.
As regulations prohibit the payment of dividend equivalents on awards, the number of shares subject to the award has been determined by applying a discount factor to the share price on grant, as previously disclosed. The Committee approved an adjustment of 29.03 per cent for colleagues who are senior managers, including the Executive Directors.
Awards made in 2020 will vest based on the Group’s performance against the financial and strategic measures, set out below. In line with the current Remuneration Policy, the Committee has full discretion to amend payout levels should the award not reflect business and/ or individual performance. Business performance includes, but is not limited to, consideration of returns to shareholders.
Methodology option A has been used and was selected on the basis that it provided the most accurate means of identifying the median, lower and upper quartile colleagues
The colleague identified at P50 did not receive a separate car benefit and does not participate in the long-term incentive plan. As a result, the ratio does not provide a direct comparison to the total remuneration of the Group Chief Executive
A minimum pay award of £500 will apply for all eligible colleagues and pay awards of up to 3.5 per cent for the lowest paid colleagues. We are proud to be an accredited Living Wage employer since 2015, and from April 2020 we will go further and raise the minimum salary for all full-time colleagues to £18,200, reflecting a rate of £10 per hour. For some colleagues this will result in an increase of up to 3.94 per cent and is 22 per cent greater than the National Living Wage and 70 pence greater than current National Living Wage Foundation’s UK wide real Living Wage.
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, purpose and values and the long-term interests of the Group, and recognises the interests of relevant stakeholders, including the wider workforce. The Committee's operation is designed to ensure that no conflicts of interest arise, and in particular, the Committee ensures that no individual is present when matters relating to their own remuneration are discussed.
The 2019 executive pay budget was set in the context of the wider colleague pay budget. Pay increases were approved on the basis that they were lower than pay increases for wider colleagues. The implications of pay increases on future CEO pay ratios and the Group’s approach to pay progression was considered
When finalising the changes to the Group’s DC employer pension offering including the reduction to ED pensions, the potential impact on pay ratios including gender pay were considered
To support colleagues to better understand the approach to determining GPS awards across the Group, including Executive Directors, the Committee gained insight into how the Group has used internal media channels to explain the process in a clear and transparent way and to emphasise the link between pay and performance
The Chairman of the Remuneration Committee alongside senior management consulted with shareholders extensively and the proposed amendments to the Policy were deliberated by the Remuneration Committee at three separate committee meetings. Throughout the process, the Committee Chair kept an open dialogue with key stakeholders to provide updates on amendments and additional points of consideration within the Policy following their feedback. The final Policy is proposed on the basis that it has been widely consulted on with stakeholders and has been designed to align to the Group’s culture, values and purpose whilst also remaining aligned to wider stakeholder interests.
No Executive Director has been involved in the determination of their own remuneration but has remained well informed to ensure alignment between executive and wider colleague remuneration structures. To manage conflicts of interests effectively, Executive Directors were asked to step out of committee meetings and relevant paperwork was also redacted for individuals if required. The Committee has also considered gender pay and CEO pay ratio analysis when finalising policy proposals.
Variable Short-term incentive 3 3 3 3 1 Eligibility based on seniority and / or role.
– Pay for comparable roles in comparable publicly listed financial services groups of a similar size.
Changes Maximum employer pension contribution available has been reduced to 15 per cent of cash salary with no compensation for the reduction to align to the maximum employer pension contribution available to colleagues on the defined contribution pension scheme.
Operation Benefits may include those currently provided and disclosed in the annual report on remuneration. Core benefits include a company car or car allowance, private medical insurance, life insurance and other benefits that may be selected through the Group’s flexible benefits plan. Additional benefits may be provided to individuals in certain circumstances such as relocation. This may include benefits such as accommodation, relocation, and travel. The Committee retains the right to provide additional benefits depending on individual circumstances. When determining and reviewing the level of benefits provided, the Committee 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.
Maximum potential The Committee will only make increases in the benefits currently provided which it believes are consistent with the two parameters above. Executive Directors receive a flexible benefits allowance, in line with all other colleagues. The flexible benefits allowance does not currently exceed 4 per cent of base salary.
All-employee plans Purpose and link to strategy Executive Directors are eligible to participate in HMRC-approved share plans which promote share ownership by giving employees an opportunity to invest in Group shares.
Vesting will be subject to an assessment of underpin thresholds being maintained measured over a period of three years, or such longer period, as determined by the Committee.
Awards may be subject to malus and clawback 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.
Further information on which performance measures were chosen and how performance targets and underpin thresholds are set are disclosed in the relevant sections throughout the report.
Adjustment of targets and measures if events occur which cause it to determine that it is appropriate to do so. The Committee also retains the right to change performance measures and the weighting of measures, including following feedback from regulators, shareholders and/or other stakeholders; and amending the plan rules in accordance with their terms and or amending the basis of operation (including but not limited to the approach in respect of dividend equivalents) including in light of any change to regulatory requirements or guidance or feedback from regulators
The exercise of the Committee’s discretion will be disclosed in accordance with regulatory requirements
2. The expected value of remuneration for performance midway between threshold and maximum, assuming 50 per cent of maximum Group Performance Share opportunity and a Long Term Share award granted at 150 per cent of salary. It is also assumed that the Long Term Share Award will vest in full.
Exceptional circumstances requiring the Chairman to take on an executive function on a short-term basis
Notice periods Newly-appointed Executive Directors will be employed on contracts that include the following provisions: The individual will be required to give six months’ notice if they wish to leave and the Group will give 12 months’ notice other than for material misconduct or neglect or other circumstances where the individual may be summarily dismissed by written notice. In exceptional circumstances, new joiners will be offered a longer notice period (typically reducing to 12 months within two years of joining)
Awards will normally continue and be released at the normal time and the number of shares subject to the award in the current year will be reduced to reflect the date of termination unless, in the case of mutual agreement, the Committee determines that exceptional circumstances apply in which case shares may be released on termination.
Awards lapse on date of leaving (or on notice of leaving) unless the Committee determines otherwise in exceptional circumstances that they will vest on the original vesting date (or exceptionally on the date of leaving). Where award is to vest it will be subject to the underpins and time pro-rating (for months worked in underpin period). Malus and clawback will apply.
For cases of redundancy, unvested deferred Group Performance Share awards are retained and in-year Group Performance Share awards are accrued until the date of termination (or the commencement of garden leave if earlier). Such awards would be subject to deferral, malus and clawback. For termination by mutual agreement, the same approach as for resignation would apply.
Death Unvested deferred Group Performance Share awards are retained and in-year Group Performance Share awards are accrued until the date of termination. Deferred Group Performance Share awards vest on death in cash, unless the Committee determines otherwise.
4 The terms applicable on a cessation of employment to Group Ownership Share Awards are as shown on page 97 of the 2017 Remuneration Policy.
When determining and reviewing fee and benefit levels, the Committee ensures that decisions are made within the following parameters: – The individual’s skills and experience.
This section discloses the remuneration awards made by the Group to Material Risk Takers (MRTs) in respect of the 2019 performance year. Additional information summarising the Group’s remuneration policies, structure and governance is also provided. These disclosures should be read in conjunction with the disclosures for Executive Directors contained in the Directors’ Remuneration Report (DRR) on pages 98 to 114 and the Directors’ Remuneration Policy (DRP) on pages 115 to 123. Together these disclosures comply with the requirements of Article 450 of the Capital Requirements Regulation (EU) No. 575/2013 (CRR). The remuneration principles and practices detailed in the DRR apply to MRTs and non-MRTs in the same way as to Executive Directors (other than where stated in this disclosure).
Other highly remunerated individuals whose activities could have a material impact on the Group’s risk profile
The overarching purpose of the Remuneration Committee is to consider, agree and recommend to the Board an overall remuneration policy and philosophy for the Group that is defined by, supports and is closely aligned to its long-term business strategy, business objectives, risk appetite and values and recognises the interests of relevant stakeholders. The remuneration policy governs all aspects of remuneration and applies in its entirety to all divisions, business units and companies in the Group, including wholly-owned overseas businesses and all colleagues, contractors and temporary staff. The Committee reviews the policy annually and Committee pays particular attention to the top management population, including the highest paid colleagues in each division, those colleagues who perform senior management functions for the Group and MRTs. During 2019 the Committee had 5 scheduled meetings. Further details on the operation of the Remuneration Committee and independent advise received during the year can be found on page 114 of the DRR.
The Group has a robust governance framework, with the Remuneration Committee reviewing all compensation decisions for Executive Directors, senior management, senior risk and compliance officers, high earners and any other MRTs. This approach to governance is cascaded through the Group with the Group People Committee having oversight for all other colleagues.
The fixed share award, made annually, delivers Lloyds Banking Group shares over a period of five years. With effect from 2020 fixed share awards will be delivered over a period of three years (subject to shareholder approval for Executive Directors). Its purpose is to ensure that total fixed remuneration is commensurate with the role, responsibilities and experience of the individual; provides a competitive reward package; and is appropriately balanced with variable remuneration, in line with regulatory requirements. The fixed share award can be amended or withdrawn in the following circumstances: – to reflect a change in role; – to reflect a Group leave policy (e.g. parental leave or sickness absence); – termination of employment with the Group; – if the award would be inconsistent with any applicable legal, regulatory or tax requirements or market practice.
The Group Performance Share (GPS) plan is an annual discretionary bonus plan. The plan is designed to reflect specific goals linked to the performance of the Group. The majority of colleagues and all MRTs participate in the GPS plan. Individual GPS awards are based upon individual contribution, overall Group financial results and performance conversations over the past financial year. The Group’s total risk-adjusted GPS outcome is determined by the Remuneration Committee annually as a percentage of the Group’s underlying profit, modified for: – Group Balanced Scorecard performance – Collective and discretionary adjustments to reflect risk matters and/or other factors.
The Group applies deferral arrangements to GPS and variable pay awards made to colleagues. GPS awards for MRTs are subject to deferral and a holding period in line with regulatory requirements and market practice. Further information on the GPS plan can be found on pages 110 to 111 of the DRR as well as page 117 of the DRP.
Further information on the current GOS plan can be found on pages 110 and 111 of the DRR. Subject to shareholder approval, it is proposed that the GOS plan be replaced with a Long Term Share Plan (LTSP) for Executive Directors with effect from 2020. The LTSP will share similarities to a restricted share plan with vesting subject to a set of three financial underpins and a further discretion for the Committee to amend the underpin vesting outcome. Shares will continue to be released over a minimum three to five-year period and subject to holding. Further details of the proposed LTSP for Executive Directors can be found on page 117 of the DRP.
At least 40 per cent of MRTs’ variable remuneration above certain thresholds is deferred into Lloyds Banking Group Shares. For all MRTs, variable remuneration is deferred in line with the regulatory requirements for three, five or seven years, (depending on MRT category). At least 50 per cent of each release is subject to a 12 month holding period. For all colleagues, any deferred variable remuneration amount is subject to performance adjustment (malus) in accordance with the Group’s Deferral and Performance Adjustment Policy.
4 2019 and 2018 data has been calculated using methodology consistent with EBA guidelines.
Table 2 Aggregate remuneration expenditure (Material Risk Takers) Analysis of aggregate remuneration expenditure by division1
Group Functions1 £m Total £m 1 Chief Operating Office and Group Functions comprises People and Productivity, Group Transformation, Chief Information Office and Chief Security Office, Business Risk, Finance, Legal, Strategy, Group Corporate Affairs, Group Internal Audit, Company Secretariat, Responsible Business and Inclusion and Diversity.
Other Material Risk Takers 60.5 60.5 – 18.4 1 Deferred in this context refers only to any unvested remuneration.
The Group’s approach to risk The Group operates a prudent approach to risk with rigorous management controls to support sustainable business growth and minimise losses. Through a strong and independent risk function (Risk division), a robust control framework is maintained to identify and escalate current and emerging risks, support sustainable growth within the Group's risk appetite, and to drive and inform good risk reward decision-making.
To meet ring-fencing requirements from 1 January 2019, core UK retail financial services and ancillary retail activities have been ring-fenced from other activities of the Group. The Group enterprise risk management framework and Group risk appetite apply across the Group and are supplemented by risk management frameworks and risk appetites for the sub-groups to meet sub-group specific needs. In each case these operate within the Group parameters. The Group’s corporate governance framework applies across Lloyds Banking Group plc, Lloyds Bank plc, Bank of Scotland plc and HBOS plc. It is tailored where needed to meet the entity specific needs of Lloyds Bank plc and Bank of Scotland plc, and supplementary corporate governance frameworks are in place to address sub-group specific requirements of the other sub-groups (Lloyds Bank Corporate Markets, Insurance and Lloyds Banking Group Equity Investments).
Role of the Board and senior management Key responsibilities of the Board and senior management include: approval of the ERMF and Board risk appetite approval of Group-wide risk principles and policies the cascade of delegated authority (for example to Board subcommittees and the Group Chief Executive)
Governance frameworks The Group’s approach to risk is founded on a robust control framework and a strong risk management culture which are the foundation for the delivery of effective risk management and guide the way all employees approach their work, behave and make decisions.
Board-level engagement, coupled with the direct involvement of senior management in Group-wide risk issues at Group Executive Committee level, ensures that escalated issues are promptly addressed and remediation plans are initiated where required.
– Market risk – 1.8 – – 1.8 1 As a separate regulated business, Insurance (excluding Wealth) maintains its own solvency requirements, including appropriate management buffers, and reports directly to the Insurance Board. Insurance does not hold any RWAs as its assets are removed from the Group's regulatory capital calculations. However, in accordance with capital rules part of the Group's equity investment in Insurance is included in the calculation of threshold RWAs, while the remainder is taken as a deduction from common equity tier 1 (CET1) capital.
4 Threshold RWAs reflect the proportion of significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from CET1 capital. Significant investments primarily arise from the investment in the Group’s Insurance business.
– Our risk management approach to climate change is outlined in the Strategic Report (page 30) and reflects our commitment to adopting the framework set out by the Financial Stability Board’s Task Force on Climaterelated Financial Disclosures (TCFD).
Macroeconomic headwinds: The UK economic outlook remains uncertain, since it is unclear how businesses will respond to the uncertainty relating to ongoing negotiations of international trade agreements, especially with the EU.
Markets have priced continued low UK interest rates, but rapid growth in labour costs resulting from low unemployment and weak productivity growth could boost inflation more than anticipated, pushing interest rate expectations upward. These factors, combined with current levels of consumer indebtedness, could lead to downward pressure on credit quality.
Internationally, growing protectionism remains a significant risk to stability of the global economy. Notwithstanding the recent first agreement on trade between the US and China, the fundamental nature of the disagreement suggests that roll-back of tariffs applied so far will prove difficult and further escalation is eminently possible. US tariffs on Europe may also increase.
More widely, concerns remain that elevated government indebtedness in advanced economies and limited headroom for conventional monetary policy could render the next global downturn more prolonged and lead to a sustained period of stagflation. These circumstances may spur the wider adoption of less conventional monetary policies such as negative interest rates.
– The Chief Security Office also maintains the operational resilience framework to embed resilience activities across the Group and limit the impact of internal or external events.
– Hedging of market risk considers, inter alia, potential shocks as a result of geopolitical events.
– Group vulnerability strategy and associated actions being developed through the value stream operating model.
Group Capital Risk Committee Responsible for providing oversight of all relevant capital matters within the Group, Ring Fenced bank and material subsidiaries, including the Group’s latest capital position and plans, risk appetite proposals, Pillar 2 development updates relating to ICAAP, Recovery and Resolution and the impact from regulatory reforms and accounting developments specific to capital.
Risk Appetite: Assess the results of the stress test against the risk appetite of all parts of the Group to ensure the Group and its legal entities are managed within their risk parameters
Inform the setting of risk appetite by assessing the underlying risks under stress conditions
Full analysis of risk categories The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives. A detailed description of each category is provided on pages 139 to 187.
Ensuring compliance with the Change policy and associated policies and procedures, which set out the principles and key controls that apply across the business and are aligned to the Group risk appetite
Events related to change activities are escalated and managed appropriately in line with risk framework guidance
Monitoring Change and execution risks from across the Group are monitored and reported through to Board and Group Governance Committees in accordance with the Group’s enterprise risk management framework and aligned to our GSR3 activities. Risk exposures are discussed monthly through established governance through to Group Transformation Risk Committee with upwards reporting to Board Risk and Executive Committees. In addition, oversight, challenge and reporting are completed at Risk division level to provide oversight of management of risks and the effectiveness of controls, recommending follow up remedial action if required. All material change and execution risk events are escalated in accordance with the formal Group Operational Risk policy and Change policy.
Mitigation Data risk is a key component of the Group’s enterprise risk management framework, where the focus is on the end to end management of data risk. This ensures that risks are identified, measured, managed, monitored and reported using the risk and control self-assessment process. Significant investment has been made to enhance the maturity of data risk management in recent years. In addition to the General Data Protection programme which delivered the necessary infrastructure to achieve compliance with the new regulations in May 2018, a number of other large investments and remediation projects include: Enhancing capability by investing in professional training for data privacy managers
Where required, these projects have also delivered enhancements to colleague and client training, vetting procedures and access controls processes
Monitoring Data risk is governed through divisional risk committees and significant issues are escalated to Group Risk Committee, in accordance with the Group’s enterprise risk management framework. Risk exposures are discussed at divisional risk committees, where oversight, challenge and reporting are completed to assess the effectiveness of controls. Remedial action is recommended, if required. All material data risk events are escalated in accordance with the Group Operational Risk policy and Data risk policies to the respective divisional Managing Directors and Conduct, Compliance and Operational Risk, including, where personal data is concerned, the Group Data Protection Officer. In addition, Group-wide data risk issues and the top data risks that Group faces are discussed at Group Data Committee.
A number of activities support the close monitoring of data risk including: Design and monitoring of data risk appetite metrics, including key risk indicators and key performance indicators
Implementation of effective controls to mitigate data risk, including data privacy, ethics, data management and records management
Horizon scanning for changes in the external environment, including but not limited to changes to laws, rules and regulations
Definition Operational resilience risk is defined as the risk that the Group fails to design resilience into business operations, underlying infrastructure and controls (people, process, technology) so that it is able to withstand external or internal events which could impact the continuation of operations, and/or fails to respond in a way which meets customer and stakeholder expectations and needs when the continuity of operations is compromised.
A weakness in the Group’s cyber or security defences leaving it vulnerable to an attack
Mitigation The Group has increased its focus on operational resilience and has updated its operational resilience strategy to reflect changing priorities of both customers and regulators. The Group is carefully considering the publication of the consultation paper by the FCA, PRA and Bank of England (December 2019). Focus will be given to ensure that the Group’s strategy and approach to operational resilience aligns with industry thinking and expectation. At the core of its approach to operational resilience are the Group’s critical business processes which drive all activity, including further mapping of the processes to identify any additional resilience requirements such as impact tolerances in the event of a service outage. The Group continues to develop playbooks that guide our response to a range of interruptions from internal and external threats and tests these through scenario-based testing and exercising.
Exposures The Group faces significant risks due to the changing regulatory and competitive environments in the financial services sector, with an increased pace, scale and complexity of change. Customers, shareholders and employees expectations continue to evolve, with indications that current societal trends may accelerate, impacting the Group’s ability to respond accordingly, and negatively impacting the Group’s relevance in society.
Monitoring A review of the Group’s emerging and strategic risks, which includes the risks to the current strategic review and the mitigating actions, is undertaken on an annual basis and the findings are reported to the Group and Board Risk Committees.
Credit risk exposures in the Insurance and Wealth division relate mostly to bond and loan assets which, together with some related swaps, are used to fund annuity commitments within Shareholder funds; plus balances held in liquidity funds to manage Insurance division’s liquidity requirements, and exposure to reinsurers.
Frequent and robust Credit risk oversight and assurance: oversight and assurance of credit risk is undertaken by independent credit risk oversight functions operating within the Risk division which are part of the Group’s second line of defence. Their primary objective is to provide reasonable and independent oversight that credit risk is being effectively managed and to ensure that appropriate controls are in place and being adhered to. Group Internal Audit also provides assurance to the Board Audit Committee on the effectiveness of credit risk management controls across the Group’s activities.
In addition, the Group has in place quantitative limits such as maximum limits for individual customer products, the level of borrowing to income and the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are policy limits above which the Group will typically reject borrowing applications. The Group also applies certain criteria that are applicable to specific products for example applications for buy-to-let mortgages.
Forbearance measures consist of concessions towards a debtor that is experiencing or about to experience difficulties in meeting its financial commitments. This can include modification of the previous terms and conditions of a contract or a total or partial refinancing of a troubled debt contract, either of which would not have been required had the debtor not been experiencing financial difficulties.
Customers receiving support from UK government sponsored programmes To assist customers in financial distress, the Group participates in UK government sponsored programmes for households, including the Income Support for Mortgage Interest programme, under which the government pays the Group all or part of the interest on the mortgage on behalf of the customer. This is provided as a government loan which the customer must repay.
The Group’s loan portfolios continue to be well positioned, reflecting the Group’s effective risk management and continue to benefit from a low interest rate environment
In the following statutory basis tables, purchased or originated creditimpaired (POCI) assets include a fixed pool of mortgages that were purchased as part of the HBOS acquisition at a deep discount to face value reflecting credit losses incurred from the point of origination to the date of acquisition. The residual ECL allowance and resulting low coverage ratio on POCI assets reflects further deterioration in the creditworthiness from the date of acquisition. Over time, these POCI assets will run off as the loans redeem, pay down or losses are crystallised.
The Group uses the underlying basis to monitor the creditworthiness of the lending portfolio and related ECL allowances because it provides a better indication of the credit performance of the POCI assets purchased as part of the HBOS acquisition. The underlying basis assumes that the lending assets acquired as part of a business combination were originated by the Group and are classified as either Stage 1, 2 or 3 according to the change in credit risk over the period since origination. Underlying ECL allowances have been calculated accordingly.
Expected credit loss allowances (drawn and undrawn) as a percentage of gross lending (%)1 0.7 0.2 3.8 25.0 1.0
Expected credit loss allowance on drawn balances (4,236) (556) (1,506) (2,174)
2 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
Table 1.9: Reconciliation between statutory and underlying basis of Group gross loans and advances to customers
Table 1.10: Reconciliation between statutory and underlying basis of Group expected credit loss allowances on drawn balances
At 31 December 20183 1 Balances exclude the impact of the HBOS and MBNA related acquisition adjustments.
At 31 December 2018 1 Includes forbearance, client and product-specific indicators not reflected within quantitative PD assessments.
Expected credit loss allowances (drawn and undrawn) as a percentage of gross lending (%)3 0.6 0.2 3.6 21.5 1.0
Expected credit loss allowance on drawn balances (2,667) (590) (1,117) (960)
Expected credit loss allowances (drawn and undrawn) as a percentage of gross lending (%)4 1 Balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
Table 1.18: Reconciliation between statutory and underlying basis of Retail gross loans and advances to customers
At 31 December 20182 1 Includes forbearance and product-specific indicators not reflected within quantitative PD assessments.
Table 1.24: Retail secured loans and advances to customers (statutory basis)
Average loan to value (%)1 35.7 34.9 1 2019 interest only LTVs (loan to value) use Markit’s 2019 Halifax House Price Index; 2018 LTVs have been restated on the same basis.
Following the MBNA integration into Lloyds Banking Group systems the December 2019 disclosure includes £129 million of MBNA forbearance, with December 2018 re-stated to include £128 million of MBNA forbearance (underlying basis).
Total expected credit losses (ECL) as a proportion of loans and advances which are forborne has decreased to 9.3 per cent (31 December 2018: 9.9 per cent).
At 31 December 20182 1 Expected credit losses as a percentage of total loans and advances which are forborne are calculated excluding loans in recoveries for Unsecured (31 December 2019: £82 million; 31 December 2018: £107 million).
Commercial Banking Despite the challenging environment, the overall credit quality of the portfolio and new business remains good. The portfolio continues to benefit from effective risk management and low interest rates. Notwithstanding the current competitive market conditions, the Group is maintaining its prudent, well-defined and controlled through the cycle credit risk appetite
The possibility of a no-deal exit from the European Union remains given the timelines for striking a trade deal. Developments continue to be monitored proactively and various initiatives are in place to mitigate ‘No Deal’ risk to ensure portfolio quality is maintained whilst supporting the Group’s purpose of Helping Britain Prosper
Dynamic internal and external key performance indicators are monitored closely to help identify early signs of deterioration.
Net impairment charge of £306 million compared with a net charge of £71 million in 2018 is largely as a result of gross charges on two corporate cases, rather than any material deterioration in the underlying portfolio. These were partially offset by a net release in Stage 1 and 2 ECL, driven by enhancements to model methodology and data, including the approach to modelling loan amortisation. The impact of this was weighted toward the SME portfolio. Excluding the two large corporate cases, gross charges in 2019 were lower than 2018
Portfolios The SME and Mid Markets portfolios are domestically focused and reflect both our prudent credit risk appetite and the underlying performance of the UK economy
The commercial real estate business within the Group’s Mid Markets and Global Corporates portfolio is focused on clients operating in the UK commercial property market ranging in size from medium-sized private real estate entities up to publicly listed property companies. Credit quality remains good with minimal impairments and stressed loans. Recognising this is a cyclical sector, appropriate caps are in place to control exposure and business propositions continue to be written in line with a prudent, through the cycle risk appetite with conservative LTVs, strong quality of income and proven management teams
2 Excludes Islands Commercial UK Direct Real Estate of £0.35 billion (31 December 2018: £0.45 billion).
The Group engages with regulatory authorities and industry bodies on forthcoming regulatory changes, market reviews and investigations, ensuring programmes are established to deliver new regulation and legislation
Simplified and enhanced conduct policies and procedures in place to ensure appropriate controls and processes that deliver fair customer outcomes, and support market integrity and competition requirements
Enhanced product governance framework to ensure products continue to offer customers fair value, and consistently meet their needs throughout their product life cycle; reviewed and challenged by Group Product Governance Committee (GPGC)
Enhanced complaints management through effectively responding to, and learning from, root causes of complaint volumes and FoS change rates
Continued focus on market conduct and member of the Fixed Income, Currencies and Commodities Markets Standard Board
Table 1.38: Operational risk events by risk category (losses greater than or equal to £10,000), excluding PPI1
The Group continues to lead and support industry wide activity to help address fraud, such as leadership on the design and implementation of the industry code for Authorised Push Payment (APP) fraud, in addition to making more bespoke commitments with key partners, such as the City of London Police. Such initiatives support the continued enhancement of the Group’s control framework, whilst contributing to the raising of standards across the industry. The Group also continues to make material annual investments in both technology and colleague development to help mitigate this growing area of risk
Continued focus on the Group’s culture by developing and delivering initiatives that reinforce the appropriate behaviours which generate the best possible long-term outcomes for customers and colleagues
All material people risk events are escalated in accordance with the Group Operational Risk Policy.
The Group’s defined benefit pension schemes also expose the Group to longevity risk. For further information please refer to the defined benefit pension schemes component of the market risk section and note 36 to the financial statements.
Measurement Insurance underwriting risks are measured using a variety of techniques including stress, reverse stress and scenario testing, as well as stochastic modelling. Current and potential future insurance underwriting risk exposures are assessed and aggregated on a range of stresses including risk measures based on 1-in-200 year stresses for the Insurance business' regulatory capital assessments and other supporting measures where appropriate, including those set out in note 33 to the financial statements.
The Group measures both its capital requirements and the amount of capital resources it holds to meet those requirements through applying the regulatory framework defined by the Capital Requirements Directive and Regulation (CRD IV), as amended by provisions of the revised Capital Requirements Regulation (CRR II) that came into force in June 2019. Directive requirements are implemented in the UK by the Prudential Regulation Authority (PRA) and supplemented through additional regulation under the PRA Rulebook. Further details of the regulatory capital and leverage frameworks that the Group is subject to, including the means by which its capital and leverage requirements and capital resources are calculated, will be provided in the Group’s Pillar 3 Report.
Additional minimum requirements under Pillar 2A are set by the PRA as a firm-specific Individual Capital Requirement (ICR) reflecting a point in time estimate, which may change over time, of the minimum amount of capital that is needed by the Group to cover risks that are not fully covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered at all by Pillar 1, such as pensions and interest rate risk in the banking book (IRRBB). The Group’s Pillar 2A capital requirement at 31 December 2019 was 4.6 per cent of risk-weighted assets, of which 2.6 per cent must be met by CET1 capital.
Although the Group is not currently classified as a global systemically important institution (G-SII) under the Capital Requirements Directive, it has been classified as an ‘other’ systemically important institution (O-SII) by the PRA. The O-SII buffer is set to zero in the UK
The systemic risk buffer (SRB) came into force for UK ring-fenced banks during 2019, with the PRA setting a buffer of 2.0 per cent of riskweighted assets for the RFB sub-group. The size of the buffer applied to the RFB sub-group is dependent upon its total assets. The SRB equates to 1.7 per cent of risk-weighted assets at Group level, with the difference reflecting the risk-weighted assets of the Group that are not in the Ring-Fenced Bank sub-group and for which the SRB does not therefore apply
All buffers are required to be met with CET1 capital. Usage 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 other regulatory buffers, as referenced above) would give rise to mandatory restrictions upon any discretionary capital distributions.
Lloyds Banking Group plc acts as a holding company which also issues capital and other securities to capitalise and fund the activities of the Group. The profitability of the holding company, and its ability to sustain dividend payments, is therefore dependent upon the continued receipt of dividends from its main operating subsidiaries, including Lloyds Bank plc (the Ring-Fenced Bank), Lloyds Bank Corporate Markets plc (the non-ring-fenced bank), LBG Equity Investments Limited and Scottish Widows Group Limited (the insurance business). The principal operating subsidiary is Lloyds Bank plc which, at 31 December 2019, had a consolidated CET1 capital ratio of 14.3 per cent (31 December 2018: 14.9 per cent). A number of Group subsidiaries, principally those with banking and insurance activities, are subject to regulatory capital requirements which require minimum amounts of capital to be maintained relative to their size and risk. The Group actively manages the capital of its subsidiaries, which includes monitoring the regulatory capital ratios for its banking and insurance subsidiaries and, on a consolidated basis, the RFB sub-group against approved risk appetite levels. The Group operates a formal capital management policy which requires all subsidiary entities to remit surplus capital to their parent companies.
In addition, CET1 capital cannot be used to meet both MREL requirements and capital or leverage buffers.
The accrual for foreseeable dividends reflects the recommended final ordinary dividend of 2.25 pence per share.
Deconsolidation of instruments issued by insurance entities1 (1,796) (1,767) (1,796) (1,767)
Adjustments for transitional limit and non-eligible instruments 2,278 1,504 (2,204) (1,266)
3 The common equity tier 1 ratio is 13.8 per cent on a pro forma basis reflecting the dividend paid up by the Insurance business in February 2020 in relation to its 2019 earnings (31 December 2018: 13.9 per cent pro forma, incorporating the effects of the share buyback announced in February 2019).
Other movements 256 – – 256 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. The £450 million of dividends received from Insurance during the year include £350 million in respect of their 2018 full year ordinary dividend and £100 million in respect of their 2019 interim ordinary dividend.
CET1 capital resources have reduced by £2,423 million over the year, primarily reflecting: the interim dividend paid in September 2019 and the accrual for the 2019 full year ordinary dividend the extent of the 2019 share buyback programme completed during the year prior to the cancellation of the remaining 2019 buyback programme in September 2019 the impact of additional pension contributions made during the year the increase in other intangible assets, excess expected losses and significant investments in financial sector entities offset in part by profit generation during the year (net of PPI provision charges), the receipt of dividends paid by the Insurance business during the year and movements in treasury shares and employee share schemes
Amortised portion of eligible tier 2 instruments issued by Lloyds Banking Group plc 24 –
3 The MREL ratio is 32.6 per cent on a pro forma basis upon recognition of the dividend paid up by the Insurance business in February 2020 in relation to its 2019 earnings (31 December 2018: 32.6 per cent pro forma).
3 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital. Significant investments primarily arise from investments in the Group’s Insurance business.
Asset quality increase of £1.5 billion includes increases in the valuation of equity investments as well as movements due to changes in borrower risk, including changes in the macro-economic environment
Acquisition and disposals increase of £1.3 billion reflects the purchase of the Tesco Bank UK prime residential mortgage portfolio
Market risk, risk-weighted assets reductions of £0.3 billion were driven by refinements to internal models, a change in the business model following ring-fencing and movement in risk levels.
Leverage ratio Analysis of leverage movements The Group’s fully loaded UK leverage ratio reduced to 5.1 per cent, primarily driven by the reduction in tier 1 capital. This was partially offset by the £8.9 billion reduction in the leverage exposure measure which largely reflected the reduction in the derivatives exposure measure and off-balance sheet items.
The derivatives exposure measure, representing derivative financial instruments per the balance sheet net of deconsolidation and derivatives adjustments, reduced by £3.6 billion during the period, predominantly reflecting a move from a collateralised-to-market to a settled-to-market approach for swaps transacted through a central counterparty.
The Group also participates in the UK wide Annual Cyclical Scenario stress tests run by the Bank of England. In the 2019 Bank of England stress test the Group exceeded the capital and leverage hurdles on a transitional basis after the application of management actions and was not required to take any action as a result of the test.
Measurement Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturities with behavioural overlays as appropriate. Note 53 on page 289 sets out an analysis of assets and liabilities by relevant maturity grouping. The Group undertakes quantitative and qualitative analysis of the behavioural aspects of its assets and liabilities in order to reflect their expected behaviour.
The Group can monetise liquid assets quickly, either through the repurchase agreements (repo) market or through outright sale. In addition, the Group has pre-positioned a substantial amount of assets at the Bank
The Group continues to access wholesale funding markets across a wide range of products, currencies and investors to maintain a stable and diverse source of funds. In 2019, the Group has continued with this approach to funding, including capital and funding from the holding company, Lloyds Banking Group plc, as needed to transition towards final UK Minimum Requirements for Own Funds and Eligible Liabilities (MREL). The Group will continue to issue funding trades from Lloyds Bank plc, the ringfenced bank operating company, across senior unsecured, covered bonds, ABS and RMBS. In 2019, the Group launched an operating company funding programme for LBCM, the non-ring-fenced bank, and have since issued a number of trades for this entity including an inaugural five year £500 million senior unsecured public benchmark transaction. The maturity of the Funding for Lending and Term Funding Schemes are fully factored into the Group’s funding plans.
The Board and the Group Asset and Liability Committee (GALCO) monitor and manage total balance sheet encumbrance using a number of risk appetite metrics. At 31 December 2019, the Group had £60.6 billion (31 December 2018: £53.4 billion) of externally encumbered on-balance sheet assets with counterparties other than central banks. The increase in encumbered assets was primarily driven by an increase in covered bond issuance. The Group also had £639.5 billion (31 December 2018: £584.3 billion) of unencumbered on-balance sheet assets, and £133.7 billion (31 December 2018: £159.8 billion) of pre-positioned and encumbered assets held with central banks, the reduction in the latter was primarily driven by a decrease in encumbrance relating to FLS and TFS maturities in the year. Primarily, the Group encumbers mortgages, unsecured lending and credit card receivables through the issuance programmes and tradable securities through securities financing activity. The Group mainly positions mortgage assets at central banks.
Cash and balances at central banks – – – – – 49,270 – 5,860 55,130 55,130
Derivative financial instruments – – – – – – – 26,369 26,369 26,369
Cash and balances at central banks – – – – – 49,645 – 5,018 54,663 54,663
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; investments in joint ventures and associates; assets arising from reinsurance contracts held and other assets.
For further information on corporate governance see pages 70 to 93.
Loans and advances to customers 494,988 – 494,948 40 Interest rate
Financial assets at fair value through other comprehensive income 25,092 – 25,092 – Interest rate, foreign exchange, credit spread
Equity risk Equity risk arises primarily from three different sources; the Group’s private equity investments held by Lloyds Development Capital within the Equities sub-group the Group’s strategic equity holdings, for example Visa Inc Preference Shares, now held in the Equities sub-group a small exposure to Lloyds Banking Group share price through deferred shares and deferred options granted to employees as part of their benefits package
Interest income sensitivity: this measures the 12 month impact on future net interest income arising from various economic scenarios. These include instantaneous 25, 100 and 200 basis point parallel shifts in all yield curves and the five Group economic scenarios (subject to an appropriate floor). These scenarios are reviewed every year and are designed to replicate severe but plausible economic events, capturing risks that would not be evident through the use of parallel shocks alone such as basis risk and steepening or flattening of the yield curve. An additional negative rates scenario is also used for information purposes where all floors are removed; however this is not measured against the limit framework.
Unlike the market value sensitivities, the interest income sensitivities incorporate additional behavioural assumptions as to how and when individual products would reprice in response to changing rates. In addition a dynamic balance sheet is used which includes the run-off of current assets and liabilities and the addition of planned new business.
Structural hedge limits: the structural hedging programme managing interest rate risk in the banking book relies on a number of assumptions made around customer behaviour. A material mismatch between assumptions and reality could lead to a deterioration in earnings. In order to monitor this risk a number of metrics are in place to enhance understanding of risks within this portfolio.
Table 1.56: Group Banking activities: market value sensitivity to a steepening and flattening of the yield curve
Defined benefit pension schemes Exposures The Group’s defined benefit pension schemes are exposed to significant risks from their assets and liabilities. The liability discount rate exposes the
Group to interest rate risk and credit spread risk, which are partially offset by fixed interest assets (such as gilts and corporate bonds) and swaps. Equity and alternative asset risk arises from direct asset holdings. Scheme membership exposes the Group to longevity risk.
Measurement Management of the schemes’ assets is the responsibility of the Trustees of the schemes who are responsible for setting the investment strategy and for agreeing funding requirements with the Group. The Group will be liable for meeting any funding deficit that may arise. As part of the triennial valuation process, the Group will agree with the Trustees a funding strategy to eliminate the deficit over an appropriate period.
Interest rate risk arises through holding credit and interest assets mainly in the annuity book and also to cover general insurance liabilities, capital requirements and risk appetite
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 premium, as applied to profit before tax are set out in note 33 on page 252.
Trading market risk measures are applied to all of the Group’s regulatory trading books and they include daily VaR (table 1.59), sensitivity based measures, and stress testing calculations.
All risk factors before diversification 1.2 1.3 2.2 0.9 1.2 1.3 3.0 0.9
Trading book VaR (1-day 99 per cent) is compared daily against both hypothetical and actual profit and loss. The 1-day 99 per cent VaR chart for Lloyds Banking Group can be found in the Group’s Pillar 3 Report.
Mitigation The level of exposure is controlled by establishing and communicating the approved risk limits and controls through policies and procedures that define the responsibility and authority for risk taking. Market risk limits are clearly and consistently communicated to the business. Any new or emerging risks are brought within risk reporting and defined limits.
Models are defined as quantitative methods that process input data into quantitative outputs, or qualitative outputs (including ordinal letter output) which have a quantitative measure associated with them. Model Governance Policy is restricted to specific categories of application of models, principally financial risk, treasury and valuation, with certain exclusions, such as prescribed calculations and project appraisal calculations.
Measurement The Group risk appetite framework is the key component for measuring the Group’s model risk. Reported monthly to the Group Risk Committee and Board, focus is placed on the performance of the Group’s most material models.
Monitoring The Group Model Governance Committee is the primary body for overseeing model risk. Policy requires that key performance indicators are monitored for every model to ensure they remain fit for purpose and all issues are escalated appropriately. Material model issues are reported to Group and Board Risk Committees monthly with more detailed papers as necessary to focus on key issues.
Notes to the consolidated financial statements 206 1. Basis of preparation 2. Accounting policies 3. Critical accounting judgements and estimates 4. Segmental analysis 5. Net interest income 6. Net fee and commission income 7. Net trading income 8. Insurance premium income 9. Other operating income 10. Insurance claims 11. Operating expenses 12 Auditors’ remuneration 13. Impairment 14. Tax expense 15. Earnings per share 16. Financial assets at fair value through profit or loss 17. Derivative financial instruments 18. Financial assets at amortised cost 19. Finance lease receivables 20. Allowance for impairment losses 21. Financial assets at fair value through other comprehensive income 22. Available-for-sale financial assets 23. Acquisitions 24. Goodwill 25. Value of in-force business 26. Other intangible assets 27. Property, plant and equipment 28. Other assets 29. Financial liabilities at fair value through profit or loss 30. Debt securities in issue 31. Securitisations and covered bonds 32. Liabilities arising from insurance contracts and participating investment contracts 33. Life insurance sensitivity analysis 34. Liabilities arising from non-participating investment contracts 35. Other liabilities 36. Retirement benefit obligations 37. Deferred tax 38. Other provisions 39. Subordinated liabilities 40. Share capital 41. Share premium account 42. Other reserves 43. Retained profits 44. Other equity instruments 45. Dividends on ordinary shares 46. Share-based payments 47. Related party transactions 48. Contingent liabilities, commitments and guarantees 49. Structured entities 50. Financial instruments 51. Transfers of financial assets 52. Offsetting of financial assets and liabilities 53. Financial risk management 54. Consolidated cash flow statement 55. Adoption of IFRS 16 56. Future accounting developments
Report on the audit of the financial statements Opinion In our opinion, the financial statements of Lloyds Banking Group plc (the Group) and the parent company financial statements (the “financial statements”): – give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2019 and of the Group’s profit and the Group’s and the parent company’s cash flows for the year then ended; – have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and, as regards the parent company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and – have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.
Certain required disclosures have been presented elsewhere in the Annual Report, rather than in the notes to the financial statements. These are crossreferenced from the financial statements and are identified as audited.
Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
The key audit matters which in our professional judgement were of most significance in the audit and involved the greatest allocation of our efforts and resources: – Allowance for Expected Credit Losses (ECL) (Group) – Payment Protection Insurance (PPI) (Group) – Insurance actuarial assumptions (Group) – Defined benefit obligation (Group) – Valuation of certain level 3 financial instruments (Group) – Hedge accounting (Group) – Privileged access to IT systems (Group and parent company)
Refer to page 85 (Audit Committee report), page 206 (Note 2: Accounting policies), page 214 (Note 3: Critical accounting judgements and estimates) and page 238 (Note 20: Allowance for impairment losses).
The Group’s economics team develops future economic scenarios. The base case economic scenario is determined through the application of judgement, and the outer scenarios are generated and selected through the use of a statistical model. The four economic scenarios represent distinct parts of the loss distribution which is developed based on historical experience. The scenarios, together with their weightings, are provided to the Retail and Commercial Banking divisions for incorporation into the calculation of the allowance for ECL.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 191
We performed testing over the measurement of the overlays in place, focusing on the larger overlays and those which we considered to represent the greatest level of audit risk (e.g. overlays relating to past term interest-only exposures). We assessed the appropriateness of methodologies used to determine and quantify the overlays required and the reasonableness of key assumptions.
The allowance for ECL relating to credit impaired loans and advances (referred to herein also as being in Stage 3) in the Commercial Banking division is primarily estimated on an individual basis. Judgement is required to determine when a loan is considered to be credit impaired, and then to estimate the expected future cash flows related to that loan under multiple weighted scenario outcomes. An allowance for ECL is determined for Commercial Banking loans and advances which are not classified as being credit impaired at the reporting date (referred to as being in Stages 1 and 2) using impairment models based on key assumptions including probability of default and loss given default. Management apply overlays to the modelled output to address methodology and data limitations, or risks not captured by the model.
For the Stage 3 allowance, we focused on: – The controls in place for the identification of credit impaired loans and subsequent transfer of these cases to the credit loss assessment team; and – The review, challenge and approval processes that are in place to assess the overall reasonableness of the allowance for ECL.
Payment Protection Insurance (PPI) Group Refer to page 85 (Audit Committee report), page 206 (Note 2: Accounting policies), page 214 (Note 3: Critical accounting judgements and estimates) and page 260 (Note 38: Other provisions). Provisions reflecting the Group’s best estimate of present obligations relating to anticipated customer redress payments, operational costs and regulatory costs as a result of PPI continues to be significant and therefore represent a key audit matter.
Determining the measurement of provisions requires a number of assumptions which are made using a significant degree of management judgement. Key assumptions include the conversion ratio of PPI information requests to complaints, related redress costs and operational costs.
We independently recalculated the provision and compared our results to management’s model output. We performed sensitivity analysis on the assumptions used within the model to inform our risk assessment of which were significant. We performed sample testing over the data used to inform the key assumptions within the model.
Given the inherent uncertainty in the estimation of the PPI provision and its judgemental nature, we evaluated the disclosures made in the financial statements. In particular, we focused on challenging management around whether the disclosures were sufficiently clear in highlighting significant uncertainties and the sensitivity of the provision to changes in the underlying assumptions.
Our actuarial specialists assessed the reasonableness of the actuarial assumptions, including considering and challenging management’s rationale for judgements applied and any reliance placed on industry information. Where appropriate, assumptions were benchmarked by comparing to the Group’s peers in the insurance market whilst overlaying an understanding of the specific policy features of the Group’s business.
The valuation of the retirement benefit obligations in the Group are determined with reference to various actuarial assumptions including discount rate, rate of inflation and mortality rates. Due to the size of these schemes, small changes in these assumptions can have a material impact on the estimated defined benefit obligation.
With the support of our valuation’s specialists, we performed the following further testing: – Evaluating the appropriateness of management’s valuation methodologies and testing their application; – Evaluating key inputs and assumptions, with reference to matters including historic performance, market information and perspectives, servicer and trustee reports and investment prospectuses; and – Assessing the reasonableness of the valuations and performing sensitivity analyses over them.
Based on the evidence obtained, we determined the methodologies, inputs and assumptions to be appropriate.
Refer to page 206 (Note 2: Accounting policies) and page 289 (Note 53: Financial risk management).
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 hedging strategy and related documentation prior to the implementation of new hedges.
As part of our audit work in prior periods, we identified control matters in relation to the management of IT privileged access to IT platforms supporting applications in-scope for financial reporting. While there is an ongoing programme of activities to address such control matters across the IT estate, the fact that these were open during the period meant there was a risk that automated functionality, reports and data from the systems were not reliable.
As part of our review, we identified a number of IT privileged accounts that had not been onboarded to the privileged access restriction tool during the period.
Consequently, we performed an assessment of each of the areas within our audit approach where we place reliance on automated functionality and data within IT systems. In each case we identified a combination of mitigating controls, performed additional audit procedures and assessed other mitigating factors in order to respond to the impact on our overall audit approach.
How we determined it 5 per cent of the adjusted profit before tax. Profit was adjusted to remove the effects of certain items which were considered to have a disproportionate impact.
We have selected total assets as an appropriate benchmark for parent company materiality. Profit based benchmarks are not considered the most appropriate for parent company materiality as the Group is not required to disclose a parent company income statement. Where the calculated parent company materiality from total assets exceeds the Group overall materiality level, the parent company overall materiality has been restricted to equal the Group overall materiality level.
We are required to report if we have anything material to add or draw attention to in respect of the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to the Group’s and the parent company’s ability to continue as a going concern over a period of at least twelve months from the date of approval of the financial statements.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 199 £ million £ million
Gains and losses attributable to own credit risk: (Losses) gains before tax (419) 533 (55)
Total comprehensive income for the year 1,880 4,393 3,254 1 Restated, see note 1 .
Consolidated balance sheet at 31 December 200 Lloyds Banking Group Annual Report and Accounts 2019
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 201
The directors approved the consolidated financial statements on 19 February 2020.
Profit for the year – – 2,925 2,925 – 81 3,006
Issue of ordinary shares 107 – – 107 – – 107
Other employee award schemes – – 165 165 – – 165
Post-retirement defined benefit scheme remeasurements, net of tax – – 120 120 – – 120
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: Gains and losses attributable to own credit risk, net of tax – – 389 389 – – 389
Movements in cash flow hedging reserve, net of tax – (731) – (731) – – (731)
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 205
Proceeds from sale and maturity of financial assets 9,631 26,806 18,675
Net cash (used in) provided by investing activities (2,130) 11,921 6,808
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, financial assets measured at fair value through other comprehensive income, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. As stated on page 96, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2019 and which have not been applied in preparing these financial statements are given in note 56.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 207
(E) Financial assets and liabilities On initial recognition, financial assets are classified as measured at amortised cost, fair value through other comprehensive income or fair value through profit or loss, depending on the Group’s business model for managing the financial assets and whether the cash flows represent solely payments of principal and interest. The Group assesses its business models at a portfolio level based on its objectives for the relevant portfolio, how the performance of the portfolio is managed and reported, and the frequency of asset sales. Financial assets with embedded derivatives are considered in their entirety when considering their cash flow characteristics. The Group reclassifies financial assets when and only when its business model for managing those assets changes. A reclassification will only take place when the change is significant to the Group’s operations and will occur at a portfolio level and not for individual instruments; reclassifications are expected to be rare. Equity investments are measured at fair value through profit or loss unless the Group elects at initial recognition to account for the instruments at fair value through other comprehensive income. For these instruments, principally strategic investments, dividends are recognised in profit or loss but fair value gains and losses are not subsequently reclassified to profit or loss following derecognition of the investment.
(2) Financial assets measured at fair value through other comprehensive income Financial assets that are held to collect contractual cash flows and for subsequent sale, where the assets’ cash flows represent solely payments of principal and interest, are recognised in the balance sheet at their fair value, inclusive of transaction costs. Interest calculated using the effective interest method and foreign exchange gains and losses on assets denominated in foreign currencies are recognised in the income statement. All other gains and losses arising from changes in fair value are recognised directly in other comprehensive income, until the financial asset is either sold or matures, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement other than in respect of equity shares, for which the cumulative revaluation amount is transferred directly to retained profits. The Group recognises a charge for expected credit losses in the income statement (see (H) below) . As the asset is measured at fair value, the charge does not adjust the carrying value of the asset, it is reflected in other comprehensive income.
(3) Financial instruments measured at fair value through profit or loss Financial assets are classified at fair value through profit or loss where they do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income or where they are designated at fair value through profit or loss to reduce an accounting mismatch. All derivatives are carried at fair value through profit or loss.
Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital accretion or both, primarily within the life insurance funds. In accordance with the guidance published by the Royal Institution of Chartered Surveyors, investment property is carried at fair value based on current prices for similar properties, adjusted for the specific characteristics of the property (such as location or condition) . If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections or recent prices in less active markets. These valuations are reviewed at least annually by independent professionally qualified valuers. Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be valued at fair value.
(1) As lessor Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the lessee but not necessarily legal title. All other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable, net of allowances for expected credit losses, within loans and advances to banks and customers. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance lease income. Finance lease income is recognised in interest income over the term of the lease using the net investment method (before tax) so as to give a constant rate of return on the net investment in the leases. Unguaranteed residual values are reviewed regularly to identify any impairment.
(K) Employee benefits Short-term employee benefits, such as salaries, paid absences, performance-based cash awards and social security costs are recognised over the period in which the employees provide the related services.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 211
Liabilities Changes in the value of liabilities are recognised in the income statement through insurance claims. – Insurance and participating investment contracts in the Group’s with-profit funds
Costs which are directly attributable and incremental to securing new non-participating investment contracts are deferred. This asset is subsequently amortised over the period of the provision of investment management services and its recoverability is reviewed in circumstances where its carrying amount may not be recoverable. If the asset is greater than its recoverable amount it is written down immediately through fee and commission expense in the income statement. All other costs are recognised as expenses when incurred.
The Group’s contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers are measured at fair value at the date of acquisition. The resulting asset is amortised over the estimated lives of the contracts. At each reporting date an assessment is made to determine if there is any indication of impairment. Where impairment exists, the carrying value of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 213
(4) Reinsurance Contracts entered into by the Group with reinsurers under which the Group is compensated for benefits payable on one or more contracts issued by the Group are recognised as assets arising from reinsurance contracts held. Where the underlying contracts issued by the Group are classified as insurance contracts and the reinsurance contract transfers significant insurance risk on those contracts to the reinsurer, the assets arising from reinsurance contracts held are classified as insurance contracts. Where the underlying contracts issued by the Group are classified as non-participating investment contracts and the reinsurance contract transfers financial risk on those contracts to the reinsurer, the assets arising from reinsurance contracts held are classified as nonparticipating investment contracts.
Lifetime of an exposure The PD of a financial asset is dependent on its expected life. A range of approaches, segmented by product type, has been adopted by the Group to estimate a product’s expected life. These include using the full contractual life and taking into account behavioural factors such as early repayments and refinancing. For non-revolving retail assets, the Group has assumed the expected life for each product to be the time taken for all significant losses to be observed. For retail revolving products, the Group has considered the losses beyond the contractual term over which the Group is exposed to credit risk. For commercial overdraft facilities, the average behavioural life has been used. Changes to the assumed expected lives of the Group’s assets could impact the ECL allowance recognised by the Group.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 215
Note 3: Critical accounting judgements and estimates continued at 10 per cent. The choice of alternative scenarios and scenario weights is a combination of quantitative analysis and judgemental assessment to ensure that the full range of possible outcomes and material non-linearity of losses are captured. A committee under the chairmanship of the Chief Economist meets quarterly, to review and, if appropriate, recommend changes to the economic scenarios to the Chief Financial Officer and Chief Risk Officer. Findings dealing with all aspects of the expected credit loss calculation are presented to the Group Audit Committee.
Commercial real estate price growth (0.2) 1.8 (3.8) (7.1) 0.4 5.3 (4.7) (6.4)
Commercial real estate price growth 0.1 10.4 (0.6) (1.1) 0.1 26.9 (0.5) (0.5)
The table below shows the Group’s ECL for the upside and downside scenarios using a 100 per cent weighting, with stage allocation based on each specific scenario.
The impact of changes in the UK unemployment rate and House Price Index (HPI) have also been assessed. Although such changes would not be observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives insight into the sensitivity of the Group’s ECL to changes in these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged. The changes to HPI and the unemployment rate have been phased in to the forward-looking economic outlook over three years.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 217
Determining the amount of the provisions, which represent management’s best estimate of the cost of settling these issues, requires the exercise of significant judgement and estimate. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by regulators, and to estimate the number of future complaints, the extent to which they will be upheld, the average cost of redress and the impact of legal decisions that may be relevant to claims received. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against actual experience and other relevant evidence and adjustments made to the provisions where appropriate.
Other includes 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.
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 function 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 function. 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 – – 825 – 825
Other segment items: Investments in joint ventures and associates at end of year 4 – – 300 304 1 Net of profits on disposal of operating lease assets of £41 million.
2 Net of profits on disposal of operating lease assets of £32 million.
Interest and similar income: Loans and advances to customers 3.17 3.17 3.16 15,790 15,078 14,712
Loans and advances to banks 0.78 0.84 0.40 514 565 271
Total interest and similar income1 2.83 2.82 2.73 16,861 16,349 16,006
Customer deposits, excluding liabilities under sale and repurchase transactions 0.59 0.53 0.49 (2,015) (1,812) (1,721)
Amounts payable to unitholders in consolidated open-ended investment vehicles4 13.64 (6.07) 9.15 (1,822) 844 (1,435)
4 Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in other liabilities and the movement in these interests in interest expense.
Included within interest and similar income is £198 million (2018: £227 million; 2017: £179 million) in respect of credit-impaired financial assets. Net interest income also includes a credit of £608 million (2018: credit of £701 million; 2017: credit of £651 million) transferred from the cash flow hedging reserve (see note 42) .
Note 6: Net fee and commission income 2019 £m 2018 £m 2017 £m
Note 7: Net trading income 2019 £m 2018 £m 2017 £m
Regulatory provisions: Payment protection insurance provision (note 38) 2,450 750 1,650
Total fees payable to the Company’s auditors by the Group 26.9 26.7 27.9
The following types of services are included in the categories listed above: Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory filings. Other services supplied pursuant to legislation relate primarily to costs incurred in connection with client asset assurance and with the SarbanesOxley Act requirements associated with the audit of the Group’s financial statements filed on its Form 20-F.
Reviews of the financial position of corporate and other borrowers 0.2 0.4 0.2
In respect of: Loans and advances to banks 1 – – – 1
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 227
Other changes in credit quality Changes in loss allowance as a result of movements in risk parameters that reflect changes in customer quality, but which have not resulted in a transfer to a different stage. This also contains the impact on the impairment charge as a result of write-offs and recoveries, where the related loss allowances are reassessed to reflect ultimate realisable or recoverable value.
UK corporation tax: Current tax on profit for the year (1,389) (1,280) (1,240)
Deferred tax: Adjustments in respect of prior years 139 (29) (48)
(B) Factors affecting the tax expense for the year The UK corporation tax rate for the year was 19.0 per cent (2018: 19.0 per cent; 2017: 19.25 per cent) . An explanation of the relationship between tax expense and accounting profit is set out below: 2019 £m 20181 £m 20171 £m
Remeasurement of deferred tax due to rate changes (6) 32 (9)
Policyholder deferred tax asset in respect of life assurance expenses (53) 73 –
Note 15: Earnings per share 2019 £m 20181 £m 20171 £m
Weighted average number of ordinary shares in issue – basic 70,603 71,638 71,710
Weighted average number of ordinary shares in issue – diluted 71,285 72,279 72,393
Loans and advances to customers 10,422 10,654 21,076 26,886 10,964 37,850
Bank and building society certificates of deposit – 984 984 – 1,105 1,105
The Group holds derivatives as part of the following strategies: – Customer driven, where derivatives are held as part of the provision of risk management products to Group customers; – To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in note 53; and – Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
Amounts reclassified from reserves to income statement as: Gain (loss) recognised in other comprehensive income
There was a gain of £101 million (2018: nil) reclassified from the cash flow hedging reserve for which hedge accounting had previously been used but for which the hedged future cash flows are no longer expected to occur.
Financial assets that have been written off during the year (1) – (1)
Movements in Retail mortgage balances were as follows: Retail mortgages £m £m £m
Financial assets that have been written off during the year (35) (54) (89)
Financial assets that have been written off during the year (1,576) – (1,576)
Financial assets that have been written off during the year (29) – (29)
Total loans and advances to customers 257,760 13,428 1,275 15,313 287,776
Note 19: Finance lease receivables The Group's finance lease receivables are classified as loans and advances to customers and accounted for at amortised cost. The balance is analysed as follows: 2019 £m 2018 £m