The 2015 Annual Report and Accounts incorporates the strategic report and the consolidated financial statements, both of which have been approved by the Board of Directors.
On behalf of the Board Lord Blackwell Chairman Lloyds Banking Group 24 February 2016
Reporting Just as we operate in an integrated way, we aim to report in an integrated way. We have taken further steps towards this goal this year. As well as reporting our financial results, we also report on our approach to operating responsibly and take into account relevant economic, political, social, regulatory and environmental factors. You can download our full reporting suite of documents online.
This Annual Report and Accounts contains forward looking statements with respect to certain of 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 292.
We are meeting our customers’ needs by creating a simpler, more responsive organisation. We are investing in our digital capability and maintaining a comprehensive branch network.
Supporting of new business start-ups in the UK via our Retail Business Banking Segment
Delivering sustainable growth As the UK economy continues to recover, we are further developing Groupwide growth opportunities within our prudent risk appetite. We are maintaining market leadership in our main retail businesses, making the most of our multi-brand, multi-channel strategy whilst also focusing on areas where we can grow.
Read more about our divisions on page 42 or visit www.lloydsbankinggroup.com 42
Strategic development We remain committed to our clear strategy of building Lloyds Banking Group as a highly focused, low risk and low cost UK retail and commercial bank. In an uncertain world we are reinforced in our belief that this focus provides the best opportunity to build a strong and successful organisation that can deliver sustainable shareholder value based on outstanding customer service. At the same time we recognise that technology is transforming banking and the way our customers interact with us, and our core processes and our competitive landscape are being substantially reshaped. In addressing these challenges we believe that our customer focus and simple business model will continue to provide opportunities for competitive advantage.
The strength of our Group comes from our rich and diverse heritage, our iconic brands, and a strong commitment to our core purpose of helping Britain prosper. We believe we are in a unique position to use our scale, reach and influence to help improve the economic and social issues facing people, businesses and communities through our Helping Britain Prosper Plan.
Our shared goal for our milestone year was to make it our greatest ever year for supporting local communities. In response our colleagues completed more volunteering hours than ever and, in our first year of partnership with BBC Children in Need, we raised £5 million, more than double our original target of £2 million.
There are a number of regulatory developments where the impact on us is still unclear including the Fair and Effective Markets Review, the Senior Managers and Certification Regime and changes to the individual and corporate pensions market; but overall, we believe our simple, low risk, UK focused strategy puts us in a strong position to adapt to these regulatory changes.
Viability statement The Board fulfilled its obligation to assess the Group’s longer term viability during the year. Our viability statement can be found on page 108.
ESTABLISHMENT OF A NEW RESPONSIBLE BUSINESS COMMITTEE In 2015, an important new Board Committee was established to focus on responsible business. The Committee provides oversight of Group strategy and plans for delivering our aspirations to be a leader in responsible business.
The Committee also provides oversight and challenge to executive management on those activities which impact on our reputation as a trusted, responsible business.
We want to ensure colleagues are empowered, inspired and incentivised to do the right thing for customers. Colleagues are rewarded in a way that recognises the very highest of expectations in respect of conduct and customer treatment, and when behaviour falls below acceptable standards, it is important that accountability is taken collectively as well as individually. This is particularly the case when dealing with, and learning from, mistakes of the past.
The Group has had a successful year, with a number of strategic milestones achieved. Nevertheless, despite better underlying results in 2015, the Group’s total bonus outcome has reduced year-on-year to £353.7 million. This includes a 26 per cent collective performance adjustment being applied to the total bonus outcome to reflect the additional conductrelated provisions which impacted negatively on profitability and shareholder returns. As a percentage of pre-bonus underlying profit, the total bonus outcome has decreased to 4.2 per cent in 2015. Cash bonuses are capped at £2,000 with additional amounts paid in shares and subject to deferral and performance adjustment. Average bonus awards across all our colleagues are approximately £4,600.
At the same time I believe we must also continue to focus on rebuilding the trust of our customers, regulators and politicians. Businesses are increasingly – and rightly – judged on how they demonstrate and communicate their broader value to society. Securing that position of trust, where we are doing the right things for our customers, the economy and society at large, is essential to a successful and sustainable future.
In our milestone year we have made a strong start to the next phase of our strategy and delivered a robust financial performance.
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Strategic progress In 2015, we have made good progress in the three strategic objectives that we outlined at our strategic update in October 2014: creating the best customer experience; becoming simpler and more efficient; and delivering sustainable growth.
Dividend In line with our progressive and sustainable ordinary dividend policy, the Board has recommended a final ordinary dividend of 1.5 pence, taking the total ordinary dividend declared for the year to 2.25 pence per ordinary share.
Remuneration aligned with performance To ensure our employees act in the best interests of customers and shareholders, remuneration at all levels of the organisation is aligned to the strategic development and financial performance of the business and also takes into account specific risk management controls. Variable remuneration including bonuses for all staff, including our Executive Directors, is based on the performance of the individual, the business area and the Group as a whole. Performance is assessed against a balanced scorecard of objectives across five areas (customer, people, risk, building the business, financial) which are reviewed on a regular basis.
Our asset quality ratio continued to improve, reflecting our low risk position and the current interest rate environment. 1 Excluding TSB.
Our share price fell by 4 per cent in 2015, broadly in line with the FTSE100 but was better than the UK banking sector, with TSR also reflecting the benefit of our return to dividends. Share price performance and TSR in the last three years remain significantly ahead of the sector and the market.
Read more about our financial performance on page 35 or online at www.lloydsbankinggroup.com 35
Helping Britain Prosper Plan 2015 This is the second year we have tracked and reported performance against all our Prosper Plan metrics and targets. NUMBER
We’ll take a lead in financial inclusion to enable all individuals to access and benefit from the products and services they need to make the most of their money 4 l
Our performance in 2015 Overall, in 2015 the Group performed well against the 28 metrics in the Plan and achieved 96 per cent of the targets we set for the year.
Reflecting the pace of digital adoption, our number of active digital customers increased in the year, from 10.4 million to 11.5 million.
By becoming the best bank for customers we believe we can help Britain prosper and deliver superior and sustainable returns for our shareholders
Our strategy We are a leading financial services group focused on becoming the best bank for customers whilst delivering superior and sustainable returns for shareholders through a simple, low risk, UK focused, retail and commercial banking business model.
Outlook for 2016 Despite challenges from slowing emerging markets and rising US interest rates, the most likely outlook for the UK in 2016 is another year similar to 2015. Consensus expectations are for gdp growth of 2.2 per cent, CPI inflation rising to 1.1 per cent by the end of the year, house prices up 5 per cent, and another year without a rise in Bank Rate. As the recovery matures, borrowing is rising and domestic consumption will be the primary driver of economic growth. Lending has been subdued for five years and corporate and household balance sheets have strengthened, so that credit has room to grow without threatening macroeconomic stability. Low inflation will keep real household incomes growing, sustaining economic growth despite headwinds from the elevated level of sterling, weak manufacturing activity, tightening benefit payments and uncertainty over the future of the UK’s membership of the EU.
There are a number of other regulatory changes that have been implemented or developed through 2015, several of which are relevant to our business, including the Fair and Effective Markets Review, the Senior Managers and Certification Regime (SM&CR) and changes to the individual and corporate pensions market.
Key challenges – Economic environment: increased concerns on the global growth outlook, the impact of continued low interest rates and the impact of the EU referendum. – Regulatory environment: the level of regulatory change remains high with continued focus on ring-fencing, resolution and conduct. The SM&CR could potentially have significant impact on the business. – Competition: an increasingly competitive market for lending and deposits could further impact margins and require us to innovate and evolve more quickly. – Digital transformation: the pace of change is significant and we will need to continue to invest to meet evolving customer needs.
Many customers are motivated by their desire to achieve better value for money, not least in the current low interest rate environment, but security and reputation remain important factors. Customers want clear and transparent products delivered with good service and access to relevant, expert advice when they need it.
UK focus: Operating primarily in the UK means we are focused on a single developed market that we truly understand. It also means we avoid the complexities and costs of multi-jurisdictional operations.
Financial strength: Our balance sheet and funding position have both been transformed in recent years and they are amongst the strongest within the banking sector worldwide.
We have a differentiated, UK focused, retail and commercial banking business model
Regulatory environment Although we are now seeing more clarity, the level of regulation – whether it be focused on consumer protection, conduct, competition, capital or ring-fencing and resolution – remains high.
Competitive environment The UK financial services market is one of the most competitive worldwide and in such a dynamic market, we continue to differentiate ourselves accordingly.
We are adapting to the changes brought about by technology, changing customer behaviour and increasing regulatory requirements in a competitive market environment. To achieve this, we are focusing on three strategic priorities whilst building the best team.
Initiatives – Re-engineer and simplify processes to deliver efficiency in a digital world – Reduce third party spend – Increase investment in IT efficiency and resilience
Our colleagues are fundamental to the achievement of our strategy. We are committed to building a business our colleagues are proud to work for by creating the best environment for them to succeed, providing them with the right skills and tools and giving them the opportunity to share their views.
We assess and manage social, ethical and environmental risk in our lending activity and the Group is a signatory to the Equator Principles which provide a framework for determining, assessing and managing environmental and social risk in project finance transactions. We recognise the need to address climate change, protect biodiversity, support local communities and ensure human rights are protected.
Read more about our approach to managing risk and the Equator principles online at www.lloydsbankinggroup.com/RB
Strong risk management and governance We need to manage risk effectively and make the right decisions for our customers, shareholders and the Group. We have a Board approved Group Risk Management Framework in place which you can read about on page 29.
Improving customer experience Over the past two years we have made significant improvements, designed to enhance outcomes for customers. They include improvements to our product governance processes, making our motor finance customer credit checks more rigorous, simplifying the terms and conditions information we publish and redesigning the way we support customers who have suffered recent bereavement. We aim to lead our industry in the way we treat these and other customers in vulnerable circumstances.
26m credit and debit card transactions monitored for potential fraud every month
Reporting concerns Our whistleblowing policy, known as ‘Speak Up’, explains how colleagues can raise concerns confidentially without fear of reprisal. During 2015, 153 allegations received through our Speak Up line were investigated. Of the investigations concluded at year end, 63 per cent were upheld with appropriate remedial action taken where necessary. The majority of Speak Up allegations come from our Retail and Group Operations divisions, which given the scale of these business areas remains proportionate. We continue to educate and empower colleagues to do the right thing for our customers by challenging wrong behaviours if they witness them.
As part of our Helping Britain Prosper Plan we have a target to increase the amount of net lending to SMEs and Mid Market companies by £53 billion by 2017. We met our 2015 Prosper Plan target to increase net lending to these segments by at least £2 billion.
Widening financial inclusion We want to do more to help customers who are financially excluded or at risk of becoming so. Our financial inclusion strategy, launched in 2014, focuses on four strategic themes: providing accessible products and services that meet customers’ needs; improving awareness and understanding of the impacts of financial exclusion across the bank; working in partnership with and signposting to other organisations that might be better suited to meet customer needs; and continuing to invest in financial education.
Financial support and education The credit union sector provides an essential service to many people across Britain. We believe that it can become an even more powerful choice for consumers to turn to, which is why we’ve been working in partnership with the Association of British Credit Unions Limited and the Credit Union Foundation, to provide a £4 million fund over four years which is invested in the core funding of credit unions to help them become more sustainable. In 2015, 69 credit unions applied for awards and 21 secured a large grant or seed funding.
Creating new jobs We employ more than 75,000 colleagues. We offer them all competitive rewards and benefits, including incentivisation schemes based on customer outcomes. We are helping to create additional jobs and bring talented people into our business through our Apprenticeship Scheme. This year we created over 1,000 new apprenticeship roles, bringing the total to over 3,200 since we launched the scheme in October 2012. We have committed, as part of our Helping Britain Prosper Plan, to create 8,000 new apprenticeships by 2020.
£1.4bn of new funding support provided to UK manufacturing companies in 2015
Colleagues We want to ensure that every colleague feels valued and empowered to thrive in a truly inclusive business. We maintain regular dialogue with colleagues to assess their views and keep them informed about our performance and the issues we face. We have recognition agreements with two trade unions, Accord and Unite, which collectively negotiate and consult on behalf of around 95 per cent of our colleagues. You can read more about initiatives and progress on building the best team on page 21.
Inclusion and diversity We recognise that everyone is different. We value the unique differences that each of our colleagues bring to work every day. Together, they make Lloyds Banking Group stronger, and the best bank for customers. We’re working hard to build an inclusive bank that reflects the diversity of modern Britain. All line managers completed inclusion and diversity capability training in 2015 and an additional 200 colleagues were trained to deliver disability awareness sessions with customers. Our 2015 ‘Words Count’ campaign encouraged all colleagues to challenge non-inclusive language and behaviours, and over 20,000 colleagues are members our four diversity networks, which are open to everyone. The Group retained its leading position as the top private sector company for LGBT people in the Stonewall Top 100 and was named in The Times Top 50 Employers for Women. In addition we retained our Gold Standard in the Business Disability Forum Benchmark in recognition of the work done through the Group Disability Programme. More information on support for disabled colleagues, which is incorporated by reference into the strategic report, in the Directors’ report on page 109.
Seniors Managers: Grades F+ Managers: Grade D-E Data source: HR system (HR Online). Apart from gender data, all diversity information is based on colleagues’ voluntary self-declaration. As a result this data is not 100 percent representative; our systems do not record diversity data for the proportion of colleagues who have not declared this information.
Environment Our ability to help Britain prosper is inextricably linked to wider environmental issues. Man-made climate change and global trends such as resource scarcity, extreme weather and rising energy and commodity prices have an impact on our stakeholders and our own operations.
Greenhouse gas emissions This year our overall carbon emissions, measured in CO2 equivalent tonnes (CO2e), have decreased by 9.85 per cent year-on-year and by 29.6 per cent against our 2009 baseline. The majority of this reduction is attributable to the reduction in consumption of gas and electricity, which make up the largest proportion of our emissions. This reduction was mainly due to energy management activity, for example continued optimisation of building management systems to ensure that heating and ventilation plant and lighting run times are matched to actual building operations and occupancy.
Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard revised issue (2004).
Indicator is subject to limited ISAE 3000 (Revised) assurance by Deloitte LLP for the 2015 Annual Responsible Business Reporting. Deloitte LLP’s 2015 assurance statement and the 2015 Reporting Criteria are available online at www. lloydsbankinggroup.com/RBdownloads 32% reduction in energy use compared to our 2009 target baseline
In 2015, our UK based team was responsible for financing renewable projects with a combined capacity of more than 2.35GW. Globally, our investments in renewable energy are in excess of 9GW in capacity and cover solar, offshore and onshore wind, waste to energy and biomass.
Read more on emissions reporting and methodology in the Directors’ report 109
We want to do more to help even more people through our four independent charitable Foundations. Our England and Wales Foundation is the UK’s largest corporate foundation.
Stakeholders We identify and engage with many different groups and individuals to understand their needs and views, to ensure our approach remains relevant.
How we manage risk is a fundamental part of our strategy. We operate as a simple, low risk, UK focused, retail and commercial bank with a culture founded on a prudent through the cycle appetite for risk.
State aid commitments We have satisfied all material structural and behavioural commitments following the successful carve-out and disposal of TSB with respect to the State Aid commitments agreed with the European Commission under the State Aid regime in 2009. We are therefore no longer subject to restrictive behavioural commitments including the constraint on acquisitions, but continue to be bound by two remaining limited ancillary commitments which means that we remain subject to supervision by the European Commission with respect to these commitments until they cease to have effect on or before June 2017. Our strong risk management has assisted in the government’s continued sell-down of shares to a holding which is approximately 9 per cent.
Processes and infrastructure are being invested in to further improve our risk management capabilities
The most significant risks we face which could impact the delivery of our strategy, together with key mitigating actions, are outlined below.
Credit risk The risk that customers to whom we have lent money or other counterparties with whom we have contracted, fail to meet their financial obligations, resulting in loss to the Group.
Best bank for customers index Creating the best customer experience We continue to focus on developing colleagues, their capabilities and skills in order to create the best customer experience and to respond quickly to the rapidly evolving change in customers’ decision making.
Impairments remain below long term levels and are expected to normalise over time. Emerging credit risks that have the potential to increase impairment include the global and UK economic environment as it can impact customer and counterparties’ affordability.
Insurance (Life and Pensions) present value of new business premiums £1,148m £1,197m
Liquid assets are broadly equivalent to our total wholesale funding and thus provide a substantial buffer in the event of continued market dislocation.
Mitigating actions are implemented to reduce the impact of market movements, resulting in a stable capital position. This allows us to more efficiently utilise available capital resources to deliver sustainable growth.
By reducing the volatility in the Group’s Defined Benefit Pension Schemes through hedging in 2014, we have taken a conservative approach to risk in line with our strategy.
Total loans and advances to customers were £455 billion compared with £456 billion (excluding TSB) at 31 December 2014, with growth in the key customer segments offset by further reductions in run-off and portfolios closed to new business. Customer deposits were £418 billion compared with £423 billion (excluding TSB), a reduction of £5 billion, or 1 per cent, compared with 31 December 2014, largely due to a planned reduction in tactical deposits.
Further detail on net interest income and other income is included on page 52.
The Group expects the net interest margin for the 2016 full year will be around 2.70 per cent, despite continued low base rates, benefiting from further improvements in deposit and wholesale funding costs, including the impact of the ECN exchange, partly offset by continued pressure on asset prices.
Provisions as a % of impaired loans excluding run-off 43.0% 44.6% (1.6)pp
The impairment charge was £568 million, 48 per cent lower than in 2014 as a result of the significant reduction in run-off business and improvements in all divisions. The charge is net of significant provision releases and write-backs, although at lower levels than seen in 2014. The asset quality ratio improved to 14 basis points from 23 basis points in 2014.
Statutory profit before tax was £1,644 million, down 7 per cent compared to 2014.
Asset sales and other items Asset sales and volatility of £182 million included a charge of £101 million for the reduction in the value of the equity conversion feature embedded in the Group’s Enhanced Capital Notes (ECNs) and negative insurance volatility of £105 million offset by a number of other items including own debt and banking volatility. The charge in 2014 of £1,190 million included a net loss of £988 million relating to the Group’s ECN exchange offers and changes in value of the equity conversion feature, and negative insurance volatility of £228 million.
The fair value unwind arises as a result of acquisition related adjustments made at the time of the HBOS transaction in 2009. The reduction in the unwind in 2015 to £192 million relates to a lower charge relating to the HBOS subordinated debt of £363 million (2014: £497 million) and a credit for the accelerated amortisation of a fair value adjustment which was recognised in the first half of the year.
1 Comparatives restated to exclude TSB. As at 31 December 2014, loans and advances to customers including TSB were £478 billion, customer deposits including TSB were £447 billion and the loan to deposit ratio was 107 per cent.
1 There is minimal difference between the common equity tier 1 ratios and risk-weighted assets under both the fully loaded and transitional bases.
The Group is aware that the Trustee has been granted leave by the Supreme Court to appeal the Court of Appeal decision. In the event that the Supreme Court were to determine that a CDE had not occurred, the Group would compensate fairly the holders of the ECNs whose securities are redeemed using the Regulatory Call Right for losses suffered as a result of early redemption.
The total ordinary dividend per share for 2015 of 2.25 pence has increased from 0.75 pence in 2014, in line with our progressive and sustainable dividend policy, and we continue to expect ordinary dividends to increase over the medium term with a dividend payout ratio of at least 50 per cent of sustainable earnings.
The amount of capital we believe is appropriate to hold is likely to vary from time to time depending on circumstances and the Board will give due consideration, subject to the situation at the time, to the distribution of any surplus capital through the use of special dividends or share buy backs. By its nature, there can be no guarantee that this level of special dividend or any surplus capital distribution will be appropriate in future years.
– Loans and advances to customers were £314.1 billion (31 December 2014: £315.2 billion) with the open mortgage book (excluding specialist mortgage book and Intelligent Finance) increasing 1 per cent slightly below market growth, reflecting actions to protect the net interest margin in a highly competitive, low growth environment. This is offset by a reduction in the portfolios closed to new business. – Customer deposits decreased 2 per cent to £279.5 billion, with more expensive tactical balances down 20 per cent to £30.2 billion, reflecting actions to protect interest margins. – Risk-weighted assets decreased by £1.8 billion to £65.9 billion, driven by an improvement in the credit quality of assets and a modest contraction to lending balances, partly offset by an increased allocation of operational risk risk-weighted assets.
Progress against strategic initiatives – Continued to support the UK economy and Help Britain Prosper globally. – Increased lending to SMEs by 5 per cent year-on-year, outperforming the market; remain the largest net lender to SMEs under the Funding for Lending Scheme (FLS), with over £6 billion of gross lending in 2015.
– Raised £540 million to date through our Environmental, Social and Governance (ESG) programmes to finance SMEs, healthcare providers and renewable energy projects in the most economically disadvantaged areas of the UK. – Exceeded our funding commitment by providing £1.4 billion of support to UK manufacturing and opened the Advanced Manufacturing Training Centre as part of a five year programme to help increase manufacturing skills in the UK. – Continued to attract new Mid Markets clients, increasing client advocacy and investing in relationship manager capability; supported British universities and housing associations in accessing £1 billion of bond financing. – Strong income growth in Global Corporates with continued discipline in capital management; ranked first in Sterling capital markets financing for UK corporates in 2015. Enhanced our proposition to UK linked International clients doing business globally with strong growth in our UK linked US client franchise and the opening of a regional office in Singapore. – Facilitated £11.3 billion of financing to support UK infrastructure projects, including the Thames Tideway Tunnel that is expected to create c.9,000 new jobs and Galloper Wind Farm that will provide clean energy to c.336,000 homes. – Strong growth in our Financial Institution franchise benefiting from London as the world’s leading financial centre and supporting the Financial Services industry in the UK. In 2015 we have helped our clients raise over £60 billion of funding. – Continued to invest in next generation digital capabilities to transform clients’ experiences, with the pilot underway on the new ‘CB Online’ transaction banking platform.
Progress against strategic initiatives Investing in growth: – Exceeded UK customer assets growth targets, whilst improving portfolio credit quality. – Developed a broader and more competitive Cards product range, investing in digital reach and core capabilities to deliver new business and customer service improvements. – Implemented enhanced application processes in Black Horse for motor dealers, leading to more efficient customer service; launched a new direct to consumer online secured car finance proposition to serve the needs of internet banking customers; and implemented further capabilities in the light commercial vehicle sector to improve the offering to Lex Autolease customers.
Progress against strategic initiatives Against a backdrop of continued regulatory change, Insurance has made good progress against its strategic initiatives.
Assumption changes and experience variances (208) 240 30 − (2) 60 (134)
2 To aid comparability, 2014 profit by product group has been restated to align with the revised product offerings and how the Insurance business supports customers. Full 2014 comparator tables for the profit and cash disclosures can be found on the Lloyds Banking Group investor site.
Assumption changes and experience variances include an adverse impact of £208 million in pensions and investments as a result of the strengthening of lapse assumptions on the pensions book to allow for the impact of the recent pension reforms. This was more than offset by the £240 million of benefit recognised within Protection and Retirement, primarily as a result of changes to assumptions on longevity. These longevity changes reflect both experience in the annuity portfolio and the adoption of a new industry model reflecting an updated view of future life expectancy.
Cash invested in new business (178) (30) (129) − − (337) (288)
Statutory return on required equity is the statutory profit after tax less the post-tax profit attributable to other equity holders divided by the average required equity for the period. An adjustment is also made to reflect the notional earnings on any excess or shortfall in equity.
9 Capital ratios for 2012 and 2011 were not restated to reflect the adoption of IAS 19 (Revised).
Skills and experience: Deborah has an extensive executive background in managing technology, operations and new digital innovations across banking, payments and institutional investment. She broadens the Board’s diversity from a global market perspective. Deborah is a former Chief Executive Officer, Global Enterprise Payments and President, Personal Banking and Wealth Management at Citibank. She was previously President of Institutional Services at Charles Schwab Corporation and held executive roles at Engage Media Services Group, Visa International and Bank of America, where she held senior roles in Consumer Banking. External appointments: Independent Director of Fluor Corporation and IHS Corporation, a Trustee of the California Institute of Technology and of the Institute for Defense Analyses.
Skills and experience: Stuart has extensive experience in retail banking and insurance and also brings to the Board wider experience in consumer finance and asset finance. He is a former Non-Executive Director of TSB Banking Group plc and TSB Bank plc. Stuart was previously a Non-Executive Director of LV Group, President and Chief Operating Officer of Aspen Insurance, held Chief Executive Officer roles at GE Capital’s Consumer Finance division both in the UK and China, and Director of UK Retail Banking then Chief Executive Officer of Tesco Personal Finance at Royal Bank of Scotland. He was also a Council Member of The Royal Institute for International Affairs. His early career included Managing Consultant at Braxton Associates and Partner at Mercer Managing Consultant (now Oliver Wyman). External appointments: Non-Executive Director and Chair of the Risk Committees at Provident Financial Plc, Vitality Life and Vitality Health. Senior Independent Director at QBE Insurance (Europe) Limited and Swinton Group Limited.
Skills and experience: Tony is our Senior Independent Director and with over 40 years of experience in the investment management industry and related sectors, he is well placed to carry out this role. His former positions include Chief Executive of Hermes Pensions Management and Chairman of the Asian Infrastructure Fund, MEPC, the Marks & Spencer Pension Trustees and of the Strategic Investment Board (Northern Ireland). He is also a former Member of the Financial Reporting Council, a Senior Independent Director of Hammerson and a Non-Executive Director of the Shareholder Executive and Vodafone Group. External appointments: Senior Independent Director of Witan Investment Trust, Chairman of the Lincoln’s Inn Investment Committee and a member of the Norges Bank Investment Management Corporate Governance Advisory Board.
The depth of diverse experience and complementary skills within our management team strengthens our ability to adjust to changing market environments and to deliver our strategy to become the best bank for customers.
O ther info rm atio n 01 Andrew Bester Chief Executive Officer, Commercial Banking
Mary joined the Group in 2014 from KPMG Canada where she was a senior Financial Services Audit Partner having previously held various senior roles including Canadian Industry Leader for Financial Services, Canadian National Banking Sector Leader and Chair of KPMG’s Global New Banking Entrants Committee. Mary is a Chartered Accountant with over 25 years in the financial services industry.
Since her appointment, Mary has defined a transformational vision for Group Audit, providing independent and fresh perspectives. Mary has a primary reporting line to the Chairman of the Audit Committee and a secondary reporting line to the Group Chief Executive. Mary sits on the advisory Board of the Forward Institute in the UK.
Karin joined the Group in 2013 as Chief Operating Officer, Commercial Banking and became Group Director, Operations in 2015. Karin joined from HSBC where she was Global Chief Operating Officer for Private Banking from 2010 to 2013 and Global Head of OTC Derivative Operations for HSBC from 2004 to 2010. Prior to HSBC, Karin spent nine years at Morgan Stanley in London where she led a combined Finance and Operations team for Equity Derivatives after beginning her career at Goldman Sachs in Paris in 1990, where she worked in Futures Operations.
David was appointed in June 2015 as Group Director for the Retail Division responsible for the largest retail banking network in the UK, serving around 30 million customers. Additionally, in February 2016, David assumed responsibility for the Consumer Finance Division.
David is a Non-Executive Director for Motability Operations Plc and a Fellow of the Chartered Institute of Bankers. He is also Group Executive Sponsor for Disability.
I recognise that governance must be dynamic and evolve to meet current and future demands. Therefore, in late 2014, I commissioned our newly appointed Company Secretary to undertake an end-to-end review of our governance arrangements from a fresh perspective.
Your Board remains focused on how the Group delivers solutions that continue to put the customer at the heart of everything we do. There is an ever increasing understanding of the criticality of technology in delivering customer service. During the year, the Board spent considerable time reviewing the delivery of our investment in IT resilience and digital transformation programmes.
Remuneration The Board ensures that there is a clear link between remuneration and the delivery of the Group’s business strategy.
Non-Executive Directors – Challenge constructively – Help develop and set the Group’s strategy – Actively participate in Board decision making – Scrutinise management performance – Satisfy themselves on the integrity of financial information – Review the Group’s risk exposures and controls – Determine the remuneration of Executive Directors
A full schedule of all matters reserved to the Board and Terms of Reference for each of the Board Committees can be found at www.lloydsbankinggroup.com/our-group/corporategovernance
Company Secretary All Directors, including Non-Executive Directors, have access to the services of the Company Secretary in relation to the discharge of their duties. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole.
The Group continues to conduct the majority of its business through a number of subsidiary entities. A certification process, at individual entity level, of compliance with the minimum governance standards set out in the Corporate Governance Framework enhances management of any legal, regulatory and reputational risks associated with the Group’s subsidiary entities.
Draft Board papers are reviewed at the appropriate Group Chief Executive Committee meeting held prior to the Board meeting, along with the draft Board agenda, and there is time allocated at each GEC meeting to consider whether any matters require escalation to the Board. The Group Chief Executive also held separate Board paper review meetings to review individual papers in more detail or those not considered at one of the meetings referred to above. These meetings were held with the Chief Financial Officer, the Chief Risk Officer, the Company Secretary and authors of the main papers, as required.
How Board meetings are run The Chairman ensures Board meetings are structured to facilitate open discussion, debate and challenge. Through his opening remarks, the Chairman sets the focus of each meeting.
Strategy offsite During the year the Board spent two days offsite focusing on: – Culture and colleague engagement – Group strategy implementation – Retail strategy
Board oversight: IT resilience and digital transformation The Board remains focused on how the Group delivers solutions that continue to put the customer at the heart of everything it does. The Group’s multi-channel service reflects customers’ changing preferences in how they choose to do business with the Group, providing seamless access through a secure and resilient digital infrastructure.
Branch and site visits form part of the induction and in the case of Mr Sinclair, he requested a visit to the Group’s insurance business, Scottish Widows.
Both Ms McWhinney and Mr Sinclair also received specific briefings on the Committees on which they will serve.
Site visits and conversations at Board dinners are also recognised as effective ways of learning, since they give Directors an opportunity to consider business areas and experiences outside their direct areas of expertise. Site visits in particular provide ‘shop floor’ experiences and reconnect Directors and senior management alike with the business and with customer service as it is performed throughout the branches. This provides insights into what customers want and need from the Group.
2014 evaluation of the Board’s performance The 2014 evaluation was conducted internally between December 2014 and January 2015 by the Company Secretary, and was overseen by the Nomination & Governance Committee. Following the review, a number of changes were introduced and actions implemented which led to improvements in a number of areas including the timeliness and content of papers and the process for escalation of issues to the Board and its Committees. These enhancements have been reflected in improved scores from the 2015 evaluation. A summary of the Board’s progress against the actions arising from the 2014 effectiveness review are set out on page 68.
The 2015 review considered broadly the same areas as the 2014 review for comparability including: strategy; risk and control; planning and performance; Board composition and size; culture and dynamics; balance of skills and experience; diversity; relationships between management and independent directors; governance; the Board’s calendar and agenda; the quality and timeliness of information; and support for Directors and Committees.
Succession planning – Maintain a proactive approach to succession planning for Executive and Non-Executive Directors and for senior management
Board information – Continue the progress made in 2015 in ensuring that information provided to the Board and its Committees is clear, concise, relevant and focused – Review and continue to evolve metrics used to assess business performance to ensure that they provide an appropriate level of detail and insight for the Board
The terms and conditions of appointment of the Chairman, Non-Executive Directors and Executive Director are available for inspection at the registered office address.
The review focused on the operation of the Board and its Committees and in particular: agenda setting and the process of escalating issues; the timing and content of information received by the Board and its Committees; how the Board and the Committees used their time; and Secretariat support.
Directors are responsible for notifying the Chairman and Company Secretary as soon as they become aware of actual or potential conflict situations. In addition, conflicts are monitored as follows: – the Directors are required to complete a conflicts questionnaire on appointment and annually thereafter; – changes to the commitments of all Directors are reported to the Nomination & Governance Committee and the Board; and – a register of potential conflicts and time commitments is regularly reviewed and authorised by the Board to ensure the authorisation status remains appropriate.
REMUNERATION The statement by the Chairman of the Remuneration committee, the Directors’ Remuneration policy and the Directors’ Remuneration Implementation Report are set out on pages 82 to 106.
The Group’s retail shareholders are well informed and knowledgeable and this is demonstrated through much of the correspondence received. Enquiries from retail shareholders range from discussing technical accounting matters and strategy implementation, through to their experiences as customers.
The British Bankers’ Association Code for Financial Reporting Disclosure The Group has adopted the British Bankers’ Association’s Code for Financial Reporting Disclosure and its 2015 financial statements have been prepared in compliance with its principles.
Investor Relations ensures that the Group’s Board and Executive Committee are informed of key messages, market developments and the perception of the Group in the market. The primary responsibility for managing and developing relationships with existing and potential debt investors rests with the Group Corporate Treasury team with support from Investor Relations.
Details of all Board changes during the year are set out on page 66. More about the appointment of Deborah and Stuart and the Group’s approach to succession planning can be found on the next page.
Committee composition, skills and experience To ensure a broad representation of experienced and independent Directors, membership of the Committee comprises the Chairman, the Deputy Chairman, the Senior Independent Director, the Chairman of the Audit Committee, the Chairman of the Remuneration Committee and, from 17 July 2015, the Chairman of the Risk Committee. The Group Chief Executive attends meetings as appropriate.
During the year, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review.
Gaps may also be identified through the annual Board evaluation process, where Board composition is a key focus. Underpinning this process is consideration of the personal characteristics that an individual is expected to bring to the Board.
– Long list of candidates considered – Short list of potential candidates selected and approached by Russell Reynolds to gauge interest – Potential candidates invited to meet the Chairman, Group Chief Executive and individual Committee members
– Recommended to the Board the appointment of two candidates, Deborah McWhinney and Stuart Sinclair, who had stood out in the recruitment process as having the skills, experience, values and personal characteristics to be strong contributors to the Board and to address the Board’s skills requirements
How the Nomination & Governance Committee spent its time in 2015
It has been another busy year for the Committee. We have continued to focus on the issues relevant to the Group’s financial reporting, considering key accounting judgments and ensuring ongoing quality in related disclosures. We have also spent a significant proportion of our time considering other key areas, including monitoring of the Group’s internal control framework, where we continue to work to ensure it remains strong and fit for purpose.
The Committee has reviewed and challenged management’s assessment of the remaining costs relating to PPI claims and is satisfied that the accounting, and related disclosures, are appropriate. Further detail on PPI and other key financial reporting issues are set out in the report below.
The Committee has overseen continued transformation of the internal audit function under the leadership of the Group Audit Director, Mary Hall, following her appointment in the second half of 2014. Audit planning, supported by the development of an audit risk universe, has been enhanced, and greater rigour has been introduced to the audit methodology. Carefully directed use of external expertise is being used to ensure that appropriate skills are deployed in audits of technical areas, and good progress is being made in developing the skills and experience of the internal audit team.
Committee composition, skills and experience The Committee acts independently of the executive to ensure that the interests of the shareholders are properly protected in relation to financial reporting and internal control.
How Committee meetings are run The management of the Committee is in keeping with the basis on which meetings of the Board are managed, as detailed on page 63, with a structure which facilitates open discussion and debate, with steps taken to ensure adequate time for members of the Committee to consider proposals which are put forward.
Carolyn Fairbairn3 6 6 1 Mr Henry was unable to attend both January and July Audit Committee meetings due to prior executive commitments.
2 Joined the Committee on 1 December 2015. 3 Retired on 31 October 2015.
O ther info rm atio n the year, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review. Based on the outcomes of the annual board effectiveness review further efforts are being made to build upon improvements made in the previous year on the timeliness and quality of Committee papers, and additional opportunities for training for Committee members are being introduced.
– The Committee considered the recognition of deferred tax assets, in particular legal entity forecast taxable profits based on the Group’s operating plan and the Group’s long-term financial and strategic plans. – The Committee considered the impact on deferred tax assets of changes in tax legislation and the removal of the ability to offset customer redress costs against taxable profits. – The Committee agreed with management’s judgement that the deferred tax assets were appropriately supported by forecast taxable profits, taking into account the Group’s long-term financial and strategic plans. The disclosures relating to deferred tax are set out in note 3: Critical accounting estimates and judgements on page 197 and note 38: ‘Deferred tax’ on page 232 of the financial statements.
In addition, the Committee considered a number of other significant 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.
– The uncertain tax positions of the Group were considered taking into account the respective views of management and the views of the relevant tax authorities. The Committee also understood the external advice obtained by management to support the views taken. – The Committee was satisfied that the provisions and disclosures made in respect of uncertain tax positions were appropriate. The relevant disclosures are set out in note 49: ‘Contingent liabilities and commitments’ on page 246 of the financial statements.
Retirement benefit obligations The Group must make both financial and demographic assumptions of a judgemental nature to determine the value of the defined benefit obligation.
– The Committee challenged the economic and non-economic actuarial assumptions made by management and reviewed the movements in the key assumptions since 31 December 2014. – The Committee was satisfied that the value of the VIF asset and insurance liabilities were appropriate. The disclosures are set out in note 25 on page 218 and note 33 on page 222 of the financial statements.
Sale of interests in businesses Determining the appropriate accounting for the sale of shares in TSB Banking Group (TSB) required management to make judgements when assessing the facts and circumstances specific to each tranche of the transaction.
– Judgement was required to assess when the Group ceased to control TSB, at which point its results and balance sheet were no longer consolidated in the Group’s accounts, and the loss on disposal recognised. – The Committee was satisfied with the accounting treatment of the various tranches of TSB shares sold. – The interest in Visa Europe is carried as an available-for-sale financial asset. The Committee reviewed management’s assessment of its valuation having regard for the terms of the offer made by Visa Inc and concurred with the view taken by management.
Other significant issues The following matters were also considered by the Committee: Risk management and internal control systems Full details of the internal control and risk management systems in relation to the financial reporting process are given within the risk management report on pages 111 to 169. Specific matters that the Committee considered during the year included: – the effectiveness of systems for internal control, financial reporting and risk management; – the extent of the work undertaken by the Finance teams across the Group and consideration of the resources to ensure that the control environment continued to operate effectively; – the major findings of internal investigations into control weaknesses, fraud or misconduct and management’s response along with any control deficiencies identified through the assessment of the effectiveness of the internal controls over financial reporting under the US SarbanesOxley Act; and – Three Lines of Defence, where Group Audit led an assessment of the effectiveness of such arrangements during the first half of the year, and reported regularly to the Committee on progress made by management against actions raised as part of this assessment.
The Committee oversees the relationship with the external auditor. During the year, the Committee considered the auditors’ terms of engagement (including remuneration), their independence and objectivity and approved the audit plan (including methodology and risk identification processes).
Statutory Audit Services compliance The company and the Group confirms its compliance with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the year to 31 December 2015.
The Committee has concluded that the Group continues to have strong discipline in the management of both emerging and existing risks and has taken further positive steps towards achieving the objective of operating a safe, low risk bank. The environment in which the Group operates continues to change rapidly and the Committee will continue to review emerging and inherent risks with that objective very much in mind.
Committee purpose and responsibilities The purpose of the Board Risk Committee is to review the risk culture of the Group, setting the tone from the top in respect of risk management. The Committee is also responsible for ensuring the risk culture is fully embedded and supports at all times the Group’s agreed risk appetite, covering the extent and categories of risk which the Board considers as acceptable for the Company.
O ther info rm atio n not members of the Committee routinely attended meetings during 2015. Stuart Sinclair was appointed as an independent Non-Executive Director and a member of the Committee on 4 January 2016, and from January 2016, all Non-Executive Directors are members of the Board Risk Committee. The Chief Risk Officer has full access to the Committee and attends all meetings, the Group Audit Director and members of the Executive also attend meetings as appropriate.
Conclusion: Management continues to take satisfactory action in addressing the risks arising from these key lending portfolios, and the Committee will continue to review these core aspects of the Group’s business during the course of 2016.
A variety of exercises were undertaken to test the resilience of IT and cyber security arrangements, with considerable time spent reviewing the results of these exercises and considering the recommendations of management to provide enhancements to these arrangements. In particular the delivery of the Group’s related Cyber Security and IT Resilience programmes was reviewed. Consideration was also given to the Group’s position in the context of its wider banking sector peers.
Stress testing The review of stress testing exercises and their results was a key area of focus during the year.
Consolidated risk report Review was undertaken on a regular basis of a consolidated report on key aspects of risk management across the business, both existing and emerging risks, including assessment of adherence to risk appetite limits set by the Board.
Divisional risk profiles In addition to the Consolidated Risk Report, detailed summaries of risk management across each of the Group’s main operating divisions were also considered.
Conclusion: As part of its review of these arrangements the Committee concluded there continues to be action needed to fully implement the requirements of the Act, as detailed provisions continue to emerge, however the Group is well placed to respond to the ongoing requirements and future developments.
Pensions risk Risks arising from the Group’s various pension arrangements were reviewed, in light of ongoing changes in actuarial profiles.
Factors considered by the Committee in the assessment of pensions risk included levels of risk appetite in relation to overall pension provision, with particular consideration of projected future asset performance in changing economic conditions. The risks posed in respect of certain market events were also assessed, including potential interest rate and inflation changes, and also the impact on Group pension schemes of ongoing improvements in life expectancy.
An update on our responsible business activities forms part of the strategic report on page 22. The HBPP, on page 15, provides an overview of what the Group is doing to help Britain’s communities, businesses and individuals address current social and economic issues. The Committee has overseen the development of both plans, as they evolve in response to progress we have already made and challenges that lie ahead.
Alignment to strategy The Committee continues to place great importance on ensuring there is a clear link between remuneration and delivery of the Group’s key strategic objectives. For 2015, the Group’s priorities have been creating the best customer experience, becoming simpler and more efficient and delivering sustainable growth. These support our continued aim of becoming the best bank for customers and our ‘helping Britain prosper’ plan.
Taking into consideration all relevant factors, the Committee has applied collective adjustments of 26 percent to the Group’s 2015 bonus outcome, reducing the total to £353.7 million. As a percentage of pre-bonus underlying profit, the bonus outcome is 4.2 per cent for 2015, down from 4.5 per cent in 2014.
Rewarding colleagues During 2015, the Group has continued to invest in the broader remuneration package for colleagues, with improvements made to pay, benefits and colleague share plans. It also undertook a detailed review of the variable pay arrangements used to incentivise customer-facing colleagues, primarily in the Retail division. These arrangements do not contain sales output measures, so colleagues are incentivised purely by reference to customer service or Balanced Scorecard performance measures. In some parts of our business, variable pay arrangements have been removed and have either been replaced with fixed base salary or eligible colleagues have transitioned to the discretionary annual bonus plan. From 2016, a single variable pay arrangement will be introduced for all customer-facing colleagues in the Retail division, using a Balanced Scorecard approach with clearly identified performance descriptors, measuring whole job contribution.
Average discretionary bonus awards across all colleagues are approximately £4,600, with only 3 per cent of our colleagues receiving a bonus in excess of £25,000. In line with previous years, the first £2,000 of any bonus award is paid in cash with the balance being deferred in shares which are released periodically over subsequent months and years.
Executive salary awards for 2016 The Committee’s continuing aim is to position Executive Director remuneration conservatively, but competitively, against the market. We are also very mindful of the average awards made to colleagues across the Group, which in 2016 will be 2 per cent. The Group is therefore proposing to increase the base salaries of the Executive Directors. For the Chief Financial Officer and Chief Risk Officer, it is proposed that base salaries will increase by 2 per cent, in line with colleagues across the Group.
For the first time since 2011, a base salary increase is also proposed for the Group Chief Executive. The Group Chief Executive was hired on the basis that upon the Government shareholding falling in the range of 15-20 per cent or less, the Committee would consider his remuneration being increased in line with market conditions. With the Government’s shareholding now being around 9 per cent and given the recovery of the Group’s financial strength, the Committee has decided it should now begin to adjust the Group Chief Executive’s salary towards the Reference Salary. After discussion with shareholders, the Committee has decided to stage this adjustment over two years. For 2016, this will consist of an increase in base salary of 2 per cent, in line with the other Executive Directors, and an additional increase of 4 per cent to reflect the arrangements above, taking his total salary to £1,125,000. The Group Chief Executive has suggested, and the Board has approved, that for 2016 the 4 per cent increase be delivered in shares and held until the Government has sold its shareholding in the Group. After this increase, the Group Chief Executive’s salary remains conservative compared to peers.
Impact of regulatory change 2015 has been another year in which significant regulatory change has dominated the remuneration agenda. This has included the publication of revised PRA and FCA rules on remuneration under CRD IV and a significant consultation on changes to the EBA Guidelines that overlay the UK rulebook.
Total Shareholder Return (TSR) Per annum for the three years ended 31 December 16.6% 30.2%
1 The underlying profit result used for remuneration purposes is £7,994 million (excluding TSB).
The levels of award set for 2016 remain unchanged and are as follows: GCE: £900,000 CFO: £504,000 CRO: £497,000 Shares will be released in equal tranches over a five year period.
Annual bonus Incentivise and reward the achievement of the Group’s annual financial and strategic targets.
The maximum annual long-term incentive award for Executive Directors is 300 per cent of salary. Awards in 2016, based on individual performance in 2015, are being made as follows: GCE: 300 per cent of reference salary CFO: 275 per cent of base salary CRO: 275 per cent of base salary
The remuneration policy tables for Executive and NonExecutive Directors are included below for ease of reference. They have been reproduced as approved in 2014 with minor changes due to regulatory requirements under the latest PRA Rulebook which take effect in 2016 and changes in the operation of the all-employee share plans in 2015. Information on how the Policy will be implemented in 2016 is included in the annual report on remuneration. The full policy is set out on pages 102 to 109 of the annual report and accounts for the year ended 31 December 2013 which is available at: www.lloydsbankinggroup.com/globalassets/documents/ investors/2013/2013_lbg_annual_report.pdf
The policy is based on principles which are applicable to all employees within the Group and in particular the principle that the reward package should support the delivery of the strategic aim of becoming the ‘best bank for customers’. It embeds a performance-driven and meritocratic culture, encourages effective risk disciplines and is in line with relevant regulations and codes of best practice. There is no significant difference between the policy for Executive Directors and that for other senior employees. If a significant difference for any individual were proposed, this would be subject to approval by the Remuneration Committee (within regulatory requirements).
The Committee also takes into account base salary increases for employees throughout the Group.
As disclosed in previous reports, since his appointment, the Group Chief Executive (GCE) has a reference salary of £1.22 million which is used to calculate certain elements of long-term remuneration and the pension allowance.
Purpose and link to strategy To ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for Executive Directors with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements.
The maximum allowance for other Executive Directors is 25 per cent of base salary.
Operation Measures and targets are set annually and awards are determined by the Committee after the year end based on performance against the targets set. The annual bonus may be delivered partly in cash and partly deferred into cash, shares, notes or other debt instruments including contingent convertible bonds. The Committee may adjust deferred awards in the event of any variation of share capital, demerger, special dividend or distribution or amend the terms of the plan in accordance with the plan rules.
The Committee applies its judgement to determine the payout level commensurate with business and/or individual performance. The Committee may reduce the level of deferred award (including to zero), apply additional conditions to the vesting, or delay the vesting of deferred awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate as a result of an event occurring before vesting. Bonus awards may be subject to clawback for a period of up to seven years after the date of award. This period may be extended to ten years where there is an ongoing internal or regulatory investigation.
From 2016, deferred awards normally vest over a period of seven years with vesting between the third and seventh anniversary of award, on a pro-rata basis.
When determining and reviewing fee and benefit levels, 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 sizing methodologies. – Pay for comparable roles in comparable publicly listed financial services groups of a similar size.
ANNUAL REPORT ON REMUNERATION Remuneration Committee Committee purpose and responsibilites The Remuneration Committee has responsibility for setting remuneration for all Executive Directors and the Chairman, including pension rights and any compensation payments. The Committee also recommends and monitors the level and structure of remuneration for senior management and material risk takers. The Committee’s purpose is to consider, agree and recommend to the Board an overall remuneration policy and philosophy for the Group that is aligned with its long-term business strategy, its business objectives, its risk appetite, values and the long-term interests of the Group that recognises the interests of relevant stakeholders. The Committee’s Terms of Reference can be found on the Company’s website at www.lloydsbankinggroup.com/our-group/corporate-governance
Lord Blackwell 11 11 Alan Dickinson3 2 2 Dyfrig John 11 11 Sara Weller 11 11 Former members who served during 2015
How Committee meetings are run The management of the Committee is in keeping with the basis on which meetings of the Board are managed, as detailed on page 61, with a structure which facilitates open discussion and debate, with steps taken to ensure adequate time for members of the Committee to consider proposals which are put forward. During 2015, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review. Building on improvements made in the previous year, the review identified a number of actions relating to agenda planning, the timeliness and content of Committee papers and induction of new Committee members that will continue to maintain and improve the Committee’s effectiveness.
Juan Colombás (Chief Risk Officer) and George Culmer (Chief Financial Officer) also attended the Committee to advise as and when necessary on risk and financial matters.
Conditional pension buy-out5 – 712 – – – – – 712
– As disclosed last year, the 2014 annual bonus awarded to the Group Chief Executive (GCE) was subject to a discretionary adjustment to reflect the external environment. The 2014 mechanical bonus outcome, before any discretionary adjustment would have been £978,882, but was reduced by approximately 18 per cent to £800,000. This year the mechanical bonus outcome is £849,649. – In June 2015, the Group reached a settlement with the Financial Conduct Authority (FCA) with regard to aspects of its Payment Protection Insurance (PPI) complaint handling process during the period March 2012 to May 2013. As a result, the Committee decided to make performance adjustments in respect of bonuses awarded in 2012 and 2013 to the Group Executive Committee and some other senior executives given their ultimate oversight of the PPI operations. The number of shares adjusted was 409,039 for the GCE, 109,464 for the Chief Financial Officer (CFO) and 376,055 for the Chief Risk Officer (CRO) (pro-rated in the above table to reflect his appointment to Executive Director).
2 Other remuneration payments comprise contractual cash payments to George Culmer as part of the buyout of benefits from his previous employer and income from all employee share plans, which arises through employer matching or discounting of employee purchases.
3 In addition to deferral and performance adjustment, the GCE’s bonus will only vest if the Group’s share price remains above 75.5 pence on average for any 126 consecutive trading days in the five years following grant or the UK government sells 100 per cent of its shareholding in the Group at any time during the three years following grant. 50 per cent of the award will vest and be released, at the earliest, on the second anniversary of the award if either of the conditions has been met by that date, with the remaining 50 per cent vesting no less than six months later. If neither of the conditions has been met by the fifth anniversary of the award, the award will lapse entirely.
7 Performance adjustment: the share price used for the valuation was the market price for a share in the Group at the award dates, 49.29 pence and 78.878 pence, respectively. For the CRO, the total number of shares (376,055) has been pro-rated to reflect his appointment to Executive Director on 29 November 2013.
– Balanced Scorecard performance: stretching objectives for each division were approved by the Committee around the start of the performance year. The objectives were aligned to the Group’s strategy and split across five categories: – Customer
BSC ratings are based on a scale ranging from ‘Under’ (at the lowest level), through ‘Developing’, ‘Good’, ‘Strong’ and up to ‘Top’ which is the highest rating. Each of these ratings may be further differentiated by the addition of ‘minus’ or ‘plus’.
– Low risk – the continued reduction in risk-weighted assets resulted in an improvement in the Group’s common equity tier 1 ratio and the asset quality ratio continued to improve, demonstrating the Group’s low risk position.
– Effective cost leadership – the ongoing Simplification programme has delivered £373 million of annual run-rate savings to date and is ahead of target in achieving £1 billion of savings by the end of 2017. The Group has increased investment in IT, with a focus on ensuring that systems and processes are both efficient and resilient.
– Maintained conditions that allowed UKFI to effect a significant reduction in the government shareholding. The UKFI shareholding is now around 9 per cent compared to around 25 per cent before the trading plan commenced in December 2014.
Based on a full assessment of performance, the Committee agreed an individual rating for 2015 of Strong Plus for the CFO. Expected outcomes are based on individual performance before taking into account a modifier based on underlying profit and the Finance division’s BSC, as follows: Rating Under Developing Good Strong Top
Following the Committee’s assessment of performance against the underlying profit target and the Risk division’s BSC objectives, and taking into account the collective performance adjustment of 26 per cent and the individual rating of Strong Plus, the Committee determined a 2015 bonus award to the CRO of £455,431 (63 per cent of maximum).
Deferral Consistent with the aim of ensuring that short-term financial results are only rewarded if they promote sustainable growth, the 2015 bonus awards for all Executive Directors are deferred into shares until at least March 2018 and subject to malus, clawback and a further holding period following vesting. They are also subject to remaining in the Group’s employment.
The Group Chief Executive’s 2015 bonus award is subject to an additional condition that the share price must remain above 75.5 pence on average for any 126 consecutive trading days in the five years following grant or the UK government sells 100 per cent of its shareholding during the three years following grant. 50 per cent of the award will vest and be released, at the earliest, on the second anniversary of the award if either of the conditions has been met by that date, with the remaining 50 per cent vesting no less than six months later. If neither of the conditions has been met by the fifth anniversary of the award, the award will lapse entirely.
% change in benefits 1 Adjusted for movements in staff numbers and other impacts to ensure a like-for-like comparison.
Total shareholder return indices – Lloyds Banking Group and FTSE 100 Lloyds return index
A summary of transactions undertaken in the year, including share plan awards vested plus open market purchases and sales made by Directors, is shown on page 102.
The performance conditions attached to these awards are set out in the table below. The performance period ends on 31 December 2017.
Absolute TSR Growth in share price including dividends over 3-year period
Economic profit Set relative to 2017 targets Threshold: £2,870m Maximum: £3,587m
Cost:income ratio Set relative to 2017 targets Threshold: 45.6% Maximum: 44.5%
António Horta-Osório 22,156 – – – 22,156 40.62p 1/6/2016 30/11/2016 1
The aggregate amount of gains made by Directors on the exercise of share options was £3,491,290.
None of the other Directors at 31 December 2015 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
27/03/15 83,799 Fixed Share Award 31/03/15 2,358,546 Exercise of Share Buy out Award 19/05/15 11,151 Dividend reinvestment 25/06/15 76,652 Fixed Share Award 25/06/15 357,526 Release of 2012 Deferred Bonus 02/09/15 357,526 Release of 2012 Deferred Bonus 28/09/15 41,358 Dividend reinvestment 29/09/15 90,867 Fixed Share Award 21/12/15 93,516 Fixed Share Award
Lord Blackwell 50,000 50,000 Alan Dickinson 50,000 30/10/2015 50,000 Purchase 100,000
Implementation of the policy in 2016 It is proposed to operate the policy in the following way in 2016: Base salary In line with the policy, when determining and reviewing base salary levels, 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.
When the Group Chief Executive Officer (GCE), António Horta-Osório, was appointed to the Board at the start of 2011 it was agreed that, reflecting the weak financial position of the Group at that time, his salary would initially be held at £1,061,000, a level below the prevailing market rate. To recognise this fact, the agreement with the GCE also contained a market related ‘reference salary’ of £1.22 million, to be used in setting long term remuneration such as pension and LTIP. Since 2011 the Group has achieved a successful transformation of its financial strength under his leadership and the government has reduced its shareholding from over 40 per cent to around 9 per cent. Until now, however, the GCE has received no increase in his base salary since joining the Board in January 2011, despite overall pay settlements in the Group, including the proposed 2 per cent for 2016, amounting to 13.8 per cent since 2011.
Salaries will therefore be as follows, effective dates shown below: There is no change to the GCE’s reference salary of £1.22 million which is used to calculate certain elements of long-term remuneration and the pension allowance.
Pension In line with the remuneration policy, Executive Directors are entitled to a pension allowance which they may choose to take as cash in lieu of pension contributions. The level of allowances has not been increased for 2016.
Deferral For the 2016 performance year, the annual bonus will be awarded in a combination of cash (up to 50 per cent) and shares. 40 per cent of the annual bonus will be released immediately on award, 40 per cent will be released on the first anniversary of award and the remaining 20 per cent will be released on the second anniversary of award. These deferral arangements will apply to the GCE and the other Executive Directors.
– Balanced scorecard (BSC) objectives comprising five categories (customer, people, control environment, building the business, finance) – 50 per cent
The awards made in 2016 will vest based on the Group’s performance against the following key measures: – Absolute Total Shareholder Return (30 per cent)
The Committee believes these measures capture risk management and profit growth and appropriately align management and shareholder interests.
The Committee may consider the application of malus and clawback as outlined in the annual bonus section above.
The annual Non-Executive Director fees were reviewed in November 2015. As a result of this review and following consultation with shareholders, for the first time since 2008, the fees were increased, as follows, to reflect market practice in financial services groups of a similar size. These changes took effect from 1 January 2016.
The following pages contain information that is required to be audited in compliance with the Directors’ remuneration requirements of the Companies Act 2006. All narrative and quantitative tables are unaudited unless otherwise stated.
Variable remuneration in respect of performance year 2015. LTIP values shown reflect awards for which the performance period ended on 31 December 2015 and include dividend equivalents. Pension costs based on a percentage of salary according to level.
The directors have recommended a final dividend, which is subject to approval by the shareholders at the Annual General Meeting, of 1.5 pence per share (2014: 0.75 pence per share) totalling £1,070 million (2014: £535 million). The directors have also recommended a special dividend of 0.5 pence per share (2014: nil) totalling £357 million (2014: £nil). The final and special dividend will be paid on 17 May 2016.
Deborah McWhinney and Stuart Sinclair have been appointed to the Board since the 2015 AGM and will therefore stand for election at the forthcoming AGM. In the interests of good governance and in accordance with the provisions of the UK Corporate Governance Code, all of the other Directors will retire, and those wishing to serve again, will submit themselves for re-election at the forthcoming AGM. Dyfrig John, an independent Non-Executive Director, has notified the Board that he does not intend to seek re-election at the 2016 AGM.
Information incorporated by reference The following additional information forms part of the Directors’ Report, and is incorporated by reference.
Group results Summary of Group results 35 to 41 Ordinary dividends Ordinary dividends – note to the accounts 241 Directors’ biographies Directors and their biographical details 56 to 57 Directors in 2015 Directors who served in 2015 56 to 57 Directors’ emoluments Directors’ emoluments and share interests 82 to 106 Internal control and financial risk management
Future developments 2 to 33 Greenhouse gas emissions (additional information) 27 Inclusion and diversity 26 Engaging colleagues (additional information) 22
Post balance sheet events Events since the balance sheet date - note to the accounts 279
Viability statement The Directors have an obligation under the UK Corporate Governance Code to state whether they believe the Company and the Group will be able to continue in operation and meet their liabilities as they fall due over a specified period determined by the Directors, taking account of the current financial position and the principal risks of the Company and the Group.
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, these powers include the Directors’ ability to issue or buy back shares. The Directors were granted authorities to issue and allot shares and to buy back shares at the 2015 AGM. Shareholders will be asked to renew these authorities at the 2016 AGM.
The Solicitor for the Affairs of Her Majesty’s Treasury 7,057,718,7922 9.89%
The Company is party to a deed of covenant with each of the four Lloyds Foundations (the Foundations) which hold limited voting shares in the Company (the limited voting shares are further described in note 41 on pages 237 to 238). Under the terms of the deeds of covenant, the Company makes an annual payment to each of the Foundations. In the event of a successful offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting share would convert to an ordinary share under the terms of the Company’s articles of association. The payment obligation under the deeds of covenant would come to an end one year following the conversion of the limited voting shares.
Methodology The Group follows the principles of the Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard to calculate our Scope 1, 2 and 3 emissions from our worldwide operations.
The reporting period is 1 October 2014 to 30 September 2015, which is different to that of our Directors’ report (January 2015 – December 2015). This is in line with Regulations in that the majority of the emissions reporting year falls within the period of the Directors’ report. Emissions are reported based on an operational boundary. The scope of reporting is in line with the GHG Protocol and covers Scope 1, Scope 2 and Scope 3 emissions. Reported Scope 1 emissions cover emissions generated from gas and oil used in buildings, emissions from UK company-owned vehicles used for business travel and emissions from the use of air conditioning and chiller/ refrigerant plant. Reported Scope 2 emissions cover emissions generated from the use of electricity. Reported Scope 3 emissions relate to business travel undertaken by colleagues and emissions associated with the extraction and distribution of each of our energy sources – electricity, gas and oil. A detailed definition of these emissions can be found in our 2015 Reporting Criteria online at www.lloydsbankinggroup.com/ RBdownloads
Intensity ratio An intensity ratio of GHG gases per £m of underlying income has been selected.
Our award-winning workplace adjustment programme, which provides physical and non-physical adjustments to all colleagues including disabled colleagues, carried out more than 6,300 adjustments in 2015, bringing the total to 28,000 since the programme started in 2002. We retained our Gold Standard in the Business Disability Forum Benchmark with a score of 98. The Disability Standard establishes what best practice is across the business in terms of disability performance and recognises the adjustments the Group has made for employees, candidates and customers as part of the Group Disability Programme.
Each of the current Directors, who are in office and whose names and functions are listed on pages 56 and 57 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; and – the management report contained in the strategic report and the directors’ report includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face.
Governance and control – 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. – Governance is maintained through delegation of authority from the Board down to individuals through the management hierarchy. Senior executives are supported by a committeebased structure which is designed to ensure open challenge and support effective decision making. – The Group’s risk appetite, principles, policies, procedures, controls and reporting are regularly reviewed and updated where needed to ensure they remain fully in line with regulations, law, corporate governance and industry good-practice. – The interaction of the executive and non-executive governance structures relies upon a culture of transparency and openness that is encouraged by both the Board and senior management. – Board-level engagement, coupled with the direct involvement of senior management in Groupwide risk issues at Group Executive Committee level, ensures that escalated issues are promptly addressed and remediation plans are initiated where required. – Line management is directly accountable for identifying and managing risks in their individual businesses, ensuring that business decisions strike an appropriate balance between risk and reward consistent with the Group’s risk appetite.
As part of a conservative business model that embodies a risk culture founded on a prudent approach to managing risk, the Group refreshed its Codes of Business and Personal Responsibility in 2015 reinforcing its approach where colleagues are accountable for the risks they take and where the needs of customers are paramount.
2 As a separate regulated business, Insurance maintains its own regulatory solvency requirements, including appropriate management buffers, and reports directly to Insurance Board. Insurance does not hold any RWAs, as its assets are removed from the Banking Group’s regulatory capital calculations. However, part of the Group’s investment in Insurance is included in the calculation of Threshold RWAs, subject to the CRD IV rules, while the remainder is taken as a capital deduction.
3 Exposures relating to the default fund of a central counterparty and credit valuation adjustments are included in Credit Risk and Counterparty Credit Risk respectively for the purposes of this table.
Principal risks The Group’s principal risks are shown in the risk overview (pages 28 to 33). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk drivers is on pages 120 to 169.
– Organisational and behavioural effectiveness is reviewed through regular Group Strategic Reviews, ensuring the continued drive for simplicity and efficiency, and the building of new capabilities to support sustainable growth. – Sustained and continuing investment in digital capability and customer channels with our plans progressively updated to reflect market trends and customer behaviour.
– Delivery of the Group cyber control framework, aligned to industry-recognised cyber security framework, and continued investment in the Group’s Cyber Programme to ensure integrity of key systems and processes remains a priority. – Resilience programmes in place to protect the integrity and availability of the Group’s systems and mitigate the impacts of cyber-attacks.
Leveraging data: Increasing regulatory scrutiny under EU Data Protection Regulation may limit the extent to which customer data can be used to support the Group in achieving its strategic objectives.
The Group uses scenario stress testing to: – Assess its strategic plans to adverse economic conditions and understand key vulnerabilities of the Group. – Assess results against Board risk appetite to ensure the Group is managed within its risk parameters, allowing senior management and the Board to adjust strategies if the plan does not meet risk appetite in a stressed scenario. At the same time, the results of the stress tests will also inform the setting of risk appetite by assessing the underlying risks under stress conditions. – Drive the development of potential actions and contingency plans to mitigate the impact of adverse scenarios. Stress testing also links directly to the Group’s Recovery Planning process. – Support the Internal Capital Adequacy Assessment Process (ICAAP) by demonstrating capital adequacy, and meet the requirements of regulatory stress tests that are used to inform the setting of the Group’s PRA buffer (see Capital Risk on pages 160 to 165). – Meet the required standards and the information needs of internal and external stakeholders, including regulators.
HOW RISK IS MANAGED IN LLOYDS BANKING GROUP The Group’s Risk Management Framework (RMF) (see risk overview, page 29) is structured around the following nine components which meet and align with the industry-accepted internal control framework issued by the Committee of Sponsoring Organisations of the Treadway Commission. The RMF provides the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also seeks to facilitate effective communication on these matters across the Group.
Three Lines of Defence model – the RMF is implemented through a ‘Three Lines of Defence’ model which defines clear responsibilities and accountabilities and ensures effective independent oversight and assurance activities take place covering key decisions.
– Business lines (first line) have primary responsibility for risk decisions, identifying, measuring, monitoring and controlling risks within their areas of accountability. They are required to establish effective governance, and control frameworks for their business to be compliant with Group Policy requirements, to maintain appropriate risk management skills, mechanisms and toolkits, and to act within Group risk appetite parameters set and approved by the Board.
The Chief Risk Officer is accountable for developing and leading an industry-wide recognised Risk function that adds value to the Group by: – providing a regular comprehensive view of the Group’s risk profile, key risks both current and emerging, and management actions; – (with input from the business areas and Risk Division) proposing Group risk appetite to the Board for approval, and overseeing performance of the Group against risk appetite; – developing an effective RMF which meets regulatory requirements for approval by the Board, and overseeing execution and compliance; and – challenging management on emerging risks and providing expert risk and control advice to help management maintain an effective risk and control framework.
Insurance Risk through the governance arrangements for Insurance Group (Insurance Group is a separate regulated entity with its own Board, governance structure and Chief Risk Officer)
Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the Corporate Governance section on pages 60 to 81, for further information on Board committees.
Pensions Committee Supports the Chief Financial Officer in relation to Group pension arrangements.
Monitors and reviews the Group’s aggregate market risk exposures and concentrations and provides a proactive and robust challenge around business activities giving rise to market risks.
Group Financial Crime Committee Reviews and challenges the management of financial crime risk including the overall strategy and performance and engagement with financial crime authorities. The committee is accountable for ensuring that, at Group level, financial crime risks are effectively identified and managed within risk appetite and that strategies for financial crime prevention are effectively coordinated and implemented across the Group.
Risk appetite Credit risk appetite is described and reported on a monthly basis through a suite of Board metrics derived from credit portfolio performance measures. The Board metrics are supported by more detailed sub-Board appetite metrics at Divisional and Business level and by a comprehensive suite of credit risk appetite statements, credit policies, sector caps, and product and country limits to manage concentration risk and exposures within the Group’s approved risk appetite. The metrics cover but are not limited to geographic concentration, single name customer concentration, product exposure, Loan to Value ratios (LTVs), higher risk sector concentration, limit utilisation, leveraged exposure, equity exposure, affordability and the obligor quality of new to bank lending.
Credit risk also arises from debt securities and derivatives. The total notional principal amount of interest rate, exchange rate, credit derivative and other contracts outstanding at 31 December 2015 is shown on page 129. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 53 on page 265.
Measurement In measuring the credit risk of loans and advances to customers and to banks at a counterparty level, the Group reflects three components: (i) the ‘probability of default’ by the counterparty on its contractual obligations; (ii) current exposures to the counterparty and their likely future development, from which the Group derives the ‘exposure at default’; and (iii) the likely loss ratio on the defaulted obligations (the ‘loss given default’).
In the principal retail portfolios, exposure at default and loss given default models are also in use. For regulatory reporting purposes, counterparties are also segmented into a number of rating grades, each representing a defined range of default probabilities and exposures migrate between rating grades if the assessment of the counterparty probability of default changes. The Retail Master scale comprises 13 non-default ratings and one default rating.
Strong rating systems and controls: The Group has established an independent team in the Risk Division that sets common minimum standards, designed to ensure risk models and associated rating systems are developed consistently and are of sufficient quality to support business decisions and meet regulatory requirements. Internal rating systems are developed and owned by the Risk Division. The designated model owner takes responsibility for ensuring the validation of the rating systems, supported and challenged by an independent specialist Group function.
Stress testing and scenario analysis: The Group’s credit portfolios are also subjected to regular stress testing, with stress scenario assessments run at various levels of the organisation. Exercises focused on individual divisions and portfolios are performed in addition to the Group led and regulatory stress tests. For further information on the stress testing process, methodology and governance refer to page 115.
The Group’s approach to underwriting applications for unsecured products ensures that lending is affordable and sustainable. The Group takes reasonable steps to validate information used in the assessment of a customer’s income and expenditure. The Group rejects any application for an unsecured lending product where a customer is registered as bankrupt or insolvent, or has a County Court Judgment in excess of £1,000 registered at a CRA used by the Group. In addition, the Group rejects any applicant with total unsecured debt greater than £50,000 registered at the CRA; policy rules are also in place to provide additional scrutiny to applications where an applicant’s total unsecured debt-to-income ratio greater than 100 per cent.
Additional mitigation for Commercial customers Individual credit assessment and independent sanction of customer and bank limits: With the exception of small exposures to SME customers where relationship managers have limited delegated sanctioning authority, credit risk in commercial customer portfolios are subject to sanction by the independent Risk Division, which considers the strengths and weaknesses of individual transactions, the balance of risk and reward, and how credit risk aligns to the Group’s risk appetite. Exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a tiered hierarchy of delegated sanctioning authorities and limit guidelines. Approval requirements for each decision are based on a number of factors including the transaction amount, the customer’s aggregate facilities, credit risk ratings and the nature and term of the risk. The Group’s credit risk appetite criteria for counterparty and customer underwriting is generally the same as that for assets intended to be held to maturity. All underwriting must be sanctioned via credit limits.
Those forborne loans which fall below individual assessment limits are grouped with other assets of similar characteristics and assessed collectively for impairment in accordance with the Group impairment policy detailed in note 2(H). The Group’s approach is to ensure that provisioning models, supported by management judgement, appropriately reflect the underlying loss risk of exposures. The performance and output of models are monitored and challenged on an ongoing basis, in line with the Group’s model governance policies.
Customers in financial difficulty receiving support under other schemes The Group measures the success of a forbearance scheme based upon the proportion of customers performing (less than or equal to three months in arrears) over the 24 months following the exit from a forbearance treatment. For temporary treatments, 79 per cent of customers accepting reduced payment arrangements are performing. For permanent treatments, 82 per cent of customers who have accepted capitalisations of arrears and 84 per cent of customers who have accepted term extensions are performing.
A detailed assessment is undertaken for cases in BSU to assist in reducing and minimising risk exposure and to also highlight potential strategic options. A range of information is required to fully appraise and understand the customer’s business, cashflow (and therefore debt serviceability) and will involve the Group, in addition to using its own internal sector experts, engaging professional advisers to perform asset valuations, strategic reviews and where applicable, independent business reviews. The assessment may also involve: – critically assessing customer’s ability to successfully manage the business effectively in a distressed situation where turnaround is required; – analysis of market sector factors, i.e. products, customers, suppliers, pricing and margin issues; – performance review of operational areas that should be considered in terms of current effectiveness and efficiency and scope for improvements; – financial analysis to model plans and factor in potential sensitivities, vulnerabilities and upsides; and – determining the most appropriate corporate and capital structure suitable for the work-out strategy concerned.
Types of forbearance The Group’s strategy and offer of forbearance is largely dependent on the individual situation and early identification, control and monitoring are key to supporting the customer and protecting the Group. Concessions are often provided to help the customer with their day to day liquidity and working capital. A number of options are available to the Group where a customer is facing financial difficulty, and each case is treated depending on its own specific circumstances.
Impairment charge as a % of average advances1 0.14% 0.23% (9)bps 1 Excludes TSB.
Total Group 482,704 1 Impairment provisions include collective unidentified impairment provisions.
2 Impairment provisions as a percentage of impaired loans are calculated excluding Retail and Consumer Finance loans in recoveries (31 December 2015: £335 million in Retail Loans and Overdrafts, £28 million in Retail other and £179 million in Consumer Finance credit cards; 31 December 2014: £437 million in Retail loans and overdrafts, £26 million in Retail other and £282 million in Consumer Finance Credit Cards).
The total notional principle amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2015 and 31 December 2014 is shown in the table above. The notional principle amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 53 on page 266.
Retail – The impairment charge was £432 million in 2015, a decrease of 28 per cent against 2014. The decrease reflects continued low risk underwriting discipline, strong portfolio management and a favourable credit environment with low unemployment, increasing house prices and continued low interest rates. – The impairment charge, as a percentage of average loans and advances to customers, improved to 14 basis points in 2015 from 19 basis points in 2014. – Impaired loans decreased by £433 million to £4,494 million, which represented 1.4 per cent of closing loans and advances to customers at 31 December 2015 (31 December 2014: 1.6 per cent). – Retail Division Impairment coverage has increased to 40.4 per cent from 38.8 per cent at the end of 2014, with Secured coverage increasing 0.5 per cent to 37.5 per cent.
Forborne loans At 31 December 2015, UK secured loans and advances currently or recently subject to forbearance were 1.0 per cent (31 December 2014: 1.4 per cent) of total UK secured loans and advances. The reduction in forbearance is due to the overall improvement of credit quality in the portfolio. Loans and overdrafts currently or recently subject to forbearance were 1.5 per cent (31 December 2014: 1.6 per cent) of total loans and overdrafts.
Impairment provisions as % of loans and advances which are forborne1
3 Includes customers who had an arrangement to pay less than the contractual amount at 31 December or where an arrangement ended within the previous three months.
Commercial Banking – There was a net impairment release of £22 million in 2015, compared to a charge of £83 million in 2014. This has been driven by lower levels of new impairment as a result of effective risk management, improving UK economic conditions and the continued low interest rate environment; as well as write backs and provision releases, but at lower levels than seen during 2014. – The credit quality of the portfolio and new business remains good. Surplus market liquidity continues to lead to some relaxation of credit conditions in the marketplace, although the Group remains disciplined within its low risk appetite approach. – Impaired loans reduced by 22 per cent to £2,528 million at 31 December 2015 compared with 31 December 2014 (£3,241 million) and as a percentage of closing loans and advances reduced to 2.5 per cent from 3.2 per cent at 31 December 2014. – Impairment provisions reduced to £1,087 million at 31 December 2015 (December 2014: £1,594 million) and includes collective unidentified impairment provisions of £229 million (31 December 2014: £338 million). Provisions as a percentage of impaired loans reduced from 49.2 per cent to 43.0 per cent, predominantly due to the change in the mix of impaired assets during 2015, with newly impaired connections having lower coverage levels compared
Risk management to the portfolio average. The decrease is also partly due to the reduction in the collective unidentified impairment provisions fund during the year as a result of improved conditions. – The Group expects to benefit from its continued disciplined approach to the management of credit, and sustained UK economic growth. Nevertheless, market volatility and the uncertain global economic outlook such as the continued slowdown in Chinese economic growth and the fall in commodity prices may impact the Commercial portfolios. – The Group manages and limits exposure to certain sectors and asset classes, and closely monitors credit quality, sector and single name concentrations. This together with our conservative through the cycle risk appetite approach, means our portfolios are well positioned.
– In the Mid Markets portfolio, credit quality has remained stable. The portfolio is focused on UK businesses and dependent on the performance of the domestic economy and to some extent, the global economy. The oil and gas services element of the portfolio has been reviewed given ongoing low oil prices and this review has not revealed any material concerns with portfolio quality at this time. – The Global Corporate business continues to have a predominance of investment grade clients, primarily UK based. As a result of this profile, allied to our conservative risk appetite, our portfolio remains of good quality despite the current global economic headwinds particularly relating to the energy and mining sectors. We continue to monitor the portfolio closely to ensure there is no material deterioration. – The real estate business within the Group’s Mid Markets and Global Corporate 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. The market for UK real estate has been buoyant and credit quality remains good with minimal impairments/stressed loans. All asset classes are attracting investment but, recognising this is a cyclical sector, appropriate caps are in place to control exposure and business propositions continue to be written in line with prudent risk appetite with conservative LTV, strong quality of income and proven management teams. – Financial Institutions serves predominantly investment grade counterparties with whom relationships are either client focused or held to support the Group’s funding, liquidity or general hedging requirements.
Commercial Banking UK Direct Real Estate LTV analysis – The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities (as opposed to trading activities such as hotels, care homes and housebuilders). – The Group manages its exposures to Direct Real Estate across a number of different coverage segments. – Approximately 70 per cent of loans and advances to UK Direct Real Estate relate to commercial real estate with the remainder residential real estate. – The Group makes use of a variety of methodologies to assess the value of property collateral, where external valuations are not available. These include use of market indices, models and subject matter expert judgement. – The LTV profile of the UK Direct Real Estate portfolio in Commercial Banking continues to improve.
Classified as impaired during the year: Transferred to unimpaired: Exposures >£5m but still reported as forborne (15) (268)
The table below sets out the largest unimpaired forborne loans and advances to Commercial Banking customers (exposures over £5 million) as at 31 December 2015 by type of forbearance: Table 1.23: Commercial Banking unimpaired forborne loans and advances (audited)
2 2014 included £475 million in respect of two loans transferred from Run-off.
Consumer Finance – The impairment charge reduced by 29 per cent to £152 million from £215 million in 2014. The reduction was driven by a continued underlying improvement of portfolio quality supported by an increased level of write-backs from the sale of recoveries assets in the Credit Cards portfolio. – Impairment provisions as a percentage of impaired loans have increased to 72.8 per cent from 70.5 per cent at 31 December 2014, with Credit Cards increasing by 5.3 percentage points to 81.8 per cent and Asset Finance UK decreasing by 2.8 percentage points to 67.2 per cent. – Loans and advances increased by £2,665 million to £23,938 million during 2015. The growth was achieved in both Asset Finance UK and Credit Cards portfolio with no relaxation in risk appetite and underwriting standards. Impaired loans decreased by £177 million in 2015 to £543 million which represented 2.3 per cent of closing loans and advances to customers (31 December 2014: 3.4 per cent).
Forborne loans At 31 December 2015, Consumer Credit Card loans and advances currently or recently subject to forbearance were 2.4 per cent (31 December 2014: 2.6 per cent) of total Consumer Credit Card loans and advances. At 31 December 2015, Asset Finance UK Retail loans and advances on open portfolios currently or recently subject to forbearance were 1.4 per cent (31 December 2014: 2.1 per cent) of total Asset Finance UK Retail loans and advances. Further analysis of the forborne loans and advances is set out below: Table 1.27: Consumer Finance forborne loans and advances (audited)
Consumer Credit Cards and Asset Finance UK Retail forborne loans have reduced in 2015 by £9 million and £9 million respectively, driven primarily by improvements in the underlying quality of the portfolios. The movements in forborne loans and advances during the year were as follows: Table 1.28: Movement in Consumer Finance forborne loans and advances (audited)
Run-off – With the exception of a small residual book (£37 million of which £5 million is impaired), the Irish Wholesale book (which contained the Commercial Real Estate portfolio), is now effectively exited following completion of the divestment announced on 30 July 2015. The Ireland Retail portfolio has reduced from £4,464 million at 31 December 2014 to £4,040 million at 31 December 2015. – The Corporate real estate and other corporate portfolio has continued to reduce significantly ahead of expectations. Net loans and advances reduced by £1,908 million, from £3,036 million to £1,128 million for 2015. – Net loans and advances for the specialist finance asset based run-off portfolio stood at £4,001 million at 31 December 2015 (gross £4,190 million), and include Ship Finance, Aircraft Finance and Infrastructure, with around half of the remaining lending in the lower risk leasing sector. Including the reducing Treasury Asset Legacy investment portfolio, and operating losses, total net external assets reduced to £5,552 million at 31 December 2015 (gross £5,742 million). – Ireland retail loans and advances with an indexed LTV in excess of 100 per cent decreased to £1,269 million (31.4 per cent) at 31 December 2015, compared with £1,737 million (38.9 per cent) at 31 December 2014. Of this amount £71 million were impaired (31 December 2014: £78 million).
Run-off Corporate real estate, other corporate and Specialist Finance At 31 December 2015 £1,780 million (31 December 2014: £1,998 million) of total loans and advances were forborne of which £1,771 million (31 December 2014: £1,912 million) were impaired. Impairment provisions as a percentage of forborne loans and advances decreased from 58.3 per cent at 31 December 2014 to 52.5 per cent at 31 December 2015.
For multi-country asset backed securities exposures, the Group has reported exposures based on the largest country exposure. The country of exposure for asset backed securities is based on the location of the underlying assets which are predominantly residential mortgages not on the domicile of the issuer.
For Insurance, the Group has reported shareholder exposures i.e. where the Group is directly exposed to risk of loss. These shareholder exposures relate to direct investments where the issuer is resident in the named Eurozone country and the credit rating is consistent with the tight credit criteria defined under the appropriate investment mandate. Insurance also has interests in two funds domiciled in Ireland (Global Liquidity Fund and the Investment Cash Fund) where, in line with the investment mandates, cash is invested in short term financial instruments. For these funds, the exposure is analysed on a look through basis to the country risk of the obligors of the underlying assets rather than treating the insurance holding in the funds as exposure to Ireland.
In addition to the exposures detailed above, the Group has the following exposures to sovereigns, financial institutions, asset backed securities, corporates and personal customers in the following Eurozone countries: Table 1.34: Other Eurozone exposures Sovereign debt
Within Commercial Banking, an electronic environmental risk screening system has been the primary mechanism for assessing environmental risk in lending transactions. This system provides screening of location specific and sector based risks that may be present in a transaction. Identified risk results in the transaction referred to the Group’s expert in-house environmental risk team for further review and assessment, as outlined below. Where required, the Group’s panel of environmental consultants provide additional expert support.
The Group has been a signatory to the Equator Principles since 2006 and has adopted and applied the expanded scope of Equator Principles III. The Equator Principles support the Group’s approach to assessing and managing environmental and social issues in Project Finance, Project-Related Corporate loans and Bridge loans. Further information is contained within the Group’s Responsible Business Review ( com/our-group/responsible-business/our-approach/managing-risk/).
MARKET RISK Definition Market risk is defined as the risk that unfavourable market moves (including changes in and increased volatility of interest rates, market implied inflation rates, credit spreads and bond prices, foreign exchange rates, equity, property and commodity prices and other instruments), lead to reductions in earnings and/or value.
Loans and advances to banks 25,117 – 3,385 21,732 Interest rate
Loans and advances to customers 455,175 – 455,175 – Interest rate
Foreign exchange risk Economic foreign exchange exposure arises from the Group’s investment in its overseas operations (net investment exposures are disclosed in note 53 on page 265). In addition, the Group incurs foreign exchange risk through non-functional currency flows from services provided by customer facing divisions and the Group’s debt and capital management programmes.
The table below shows the banking book income sensitivity to an instantaneous parallel up and down 25 and 100 basis points change to all interest rates.
Client facing activity and associated hedges 152.4 (140.1) 604.7 (464.2) (4.6) (46.0) 176.3 (222.3)
Sub-total 1 VaR over 2015 is based on diversified VaR across risk factors following the PRA granting the Group permission to calculate VaR on a diversified basis. We have applied the same diversification approach for 2014.
Risk appetite The Group’s operational risk appetite is designed to safeguard the interests of customers, internal and external stakeholders, and shareholders. Appetite is expressed through four high level statements summarised below, each of which are defined with limits and triggers approved by the Board, and are regularly monitored by executive and Board Risk Committee (BRC): – Customer: The Group builds trust and does not expect its customers to be impacted negatively. – Reputation: The Group does not expect to suffer events or behaviours that have a material negative impact on its reputation. The Group minimises the impact from cyber attacks that could result in a significant loss of customer confidence or undermine the stability of the Group. – Financial loss: The Group does not expect to experience cumulative fraud or operational losses above 3 per cent or more of budgeted Group income, or individual losses of more than £100 million. – Management time and resources: The Group does not expect internal events that divert excessive senior management time from running the business or have extensive impact on colleague time and/or morale.
Exposures The principal operational risks to the Group are: – The risk that the Group is unable to provide services to customers as a result of an IT systems failure; – Cyber risks associated with malicious attacks on the confidentiality or integrity of electronic data, or the availability of systems; – External fraud arising from an act of deception or omission; – Risks arising from inadequate delivery of services to customers; and – The risk associated with the ongoing provision of services to TSB and other organisations.
Table 1.43: Operational risk events by risk category (losses greater than or equal to £10,000) % of total volume % of total losses
Monitoring Monitoring and reporting is undertaken at Board, Group and business area committees, in accordance with delegated limits of authority which are regularly reviewed and refreshed. Business unit risk exposure is aggregated and discussed at the Group Conduct, Compliance and Operational Risk Committee, and matters are escalated to the Chief Risk Officer, or higher committees, if appropriate. A combination of: regular management information and reporting from business areas, oversight and challenge from Risk Division, Group Audit and other assurance activities ensures that key risks are regularly presented and debated by executive management.
Risk appetite Funding and liquidity risk is managed separately for the Banking and Insurance businesses. Funding and liquidity risk appetite for the Banking business is set with the support of the Group Asset and Liability Committee (GALCO). The liquidity risk appetite for the Insurance business is reviewed and set annually by the Insurance Board.
For the Banking Group, the liquidity risk appetite covers a range of metrics considered key to maintaining a strong liquidity and funding position, including a number of stressed metrics, with regular reporting to GALCO and the Board. Risk appetite is a key element of the annual Group planning process with risk appetite defined over the life of the funding plan. For further information on risk appetite refer to page 112.
The Group’s funding and liquidity position is underpinned by its significant customer deposit base, and is supported by strong relationships with corporate customers and certain wholesale market segments. A substantial proportion of the retail deposit base is made up of customers’ current and savings accounts which, although mostly repayable on demand, have traditionally in aggregate provided a stable source of funding. Funding concentration by counterparty and currency is monitored on an ongoing basis. Where concentrations do exist (for example, maturity profile), these are limited by the internal risk appetite and considered manageable. The ability to deploy assets quickly, either through the repo market or through outright sale, is also an important source of liquidity for the Group’s Banking businesses.
To assist in managing the balance sheet the Group operates an LTP process which: allocates relevant interest expenses from the centre to the Group’s Banking businesses within the internal management accounts in a manner consistent with the Group Funding and Liquidity Policy; helps drive the correct inputs to customer pricing and supports the overall Group balance sheet strategy; and is consistent with regulatory requirements.
Relevant interest expenses allocated via LTP include term funding spreads incurred over a three month LIBOR benchmark and the cost of funding and holding liquid asset reserves. LTP makes extensive use of behavioural maturity profiles, taking account of expected customer loan prepayments and stability of customer deposits. Such behavioural maturity assumptions are subject to formal governance, reviewed at least annually and founded on analysis and evidence of actual customer behaviour using historical data gathered over several years.
Liquidity risk within the Insurance business may result from: the inability to sell financial assets quickly at their fair values; an insurance liability falling due for payment earlier than expected; the inability to generate cash inflows as anticipated; an unexpected large operational event; or from a general insurance catastrophe e.g. a significant weather event. Following the implementation of Solvency II, the annuity portfolio is ring-fenced and assets held to match annuity liability cashflows are excluded from shareholder liquidity. In the event a liquidity shortfall arises on the annuity portfolio, shareholder liquidity will be required to support this. As a result, the shareholder’s exposure to liquidity risk is through Insurance’s non-annuity and surplus assets, any shortfall arising in the annuity portfolio and the investment portfolios within the general insurance business. Liquidity risk is actively managed and monitored within the Insurance business to ensure that, even under stress conditions, there is sufficient liquidity to meet obligations and remain within approved risk appetite. In addition, liquidity risk is controlled via approved funding and liquidity policies.
1 Comparative 2014 data relates to Individual Liquidity Adequacy Standards (ILAS) eligible primary liquid assets.
Repurchase agreements – 1.1 1 Excludes £nil (31 December 2014: £5.1 billion) of reverse repurchase agreements.
4 Cash balances and balances at central banks are combined in the Group’s balance sheet.
5 Other assets and other liabilities primarily include balances in the Group’s Insurance business and the fair value of derivative assets and liabilities.
2 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
Table 1.49: Analysis of 2015 term issuance (audited) Sterling £bn US dollar £bn Euro £bn
Of which is issued by Lloyds Banking Group plc2 – 0.3 – – 0.3 1 Private placements include structured bonds and term repurchase agreements (repos).
2 Designated multilateral development bank (MDB). Includes eligible government guaranteed bonds.
Table 1.51: LCR eligible assets by currency At 31 December 2015
Total liquidity 221.2 208.5 1 Primary and secondary liquidity as defined under the ILAS regulatory system.
Total £bn 1 Primary and secondary liquidity as defined under the ILAS regulatory system.
The Group considers diversification across geography, currency, markets and tenor when assessing appropriate holdings of primary and secondary liquid assets. This liquidity is managed as a single pool in the centre and is under the control of the function charged with managing the liquidity of the Group. It is available for deployment at immediate notice, subject to complying with regulatory requirements, and is a key component of the Group’s liquidity management process.
– Encumbered assets: Assets recognised on the Group’s balance sheet which have been pledged as collateral against an existing liability, and as a result are assets which are unavailable to the Group to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements. – Pre-positioned and encumbered assets held with central banks: Assets which have been delivered to central banks to facilitate future drawdowns under central bank funding schemes and assets which are encumbered under such schemes.
The following assets are classified as unencumbered – cannot be used: assets held within the Group’s Insurance businesses which are generally held to either back liabilities to policyholders or to support the solvency of the Insurance subsidiaries; assets held within consolidated limited liability partnerships which provide security for the Group’s obligations to its pension schemes; assets pledged to facilitate the use of intra-day payment and settlement systems; and reverse repos and derivatives balance sheet ledger items.
and encumbered assets held with central banks Unencumbered assets not pre-positioned with central banks Total
Loans and receivables: Loans and advances to banks – – 37 37 – 431 910 23,739 25,080 25,117
Loans and advances to customers 25,534 39,280 7,850 72,664 107,803 16,086 161,458 124,693 302,237 482,704
1 Other comprises: items in the course of collection from banks, investment properties, goodwill, value of in-force business, other intangible assets, tangible fixed assets, current tax recoverable, deferred tax assets, retirement benefit assets and other assets.
Measurement The Group measures the amount of capital it holds using the regulatory framework defined by the Capital Requirements Directive and Regulation (CRD IV) as implemented in the UK by the Prudential Regulation Authority (PRA). Full details of the Group’s regulatory capital framework are provided on page 14 of the Pillar 3 Report.
Additional minimum requirements are set by the PRA by the issuance of bank specific Individual Capital Guidance (ICG). This reflects a point in time estimate by the PRA, which may change over time, of the total amount of capital that is needed by the bank. It includes the assessment of 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. During 2015 the PRA increased the Group’s ICG such that at 31 December 2015 it represented 4.6 per cent of risk-weighted assets of which 2.6 per cent had to be covered by CET1 capital. The Group believes that the increase reflects the impact of market and economic factors and the reduction in risk-weighted assets rather than any fundamental changes to the nature of the underlying risks. However the Group is not permitted by the PRA to give any further details of the quantum of the individual components.
The FPC can also set sectoral capital requirements which are temporary increases to banks’ capital requirements on exposures to specific sectors, if the FPC judges that exuberant lending to those sectors poses risks to financial stability. No sectoral capital requirements currently apply to the Group.
As part of the capital planning process, forecast capital positions are subjected to extensive stress analyses to determine the adequacy of the Group’s capital resources against the minimum requirements, including ICG. The PRA uses the outputs from some of these stress analyses to inform the setting of a minimum level of capital buffer for the Group. Prior to 2016 this was known as the Capital Planning Buffer but has now been replaced by the PRA Buffer which is set taking account of the capital conservation buffer, countercyclical capital buffer and any sectoral capital requirements that already apply to the Group. The PRA requires the PRA Buffer to remain confidential between the Group and the PRA.
Capital management in 2015 The continued strengthening of the Group’s capital position during 2015, through a combination of increased underlying profits, net of PPI and other conduct charges, and a reduction in risk-weighted assets, provided the Group with the ability to pay both an interim dividend at half year and to recommend the payment of both a full year ordinary dividend and a special dividend whilst maintaining strong capital ratios.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At 31 December 2015 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £7,500 million. Substantially all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009.
Adjustment to retained earnings for foreseeable dividends (1,427) (535) (1,427) (535)
Table 1.56: Movements in capital resources Common equity tier 1 £m
Dividends paid out on ordinary shares during the year (1,070) (1,070)
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 can then be recognised as CET1 capital.
CET1 capital resources have reduced by £2,145 million in the year largely as a result of dividends paid out during the year and the accrual of the full year ordinary dividend and special dividend, representing returns to ordinary shareholders following strong underlying profit generation. Other reductions to CET1 capital primarily reflected the removal of eligible minority interest related to TSB and movements in treasury shares, employee share schemes and the AFS reserve. These reductions in CET 1 capital were partially offset by reductions in both the deferred tax asset deduction and the excess of expected losses over impairment provisions and value adjustments.
AT1 capital resources have reduced by £869 million in the year, primarily reflecting the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments and an increase in the significant investments deduction.
Contributions to the default fund of a central counterparty 488 515
Fully loaded risk-weighted assets 222,747 239,734 1 Threshold risk-weighted assets reflect the element 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.
The risk-weighted assets movement tables provide analyses of the reduction in risk-weighted assets in the period by risk type and an insight into the key drivers of the movements. The key driver analysis is compiled on a monthly basis through the identification and categorisation of risk-weighted asset movements and is subject to management judgment.
1 Restated to align with the amended CRD IV rules on leverage implemented in January 2015.
Each life insurance company within the Group is regulated by the PRA. The PRA specifies the minimum amount of capital that must be held by each life insurance company within the Group. Under the PRA rules, applying during the year, each life insurance company within the Group must hold assets in excess of the higher of: (i) the Pillar 1 amount, which is calculated by applying fixed percentages of mathematical reserves and capital at risk; and
(ii) the Pillar 2 amount, which is derived from an economic capital assessment undertaken by each regulated life insurance company, which is reviewed by the PRA.
The new Solvency II regime for insurers and insurance groups is in force from 1 January 2016. The insurance businesses are required to calculate capital requirements and available capital on a revised risk-based approach. The insurance business of the Group will calculate regulatory capital from 1 January 2016 on the basis of an internal model, which was approved by the PRA on 5 December 2015. The estimated solvency II capital ratio of SWG at 1 January 2016 was 148 per cent before allowing for dividends.
Insurance risk appetite for longevity in the defined benefit pension schemes is set by the Board using two key metrics: a one year increase to life expectancy, and a combined market and longevity stress.
Measurement Insurance 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 risk exposures are assessed and aggregated on a range of stresses including risk measures based on 1-in-200 year stresses for Insurance’s regulatory capital assessments (Group defined benefit pension schemes utilise 1-in-20 year stresses) and other supporting measures where appropriate, including those set out in note 34 to the financial statements.
The most significant insurance risk in the defined benefit pension schemes is longevity risk. The merits of longevity risk transfer and hedging solutions are regularly reviewed.
Definition People risk is defined as the risk that the Group fails to lead, manage and enable colleagues to deliver to customers, shareholders and regulators leading to an inability to deliver the Group’s strategy.
Monitoring People risks from across the Group are monitored and reported through Board and Group Governance Committees in accordance with the Group’s Risk Management Framework and People Risk sub-framework. Risk exposures are discussed monthly via the Group HR & People Risk Committee with upwards reporting to Group Risk and Executive Committees. In addition oversight, challenge and reporting is completed at Risk Division level and combined with Risk Assurance reviews, is intended to assess the effectiveness of controls, recommending follow up remedial action if relevant. All material People Risk events are escalated in accordance with the formal Group Operational Risk Policy and People Policies to the respective Divisional Managing Directors and the Group Director, Compliance, Conduct and Operational Risk.
Exposures Exposure represents the sufficiency of the Group’s policies and procedures to maintain adequate systems, processes and controls to support statutory, prudential regulatory and tax reporting, to prevent and detect financial reporting fraud, to manage the Group’s tax position and to support market disclosures.
Mitigation The Group’s Risk Management Framework (RMF) establishes robust arrangements for risk governance, in particular by: – Defining individual and collective accountabilities for risk management, risk oversight and risk assurance through a Three Lines of Defence model which supports the discharge of responsibilities to customers, shareholders and regulators; – Outlining governance arrangements which articulate the enterprise-wide approach to risk management; and – Supporting a consistent approach to Groupwide behaviour and risk decision making through a Group Policy Framework which helps everyone understand their responsibilities by clearly articulating and communicating rules, boundaries and risk appetite measures which can be controlled, enforced and monitored.
Driving adherence to the Group’s RMF goes ‘hand in glove’ with its approach to risk culture which is embedded in the Group’s approach to recruitment, selection, training, performance management and reward.
This includes a review of the Group’s current approach to governance and ongoing initiatives in light of the latest regulatory guidance, including in 2015 evolution of frameworks to address Senior Managers and Certification Regime (SM&CR) requirements and the recommendations from a third party review of the Three Lines of Defence.
For further information on Corporate Governance see pages 60 to 81.
Notes to the consolidated financial statements 187 1. Basis of preparation 2. Accounting policies 3. Critical accounting estimates and judgements 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 13. Taxation 14. Earnings per share 15. Trading and other financial assets at fair value through profit or loss 16. Derivative financial instruments 17. Loans and advances to banks 18. Loans and advances to customers 19. Securitisations and covered bonds 20. Structured entities 21. Allowance for impairment losses on loans and receivables 22. Available-for-sale financial assets 23. Held-to-maturity investments 24. Goodwill 25. Value of in-force business 26. Other intangible assets 27. Property, plant and equipment 28. Other assets 29. Deposits from banks 30 Customer deposits 31. Trading and other financial liabilities at fair value through profit or loss 32. Debt securities in issue 33. Liabilities arising from insurance contracts and participating investment contracts 34. Life insurance sensitivity analysis 35. Liabilities arising from non-participating investment contracts 36. Other liabilities 37. Retirement benefit obligations 38. Deferred tax 39. Other provisions 40. Subordinated liabilities 41. Share capital 42. Share premium account 43. Other reserves 44. Retained profits 45. Other equity instruments 46. Dividends on ordinary shares 47. Share-based payments 48. Related party transactions 49. Contingent liabilities and commitments 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. Disposal of interest in TSB Banking Group plc 56. Events since the balance sheet date 57. Future accounting developments
Notes to the parent company financial statements 283 1. Accounting policies 2. Amounts due from subsidiaries 3. Share capital, share premium and other equity instruments 4. Other reserves 5. Retained profits 6. Subordinated liabilities 7. Debt securities in issue 8. Related party transactions 9. Financial instruments 10. Other information
REPORT ON THE FINANCIAL STATEMENTS Our opinion In our opinion: – Lloyds Banking Group plc’s consolidated financial statements and 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 2015 and of the Group’s profit and the Group’s and the parent company’s cash flows for the year then ended; – the consolidated financial statements have been properly prepared in accordance with International Financial Reporting Standards (‘IFRSs’) as adopted by the European Union; – the parent company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and – the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.
We performed audit procedures over reporting units considered financially significant in the context of the Group (full scope audit) or in the context of individual primary statement account balances (audit of specific account balances). We also performed other procedures including testing entity level controls, information technology general controls and analytical review procedures to mitigate the risk of material misstatement in the residual reporting units.
Areas of focus The areas of focus for our audit which involved the greatest allocation of our resources and effort were: – Credit risk and impairment of loans and advances to customers – Conduct risk and provisions – Actuarial assumptions used in the valuation of insurance contracts (liabilities and assets representing the value of in-force business) – Hedge accounting
Our work covered impairment of loans and advances to customers within Retail Banking, Consumer Finance and Commercial Banking.
Management also applies adjustments, or overlays, where they believe the data driven parameters and calculations are not appropriate, either due to emerging trends or models not capturing the risks in the loan portfolio. An example of this is an overlay for the current low interest rates which management apply on top of the impairment model output in Retail Banking. These overlays require significant judgement.
In addition we have performed the following substantive procedures: Retail Banking and Consumer Finance
We met with Divisional and Group management to understand the emerging and potential issues that they had identified. We assessed independently emerging and potential areas where exposures might have arisen based upon our knowledge and experience of emerging industry issues and the regulatory environment. We used this to challenge the completeness of the issues identified by management and whether a provision was required.
We understood customer complaints received, assessed the trends and tested a sample of complaints to ensure they were appropriately categorised. We used this analysis to understand whether there were indicators of more systemic issues being present for which provisions or disclosures may need to be made in the financial statements.
We read the Group’s correspondence with the Financial Conduct Authority and Prudential Regulation Authority and discussed the output of any meetings held. We met on a trilateral basis with the Financial Conduct Authority, Prudential Regulation Authority and the Chair of the Group Audit Committee. We also met on a bilateral basis with each regulator.
Given the inherent uncertainty in the calculation of conduct provisions and their judgemental nature, we evaluated the disclosures made in the financial statements. In particular, we focused on challenging management that the disclosures were sufficiently clear in highlighting the exposures that remain, significant uncertainties that exist in respect of the provisions and the sensitivity of the provisions to changes in the underlying assumptions.
Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), page 197 (Critical Accounting Estimates and Judgements) and page 218 (notes).
The valuation of the Group’s insurance contracts is dependent on a number of subjective assumptions about future experience.
Some of the economic and non-economic actuarial assumptions used in valuing insurance contracts are judgemental, in particular persistency (the retention of policies over time), longevity (the expectation of how long an annuity policyholder will live and how that might change over time), expenses (future expenses incurred to maintain existing policies to maturity), credit risk and illiquidity premium (adjustments made to the discount rate).
Persistency can be impacted by changes to regulation for products sold by the Group. Recently the Group’s products have been affected by regulatory changes including the Retail Distribution Review, Pensions Auto Enrolment and more recently the Finance Act 2014. We focused on whether management’s assumptions were appropriate given this changing regulatory background.
We understood and tested key controls and governance around the processes for analysing economic and noneconomic assumptions. We found the key controls for the setting of assumptions, including the experience analysis data, were designed, implemented and operated effectively, and therefore we determined that we could place reliance on these controls for the purposes of our audit.
For credit risk and illiquidity premium we assessed the appropriateness of the methodology and any modifications made against our knowledge and experience of the regulatory requirements and of the industry. We assessed the assumptions with reference to wider market practice and prevailing economic conditions. We challenged whether the actual asset mix remained an appropriate proxy to a market consistent portfolio by comparing the proportion of illiquid assets held to the most recent public information for other similar companies. We performed testing to confirm that the assumptions approved were those applied.
Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), and page 211 (notes).
We examined the analyses performed by management which set out the bases for their judgements in respect of the material tax exposures identified, together with relevant supporting evidence such as correspondence with tax authorities and legal opinions obtained. We used our understanding of the business and also read correspondence with tax authorities to challenge the completeness of identified exposures and the need for provisions.
Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), and page 232 (notes).
We understood and tested key controls over the production and approval of the forecast taxable profits used to support the recognition of various deferred tax assets. We found the key controls were designed, implemented and operated effectively, and therefore we were able to place reliance on these controls for the purposes of our audit.
We assessed whether the forecast profits were appropriate by challenging both the underlying and economic assumptions, focusing on those directly impacting the adjusted profit figures, for example interest rates, consumer spending rates and gross domestic product. We used our independent benchmarking data to benchmark a number of the economic assumptions to external data sources where possible, and also assessed the accuracy of previous forecasts.
Valuation of pension obligations Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), page 197 (Critical Accounting Estimates and Judgements) and page 226 (notes).
We understood and tested key controls over the completeness and accuracy of data extracted and supplied to the Group’s actuary, which is used to calculate the pension scheme surplus or deficit. We also tested the controls for determining and approving the fair value of the scheme assets and the actuarial assumptions and valuations. We found the key controls were designed, implemented and operated effectively, and therefore we determined that we could place reliance on these controls for the purposes of our audit.
We also read and assessed the disclosures made in the financial statements, including disclosures of the assumptions, and found them to be appropriate.
For FVA, the Group has refined its methodology in line with developing industry practice, and based on data from observed transactions over the last 18 months. We assessed the methodology for calculating FVA based on our knowledge of current industry practices, and tested underlying transactions back to supporting evidence.
We tested the design, implementation and operating effectiveness of the one-off transactions key control, and determined that we could rely on this control for the purposes of our audit.
Given the judgmental nature of the accounting for the sale of TSB Banking Group plc, we assessed the disclosures made in the financial statements to check they complied with the relevant accounting standards and other pronouncements on disclosures. We particularly focused on challenging management that the disclosures were complete and sufficiently clear in highlighting the nature, accounting treatment and financial statement impact of the transaction.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed over the business reporting units by us, as the Group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction (‘component auditors’). Almost all of our audit work is undertaken by PwC UK component auditors.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those business reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. This included regular communication with the component auditors throughout the audit, the issuance of instructions, a review of the results of their work on the areas of focus and attendance at formal clearance meetings.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £20 million (2014: £8 million) as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and parent company’s ability to continue as a going concern.
OTHER REQUIRED REPORTING Consistency of other information Companies Act 2006 opinion In our opinion: – the information given in the strategic report and the directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the information given in the corporate governance report set out on pages 60 to 71 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.
ISAs (UK & Ireland) reporting Under ISAs (UK & Ireland) we are required to report to you if, in our opinion: – information in the Annual Report is: – materially inconsistent with the information in the audited financial statements; or – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and parent company acquired in the course of performing our audit; or – otherwise misleading.
– the statement given by the directors on page 110, in accordance with provision C.1.1 of the UK Corporate Governance Code (the ‘Code’), that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s and parent company’s performance, business model and strategy is materially inconsistent with our knowledge of the Group and parent company acquired in the course of performing our audit.
– the directors’ explanation on page 108 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Directors’ remuneration Directors’ remuneration report – Companies Act 2006 opinion In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT Our responsibilities and those of the directors As explained more fully in the statement of directors’ responsibilities set out on page 110, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What an audit of financial statements involves An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: – whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; – the reasonableness of significant accounting estimates made by the directors; and – the overall presentation of the financial statements.
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: Remeasurements before taxation (274) 674 (136)
Post-retirement defined benefit scheme remeasurements, net of taxation – – (108) (108) – (108)
During 2015, government debt securities with a carrying value of £19,938 million, previously classified as available-for-sale, were reclassified to held-to-maturity. Unrealised gains on the transferred securities of £194 million previously taken to equity continue to be held in the available-for-sale revaluation reserve and are being amortised to the income statement over the remaining lives of the securities using the effective interest method or until the assets become impaired.
(A) Consolidation The assets, liabilities and results of Group undertakings (including structured entities) are included in the financial statements on the basis of accounts made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures. Details of the Group’s subsidiaries and related undertakings are given on pages 299 to 307.
The treatment of transactions with non-controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary. Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent entity. Where the Group loses control of the subsidiary, at the date when control is lost the amount of any non-controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest.
Other financial assets and liabilities at fair value through profit or loss are designated as such by management upon initial recognition. Such assets and liabilities are carried in the balance sheet at their fair value and gains and losses arising from changes in fair value together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur. Financial assets and liabilities are designated at fair value through profit or loss on acquisition in the following circumstances: – it eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising gains or losses on different bases. The main type of financial assets designated by the Group at fair value through profit or loss are assets backing insurance contracts and investment contracts issued by the Group’s life insurance businesses. Fair value designation allows changes in the fair value of these assets to be recorded in the income statement along with the changes in the value of the associated liabilities, thereby significantly reducing the measurement inconsistency had the assets been classified as available-for-sale financial assets. – the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, with management information also prepared on this basis. As noted in (A)(2) above certain of the Group’s investments are managed as venture capital investments and evaluated on the basis of their fair value and these assets are designated at fair value through profit or loss. – where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise need to be separately accounted for.
A sale or reclassification of a more than insignificant amount of held-to-maturity investments would result in the reclassification of all held-to-maturity investments to available-for-sale financial assets.
(F) Derivative financial instruments and hedge accounting All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and using valuation techniques, including discounted cash flow and option pricing models, as appropriate. Derivatives are carried in the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 3 (Critical accounting estimates and judgements: Fair value of financial instruments) and note 50(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models.
The method of recognising the movements in the fair value of derivatives depends on whether they are designated as hedging instruments and, if so, the nature of the item being hedged. Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be designated as a hedge of another financial instrument such as a loan or deposit or a portfolio of such instruments. At the inception of the hedge relationship, formal documentation is drawn up specifying the hedging strategy, the hedged item, the hedging instrument and the methodology that will be used to measure the effectiveness of the hedge relationship in offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness of the
Write offs A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that forbearance is no longer appropriate. For commercial lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
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. For investment property under construction, the value on disposal is considered to be at the point at which the property is fully constructed. Adjustments are made for the costs and risks associated with construction. Investment property under construction for which fair value is not yet reliably measurable is valued at cost, until the fair value can be reliably measured. Changes in fair value are recognised in the income statement as net trading income.
(2) 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 provisions, 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.
Full actuarial valuations of the Group’s principal defined benefit schemes are carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 December each year by qualified independent actuaries. For the purposes of these annual updates scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related
(L) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans in respect of services received from certain of its employees. The value of the employee services received in exchange for equity instruments granted under these plans is recognised as an expense over the vesting period of the instruments, with a corresponding increase in equity. This expense is determined by reference to the fair value of the number of equity instruments that are expected to vest. The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments at the date of grant is estimated using an appropriate valuation technique, such as a Black-Scholes option pricing model or a Monte Carlo simulation. The determination of fair values excludes the impact of any non-market vesting conditions, which are included in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date, this estimate is reassessed and if necessary revised. Any revision of the original estimate is recognised in the income statement, together with a corresponding adjustment to equity. Cancellations by employees of contributions to the Group’s Save As You Earn plans are treated as non-vesting conditions and the Group recognises, in the year of cancellation, the amount of the expense that would have otherwise been recognised over the remainder of the vesting period. Modifications are assessed at the date of modification and any incremental charges are charged to the income statement.
(M) Taxation Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
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 is reviewed for impairment 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.
Financial statements statement when earned. Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future policy terminations based upon past experience.
(P) Provisions and contingent liabilities Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the obligations and they can be reliably estimated.
(Q) Share capital (1) Share issue costs Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds.
Allowance for impairment losses on loans and receivables At 31 December 2015 gross loans and receivables totalled £487,613 million (2014: £516,612 million) against which impairment allowances of £3,130 million (2014: £6,540 million) had been made (see note 21). The Group’s accounting policy for losses arising on financial assets classified as loans and receivables is described in note 2(H)(1); this note also provides an overview of the methodologies applied.
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. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by regulators, 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
The allowance for impairment losses on loans and receivables is management’s best estimate of losses incurred in the portfolio at the balance sheet date. In determining the required level of impairment provisions, the Group uses the output from various statistical models. Management judgement is required to assess the robustness of the outputs from these models and, where necessary, make appropriate adjustments. Impairment allowances are made up of two components, those determined individually and those determined collectively.
Recoverability of deferred tax assets At 31 December 2015 the Group carried deferred tax assets on its balance sheet of £4,010 million (2014: £4,145 million) and deferred tax liabilities of £33 million (2014: £54 million) (note 38). This presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally enforceable right of offset. Note 38 presents the Group’s deferred tax assets and liabilities by type. The largest category of deferred tax asset relates to tax losses carried forward.
As disclosed in note 38, deferred tax assets totalling £1,109 million (2014: £921 million) have not been recognised in respect of certain capital losses carried forward, trading losses carried forward and unrelieved foreign tax credits as there are no predicted future capital or taxable profits against which these losses can be recognised.
NOTE 3: CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued Valuation of assets and liabilities arising from insurance business At 31 December 2015, the Group recognised a value of in-force business asset of £4,219 million (2014: £4,446 million) and an acquired value of in-force business asset of £377 million (2014: £418 million). The value of in-force business asset represents the present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts. The acquired value of in-force business asset represents the contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers. The methodology used to value these assets is set out in note 25. The valuation or recoverability of these assets requires assumptions to be made about future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to these assets. The key assumptions that have been made in determining the carrying value of the value of in-force business assets at 31 December 2015 are set out in note 25.
The effect on the Group’s profit before tax and shareholders’ equity of changes in key assumptions used in determining the life insurance assets and liabilities is set out in note 34.
Other income, net of insurance claims 6,103 214 – (36) (126) – 6,155 Total income, net of insurance claims 17,421 532 – (228) (88) – 17,637 1 Comprises the effects of asset sales (gain of £54 million), volatile items (loss of £208 million), liability management (loss of £28 million), the fair value unwind (loss of £192 million) and the amortisation of purchased intangibles (£342 million).
Removal of: Asset sales and other items1 £m Simplification £m TSB3 £m
Liabilities under sale and repurchase agreements 0.57 2.61 1.21 (34) (55) (79)
Included within interest and similar income is £248 million (2014: £407 million; 2013: £901 million) in respect of impaired financial assets. Net interest income also includes a credit of £956 million (2014: credit of £1,153 million; 2013: credit of £550 million) transferred from the cash flow hedging reserve (see note 43).
Total net gains arising on assets and liabilities held at fair value through profit or loss 2,849 8,546 15,775
Gains less losses on disposal of available-for-sale financial assets (note 43) 51 131 629
Losses of £28 million arose in the year ended 31 December 2015 (2014: losses of £24 million; 2013: losses of £142 million) on other transactions undertaken as part of the Group’s management of its wholesale funding and subordinated debt.
Change in insurance and participating investment contracts (note 33) 2,898 (4,392) (5,184)
Amortisation of acquired value of in-force non-participating investment contracts (note 25) 41 43 54
Regulatory provisions: Payment protection insurance provision (note 39) 4,000 2,200 3,050
Performance-based compensation expense deferred until later years comprises: Awards made in respect of the year ended 31 December 114 152 47
Audits of the unconsolidated Open Ended Investment Companies managed by the Group 0.4 0.4 0.5
Acquisition due diligence and other work performed in respect of potential venture capital investments 1.2 1.0 2.1
NOTE 13: TAXATION (A) Analysis of tax charge for the year 2015 £m 2014 £m 2013 £m
Due to change in UK corporation tax rate (27) (24) (594)
Deferred tax on losses no longer recognised following sale of Australian operations – – (348)
Effect of results of joint ventures and associates (1) 7 9
Tax relief on distributions to other equity holders 80 62 –
Asset-backed securities: Corporate and other debt securities 612 19,704 20,316 1,486 20,604 22,090
Weighted average number of ordinary shares in issue – basic 71,272 71,350 71,009
Weighted average number of ordinary shares in issue – diluted 72,340 72,447 71,009
The weighted-average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 1 million at 31 December 2015 (2014: 7 million; 2013: 28 million).
Total loans and advances to customers before allowance for impairment losses 458,208 489,118
Loans and advances to customers include finance lease receivables, which may be analysed as follows: 2015 £m 2014 £m
Cash deposits of £8,383 million (2014: £11,251 million) held by the Group are restricted in use to repayment of the debt securities issued by the structured entities, the term advances relating to covered bonds and other legal obligations. Additionally, the Group had certain contractual arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2015 these obligations had not been triggered; the maximum exposure under these facilities was £381 million (2014: £392 million).
All debt securities and lending assets held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary for standard lending activities in the normal course of the Group’s banking activities. The Group could be asked to provide support under the contractual terms of these arrangements if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption. As at 31 December 2015 and 2014 these obligations had not been triggered.
The assets and liabilities of the Insurance business held in consolidated collective investment vehicles, such as Open-Ended Investment Companies and limited partnerships, are not directly available for use by the Group. However, the Group’s investment in the majority of these collective investment vehicles is readily realisable. As at 31 December 2015, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the Group was £67,122 million (2014: £66,070 million).
Of the total allowance in respect of loans and advances to customers, £1,170 million (2014: £1,482 million) was assessed on a collective basis.
Details of the Group’s asset-backed conduits shown in the table above are included in note 20.
Movement in the value of in-force business taken to income statement (note 9) (162) (428)
Risk-free rate (value of in-force non-annuity business)1 0.00 to 4.20 0.00 to 3.27
NOTE 27: PROPERTY, PLANT AND EQUIPMENT Investment properties £m Premises £m Equipment £m
Liabilities in respect of securities sold under repurchase agreements 7,061 1,075
Liabilities in respect of securities sold under repurchase agreements – –
For amounts included above which are subject to repurchase agreements, see note 53.
Liabilities held at fair value through profit or loss 7,879 6,744
Life insurance (see below): Non-life insurance contracts: Reinsurance balances are reported within other assets (note 28).
NOTE 34: LIFE INSURANCE SENSITIVITY ANALYSIS The following table demonstrates the effect of reasonably possible changes in key assumptions on profit before tax and equity disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical.
Guaranteed annuity option take up6 5% addition 2 2 1 1
The balances above are shown gross of reinsurance. As at 31 December 2015, related reinsurance balances were £34 million (2014: £39 million); reinsurance balances are reported within other assets (note 28). Liabilities arising from non-participating investment contracts are categorised as level 2. See note 50 for details of levels in the fair value hierarchy.
Net amount recognised in the balance sheet 736 890 2015 £m 2014 £m
NOTE 37: RETIREMENT BENEFIT OBLIGATIONS continued Composition of scheme assets: Quoted Unquoted Total Quoted Unquoted Total £m £m £m £m £m £m
Debt instruments1: Fixed interest government bonds 4,841 – 4,841 4,150 – 4,150
Corporate and other debt securities 7,243 – 7,243 6,623 – 6,623
The pension schemes’ pooled investment vehicles comprise: 2015 £m 2014 £m
Assumptions The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows: Discount rate 3.87 3.67
Life expectancy for member aged 60, on the valuation date: Life expectancy for member aged 60, 15 years after the valuation date: The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 at 31 December 2015 is assumed to live for, on average, 28.1 years for a male and 30.4 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60.
Risk exposure of the defined benefit schemes Whilst the Group is not exposed to any unusual, entity specific or scheme specific risks in its defined benefit pension schemes, it is exposed to a number of significant risks, detailed below: Inflation rate risk: the majority of the plans’ benefit obligations are linked to inflation both in deferment and once in payment. Higher inflation will lead to higher liabilities although this will be partially offset by holdings of inflation-linked gilts and, in most cases, caps on the level of inflationary increases are in place to protect against extreme inflation.
Expected life expectancy of members: Increase of one year 43 34 952 750
1 At 31 December 2015, the assumed rate of RPI inflation is 2.99 per cent and CPI inflation 1.99 per cent (2014: RPI 2.95 per cent and CPI 1.95 per cent).
For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 31 December 2014 by qualified independent actuaries. The principal assumptions used were as set out above, except that the rate of increase in healthcare premiums has been assumed at 6.59 per cent (2014: 6.55 per cent).
Movements in the other post-retirement benefits obligation: 2015 £m 2014 £m
Amount credited (charged) to equity: Post-retirement defined benefit scheme remeasurements 59 (135)
Asset at 31 December 3,977 4,091 Asset at 31 December 3,977 4,091
Deferred tax assets and liabilities are comprised as follows: 2015 £m 2014 £m
The change in the main rate of corporation tax from 20 per cent to 18 per cent, and the additional surcharge of 8 per cent, have resulted in a movement in the Group’s net deferred tax asset at 31 December 2015 of £123 million, comprising the £27 million charge included in the income statement and a £96 million charge included in equity.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward at 31 December 2015 of £76 million (2014: £117 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be utilised. These tax credits can be carried forward indefinitely.
The Group expects to maintain the PPI operation on its current scale for longer than previously anticipated given the update to volume related assumptions and the re-review of previously handled cases continuing into the first quarter of 2016. The estimate for administrative expenses, which comprise complaint handling costs and costs arising from cases subsequently referred to the FOS, is included in the provision increase outlined above.
The volume of reactive PPI complaints has continued to fall, with an 8 per cent reduction in 2015 compared with 2014, to approximately 8,000 complaints per week. Whilst direct customer complaint levels fell 30 per cent year-on-year, those from Claims Management Companies (CMCs) have remained broadly stable and as a result, CMCs now account for over 70 per cent of complaints.
The total amount provided for PPI represents the Group’s best estimate of the likely future cost. However a number of risks and uncertainties remain in particular with respect to future volumes. The cost could differ materially from the Group’s estimates and the assumptions underpinning them, and could result in a further provision being required. There is significant uncertainty around the impact of the proposed FCA media campaign and CMC and customer activity in the lead up to the proposed time bar.
2 Sensitivity includes complaint handling costs. Future volume includes complaints falling into the Plevin rules and guidance. As a result, the sensitivity per 100,000 complaints includes cases where the average redress would be lower than historical trends.
4 The amount that is paid in redress in relation to a policy found to have been mis-sold, comprising, where applicable, the refund of premium, compound interest charged and interest at 8 per cent per annum. Actuals are based on the six months to 31 December 2015. Future average redress is influenced by expected compensation payments for complaints falling under the Plevin rules and guidance.
Provisions are made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes irrevocably committed to the expenditure.
4.25% Perpetual Fixed to Floating Rate Reset Subordinated Guaranteed Notes – – (276) – – (276)
6.75% Subordinated Callable Fixed to Floating Rate Instruments 2017 – – – – (9) (9)
Subordinated Callable Floating Rate Instruments 2017 – – – – (36) (36)
Foreign exchange and other movements 215 379 64 (236) 663 1,085
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary and preference shares as granted at the annual general meeting on 14 May 2015. The authority to issue shares and the authority to make market purchases of shares will expire at the next annual general meeting. Shareholders will be asked, at the annual general meeting, to give similar authorities.
1 During the year ended 31 December 2015, the Company redeemed all of its outstanding 6.0884% Non-cumulative Fixed to Floating Rate Preference Shares and 5.92% Non-cumulative Fixed to Floating Rate Preference Shares at their combined sterling equivalent par value of £131 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £131 million was transferred from the distributable merger reserve to the share premium account.
Revaluation reserve in respect of available-for-sale financial assets (438) (67) (615)
Movements in other reserves were as follows: 2015 £m 2014 £m 2013 £m
Issue costs of other equity instruments (net of tax) (note 45) – (21) –
Additional Tier 1 securities issued in the year: Sterling notes (£3,725 million nominal) – 3,725 –
NOTE 47: SHARE-BASED PAYMENTS Charge to the income statement The charge to the income statement is set out below: 2014 £m 2013 £m
Executive and SAYE plans: Options granted in the year 12 29 42
For options granted on 27 March 2014 under the Commercial Banking Transformation Plan (CBTP), the number of options that may be delivered in March 2017 may vary by a factor of 0-4 from the original ‘on-target’ award, depending on the degree to which the performance conditions have been met. An ‘on-target’ vesting is contingent upon Commercial Banking achieving £2.5 billion underlying profit and 2 per cent Return on Risk-weighted Assets (‘RoRWA’) on 31 December 2016. The Plan will pay out at between £1.9 billion and £3 billion underlying profit, and between 1.6 per cent and 2.5 per cent RoRWA.
Exercised/lapsed (includes entitlements of former key management personnel) (7) (1) (16)
Exercised/lapsed (includes entitlements of former key management personnel) (57) (22) (7)
Repayments (includes loans of former key management personnel) (2) (1) (2)
No provisions have been recognised in respect of loans given to key management personnel (2014 and 2013: £nil).
At 31 December 2015, the Group did not provide any guarantees in respect of key management personnel (2014 and 2013: none).
At 31 December 2015, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £1 million with four directors and six connected persons (2014: £1 million with six directors and six connected persons; 2013: £1 million with six directors and five connected persons).
Funding for Lending The Funding for Lending Scheme represents a further source of cost effective secured term funding available to the Group. The initiative supports a broad range of UK based customers, focusing primarily on providing small businesses with cheaper finance to invest and grow. In November 2015, the Bank of England announced that the deadline for banks to draw down their borrowing allowance would be extended for a further two years until 31 January 2018. At 31 December 2015, the Group had drawn down £32 billion (31 December 2014: £20 billion) under the Scheme.
Help to Buy The Help to Buy Scheme is a scheme promoted by the UK government and is aimed to encourage participating lenders to make mortgage loans available to customers who require higher loan-to-value mortgages. Halifax and Lloyds are currently participating in the Scheme whereby customers borrow between 90 per cent and 95 per cent of the purchase price. In return for the payment of a commercial fee, HM Treasury has agreed to provide a guarantee to the lender to cover a proportion of any loss made by the lender. £3,133 million of outstanding loans at 31 December 2015 (31 December 2014: £1,950 million) had been advanced under this scheme.
Business Growth Fund The Group has invested £176 million (31 December 2014: £118 million) in the Business Growth Fund (under which an agreement was entered into with RBS amongst others) and, as at 31 December 2015, carries the investment at a fair value of £170 million (31 December 2014: £105 million).
NOTE 48: RELATED PARTY TRANSACTIONS continued Other related party transactions Pension funds
NOTE 49: CONTINGENT LIABILITIES AND COMMITMENTS Interchange fees With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the on-going investigations and litigation (as described below) which involve card schemes such as Visa and MasterCard. However, the Group is a member of Visa and MasterCard and other card schemes.
On 2 November 2015, Visa Inc announced its proposed acquisition of Visa Europe, which remains subject to completion. As set out in the announcement by the Group on 2 November, the Group’s share of the sale proceeds will comprise upfront consideration of cash (the amount of which remains subject to adjustment prior to completion) and preferred stock. The preferred stock will be convertible into Class A Common Stock of Visa Inc or its equivalent upon occurrence of certain events. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement (LSA) with Visa Inc, which clarifies how liabilities will be allocated between the parties should the litigation referred to above result in Visa Inc being liable for damages payable by Visa Europe. Visa Inc may only have recourse to the LSA once €1 billion of damages have been applied to the value of the UK preferred stock received by Visa UK members (including the Group) as part of the consideration to the transaction. The value of the preferred stock will be reduced (by making a downward adjustment to the conversion rate) in an amount equal to any covered losses. The maximum amount of liability to which the Group may be subject under the LSA is capped at the cash consideration to be received by the Group. Visa Inc may also have recourse to a general indemnity, currently in place under Visa Europe’s Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.
Certain Group companies are also named as defendants in UK based claims raising LIBOR manipulation allegations in connection with interest rate hedging products.
Joint ventures and associates At 31 December 2015 there were loans and advances to customers of £225 million (2014: £1,901 million) outstanding and balances within customer deposits of £8 million (2014: £24 million) relating to joint ventures and associates.
The ultimate impact on the Group of the above investigations and the litigation against Visa and MasterCard cannot be known before the conclusion of these matters.
Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year original maturity: Mortgage offers made 9,995 8,809
Other commitments 57,809 64,015 1 year or over original maturity 44,691 34,455
Items in the course of collection from banks – – – – – 697 – 697
Unallocated surplus within insurance businesses – – – – – – 260 260
Debt securities: Bank and building society certificates of deposit – 186 – 186 Asset-backed securities: Mortgage-backed securities – 197 – 197 Other asset-backed securities – 264 55 319
Gains recognised in other comprehensive income within the revaluation reserve in respect of available-for-sale financial assets – 302 302 – (61) (61)
Transfers into the level 3 portfolio 71 55 126 708 – 708
(B) Financial liabilities, excluding derivatives Valuation hierarchy At 31 December 2015, the Group’s financial liabilities carried at fair value, excluding derivatives, totalled £51,911 million (31 December 2014: £62,153 million). The table below analyses these financial liabilities by balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 251). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
Liabilities held at fair value through profit or loss – 7,878 1 7,879 Trading liabilities: Liabilities in respect of securities sold under repurchase agreements – 38,431 – 38,431 Short positions in securities 4,153 287 – 4,440
Total trading and other financial liabilities at fair value through profit or loss 2,700 59,397 5 62,102
Valuation methodology for financial liabilities, excluding derivatives Liabilities held at fair value through profit or loss These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose inputs are based on observable market data. The carrying amount of the securities is adjusted to reflect the effect of changes in own credit spreads. The resulting gain or loss is recognised in the income statement.
The Group’s level 3 derivative assets include £545 million (2014: £646 million) in respect of the value of the embedded equity conversion feature of the Enhanced Capital Notes issued in December 2009. The embedded equity conversion feature is valued by comparing the market price of the Enhanced Capital Notes with the market price of similar bonds without the conversion feature. The latter is calculated by discounting the expected Enhanced Capital Note cash flows in the absence of a conversion using prevailing market yields for similar capital securities without the conversion feature. The market price of the Enhanced Capital Notes was calculated with reference to multiple broker quotes.
The table below analyses movements in level 3 derivative assets and liabilities carried at fair value. Following changes in the valuation methodology in 2015, uncollateralised inflation swaps are considered not to have significant unobservable inputs and have been transferred from level 3 to level 2.
(i) Uncollateralised derivative valuation adjustments, excluding monoline counterparties The following table summarises the movement on this valuation adjustment account during 2015 and 2014: £m 2014 £m
Market Credit Default Swap (CDS) spreads are used to develop the probability of default for quoted counterparties. For unquoted counterparties, internal credit ratings and market sector CDS curves and recovery rates are used. The Loss Given Default (LGD) is based on market recovery rates and internal credit assessments.
A one per cent rise in the CDS spread would lead to an increase in the DVA of £122 million to £200 million.
Trading and other financial assets at fair value through profit or loss Debt securities Discounted cash flows Credit spreads (bps) (168bps/211bps)
Lead manager or broker quote/consensus pricing n/a 55 – – – – –
(4) Financial assets and liabilities carried at amortised cost (A) Financial assets Valuation hierarchy The table below analyses the fair values of the financial assets of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as described on page 251). Loans and receivables are mainly classified as level 3 due to significant unobservable inputs used in the valuation models. Where inputs are observable, debt securities are classified as level 1 or 2.
At 31 December 2015 Loans and receivables: Loans and advances to customers: unimpaired 448,010 447,808 – – 447,808 Loans and advances to customers: impaired 7,165 6,989 – – 6,989 Loans and advances to customers 455,175 454,797 – – 454,797 Loans and advances to banks 25,117 25,130 – – 25,130
Held-to-maturity investments 19,808 19,851 19,851 – – Reverse repos included in above amounts: Loans and advances to customers – – – – – Loans and advances to banks 963 963 – – 963
Reverse repos included in above amounts: Loans and advances to customers 5,148 5,148 – – 5,148
Repos included in above amounts: Deposits from banks 1,075 1,075 – 1,075 –
As set out in note 19, included within loans and receivables are loans transferred under the Group’s securitisation and covered bond programmes. As the Group retains all of a majority of the risks and rewards associated with these loans, including credit, interest rate, prepayment and liquidity risk, they remain on the Group’s balance sheet. Assets transferred into the Group’s securitisation and covered bond programmes are not available to be used by the Group whilst the assets are within the programmes. However, the Group retains the right to remove loans from the covered bond programmes where they are in excess of the programme’s requirements. In addition, where the Group has retained some of the notes issued by securitisation and covered bond programmes, the Group has the ability to sell or pledge these retained notes.
Loans and receivables: Loans and advances to customers 1,491 – 2,353 908
Total structural foreign currency exposures, after net investment hedges 68 50 73
Loans and advances to customers, net1 455,175 (7,250) 447,925 482,704 (4,094) 478,610
At 31 December 2015 the most significant concentrations of exposure were in mortgages (comprising 68 per cent of total loans and advances to customers) and to financial, business and other services (comprising 9 per cent of the total). For further information on concentrations of the Group’s loans, refer to note 18.
C. Credit quality of assets Loans and receivables The disclosures in the table below and those on pages 268 and 269 are produced under the underlying basis used for the Group’s segmental reporting. The Group believes that, for reporting periods following a significant acquisition such as the acquisition of HBOS in 2009, this underlying basis, which includes the allowance for loan losses at the acquisition date on a gross basis, more fairly reflects the underlying provisioning status of the loans. The remaining acquisition-related fair value adjustments in respect of this lending are therefore identified separately in this table.
The table below sets out the reconciliation of the allowance for impairment losses of £3,033 million (2014: £6,414 million) shown in note 21 to the allowance for impairment losses on an underlying basis of £4,172 million (2014: £7,652 million) shown above: 2015 £m
Allowance for impairment losses on loans and advances to customers 3,033 6,414
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and commercial are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Commercial lending has been classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating models. Further information about the Group’s internal probabilities of default rating models can be found on page 121.
A financial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.
Asset-backed securities: Corporate and other debt securities 5,808 – 5,808 5,490 39 5,529
Total held as available-for-sale financial assets 31,835 4 31,839 55,408 43 55,451 1 Credit ratings equal to or better than ‘BBB’.
Total debt securities held as trading assets 9,452 30 9,482 10,122 210 10,332
Asset-backed securities: Corporate and other debt securities 17,371 2,333 19,704 18,119 2,485 20,604
Past due but not impaired £m Impaired £m Gross £m 70 per cent to 80 per cent 45,764 1,350 671 47,785 58,837 1,998 726 61,561 80 per cent to 90 per cent 27,529 935 528 28,992 32,771 1,526 702 34,999 90 per cent to 100 per cent 10,908 610 247 11,765 15,858 1,005 486 17,349
Unimpaired non-mortgage retail lending amounted to £39,279 million (2014: £38,560 million). Lending decisions are predominantly based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at the time of loan origination and are thereafter monitored in accordance with business unit credit policy.
At 31 December 2015, impaired secured commercial lending amounted to £1,245 million, net of an impairment allowance of £577 million (2014: £2,539 million, net of an impairment allowance of £3,799 million). The fair value of the collateral held in respect of impaired secured commercial lending was £1,367 million (2014: £2,517 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
O ther info rm atio n collateral against commercial lending. In such cases, the assets are carried on the Group’s balance sheet and are classified according to the Group’s accounting policies.
Repurchase transactions Deposits from banks Included in deposits from banks are deposits held as collateral for facilities granted, with a carrying value of £7,061 million (2014: £1,075 million) and a fair value of £6,707 million (2014: £1,075 million).
Customer deposits Customer deposits included no deposits held as collateral for facilities granted (2014: £nil). Collateral balances in the form of cash provided in respect of repurchase agreements amounted to £5 million (2014: £6 million).
Securities lending transactions The following on balance sheet financial assets have been lent to counterparties under securities lending transactions: 2015 £m 2014 £m
Trading and other financial liabilities at fair value through profit or loss 15,055 15,465 5,365 5,897 10,662 52,444