Financial statements Report of the independent auditors on the consolidated financial statements 206
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The main business activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment provision. The Group operates the UK’s largest retail bank and has a large and diversified customer base.
Services are offered through a number of well recognised brands including Lloyds TSB, Halifax, Bank of Scotland, and Scottish Widows, and a range of distribution channels including the largest branch network in the UK.
Through investing in our branches, such as the Lloyds TSB branch in Stratford, East London, we are reinvigorating our brands and enabling better customer service.
In 2011, we established our longer term strategy for the Group, acted quickly and decisively to mitigate the effects of a challenging environment and put in place the right foundations to deliver on our objectives over the next 3-5 years. We delivered a resilient performance and made good progress against the key elements of our strategic plan to become the best bank for our customers.” António Horta-Osório Group Chief Executive
Good progress against strategy creating new opportunities for growth Balance sheet further strengthened
– Strong deposit growth: customer deposits (excluding repos) increased 6 per cent to £406 billion
– Funding position significantly improved: wholesale funding reduced to £251 billion, down 16 per cent
– Strong progress against term funding objectives with £35 billion of wholesale term issuance
Reshaping our business portfolio: reducing risk, focusing on the core, and exiting non-core areas
– Integration successfully executed, realising annual run-rate savings of more than £2 billion
– Successful launch of multi-brand strategy, including relaunch of Halifax as a challenger brand
– Support for Small and Medium-sized Enterprises (SMEs) strengthened: Merlin commitments exceeded, and Commercial loan growth of 3 per cent against UK market, down 6 per cent
– Increased market shares in key, capital-light Wholesale products, facilitated by Arena platform
– Statutory loss before tax was £3,542 million (2010: profit of £281 million), and includes a £3.2 billion non-recurring provision for Payment Protection Insurance (PPI) contact and redress costs
Outlook and financial guidance Expect the external environment to remain challenging in 2012
– As anticipated in our Q3 2011 Interim Management Statement, now expect the attainment of income related targets, including for other operating income, to be delayed beyond 2014 as a result of the weaker than expected economic outlook
– A further reduction in costs, and a similar percentage reduction in Group impairment as seen in 2011, with the largest improvement coming from International
– To continue to strengthen our balance sheet through: non-core asset reduction of approximately £25 billion, further deposit growth, at least in line with the market, and strengthening our funding position and our core tier 1 ratio
Reconciliation of combined businesses profit before tax to statutory (loss) profit before tax £m £m
To enable a better understanding of the Group’s core business trends and outlook, certain income statement, balance sheet and regulatory capital information is analysed between core and non-core portfolios. The non-core portfolios consist of businesses which deliver below-hurdle returns, which are outside the Group’s risk appetite or may be distressed, are subscale or have an unclear value proposition, or have a poor fit with the Group’s customer strategy. The EC mandated retail business disposal (Project Verde) is included in core portfolios. A full reconciliation of the combined businesses basis to the statutory basis is given in note 4 on pages 231 to 236. Unless otherwise stated, the commentaries on pages 21 to 97 are on a combined businesses basis.
Our corporate strategy Our strategy is built around becoming the best bank for individual, commercial and corporate customers across the UK and creating value by investing in areas that make a real difference to these customers. Customer leadership driven by superior customer insight, tailored products, better service and relationship focus is the overriding priority. This customer focus will enable delivery of strong, stable and sustainable returns for shareholders over time.
Although the cost:income ratio increased in 2011, largely as a result of income reduction associated with the risk and balance sheet reduction, we continue to expect simplification initiatives to help reduce this over time.
Excellent progress continues to be made in reshaping the business through the reduction of our non-core assets which now stand at £141 billion, following a £53 billion reduction in the year.
Alignment with remuneration To help ensure individuals are acting in the best interest of customers and shareholders, remuneration at all levels of the organisation across the business is aligned to the strategic development and financial performance of the business. All staff, including Executive Directors, have a balanced scorecard comprising five areas (building the business, customer, risk, people and finance) which is aligned to the Group’s strategic priorities and reviewed on a regular basis. Executive remuneration, in particular bonuses and incentive plans, is also assessed against balanced scorecard measures which incorporate Group financial performance measures, notably profit before tax, economic profit, earnings per share and total shareholder return.
Wholesale The division comprises Wholesale Banking and Markets along with our Asset Finance business. The Wholesale Banking and Market business serves corporates with turnover above £15 million with a range of relationship focused propositions, segmented according to customer need.
Key product markets – Corporate Banking Services – Treasury and Trading – Asset Finance
Key product markets – Commercial Banking – Commercial Finance – Invoice discounting and factoring
High-quality committed colleagues Our colleagues have continued to perform well despite the challenges of the economic environment and the significant changes progressing in the Group. We recognise the importance of our colleagues as the face of the bank and the fulcrum of our relationship strategy. We therefore strive to attract, retain and develop the best talent and are committed to making significant investment in our people.
With 2,900 branches we have the largest branch network in the UK. This allows a greater number of customers to talk to us face-to-face, building trust and understanding, and strengthening our relationship with them. Our investment programme to reinvigorate our branch network will help ensure these relationships are fostered in a suitable, comfortable and functional environment. We also operate one of the largest fee free ATM networks in the UK.
We provide a comprehensive suite of services through other channels including telephony and the internet.
Having largely completed one of the biggest integrations ever undertaken in banking, we are now working hard against a demanding set of targets to simplify the Group to improve our agility and efficiency, thereby realising cost savings which we will invest to enhance our service to customers. By delivering against this plan, we will seek to unlock the potential in our franchise and deliver increased value to our shareholders.
Despite the progress made there were a number of challenges. In particular our share price performance, down 61 per cent over the year, although partially due to external factors, is not acceptable. This decline compares with a fall of 30 per cent of an index of UK banks and of 38 per cent of European banks. Nor are the financial results satisfactory, particularly given a number of one off items, including the £3.2 billion provision for PPI. This provision has had a significant impact on our statutory results but the decision to take this approach reflects the Bank’s desire to do the right thing for customers.
We believe that it is fair and reasonable that the activities which led to the PPI provision are reflected in the Long-Term Incentive Plan (LTIP) for the years 2009 to 2011 in spite of the longer term nature of the issue. Our current shareholders who may not have been shareholders at the time the income on PPI arose have been affected by the impact of the provision in 2011 and therefore the Board, on the recommendation of the Remuneration Committee, decided that the provision should also impact the awards to our senior executives.
In December we were pleased to announce that the Co-operative Group is our preferred bidder for the EC mandated disposal (Project Verde). The acquisition will significantly enhance their banking operations, producing a new and effective competitor in the market, as the EC mandate envisaged. This transaction combined with complementary measures to improve current account switching and actions taken to improve the transparency and comparability of retail products will, I believe, further enhance the UK’s competitive retail banking market.
Equity Dividends The European Commission’s restriction on dividend payments was, initially placed on us as part of the State Aid restructuring plan which expired in early 2012. We understand that the absence of dividends has created difficulties for many of our shareholders and we remain committed to recommencing progressive dividend payments as soon as we are able.
At the same time, our Insurance business, including Scottish Widows, has continued to perform well through its established value rather than volume strategy and through its focus on customers. Our Bancassurance business continues to highlight the importance of meeting our customers’ protection needs and has had a successful year doing so.
Management and Board The year has seen significant management change within the Group as we enter the next stage of our development. We have a strong and experienced management team, which proved its effectiveness throughout the year.
Outlook Lloyds Banking Group has made significant structural and strategic progress during 2011 but there remains much to be done against the background of the current economic and regulatory environment.
Executive Remuneration As I have already referenced in my statement, remuneration remains an important issue for shareholders, and other key stakeholders. This is a sensitive area, but the Board is committed to ensuring that the right balance is struck between the need to incentivise staff, at all levels of the organisation, to deliver strong, sustainable growth, whilst reflecting the work required to reshape the business, and broader concerns about fairness.
Summary In 2011, we established our longer term strategy for the Group, acted quickly and decisively to mitigate the effects of a challenging environment and put in place the right foundations to deliver on our objectives over the next 3-5 years, whilst continuing to support the UK economy. Using the framework set out in our Strategic Review, we accelerated strengthening our balance sheet, decreasing risk and reducing costs. The investments we made behind our brands, distribution, customer relationships and people have strengthened our franchise, and created new opportunities which will enable us to realise over time the Group’s full potential for growth. We also made good progress on the EC mandated business disposal (Project Verde), and saw greater clarity emerge on the future UK regulatory framework following the publication of the Independent Commission on Banking’s (ICB’s) final report and the Government’s response on 19 December 2011.
The new pricing management of savings products we introduced in the year and our multi-brand strategy resulted in customer deposit growth (excluding repos) of 6 per cent, significantly above market growth, and without leading the market on rates. We had a particularly strong performance in our Halifax challenger brand as a result of innovative products launched in the year. As a consequence of our actions in reducing non-core loans and increasing deposits, we substantially improved our loan to deposit ratio, by 19 percentage points to 135 per cent.
It is built on being the best bank for our personal, commercial and corporate customers, creating value by investing in initiatives where we can make a real difference for them, and focusing on operating sustainably and responsibly with the objective of delivering strong, stable and sustainable returns for shareholders over time.
Alison joined the Group in September 2011. Alison has 25 years Retail and Commercial Banking experience, having previously been Executive Director for Retail Distribution at Santander and prior to that worked at Barclays in senior management roles across a variety of business areas and functions.
Juan joined the Group in January 2011 having previously been Chief Risk Officer at Santander UK. Juan has over 25 years of banking experience, with Risk, Control and Business Management roles across Corporate, Investment, Retail and Risk divisions.
Toby joined the Group in October 2011 having previously been UK Life CEO at Aviva, joining them in 2008. He has a range of experiences in financial services and technology sectors, with much time spent at McKinsey.
The Group benefits from the depth and diversity of experience within the management team. The complementary skill sets across the team strengthens the Group’s ability to effectively adjust to changing market environments, deliver on our strategic plan and become the best bank for customers. Brief biographies of the management team are outlined below: Standing L to R: Seated L to R: GROUP CHIEF EXECUTIVE’S REVIEW
Meeting our customers’ needs with successful new products and services Our strategy recognises our customers’ needs for product simplicity and transparency, access through multiple channels, and value-for-money products and services. I am therefore pleased at the success of the new products and services launched in 2011, and the widespread recognition and broad range of external awards achieved across the Group. In Retail, notable product successes included a number of innovative Halifax savings products, which while not rate-leading, delivered strong deposit growth. These included, in the first half, the ISA Promise which saw our cash ISA balances grow significantly above our historic share, and, in the second half, the Savers Prize Draw which saw over 450,000 customers registered for the first draw.
Equity dividends The European Commission’s restriction on equity dividend payments was part of the conditions of the State Aid restructuring plan which expired in early 2012. We understand that the absence of dividends has created difficulties for many of our shareholders and we remain committed to recommencing progressive dividend payments as soon as we are able.
We also welcome the Government’s endorsement of the ICB’s proposals to ring-fence retail banking operations as part of a wider regulatory framework including capital and liquidity and effective macro- and micro-prudential supervision, which should remove any implicit tax-payers’ guarantee for the ring-fenced entities. Given that we are predominantly a retail and commercial bank, we would expect to be less affected by the implementation of a retail ring-fence, but believe it will be important for any transition period to be flexible in order to minimise any impact on economic growth, and for banks to implement the required structural changes.
Nevertheless, we remain confident that our medium-term financial targets, as set out in our June 2011 Strategic Review are achievable over time, although, as we anticipated in our Q3 2011 Interim Management Statement, we now expect the attainment of our income related targets, including for Other Operating Income, to be delayed as a result of the weaker than expected economic outlook. As a consequence, we now also expect the attainment of our return on equity target to be delayed beyond 2014. On the other hand, we continue to expect to deliver our balance sheet, cost and impairment targets in 2014, and in some cases sooner, given the good progress made so far.
Independent Commission on Banking In 2010 the UK Government appointed an Independent Commission on Banking (ICB) to review possible structural measures to reform the banking system and promote stability and competition. The ICB published its final report on the 12 September 2011 putting forward proposals that require ring-fencing some of the retail and SME activities of banks from their investment banking activities and additional capital requirements beyond those required under Basel III.
Capital Requirements Directive IV Evolving capital and liquidity requirements continue to be a priority for the Group. Separate to the capital recommendations laid out by the ICB, the Basel Committee on Banking Supervision has put forward proposals for a reform package which changes regulatory capital and liquidity standards, the definition of ‘capital’, introduces new definitions for the calculation of counterparty credit risk and leverage ratios, additional capital buffers and development of a global liquidity standard. Implementation of these changes is expected to be phased in between 2013 and 2018 and the fourth round of changes to the European Capital Requirements Directive IV is currently in draft form and progressing through the European legal framework towards finalisation.
Based on data for the first three quarters of 2011, the Irish economy appears to have grown in 2011 for the first time since 2007, and the unemployment rate appears to be stabilising. Strict austerity measures in recent years targeted at improving international competitiveness are beginning to pay off – falling domestic demand is now being more than offset by increasing net exports. Property markets remain very weak, however; house prices fell by over 16 per cent in 2011 and CRE prices by 11 per cent. Despite the large fall in prices already, an overhang of vacant property continues to weigh on market prices.
In Ireland, continued falls in house prices, despite the already steep reductions prior to 2011, have kept impairments high and we expect property prices to remain subdued.
Key opportunities Economic environment: Significant progress in reducing the Group’s risk profile and strengthening the balance sheet in recent years along with strategic actions taken in 2011 means we are better positioned to benefit as the economy recovers.
Customer requirements: Our strategic assets, including a comprehensive multi-channel distribution network, strong customer relationships, well recognised brands and high quality people mean we are positioned to address the customer trends.
In delivering these products to our customers we capitalise on our strong customer relationships, our iconic and distinct brands, our broad multi channel distribution and our customer focused people.
We intend to reshape our business portfolio to fit our assets, capabilities and risk appetite. We will further reduce the balance sheet through the continued reduction of our non-core assets and reduce the risk in the business through the application of a conservative approach to, and prudent appetite for risk. We will also reduce our international presence.
We believe we can unlock the potential in the franchise and deliver value to customers and shareholders by creating a simpler, more agile and responsive organisation. Opportunities exist to increase the efficiency of operations and processes and reduce costs whilst still addressing customer needs more effectively. The creation of a simpler, more agile organisation will enable the Group to adapt more effectively to the external environment whilst addressing the changing needs of the customer base more effectively.
In reshaping our business, we have identified the following areas of focus: Continued reduction in non-core assets A prudent appetite for risk Streamlining our international presence
Streamlining our international presence We will streamline our international presence from around 30 countries to less than half that number by 2014 and in 2011 we have already made good progress having announced the exit from seven countries. We will also concentrate our skills and investment in these countries which will enable us to make sure local opportunities can be identified and initiated in a cost effective value adding manner.
Good progress continues to be made in reducing the level of non-core assets.
This is in addition to our business-as-usual investment programme and is expected to result in core income growth above UK GDP growth, primarily driven by growth in other operating income.
Investing to be the best bank for personal customers In Retail, we have started to revitalise the Halifax brand to be a leading challenger brand in UK retail banking. We aim to deliver a simple, efficient and fair customer experience, innovative products such as the ISA Promise or Savers Prize Draw, and to be a value-for-money leader.
We also expect a continued reduction in the level of government and central bank funding with current plans assuming that the remaining facilities will be repaid in line with contractual maturity dates, the last of which is in October 2012. The Group remains committed to being a commercial, self sufficient, dividend paying entity over time.
Group loan-to-deposit ratio With a reduction in our non-core assets, and further growth in our relationship customer deposits, we were initially targeting an improvement in our Group loan-to-deposit ratio to 130 per cent or below by the end of 2014, but we now expect to attain this in 2012.
We have over 30 million personal, commercial and corporate customers and operate the largest retail bank in the UK. in 2011 we made great progress towards our goal of being the best bank for customers with a number of notable product launches, a significant reduction in customer complaints and numerous system and process improvements whilst continuing to support our customers and the UK economic recovery. We also received a number of external awards recognising the quality and consistency of delivery to our customers. our Corporate and Commercial businesses won the best bank of the year award for the seventh consecutive year at the Real Fd/Cbi excellence awards, while in Retail we were named ‘best overall Mortgage lender’ for the tenth year running in the your Mortgage Magazine Awards and in insurance we were named as britain’s most popular home insurance provider by the independent market researchers GFK nop for the tenth year in a row.
Supporting our customers and the UK economic recovery As part of our strategy to be the best bank for customers, and as a leading financial services provider in the UK, the Group continues to actively support sustainable growth in the UK economy through the focused range of products and services we provide to our business and personal customers, as well as through partnerships we have built with industry and government.
Maximize the use of our customer relationships and insight to enable us to engage more effectively with our customers and become more responsive to customers’ needs
We have enhanced our internet banking offering to enable our retail customers to do more online, and extended the innovative lloyds tsb lend a hand Mortgage to help customers purchase a home with the help of their local authority. to strengthen our strategy of being the best bank for sMes, we launched our best for business campaign, reaffirmed our continued support for the sMe Charter to respond to 90 per cent of lending appeals within 15 days which will exceed the industry standard of 30 days, and maintained our leading part in the business Growth Fund which is the latest initiative from the business Finance taskforce.
Customer satisfaction is assessed through the net promoter score (nps), which measures the likelihood of customers recommending us to others and all of our high street brands made significant headway in 2011, achieving their highest ever nps scores, with the group wide score rising from 38 in 2010 to 44 in 2011. the Group monitors nps across a range of touch points to ensure that the customer experience improves across the board. the process gives insight for specific channels, such as a branch or telephony network, product experiences, such as opening a new account, and other key events such as handling of complaints. this insight allows us to adapt our colleague training and processes in order to give customers an increasing quality of service. our halifax brand also received the highly coveted ‘best Customer service’ award at the Consumer MoneyFacts awards 2012, evidencing the real progress that’s being made.
Colleagues our colleagues deliver the experiences that will make us britain’s best bank for customers.
The Employee Engagement Index (EEI) measures the individual motivation of colleagues whilst the Performance Excellence Index (PEI) measures how strongly colleagues believe the Group is committed to improving customer service.
Aim our ambition is for a more diverse, better engaged and stimulated employee group to help us achieve our goals. At lloyds banking Group, we want the diversity of our employee base to more accurately reflect the diversity in our society; the better we reflect our marketplace the better we can serve it.
the new survey uses a proven engagement model, delivered through the means of a single focussed question set. the outputs provide two separate and measurable scores, the employee engagement index (eei), which measures the individual motivation of colleagues, and the performance excellence index (pei), measuring how strongly colleagues believe the Group is committed to improving customer service. these will be used to create national and local action plans that prioritise the things that will make the Group a better place to work.
to demonstrate our strong commitment to listening and acting on issues that matter most to colleagues, we will: Firstly, continue to deliver on our Group strategy to be the best bank for customers and colleagues. We know this will improve confidence in the future of our organisation and result in growth, greater efficiencies, new business opportunities and real career prospects for colleagues across our business.
the success of the exercise was a tribute to the way in which colleagues throughout the Community banks worked together. the branch experience involved colleagues from halifax and bank of scotland working in lloyds tsb branches. this practical hands-on experience saw communities working together, sharing knowledge and experience that was an essential ingredient to colleagues learning.
this year has seen the design and implementation of an award winning new defined Contribution pension scheme – your tomorrow which gives considerable flexibility to employees to plan for retirement.
We have continued to shape and deploy our learning Academies which provide easy access to clear learning maps for colleagues providing further clarity on the technical and leadership capabilities required to be effective. nearly 100,000 colleagues have access to the academies which cover critical topics such as risk, relationship management and financial control.
in our ethnic diversity strategy, we have launched a new Career development programme for ethnic minority managers, targeted at those colleagues who are looking to achieve their first management or senior management position. the programme discusses barriers to progression, how to overcome them and supports participants to achieve their full potential.
Funding grassroots charities in 2011, we donated almost £30 million to the lloyds tsb Foundations and the bank of scotland Foundation. the Foundations disburse grants to local, regional and national charities that operate at the heart of communities. 2011 also marked the 25th anniversary of the lloyds tsb Foundations. over the last quarter of a century, the lloyds tsb Foundations and bank of scotland Foundation have invested more than £510 million supporting over 50,000 community based charities.
in addition to making grants, the Foundations work in partnership with the Group to champion colleague fundraising and volunteering efforts through their Matched Giving scheme. Colleagues in the UK can claim up to £1,000 in Matched Giving each year. in 2011, over 6,200 applications were made, totalling £2.3 million in matched giving for charity.
Aim We have a presence in every community across the UK. We recognise that to be the best bank for customers, we must also be the best bank for communities.
In 2011, the Group supported over 16,000 colleagues’ volunteering for charities and community groups. The Foundations also provided Matched Giving to some of these organisations for colleagues’ time spent volunteering outside of working hours.
Charity of the Year our Charity of the year for 2011/2012 is save the Children. We raised £1.4 million in 2011 for save the Children which will fund 46 FAst programmes across the UK. FAst (Families and schools together) increases the life chances of children in the UK’s most deprived areas by supporting parents to improve their children’s learning and development at home, so they can reach their full potential at school.
Making a Difference Awards our annual Making a difference Awards celebrate employees who make an exceptional contribution to charities and community groups. in 2011 we received nominations for 1,164 colleagues who had made a huge difference to their communities. the 203 award winners received a contribution from the Group for their chosen charities. the Group also donated £20 for every nomination received to our Charity of the year, totalling £23,280 for save the Children. in total the Group donated almost £100,000 through these awards to charities and local communities.
Financial wellbeing We take seriously our responsibility to do more to raise levels of general financial understanding amongst the communities we serve. in addition, we make a very significant investment in helping to bring those who are excluded into mainstream financial services. our financial inclusion work is covered in more detail on page 33.
Jeff McArthur, Regulatory and external Risk Manager at lloyds tsb, is a graduate of the Money for life teach others course. he has delivered financial capability workshops at dress for success, a charity offering employment-based services and workshops to help disadvantaged women become economically independent.
Tracking progress independent consultants verify our performance every year. We also measure our performance against our peers through external benchmarks. in 2011, we were re-selected for the dow Jones sustainability index. We were also ranked top UK bank in the Ftse4Good index and were re-selected for the Carbon disclosure leadership index. We have a platinum ranking in business in the Community’s Corporate Responsibility index and were awarded business in the Community’s CommunityMark, the national standard that publicly recognises excellence in community investment.
We will also pilot a community fund that will enable colleagues to help their chosen community organisation with financial support. small grants will be made available for community organisations that our colleagues and customers have elected to support.
As a volunteer for st. John Ambulance, Andrew is County staff officer for the operations department who are responsible for the management of all public duties, vehicles and logistics in the county. For a number of years Andrew has also crewed an ambulance, having completed his ambulance service blue light driving assessment and ambulance training. in 2010 Andrew contributed 413 hours of voluntary service.
Giving customers the chance to get involved We are creating as many opportunities as possible for our customers and the communities we serve across the UK to get involved in the Games: In 2011, more than 200,000 people signed up to Trackside, our customer exclusive programme. Trackside is just one of the ways we are giving customers the chance to win tickets to the London 2012 Olympic and Paralympic Games. Through Trackside, 1,500 personal banking customers will each win a pair of tickets to the Games. We are also giving customers chances to win exclusive experiences with Olympians and Paralympians.
Helping businesses benefit from London 2012 We are focused on supporting our business customers to maximise the opportunities of the Games and ensure a lasting legacy for UK businesses. In 2011 we used the power of London 2012 to inspire businesses all over the UK: One in three of the £3 billion worth of London 2012 contracts have been awarded to our business customers with more contract opportunities still available along the supply chain.
Group income and margin reductions partially offset by lower costs and impairments The Group’s 2011 results, which are analysed below on a combined businesses basis (except where stated), were impacted by liability management, volatile items and asset sales when compared to 2010 (see page 45). Excluding these, income declined by 10 per cent, reflecting a smaller balance sheet (average interest earning assets are down 6 per cent) primarily driven by substantial reductions of non-core assets, and a net interest margin which was 14 basis points lower than in 2010. The change in margin reflected continued high funding costs, including the costs of refinancing of a significant amount of government and central bank facilities.
The statutory loss before tax was £3,542 million in 2011 included the £3,200 million PPI provision, which is excluded from the combined businesses results, and which was taken in the first half of 2011. The statutory result also includes, amongst other things, negative insurance volatility of £838 million (2010: positive volatility of £306 million), and charges totalling £1,452 million (2010: £1,653 million), of which £1,097 million related to integration, £185 million to simplification and £170 million to the EC mandated retail business disposal costs. After a tax credit of £828 million, and after taking into account the profit attributable to non-controlling interests of £73 million, the loss attributable to equity shareholders was £2,787 million and the loss per share amounted to 4.1 pence.
Further progress in reducing the Group’s risk We continued to further reduce risk in our balance sheet, by increasing customer deposits, and by making excellent progress against our funding objectives and on the continued reduction of non-core assets, thereby achieving a substantial reduction in wholesale funding requirements. We strengthened our core tier 1 capital ratio to 10.8 per cent (31 December 2010: 10.2 per cent), largely as a result of a reduction in risk-weighted assets of £54 billion principally from the run down of higher risk non-core assets. This was partially offset by the implementation of CRD III (20 basis points) and the negative impact of the PPI provision (60 basis points).
Wholesale funding requirements reduced by £47 billion to £251 billion, of which £138 billion (55 per cent) including bank deposits had a maturity date of more than one year (31 December 2010: £149 billion, 50 per cent). Primary liquid assets at the year-end were £94.8 billion (31 December 2010: £97.5 billion).
Core and non-core business performance Detailed financial information on core and non-core business performance, including non-core asset reductions, is given on pages 86 to 93.
Our core business delivered a resilient performance given the challenging external environment. The 6 per cent decline in core income excluding liability management, volatile items and asset sales reflected subdued new lending demand and continued customer deleveraging. The effect on net interest margin of higher wholesale funding costs was mitigated by improved funding mix in the core business as a result of increased customer deposits, resulting in a small decline in net interest margin of 6 basis points.
Income Total income, net of insurance claims, decreased by 10 per cent to £21,123 million. The decrease includes the effect of non-core asset reductions, a number of volatile items including banking volatility, changes in the fair valuation of the equity conversion feature of the Group’s Enhanced Capital Notes (ECNs), net derivative valuation adjustments and the effect of liability management gains in 2010 and 2011 (together ‘effects of liability management, volatile items and asset sales’).
Total income, net of insurance claims, excluding effects of liability management, volatile items and asset sales 21,197 23,537 (10)
Total income, net of insurance claims, excluding effects of liability management, volatile items and asset sales 5,102 4,927 4
As at 31 December 2011, we had realised annual run-rate savings of £2,054 million from the Integration programme. A major part of the integration from an IT perspective was the migration of Halifax and Bank of Scotland customer accounts and data to the scaled Lloyds TSB platforms and this was successfully completed in the third quarter. This was an immense exercise involving the migration of approximately 30 million customer accounts and these platforms will now provide the foundation for the Group’s transformation plans.
On 30 June 2011, we announced, as part of our strategy to deliver for customers and shareholders, that we would simplify the Group to improve service and are now targeting the delivery of £1.7 billion of annual savings in 2014 (£1.9 billion of run-rate savings by the end of 2014). By the end of 2011, after the first six months of this programme, we had achieved run-rate cost savings of £242 million.
In Wealth and International, impairment charges totalled £4,610 million, a decrease of 23 per cent from £5,988 million in 2010. The reduction predominantly reflects lower impairment charges in our Irish portfolio where the rate of impaired loan migration has slowed. The impairment charge as a percentage of average loans and advances to customers improved to 7.37 per cent from 8.90 per cent. Impaired loans increased by £0.4 billion with an increase of £1.9 billion in Ireland partly offset by a reduction in the Australasian book as a result of write-offs and disposals, resulting in 42.8 per cent of the International portfolios (66.0 per cent of the Irish portfolio) being classified as impaired compared with 35.1 per cent in 2010. Provisions as a percentage of impaired loans in the International portfolios were 61.0 per cent at the end of 2011 (31 December 2010: 52.9 per cent). Impairment coverage has increased in Ireland to 62.1 per cent from 53.7 per cent, primarily reflecting further falls in the commercial real estate market during 2011, and further vulnerability exists. Impaired loans accounted for 84.3 per cent of the Irish wholesale portfolio, with a coverage ratio of 61.1 per cent. Further provisioning has been necessary in the Group’s Australasian portfolio primarily reflecting geographical real estate concentrations where market conditions and asset valuations have remained weak in 2011.
Though funding markets remain challenging, we exceeded our 2011 term funding issuance plans with £35 billion of wholesale term issuance. We announced in our Q3 2011 Interim Management Statement that we had completed our 2011 term funding programme at the end of October. The wholesale term issuance of £2 billion in November and December was therefore pre-funding for 2012.
As previously outlined we have a £20 billion to £25 billion term funding requirement during 2012 across all public and private issuance programmes. Given the pre-funding of 2012 requirements achieved in the fourth quarter of 2011, the benefits of the liability management exercise in December 2011, and issuance of £8 billion in January and February 2012, we have already achieved over 50 per cent of this target by the end of February 2012.
Integration and simplification costs Integration costs of £1,097 million and simplification costs of £185 million were incurred in 2011. These costs relate to severance, IT and business costs of implementation.
Volatility arising in insurance businesses A large proportion of the funds held by the Group’s insurance businesses are invested in assets which are expected to be held on a long-term basis and which are inherently subject to short-term investment market fluctuations. Whilst it is expected that these investments will provide enhanced returns compared with less volatile assets over the longer term, the short-term effect of investment market volatility can be significant. The negative insurance and policyholder interests volatility of £838 million in 2011 reflects lower equity and cash returns compared to longterm expectations.
Summary of financial progress During 2011, the Group has continued to make very significant progress in divesting non-core assets and refocusing customer balances (loans and deposits) to meet our prudent risk appetite and to enable reduced wholesale funding with a strong liquidity position. We have the appropriate momentum that will allow that journey to continue in the medium-term in line with our strategic objectives. Our customer propositions are now better aligned to our income generating opportunities and, while headline progress is reflective of economic conditions, we are well positioned to continue to respond to customer needs by building income through both lending and advice products. Both our derisking and customer focus are underpinned by the ongoing reshaping of our cost base, exploiting the experience of delivering the complex integration, with significant investment spend to deliver our strategic priorities.
Loans and advances to customers excluding reverse repos 352.8 123.3 28.8 43.8 0.1 548.8
The calculation basis for banking net interest margins is set out on page 97.
Impairment on loans and advances to customers divided by average loans and advances to customers, excluding reverse repurchase transactions, gross of allowance for impairment losses.
Loans and advances to customers excluding reverse repos 363.7 141.5 28.6 55.3 0.4 589.5
Retail is focused on effectively meeting the needs of its customers. The division provides current accounts including packaged accounts and basic and social banking accounts. It is also the largest provider of personal loans in the UK, as well as being the UK’s leading credit card issuer. Retail provides one in five new residential mortgages making it one of the leading UK mortgage lenders and provided over 52,000 mortgages to help first time buyers in 2011. Retail is the largest private sector savings provider in the UK. It is also a major general insurance and bancassurance distributor, offering a wide range of long‑term savings, investment and general insurance products.
Reshaping the business Retail is reshaping the business in a way that is driven by our customers’ needs and refocusing our efforts on building deeper customer relationships. As part of this we have continued to make good progress at strengthening the balance sheet through strong customer deposit growth and by managing down balances outside our risk appetite. Retail has also progressed with plans to divest retail assets and liabilities in line with state aid obligations (Project Verde).
Total income decreased by 10 per cent: – Net interest income was 13 per cent lower, largely as a result of higher funding costs, muted demand for credit, the continued impact from previous de‑risking of the lending portfolio with a corresponding reduction in impairments and increased competition for deposits as we continued to reduce our funding gap.
– Other income increased by 3 per cent, principally as a result of higher bancassurance income. Income also includes the gain on the disposal of VISA Inc. shares.
Retail is also working to introduce simpler products, systems and processes for customers. This includes developing new digital technologies to simplify our customers’ interactions with the Group and make banking with us more convenient – in particular services like our award‑ winning internet banking, mobile banking apps (which have achieved over 1.5 million downloads) and Money Manager. Retail has seen strong improvement in customer advocacy with those customers who use these services.
We are committed to support and build stronger relationships with all customers and as part of this are developing the products and services we provide to mass affluent and business connected customers so that we can better meet their needs and form deep and enduring relationships. This includes investing in training for our advisors and more automated systems, ensuring we help address the more complex financial needs of these customers and improve customer experience.
Financial performance Despite the difficult operating environment Retail delivered a profit before tax in 2011 of £3,636 million which was £350 million, or 9 per cent, lower than 2010.
Profit before tax and fair value unwind decreased to £2,797 million, a reduction of 3 per cent compared to 2010, driven by higher funding costs and the muted demand for credit.
Retail’s gross mortgage lending was £28.0 billion in 2011 which was equivalent to a market share of 20 per cent. Retail’s new mortgage lending continued to be focused on home purchase with 70 per cent of lending being for house purchase rather than re‑mortgaging. Retail remains the UK’s largest lender to first time buyers, helping over 52,000 customers buy their first home in 2011.
Risk‑weighted assets decreased by £6.1 billion to £103.2 billion compared to 31 December 2010. This reflected the impact of lower lending balances and the reducing mix of unsecured lending.
Total customer deposits increased by £11.5 billion, or 5 per cent, to £247.1 billion in 2011. This increase was largely driven by strong growth in tax free cash ISA balances. Retail continues to perform well in the savings market despite the high levels of competition, with a strong stable of savings brands providing customers with an award winning range of products to meet their savings needs.
Following the changes to organisational structure announced in February 2012, the Asset Finance business is being transferred to Wealth and International division for 2012 reporting.
Cost:income ratio (excl. impairment of tangible fixed assets) 62.0% 42.2% Incorporates the methodology changes outlined in the October 2011 announcement (New Allocation Methodologies for Funding Costs and Capital). Other costs include impairment of tangible fixed assets in 2010.
Simplifying the Bank To deliver the strategy, a new, simplified, business model has been implemented to ensure more effective co-ordination of Coverage, Product and Support. Coverage and Product are now more closely integrated to create a single team offering to allow seamless access to the banking and financial markets expertise our customers demand. The Support functions have been reconfigured and delayered to provide centralised, efficient and client focused processes and activities to inform and drive better business decisions and performance. This simpler approach will enable easier co-ordination of multi-product solutions on behalf of Wholesale’s customers and improve the way we meet their on-going needs.
Total income decreased 38 per cent (20 per cent excluding losses on asset sales and derivative valuation adjustments) – Net interest income decreased by 25 per cent, principally reflecting the substantial reductions in non-core assets, which fell 34 per cent. Net interest margin fell by three basis points, with the impact of higher funding costs almost fully offset by re-pricing activity and increased deposit margins and volumes.
– Other income decreased by 16 per cent principally reflecting reduced trading income and a lower level of operating lease asset income in Asset Finance.
Customer deposits excluding repos were 2 per cent higher, in line with the Group Strategy to increase customer deposits.
In 2011, Wholesale initiated a Transaction Banking Transformation Programme, to build an improved, cash management, payments and trade customer offering. This programme will deliver improved customer services in stages, with the bank’s Faster Payments scheme already successfully extended and a service allowing customers to obtain more easily settlement from their European customers introduced. Lloyds Banking Group partnership with London 2012 saw the successful processing of card settlements for Olympic and Paralympic Games ticketing and Transaction Banking also launched the UK’s first contactless prepaid cards for corporate use, with a special range of Visa London 2012 Olympic and Paralympic Games themed Cards.
Core profit before tax decreased to £682 million compared to profit before tax of £2,052 million in 2010, largely due to reduced income from a reduced balance sheet as customers deleverage, a challenging trading environment and as a result of net derivative valuation adjustments. Impairments increased due to certain specific large cases. Excluding net derivative valuation adjustments core profit before tax was £1,400 million, down 33 per cent on 2010.
Net interest income decreased by £708 million, or 25 per cent, to £2,139 million. The decrease reflects lower interest-earning asset balances in line with the Group’s targeted balance sheet reduction of loans and advances to customers and banks, debt securities and available-for-sale positions. Net interest income was also adversely affected by higher funding costs. This was partially offset by an increase in the liability margin resulting from the increased market value of deposits.
Other income decreased by £639 million, or 16 per cent, to £3,335 million, mainly reflecting lower income in Asset Finance and reduced trading revenues. The effect of losses on asset disposals from the continued focus on balance sheet reductions and net derivative valuations adjustments due to the increased market implied credit risk associated with customer derivative balances resulted in losses of £1,415 million, compared to £295 million in 2010.
Core income was £3,559 million compared to £4,793 million in 2010, reflecting the effects of net derivative valuation adjustments and as a consequence of difficult market and economic conditions, reduced lending balances to corporate customers, and higher wholesale funding costs. Excluding derivative valuation adjustments income decreased 12 per cent showing resilience in the challenging environment.
The core banking net interest margin saw a significant increase of 21 basis points to 1.80 per cent, driven primarily by a lower reliance on wholesale funding as asset balances reduced and deposit balances increased. The non-core banking margin, which is predominantly asset based, decreased by 32 basis points to 1.28 per cent, largely from increased wholesale funding costs.
Costs Operating expenses decreased by £234 million, or 9 per cent, to £2,518 million from further savings from the Integration programme, lower operating lease depreciation, lower bonus accruals and other ongoing cost management actions to mitigate the impact of inflationary increases. This was partially offset by continued investment in customer facing resources and systems.
Impairment and fair value unwind The impairment charge decreased by £1,163 million, or 29 per cent, to £2,901 million reflecting a sustained decrease since the peak in 2009. As a percentage of average loans and advances to customers, the impairment charge improved to 1.95 per cent from 2.23 per cent in 2010. This reflected robust and proactive risk management and lower defaults from continued low interest rates despite a subdued economic environment.
Customer deposits excluding repos increased by 2 per cent to £84.3 billion, due to an increase in deposits in line with the Group’s funding strategy. Customer deposits on the core book increased by 3 per cent to £81.5 billion.
Risk-weighted assets decreased by £32.3 billion, or 16 per cent, to £163.8 billion, primarily reflecting balance sheet reductions and run down in other non-core asset portfolios, as well as the impact of changes in the risk profile, partially offset by Basel regulatory changes to market risk. Non-core risk-weighted assets represent £24.7 billion, or 76 per cent, of this reduction.
Effects of liability management, volatile items and asset sales (1,394) (295)
Loans and advances to customers excl reverse repos 116.9 132.6 (12)
Effects of liability management, volatile items and asset sales (21) –
Commercial comprises Commercial Banking, Commercial Finance, providing invoice discounting and factoring, hire purchase and leasing and AMC the long term lender to the agricultural sector. The business has a ‘through the cycle’ customer relationship approach, drawing on a wide range of Group service in order to meet their needs through their business lifecycle – from start-up, through growth, to maturity and succession. Through the SME Charter, Commercial have committed to lend £12 billion gross and continue to deliver positive net lending in 2012 and to help 300,000 start ups in the three years to end 2012.
Total Income increased by 7 per cent: – Net interest income grew by 11 per cent, due largely to the increase in deposit balances, and a higher net interest margin.
The impairment charge reduced by 21 per cent, due to an overall improvement in the credit quality of the portfolio reflected in a reduction in observed default and delinquency rates. This is supported by the specialist relationship support, which helps customers facing difficult business conditions.
Loans and advances to core customers increased by 3 per cent against a contracting market. This reflects the continuing support given to small and medium sized businesses, fully offsetting the reduction in non-core assets.
Customer deposits grew 3 per cent, reflecting our ongoing success in attracting deposits from new customers, combined with targeted support in key customer segments such as the education and legal sectors.
Reshaping the business The business is being reshaped by investing to improve the customer proposition, leveraging wider Group capabilities, and supporting SMEs through the cycle to help them prosper and develop. This will be achieved through investment in our Relationship Managers and will be supported by product and system development aligning to customers’ wider financial needs. The number of customer facing industry specialists has increased improving support in key markets.
In support of the SME sector, the Group has exceeded its agreed full year contribution to the aggregate Merlin capacity lending target in respect of SMEs. The core net lending balance growth of 3 per cent compares favourably with the contraction of SME lending across the industry reported by the Bank of England.
Investing in growth SMEs are a strategic priority reflecting the Group’s commitment to the sector, the competitive advantage entailed in the Group’s distribution strengths and relationship expertise, and the potential offered by better co-ordination of the wider range of services across the Group.
Awards – Awarded Bank of the Year (joint award with Wholesale) for the 7th consecutive year on the basis of votes of Finance Directors in the Real FD Excellence Awards supported by the CBI and the Institute of Chartered Accountants.
– Awarded best charity account provider in the Business Moneyfacts Awards.
Financial performance Profit before tax and fair value unwind in 2011 was £446 million compared to a profit of £210 million in 2010. The improvement of £236 million was largely driven by deposit balance growth and the increased value to the Group’s cost of funding from deposits as well as a benefit from a change in the mix of Commercial’s deposit balances. The increase in income is partially offset by other operating income which has decreased £11 million, 2 per cent, due to subdued levels of trading activity in the early part of the year and reduced levels of money transmission income reflecting the greater use of electronic banking facilities by customers.
The fair value unwind decreased by 34 per cent, reflecting the decrease in impairment charge.
Our asset management business, Scottish Widows Investment Partnership, has a broad client base, managing assets for Lloyds Banking Group customers as well as a wide range of clients including pension funds, charities, local authorities, Discretionary Managers and Financial Advisers. In addition, the Group holds a 60 per cent stake in St James’s Place, the UK’s largest independent listed wealth manager.
The International business comprises the Group’s international banking businesses outside the UK, with the exception of corporate business in North America which is managed through the Group’s Wholesale division. These largely comprise corporate, commercial and asset finance business in Australia and Continental Europe and retail businesses in Germany and the Netherlands.
Net loans and advances to customers decreased by 21 per cent
Developing employee capabilities In 2011 we launched the Wealth Academy, a new learning and development initiative for our Wealth employees. The academy offers access to thousands of industryleading learning solutions as well as a route to attaining professional qualifications.
2011 highlights Loss before tax decreased by 20 per cent, with a fall in impairments partly offset by lower income, fair value unwind and higher operating expenses.
Within the core business, profit before tax and fair value unwind increased by 20 per cent, primarily due to a 22 per cent growth in customer core balances and improvement in customer net interest margins partially offset by increased operating expenses reflecting the continued investment in deposit activity in line with our strategy of strengthening the balance sheet and growing our share of the Wealth market.
Total income decreased by 8 per cent: – Net interest income was 21 per cent lower, reflecting lower lending volumes and increased impaired assets, partly offset by the favourable impact of foreign currency movements, particularly the Australian Dollar. We saw higher deposit balances and margins in our core business where net interest income has increased by 20 per cent.
Wealth and International have reduced non-core loans and advances to customers by £11.3 billion in 2011 through a mixture of repayments and selected asset disposals (in addition to foreign exchange and impairments as outlined below), including the sale of £1 billion (gross) of commercial real estate assets in Australia and New Zealand. Our International on-line deposit business continued to grow strongly with customer balances as at December 2011 of £13.8 billion. The division has also made good progress towards reducing its International presence.
In 2011, the UK Private Banking and High Net Worth businesses have been successfully integrated to form ‘One Private Bank’, with a simplified management structure and aligned business models across the heritage brands. During the second half of the year, around 60,000 UK Wealth accounts have been migrated onto a single operating platform.
Net interest income decreased by 21 per cent, or 25 per cent in constant currency terms. Higher funding costs and the increased strain of impaired assets, reflected in a 33 per cent reduction in net lending margins together with lower lending volumes impacting net interest income are partially offset by the impact of the stronger Australian dollar in International. Deposit margins increased by 14 per cent reflecting changing product mix predominantly as a result of continued deposit inflows in the on-line deposit business at higher margins together with improving margins across the Wealth businesses.
Effects of liability management, volatile items and asset sales – 37
The impairment charge increased to £100 million primarily due to increased charges in the Group’s Spanish mortgage book reflecting deterioration in the local property markets and economic outlook in Spain.
Effects of liability management, volatile items and asset sales – –
Total income decreased by 24 per cent, but was 38 per cent lower in constant currency, reflecting lower interest-earning assets and the increased strain of lost earnings on higher impaired assets.
Operating expenses increased by 1 per cent. On constant currency terms, operating expenses reduced by 4 per cent reflecting cost saving initiatives across the International business, partly offset by the continued investment in International’s on-line deposit business.
Life, Pensions and Investments Europe: The European Life, Pensions and Investments business distributes products primarily in the German market under the Heidelberger Leben and Clerical Medical brands.
General Insurance profits increased by 21 per cent to £497 million
For example, more than 150 homes were flooded in Sutton Coldfield in Birmingham last November when a water main at nearby Barr Beacon reservoir burst.
Life, Pensions and Investments: Profit before tax and fair value unwind 1,465 1,369 7
Operating expenses and other costs decreased by 5 per cent due mainly to a continued focus on cost management and delivery of integration cost savings, partly offset by an additional charge in relation to an industry wide Financial Services Compensation Scheme (FSCS) levy in 2011.
LP&I UK EEV new business margin increased to 4.2 per cent from 3.7 per cent in 2010. The improvement reflects the growth in protection sales and the business ceasing to write certain low margin products in 2010. The Internal Rate of Return (IRR) on new business remains in excess of 16 per cent.
General Insurance profits increased by 21 per cent to £497 million primarily due to lower freeze and unemployment claims year on year offset by lower income resulting from the Group ceasing to write new PPI business in 2010.
Strategic focus Insurance is a relationship business focused on helping our customers to protect themselves today whilst preparing for a secure financial future. Having renewed its strategic vision Insurance confirmed its objective to be the best Insurance business for customers.
Simplification Insurance continues to focus on cost reduction with costs decreasing by 5 per cent in 2011. Efficiencies have been achieved without compromising the quality of customer service and customer satisfaction ratings have remained robust across the division.
The net impact of experience variances and assumption changes has increased to a credit of £16 million in 2011 from a charge of £48 million in 2010. The benefit mainly reflects the absence of the £70 million charge taken in 2010 from the Group’s decision to cease writing new PPI business.
Total sales (PVNBP) have reduced by 2 per cent to £10,662 million. New business margins have improved to 4.0 per cent in 2011 from 3.5 per cent in 2010. This partly reflects the launch of the integrated bancassurance proposition in June 2010 which has resulted in a change in mix away from higher single premium savings products towards lower premium, higher margin, protection business.
The direct channel, although relatively small at this time, is performing well and is being developed for future growth. This channel will become even more important following the introduction of RDR.
The profile of the emergence of VIF in future years show that almost 40 per cent of the VIF is expected to be released within 5 years, with nearly 80 per cent expected to be released within 15 years.
Claims paid on insurance contracts (net of reinsurance) (343) (542) 37
Profit before tax and fair value unwind from General Insurance increased by 21 per cent to £497 million. The increase was primarily due to improved PPI claims experience from the run off of this business line, the absence of severe weather related claims as experienced in 2010 and lower expenses. As a result of these factors the combined ratio has improved to 69 per cent.
Claims of £343 million were 37 per cent lower than in 2010, mainly due to improved claims experience as a result of the run off of the PPI business and lower unemployment claims and lower property claims following the freeze events that impacted January and December 2010.
Operating expenses decreased by £26 million, or 12 per cent, to £195 million primarily as a result of further delivery of integration savings and a continued focus on cost management.
2010 comparative figures have also been amended to reflect the centralisation of operations across the group as part of the integration programme. to ensure a fair comparison of 2011 performance, 2010 direct costs have been changed with an equivalent offsetting adjustment in recharges to divisions.
Strategy group operations aim is to be a world class operations business whilst ensuring value through cost and process efficiency. this will be achieved by providing excellent technology and effective process to support the businesses; driving simplification, automation and continuous improvement; developing world class operations, leadership and capability; and maintaining strong controls to protect the group.
support functions (includes group security & Fraud and group Change Management) costs decreased by 18 per cent through the delivery of integration synergy savings and simplification benefits.
central items include income and expenditure not recharged to the divisions, including the costs of certain central and head office functions and the financial impact of banking volatility taken centrally.
Profit before tax – combined businesses 2,685 2,212 other costs include fScS costs and UK bank levy in 2011, and fScS costs and impairment of tangible fixed assets in 2010.
income, net of insurance claims £m impairment charge £m loans and advances to customers1 £bn
effects of liability management, volatile items and asset sales 603 51
loans and advances to customers (excluding reverse repos) 437.0 454.2 (4)
Group £m effects of liability management, volatile items and asset sales 48 (738) – – – 1,293 603 insurance claims – – – – (343) – (343)
Assets loans and advances to customers excl reverse repos 325.1 76.5 27.4 7.9 0.1 437.0
Assets loans and advances to customers excl reverse repos 333.7 85.4 26.6 8.1 0.4 454.2
Profit before tax and fair value unwind 93 (2,057) 10 (4,322) 96 (55) (6,235)
includes volatility relating to the Group’s interest in St James’s Place.
the negative insurance volatility during the period ended 31 December 2011 in the insurance division was £557 million, primarily reflecting the underperformance of equity markets in the second half of 2011 and lower cash returns compared to long-term expectations.
in the year to 31 December 2011, the statutory results before tax in both the insurance and Wealth and international divisions included a charge to other income which relates to policyholder interests volatility totalling £283 million (2010: £216 million credit). this charge included the impact of deferred tax asset impairments due to less optimistic economic forecasts and changes in expected policyholder tax provisions. Policyholder tax liabilities increased during 2011 and led to a tax charge during the period.
Migrating our business systems to a single platform 2011 saw the single biggest event of the integration programme with the successful migration of our core business systems to a single it platform. the Group has moved 30 million customer accounts and transferred 35 billion pieces of data between systems successfully. this has been the largest ever financial services it integration, and at its peak it involved many thousands of colleagues across the organisation.
Banking net interest income is analysed for asset and liability margins based on interest earned and paid on average assets and average liabilities respectively, adjusted for funds transfer Pricing, which prices intra-group funding and liquidity. centrally held wholesale funding costs and related items are included in the Group banking asset margin.
A reconciliation of banking net interest income to Group net interest income showing the items that are excluded in determining banking net interest income follows: Banking net interest income – combined businesses 12,094 13,839 other net interest income (including trading activity) 206 343
Group net interest income – combined businesses 12,233 14,143 fair value unwind (710) (301)
The statutory financial information set out in the table below has been derived from the annual report and accounts of Lloyds Banking Group plc for each of the past five years.
Total income, net of insurance claims 20,771 24,956 23,278 9,868 10,696
(Loss) profit for the year attributable to equity shareholders (2,787) (320) 2,827 772 3,288
Net asset value per ordinary share 67p 68p 68p 155p 212p
This figure excludes 81 million (2007 to 2008: 79 million) limited voting ordinary shares.
Capital ratios are in accordance with Basel II requirements; other than the ratios for 2007 which reflect Basel I.
Restated in 2010 to reflect a prior year adjustment to available-for-sale revaluation reserves.
Culture – the Board ensures that senior management implements risk policies and risk appetites that either limit or, where appropriate, prohibit activities, relationships, and situations that could be detrimental to the group’s risk profile.
Risk Infrastructure: Continue to invest in and develop our risk systems
People Agenda: Continue to attract, retain and develop high quality people
– the group Risk Committee and the group Asset and Liability Committee are chaired by the group Chief executive. the aggregate group wide risk profile and risk appetite are discussed at these monthly meetings.
Strong Control Framework – A strong control framework remains a priority for the group and is the foundation for the delivery of effective risk management.
– the group optimises performance by allowing business units to operate within approved parameters.
– the group’s key risks, management actions and performance against risk appetite are monitored and reported at group level.
– this reinforces the model of a strong and independent Risk function that keeps the group safe, supports sustainable business growth and minimises losses within risk appetite.
As part of the allocation of investment under the group strategic Review, the continued development of risk systems was a key priority to maintain our robust control framework over the long-term.
Conservative risk appetite across the shape of our existing and new business – taking into account customer outcomes, operational risks, impact on our people, as well as credit, funding and stressed earnings metrics. Approved by the Board and now fully embedded through the whole control framework – policies, procedures and limits.
Board and Board Committees the Board, assisted by Risk Committee and Audit Committee, approves the group’s overall governance, risk and control frameworks and risk appetite. the Board also reviews the group’s aggregate risk exposures and concentrations of risk to ensure that these are consistent with the Board’s agreed appetite for risk. the roles of the Board, Audit Committee and Risk Committee are shown in the corporate governance section on pages 177 to 186 and further key risk oversight roles are described below.
– the Group Incident Executive sets the strategic direction for the group’s response to significant incidents which could affect its ability to continue to operate, and instigates any tactical initiatives required.
– the Group Product Governance Committee provides strategic and senior oversight over design, launch and management of products, including new product approval, annual product reviews and management of risk in the back book.
– the Group Risk Committee reviews and recommends the group’s risk appetite and governance, risk and control frameworks, high-level group policies and the allocation of risk appetite. the group Risk Committee regularly reviews risk exposures and risk/reward returns.
– the Group Financial Crime Committee serves as the principal group forum for reviewing and challenging 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 co-ordinated and implemented across the group.
Risk management in the business Line management is directly accountable for the management of risks arising in their individual businesses. A key objective is to ensure that business decisions strike an appropriate balance between risk and reward, consistent with the group’s risk appetite.
the group uses an enterprise-wide risk management framework to maximise shareholder value over time by aligning risk management with the corporate strategy, assessing the impact of emerging risks, and developing tolerances and mitigating strategies. the framework ensures that policies and controls can be adapted to reflect adjustments to business strategy and risk appetite in response to changing market conditions.
the Lloyds Banking Group business strategy and objectives are used to determine the group’s high level risk appetite and measures and metrics for the primary risk drivers (see table 1.3).
the risk appetite is proposed by the group Chief executive following review by the group Risk Committee and group Asset and Liability Committee, and is approved by the Board. the approved high level appetite and limits are delegated to the group Chief executive and then cascaded in consultation with the group Risk Committee and group Asset and Liability Committee to members of the group executive Committee and the business.
– Detailed group policy: more specific and detailed policy statements of group policy
– Business Area policy: local policy which is produced by exception where a greater level of detail is needed by a business area than is appropriate for group-level policy.
the impact of risks and issues is determined through effective risk measurement, including modelling, stress testing and scenario analysis to assess financial, reputational and regulatory capital implications.
Monitoring processes are in place supporting the reporting and escalation of significant issues or losses to appropriate levels of management. Business areas monitor and report on their risk levels against risk appetite and their performance against relevant limits or policies.
At group level a consolidated risk report and risk appetite dashboard are produced which are reviewed and debated by the group Risk Committee, Risk Committee and the Board to ensure that they are satisfied with the overall risk profile, risk accountabilities and mitigating actions. the report and dashboard provide a monthly assessment of the aggregate residual risk for the primary risk drivers, comparing the assessment with the previous periods and providing a forecast for the next twelve months and also provides an assessment of emerging risks, which could impact the group over the next five years.
Principal risks and uncertainties At present the most significant risks faced by the group, which are derived from the primary risk drivers and detailed risk types in table 1.3 (page 112), are shown below. these risks could impact on the success of delivering against the group’s long-term strategic objectives. For further information on the economy see pages 21 and 22.
For further information on Liquidity and funding risk, see page 112.
Mitigating Actions the group takes many mitigating actions with respect to this principle risk, key examples include: the group follows a relationship based business model with risk management processes, appetites and experienced staff in place. Further details on mitigating actions are detailed on pages 130 to 132.
Capital and Liquidity evolving capital and liquidity requirements continue to be a priority for the group. the Basel Committee on Banking supervision has put forward proposals for a reform package which changes the regulatory capital and liquidity standards, the definition of ‘capital’, introduces new definitions for the calculation of counterparty credit risk and leverage ratios, additional capital buffers and development of a global liquidity standard. implementation of these changes is expected to be phased in between 2013 and 2018.
European Regulation At a european level, the pace of regulatory reform has increased with a number of new directives or changes to existing directives planned in the next 12 months including a revised markets in Financial instruments Directive, transparency Directive, insurance mediation Directive and a Fifth Undertakings in Collective investments in transferable securities Directive as well as a proposed Directive regulating Packaged Retail investment Products.
Continuing concerns about the fiscal position in eurozone countries resulted in increased credit spreads in the areas affected, and fears of contagion affected the euro and widened spreads between central bank and interbank rates.
– A continued focus on people risk management across the group.
– ensuring compliance with legal and regulatory requirements related to Approved Persons and the FsA Remuneration Code, and embedding compliant and appropriate colleague behaviours in line with group policies, values and people risk priorities.
insurance risk within the insurance businesses has the potential to significantly impact the earnings and capital position of the insurance Division of the group. For the group’s pension schemes, insurance risk could significantly increase the cost of pension provision and impact the balance sheet of the group.
Risk Definition the risk of reductions in earnings and/or value, through financial or reputational loss, due to fluctuations in the timing, frequency and severity of insured/ underwritten events and to fluctuations in the timing and amount of claims settlements.
Financial soundness Financial soundness risk has three key risk components covering liquidity and funding risk; capital risk; and financial and prudential regulatory reporting, disclosure and tax risk.
Risk appetite Liquidity and funding risk appetite for the banking businesses is set by the Board and reviewed on an annual basis. this statement of the group’s overall appetite for liquidity risk is reviewed and approved annually by the Board. With the support of the group Asset and Liability Committee, the group Chief executive allocates this risk appetite across the group. it is reported through various metrics that enable the group to manage liquidity and funding constraints. the group Chief executive, assisted by the group Asset and Liability Committee regularly reviews performance against risk appetite.
business as usual and liquidity under stressed conditions, both of which relate to funding in the less than one year time horizon. Longer term funding is used to manage the group’s strategic liquidity profile which is determined by the group’s balance sheet structure. Longer term is defined as having an original maturity of more than one year.
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. the group holds sizeable balances of high grade marketable debt securities as set out in table 1.4 which can be sold to provide, or used to secure, additional short term funding should the need arise from either market counterparties or central bank facilities (european Central Bank, Federal Reserve, Bank of england and Reserve Bank of Australia).
monitoring Liquidity is actively monitored at business unit and group level. Routine reporting is in place to senior management and through the group’s committee structure, in particular the group Asset and Liability Committee which meets monthly. in a stress situation the level of monitoring and reporting is increased commensurate with the nature of the stress event. Liquidity policies and procedures are subject to independent oversight.
the group has invested considerable resource to ensure that it satisfies the governance, reporting and stress testing requirements of the FsA’s new iLAs liquidity regime. the group has noted the industry move towards strategic balance sheet measures of the funding profile and has started to monitor and forecast the group’s net stable Funding Ratio (nsFR) and Liquidity Coverage Ratio (LCR). the group is aware that the regulatory liquidity landscape is subject to potential change. specifically, in relation to the papers issued by the Basel Committee on Banking supervision (‘strengthening the resilience of the banking sector’ and ‘international framework for liquidity risk measurement, standards and monitoring’) the group has actively participated in the industry-wide consultation and calibration exercises which took place through 2010.
the key dependencies on successfully funding the group’s balance sheet include the continued functioning of the money and capital markets; successful right-sizing of the group’s balance sheet; the repayment of the government Credit guarantee scheme facilities in accordance with the agreed terms; no further deterioration in the group’s credit rating; and no significant or sudden withdrawal of deposits resulting in increased reliance on money markets. Additionally, the group has entered into a number of eU state aid related obligations to achieve reductions in certain parts of its balance sheet by the end of 2014. these are assumed within the group’s funding plan. the requirement to meet this deadline may result in the group having to provide funding to support these asset reductions and/or disposals and may also result in a lower price being achieved.
Total government and central bank facilities 23.5 96.6 the ratio of customer loans to deposits improved to 135 per cent compared with 154 per cent at 31 December 2010. Loans and advances reduced by £41 billion and customer deposits increased by £23 billion, representing growth of 6 per cent in 2011.
Funded by excludes £16.8 billion (31 December 2010: £3.1 billion) of reverse repurchase agreements.
Primary liquidity assets are FsA eligible liquid assets including Uk gilts, Us treasuries, euro AAA government debt and unencumbered cash balances held at central banks.
excluding repurchase agreements of £8.0 billion (31 December 2010: £11.1 billion).
Other assets pledged as collateral in special purpose entities (for example ABCP conduits) decreased from £17.1 billion at 31 December 2010 to £8.8 billion, largely as a result of a reduction in the size of the group’s holdings of debt securities. Within the asset-backed conduits, assets are encumbered as security for short term asset-backed CP investors in the vehicles; such funding forms part of debt securities in issue disclosed in note 37 on page 266.
Debt securities in issue 233.7 – (4.8) 228.9 total wholesale funding 298.0 24.0
Downgrades of the group’s long term debt rating could lead to additional collateral posting and cash outflow. A hypothetical simultaneous two notch downgrade of the group’s long-term debt rating from all major rating agencies, after initial actions within management’s control, could result in an outflow of £11 billion of cash, £4 billion of collateral posting related to customer financial contracts and £24 billion of collateral posting associated with secured funding. these effects do not take into account additional management and restructuring actions that the group has identified that could materially reduce the amount of required collateral postings under derivative contracts related to its own secured funding programmes.
the downgrades that the group experienced in the fourth quarter of 2011, did not significantly change its borrowing costs, reduce its issuance capacity or require significant collateral posting. the group notes the February 2012 announcements from moody’s placing the ratings of 114 european financial institutions, including Lloyds Banking group, on review for downgrade. even in the case of a simultaneous two notch downgrade from all rating agencies, the group would remain investment grade.
Following the introduction of the FsA’s individual Liquidity guidance under iLAs, the group now manages its liquidity position as a coverage ratio (proportion of stressed outflows covered by primary liquid assets) rather than by reference to a quantum of liquid assets; the liquidity position reflects a buffer over the regulatory minimum. the group receives no recognition under iLAs for assets held for secondary liquidity purposes.
the group maintains its own buffer to ensure that the regulatory minimum requirements and regulatory targets and buffers are met at all times. Additionally an extensive series of stress analyses is undertaken during the year to determine the adequacy of the group’s capital resources against the FsA minimum requirements in severe economic conditions.
– the european Commission published a draft of the new Capital Requirements Directive and Regulation (CRD iV) which will implement within the eU the so called ‘Basel iii’ reforms for an enhanced global capital accord developed by the Basel Committee on Banking supervision.
– Lloyds Banking group was one of 29 banks identified by the Financial stability Board as being of global systemic importance (g-siFis) and which will be subject to stronger capital adequacy requirements than Basel iii. the list of g-siFis will be reviewed annually from a pool of around initially 70 institutions.
– in December the government announced that it would implement the key recommendations of the Uk’s independent Commission on Banking covering the ring-fencing of certain banking activities, ‘bail-in’ of senior unsecured debt, higher loss absorption capability and depositor preference.
the group is able to accumulate additional capital through profit retention, by raising equity via, for example, a rights issue or debt exchange and by raising tier 1 and tier 2 capital by issuing subordinated liabilities. the cost and availability of additional capital is dependent upon market conditions and perceptions at the time.
supervisory deductions supervisory deductions mainly consist of investments in subsidiary undertakings that are not within the banking group for regulatory purposes. these investments are primarily the scottish Widows and Clerical medical life and pensions businesses together with general insurance business. Also included within deductions for other unconsolidated investments are investments in non-financial entities that are held by the group’s private equity (including venture capital) businesses. During the period there has been a decrease in supervisory deductions primarily due to reduced holdings in private equity businesses, and in some cases changes to the level and/or nature of investments resulting in a reclassification as material holdings.
Life insurance businesses the business transacted by the life insurance companies within the group comprises unit-linked business, non profit business and with-profits business. several companies transact either unit-linked and/or non-profit business, but scottish Widows plc (scottish Widows) and Clerical medical investment group Limited (Clerical medical) hold the only large With Profit Funds managed by the group.
Regulatory capital requirements each life insurance company must retain sufficient capital to meet the regulatory capital requirements mandated by the FsA; the basis of calculating the regulatory capital requirement is given below. except for scottish Widows and Clerical medical, the regulatory capital requirement is a combination of amounts held in respect of actuarial reserves, sums at risk and maintenance expenses (the Long-term insurance Capital Requirement) and amounts required to cover various stress tests (the Resilience Capital Requirement). the regulatory capital requirement is deducted from the available capital resources to give ‘statutory excess capital’.
the ‘realistic excess capital’ is calculated as the difference between realistic assets and realistic liabilities of the With Profit Fund with a further deduction to cover various stress tests (the Risk Capital margin). in circumstances where the ‘realistic excess capital’ position is less than the ‘statutory excess capital’, the company is required to hold additional capital to cover the shortfall. Any additional capital requirement under this test is referred to as the With Profit insurance Capital Component.
shareholders’ funds: Held outside the long-term funds – – – 1,843 632 2,475
available to the With Profit Fund. At 31 December 2011, the estimated value of surplus admissible assets in the non-Participating Fund was £1,198 million (31 December 2010: £1,693 million) and the estimated value of the support Account was zero (31 December 2010: £197 million). However, at 31 December 2011, the excess of realistic liabilities with-profits business written down before demutualisation over the relevant assets was £67 million (31 December 2010: £55 million) which, in accordance with the FsA’s permission, has been used to assess the estimated value of realistic assets available to the With Profit Fund (and has therefore reduced the value of the non-Participating Fund’s surplus admissible assets by that amount).
Other restrictions in the Non-Participating Fund: in addition to the policies which existed at the date of demutualisation, the With Profit Fund includes policies which have been written since that date. As a result of statements made to policyholders that investment policy will usually be the same for both types of business, there is an implicit requirement to hold additional regulatory assets in respect of the business written after demutualisation. the estimated amount required to provide such support at 31 December 2011 is £117 million (31 December 2010: £147 million). scottish Widows has obtained from the FsA permission to include the value of this support in assessing the realistic value of assets available to the With Profit Fund. there is a further test requiring that no amounts can be transferred from the non-Participating Fund of scottish Widows unless there are sufficient assets within the Long-term Fund to meet both policyholders’ reasonable expectations in light of liabilities in force at a year end and the new business expected to be written over the following year.
Clerical Medical the surplus held in the Clerical medical With Profit Fund can only be applied to meet the requirements of the fund itself or distributed according to the prescribed rules of the fund. shareholders are entitled to an amount not exceeding one ninth of the amount distributed to policyholders in the form of bonuses on traditional with-profits business. the use of capital within the fund is also subject to the terms of the scheme of demutualisation effected in 1996 and the conditions contained in the Principles and Practices of Financial management of the fund. Capital within the Clerical medical non Profit Fund is available to meet the With Profit Fund requirements.
With Profits Funds Available capital in the scottish Widows With Profit Fund has decreased from £257 million at 31 December 2010 to an estimated £85 million at 31 December 2011. this is largely as a result of a reduction in the support arrangements from the non Profit Fund. Available capital in the Clerical medical With Profit Fund has decreased from £263 million at 31 December 2010 to an estimated zero at 31 December 2011. the fund is in the process of distributing the free estate. Ultimately all surplus will be distributed to policyholders hence the available capital at 31 December 2011 is zero.
Analysis of policyholder liabilities reported in the balance sheet in respect of the group’s life insurance business is as follows. With Profit Fund liabilities are valued in accordance with FRs 27.
Other life insurance business – – 8,745 55 8,800 insurance and participating investment contract liabilities 13,651 9,300 47,223 7,856 78,030 non-participating investment contract liabilities – – 45,469 4,167 49,636
Capital sensitivities shareholders’ funds shareholders’ funds outside the long-term business fund, other than those used to match regulatory requirements, are mainly invested in assets that are less sensitive to market conditions.
the most critical non-economic assumptions are the level of take-up of options inherent in the contracts (higher take-up rates are more onerous), mortality rates (lower mortality rates are generally more onerous) and lapses prior to dates at which a guarantee would apply (lower lapse rates are generally more onerous where guarantees are in the money). the sensitivity of the capital position and capital requirements of the With Profit Funds is partly mitigated by the actions that can be taken by management.
mortality rates are more onerous). Reinsurance arrangements are in place to reduce the group’s exposure to deteriorating mortality rates in respect of life insurance contracts. in addition, poor cost control would gradually reduce the available capital and lead to an increase in the valuation of the liabilities (through an increased allowance for future costs).
– investment volatility. the calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical observed volatility where it is not possible to observe meaningful prices. For example, as at 31 December 2011, the 10 year equity-implied at-the-money assumption was set at 27.2 per cent (31 December 2010: 26.1 per cent). the assumption for property volatility was 15 per cent (31 December 2010: 15 per cent). the volatility of interest rates has been calibrated to the implied volatility of swaptions which was broadly 19 per cent (31 December 2010: 15 per cent).
Options and guarantees outside the With Profit Funds A number of typical guarantees are provided outside the With Profit Funds such as guaranteed payments on death (e.g. term assurance) or guaranteed income for life (e.g. annuities). in addition, certain personal pension policyholders in scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. the key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. there is currently a provision, calculated on a deterministic basis, of £61 million (31 December 2010: £57 million) in respect of those guarantees. if future salary growth were 0.5 per cent per annum greater than assumed, the liability would increase by some £2 million. if yields were 0.5 per cent lower than assumed, the liability would increase by some £9 million.
Risk appetite the risk appetite is set by the Board and reviewed on an annual basis or more frequently. it includes complying with statutory and regulatory reporting requirements and avoiding the need for restatement of publicly disclosed information.
the group has a disclosure committee which assists the group Chief executive and group Finance Director in fulfilling their disclosure responsibilities under relevant listing requirements.
Definition the risk of reductions in earnings and/or value, through financial or reputational loss, as a result of the failure of the party with whom the group has contracted to meet its obligations (both on and off balance sheet).
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’).
each probability of default model segments counterparties into a number of rating grades, each representing a defined range of default probabilities (details of these rating scales are published in Lloyds Banking group’s Pillar iii disclosure). exposures migrate between rating grades if the assessment of the counterparty probability of default changes. each rating system is required to map to a master scale, which supports the consolidation of credit risk information across portfolios through the adoption of a common rating scale. given the differing risk profiles and credit rating considerations, the underlying risk reporting has been split into two distinct master scales, a retail master scale and a wholesale master scale (note 56 to the financial statements on page 323 provides an analysis of the portfolio and page 134 provides details of our Credit risk portfolio).
the nature, construction and calibration of retail and non-retail models are very different and so too are their respective master scales (not least in their graduality). the distribution of probabilities of default is also different, which precludes reportage on a single consolidated basis.
the group uses a variety of lending criteria within Retail when assessing applications for mortgages and unsecured lending. the general approval process uses credit acceptance scorecards and involves a review of an applicant’s previous credit history using information held by credit reference agencies (CRA). the group also assesses the affordability of the borrowings to the borrower under stressed scenarios including increased interest rates. in addition, the group has in place quantitative limits such as product maximum limits, the level of borrowing to income and the ratio of borrowing to collateral. some of these limits relate to internal approval levels and others are hard limits above which the group will reject the application. the group also has certain criteria that are applicable to specific products such as for applications for a mortgage on a property that is to be let by the applicant.
the group’s lending practices within Retail have changed since 2009 in several ways: the group has lowered its maximum loan-to-value thresholds, which have been reduced across all mortgage product types; the group has withdrawn from ‘specialist’ secured lending since early 2009 (selfcertificated and sub-prime lending) and increased credit scorecard cut-offs for both secured and unsecured lending; the group has tightened its assessments and the maximum limit for affordability of borrowings for both secured and unsecured lending. in addition, the number of properties permitted in buy-to-let portfolios has been reduced.
For Uk mortgages, the group’s policy is to reject all standard applications with a loan-to-value (LtV) greater than 90 per cent. For mainstream mortgages the group has maximum per cent LtV limits which depend upon the loan size. these limits are currently: (Unaudited)
Controls over rating systems: 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. Line management takes responsibility for ensuring the validation of the rating systems, supported and challenged by independent specialist functions in their respective division.
the group considers risk concentrations by collateral providers and collateral type, as appropriate, with a view to ensuring that any potential undue concentrations of risk are identified and suitably managed by changes to strategy, policy and/or business plans.
the group offers a range of tools and assistance to support retail customers who are encountering financial difficulties. Cases are managed on an individual basis, with the circumstances of each customer considered separately and the action taken judged as being affordable and sustainable for the customer. Operationally, the provision and review of such assistance is controlled through the application of an appropriate policy framework; controls around the execution of policy; regular review of the different treatments to confirm that they remain appropriate; monitoring of customers’ performance and the level of payments received; and management visibility of the nature and extent of assistance provided and the associated risk.
One component of our relationship management approach is to contact customers showing signs of financial difficulty, discussing with them their circumstances and offering solutions to prevent their accounts falling into arrears.
– Financial distress assistance – an account change for customers in financial distress where arrears accrue at the contractual payment such as a short-term arrangement to pay.
– mortgage Rescue scheme: this is a government short-term initiative for borrowers in difficulty and facing repossession, who would have priority for re-housing by a local authority (e.g. the elderly, disabled, single parents). eligible customers can have their property bought in full or part by the social rented sector and then remain in their home as a tenant or shared equity partner. if the property is sold outright the mortgage is redeemed in full.
Forbearance alone is not necessarily an indicator of impairment but will always be a trigger point for the Bank to review the customer’s credit and assess whether the risk has changed.
in addition, the group, through its banking businesses, participates in a number of initiatives designed to assist small and medium-sized enterprises. these include: – the Lending Code: introduced by the British Bankers’ Association in november 2009, the Lending Code is a voluntary set of commitments and standards of good practice to ensure that lenders act fairly and reasonably in all dealings with customers. this has been reviewed and updated in march 2011, not only to incorporate the key elements of the statement of Principles, a previously issued brochure which outlined an agreed approach to working with micro-enterprise customers (entities with fewer than 10 employees and having a turnover of less than A2 million), but also to introduce key elements of the work of the Business Finance taskforce (see below). A leaflet ‘A guide to the Lending Code for micro-enterprises’ provides an introduction to the standards customers should expect from the banks, building societies and credit-card providers who follow the Lending Code.
– Prudent credit policies and procedures are in place throughout the group, focusing on development of enduring client relationships. As a result of this approach, the credit quality of new lending remains strong.
Secured arrears the percentage of mortgage cases greater than three months in arrears (excluding repossessions) remained stable at 2.3 per cent at 31 December 2011 compared to 31 December 2010 and 30 June 2011. the percentage of specialist mortgage cases greater than three months in arrears (excluding repossessions) increased to 7.5 per cent at 31 December 2011 from 6.4 per cent at 31 December 2010 with the majority of this growth occurring in the first half of 2011.
the indexed LtV in excess of 100 per cent as a percentage of closing loans and advances ending 31 December 2011 reduced to 12.0 per cent (£39.7 billion), compared with 13.2 per cent (£44.9 billion) at 31 December 2010. this decrease in negative equity was driven by the regional mix of business being biased towards areas experiencing house price growth despite national house prices falling.
– the decrease in the underlying impairment charge during 2011 is primarily driven by lower impairment from the corporate real estate and real estate-related lending portfolios, partly offset mainly by higher impairment on leveraged acquisition finance exposures during 2011 where the dampened effect of Uk economic conditions had the most impact.
impairment charge – non-core non-core impairments in 2011 were lower than 2010, primarily reflecting lower impairment from non-core corporate real estate and real estate related asset portfolios. this reflected a stabilisation of commercial property prices in 2011. non-core impairments in 2010 (particularly the first half) were significant as a result of the scale and pace of deterioration in the property sector and poorer quality heritage HBOs lending.
As a percentage of closing loans and advances to customers, impaired loans increased to 20.5 per cent from 20.0 per cent at 31 December 2010. this increase is a result of the reducing level of total loans and advances to customers as at 31 December 2011 compared with 31 December 2010. We continue to monitor our vulnerable portfolios within Wholesale and, where appropriate, remedial risk mitigating actions are being undertaken.
non-core impairment provisions as a percentage of non-core impaired assets are lower at 38.6 per cent compared to 59.4 per cent for core, mainly a factor of the asset mix, where the non-core portfolios are heavily weighted toward real estate and real estate related portfolios where security is often a larger influence on the impairment outcome.
Loans and advances to customers £m impaired loans £m impaired loans as a % of closing advances impairment provisions1 £m impairment provisions as a % of impaired loans %
Of which Wholesale markets is £25,120 million, Wholesale equity £487 million, treasury and trading £163 million, Asset Finance £7 million, Corporate £2 million and Commercial £2 million.
table 1.36: Impairments on Wholesale loans and advances – non-core (unaudited)
US Corporate – the business continues to be predominately investment grade focused and the balance sheets of Us major Corporates remain relatively strong, with good levels of liquidity. the reduction in the non-core corporate portfolio has continued through a combination of secondary sales, refinancings, and realisation of property assets. the year-end impairment position is one of modest net write backs with new impairments on existing cases more than offset by recoveries. Overall, portfolio asset quality remains strong.
During the year a number of new initiatives have been introduced including the sale of assets specifically grouped under receivership, which is the first time such a sale has been achieved; and an arrangement with a publicly quoted asset manager to facilitate certain residential portfolios through the receivers. such arrangements demonstrate our desire to find solutions to ensure we maximise the recovery from these loan positions or portfolios through managing for value the underlying real estate and we continue to seek innovative ways to achieve this aim.
Wholesale markets is also responsible for the treasury Assets portfolio which mainly encompasses a portfolio of Asset-Backed securities and financial institution Floating Rate note positions. Portfolio credit quality remained relatively stable over the year and the portfolio size continues to be actively reduced through asset sales and from bond maturities. Further details of Wholesale Division’s Asset-Backed securities portfolio is provided in note 56 to the financial statements on pages 335 and 336.
the portfolio comprises £6.0 billion of loans and advances to banks, £2.9 billion of Available-for-sale debt securities and £2.2 billion of loans and advances to customers (excluding reverse repos).
– Due to the continuing uncertainty regarding the economic outlook, we remain cautious. Downward pressures on consumer spending from a weakening labour market, still-high household indebtedness and rising government budgetary pressures continue to imply vulnerability for a number of sectors, most notably retail, motor traders and restaurants.
Commercial’s impairment charge decreased £79 million, or 21 per cent, compared to £382 million during 2010. this reflects the continued application of a prudent credit risk appetite for new business and a low interest rate environment helping to maintain defaults at a lower level. impairment charges as an annualised percentage of average loans and advances to customers reduced to 1.06 per cent from 1.24 per cent in 2010. the majority of the business is based around full banking relationships. the relatively small non-core portfolio has continued to reduce throughout 2011.
impaired loans and provisions Commercial’s impaired loans increased by £59 million to £2,915 million compared with 31 December 2010. Despite this small increase, impairment provisions reduced. this is as a result of lower default rates at the smaller end of the portfolio and write-offs. As a result, impairment provisions as a percentage of impaired loans reduced to 30.2 per cent from 34.7 per cent at 31 December 2010. As a percentage of closing loans and advances to customers, impaired loans increased to 9.8 per cent from 9.6 per cent at 31 December 2010.
– the group has successfully started to reduce its non-core exposure to ireland with a reduction in gross advances in excess of £2.6 billion during 2011 with disposals in the period being broadly in line with current provisioning levels.
– the group has also significantly reduced its exposure in its Australasian business by Aus $2.1 billion including the successful disposal of a £1 billion portfolio of impaired Australasian real estate loans in the last quarter of 2011. the levels of disposals during the year represent 40 per cent of the gross impaired portfolio.
impaired loans and provisions total impaired loans increased by £434 million to £20,776 million compared with £20,342 million at 31 December 2010 and as a percentage of closing loans and advances to customers increased to 36.8 per cent from 30.7 per cent at 31 December 2010. the increase in impaired loans predominantly relates to the group’s non-core book in ireland where impaired loans increased by £1.9 billion during 2011 reflecting ongoing difficulties in the economy. this results in 66 per cent of the total irish portfolio now being classified as impaired (84 per cent wholesale). impaired loans in the Australasian book reduced by £1.4 billion driven by write offs and impaired asset disposals.
total Wealth and international 55,357 impairment provisions include collective unimpaired provisions.1
ireland total impaired loans increased by £1,915 million, or 13 per cent to £16,360 million compared with £14,445 million at 31 December 2010 and as a percentage of closing loans and advances increased to 66.0 per cent from 52.7 per cent at 31 December 2010. impairment charges decreased by £1,077 million to £3,187 million compared to 2010. impairment charges as an annualised percentage of average loans and advances to customers decreased to 11.9 per cent from 15.4 per cent in 2010.
the group has successfully started to reduce its non-core exposure to ireland with disposals in excess of A1 billion in the period broadly in line with current provisioning levels.
the group has established a eurozone instability steering group in order to monitor developments within the eurozone on a daily basis, carry out stress testing through detailed scenario analysis and complete appropriate due diligence on the group’s exposures.
Central Bank balances – – – – 44 44 in addition to the above countries, the group has total exposures with six other european countries which are rated A or below. no balance with one individual country exceeds £350 million. these balances primarily relate to corporate exposures.
Available for sale: Derivatives – net CDs assets and liabilities – – 9 – – 9 included within exposures to banks and other financial institutions, and treated as available for sale assets, are Covered Bonds of £1.7 billion (2010: £2.0 billion). the covered bonds are ultimately secured on a pool of mortgage assets in the countries concerned and benefit from over-collaterisation, with an overall weighted maturity of approximately five years.
Remaining exposures to banks held at amortised cost are predominantly short-term and relate to general banking facilities, money market and repo facilities and fixed and floating rate notes. no impairments are held against these exposures. in addition there are unitilised and uncommitted money market lines and repo facilities of approximately £1.7 billion predominantly in respect of spanish and italian banks. Bank limits have been closely monitored with amounts and tenors reduced where appropriate.
Amortised cost: net trading assets – – – – – –
Amortised cost: net trading assets – 47 – – – 47
Banks and Financial institutions in the above countries may have exposures to other european countries that have standard and Poor’s rating of A or lower.
in 2011, we launched an electronic environmental risk screening system, which is the primary mechanism for assessing environmental risk in Wholesale. this provides real time screening of location specific and sector based risks that may be present in a transaction. Where a risk is identified, the transaction is referred to our expert in-house environmental Risk team for further review and assessment, as outlined below. Additional support is provided by the group’s panel of environmental consultants as required.
the categories are as follows: Category A – Projects with potential significant adverse social or environmental impacts that are diverse, irreversible or unprecedented; Category B – Projects with potential limited adverse social or environmental impacts that are few in number, generally site-specific, largely reversible and readily addressed through mitigation measures; and
No. £m energy & Utilities 4 123 table 1.60: Geography of Completed Transactions (unaudited)
Definition the risk of reductions in earnings, value, capital and/or reserves, through financial or reputational loss, arising from unexpected changes in financial prices, including interest rates, inflation rates, exchange rates, credit spreads and prices for bonds, commodities, equities, property and other instruments. it arises in all areas of the group’s activities and is managed by a variety of different techniques.
most of the group’s trading activity is undertaken to meet the requirements of wholesale and retail customers for foreign exchange and interest rate products. However, some interest rate, exchange rate and credit spread positions are taken using derivatives and other on-balance sheet instruments with the objective of earning a profit from favourable movements in market rates.
Risk also arises from the margin of interbank rates over central bank rates. A further banking risk arises from competitive pressures on product terms in existing loans and deposits, which sometimes restricts the group in its ability to change interest rates applying to customers in response to changes in interbank and central bank rates.
the group’s defined benefit staff pension schemes are exposed to significant risks from the constituent parts of their assets and from the present value of their liabilities, primarily equity and real interest rate risk. For further information on pension scheme assets and liabilities please refer to note 43 to the financial statements on page 275.
Although an important market standard measure of risk, VaR has limitations. these arise from the use of limited historical data, an assumed distribution, defined holding periods, set confidence intervals and frequency of calculation. the exposure level at the confidence interval does not convey any information about potential losses which may arise if this level is exceeded. A 95 per cent confidence interval with a 1 day holding period is equivalent to an expected 1 in 20 day loss. Where VaR models are less well suited to the nature of positions, the group recognises these limitations and supplements its use with a variety of other techniques. these reflect the nature of the business activity, and include interest rate repricing gaps, open exchange positions and sensitivity analysis. stress testing and scenario analysis are also used in certain portfolios and at group level, to simulate extreme conditions to supplement these core measures. trading book VaR (1-day 99 per cent) is compared daily against both forecast and actual profit and loss.
the risk of loss measured by the VaR model is the potential loss in earnings given the confidence level and assumptions noted above. the total and average trading VaR does not assume any diversification benefit across the five risk types, which now includes inflation. the maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum and minimum VaR reported as a whole. the group internally uses VaR as the primary measure for all trading book positions arising from short term market facing activity.
the following table shows, split by material currency, Lloyds Banking group sensitivities as at 31 December 2011 to an immediate up and down 25 basis points change to all interest rates.
the measure, however, is simplified in that it assumes all interest rates, for all currencies and maturities, move at the same time and by the same amount.
insurance portfolios the group’s market risk exposure in respect of insurance activities described above is measured using eeV as a proxy for economic value. the pre-tax sensitivity of eeV to standardised stresses is shown below for the years ended 31 December 2011 and 2010. impacts have only been shown in one direction but can be assumed to be reasonably symmetrical. Opening and closing numbers only have been provided as this data is not volatile and consequently is not tracked on a daily basis.
insurance activities investment holdings are diversified across markets and, within markets, across sectors. Holdings are diversified to minimise specific risk and the relative size of large individual exposures is monitored closely. For assets held outside unit-linked funds, investments are only permitted in countries and markets which are sufficiently regulated and liquid.
Monitoring the group Asset and Liability Committee and the group market Risk Committee regularly review high level market risk exposure including, but not limited to, the data described above. they also make recommendations to the group Chief executive concerning overall market risk appetite and market risk policy. exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. Levels of exposures compared to approved limits are monitored by Risk Division and where appropriate, escalation procedures are in place.
insurance activities market risk exposures from the insurance businesses are controlled via approved investment policies and triggers set with reference to the group’s overall risk appetite and regularly reviewed by the group market Risk Committee: – the With Profit Funds are managed in accordance with the relevant fund’s principles and practices of financial management and legal requirements.
Definition the risk of reductions in earnings and/or value, through financial or reputational loss, from inadequate or failed internal processes and systems, or from people related or external events.
People the risk of reductions in earnings or value through financial or reputational loss arising from ineffectively leading colleagues responsibly and proficiently, managing people resource, supporting and developing colleague talent, or meeting regulatory obligations related to our people.
it systems the risk of reductions in earnings and/or value through financial or reputational loss resulting from the failure to develop, deliver or maintain effective it solutions.
the group has zero risk appetite for regulatory breaches or systemic unfair outcomes for customers. to achieve this, the group encourages and maintains an appropriately balanced regulatory compliance culture and promotes policies and procedures to enable businesses and their staff to operate in accordance with the laws, regulations and voluntary codes which impact on the group and its activities.
Exposures By its very nature, operational risks can arise from a wide range of the group’s activities that involve people, processes and systems. the group’s principal operational risks relate to the group’s ability to attract, retain and motivate its people, the rate and scale of change arising from the group’s strategic review programme, the way in which the group treats its customers and the regulatory environment in which it operates.
the breadth of the strategic review programme is such that all parts of the group are impacted to a degree. the risks associated with the programme, including implementation and delivery, are the subject of rigorous oversight by business areas and Risk Division, with challenges by internal Audit, commensurate to the scale of the change.
Customer treatment and how the group manages its customer relationships affect all aspects of the group’s operations and are closely aligned with achievement of the group’s strategic aim – to be the best bank for customers. there is currently a high level of scrutiny regarding the treatment of customers by financial institutions from the press, politicians and regulatory bodies (see note 54 to the financial statements).
– Loss and incident management, capturing actions to manage any losses facing a business area.
– scenarios for estimation of potential loss exposures for material risks.
Current and potential future insurance risk exposures are assessed and aggregated using risk measures based on 1-in-2001 year stresses and other supporting measures where appropriate, including those set out in notes 38 and 39 to the financial statements.
in addition, exposure limits by risk type are derived from the business planning process and used as a control mechanism to ensure risks are taken within solvency risk appetite.
general insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements which are broadly spread over different reinsurers. Detailed modelling, including that of the potential losses under various catastrophe scenarios, supports the choice of reinsurance arrangements. Appropriate reinsurance arrangements also apply within the life and pensions businesses with significant mortality risk and morbidity risk being transferred to our chosen reinsurers.
in respect of insurance risks in the staff pension schemes, the group ensures that effective communication mechanisms are in place for consultation with the trustees to assist with the management of risk in line with the group’s risk appetite.
Exposures the group’s portfolio of businesses exposes it to a number of internal and external factors: – internal factors: resource capability and availability, customer treatment, service level agreements, products and funding and the risk appetite of other risk categories; and
Monitoring the group’s strategy is reviewed and approved by the Board, which includes the group executive Committee and the group Risk Committee. Regular reports are provided to the group executive Committee and the Board on the progress of the group’s key strategies and plans, including assessment of performance against Risk Appetite.
Joined the Board in March 2010. Chairman of Pearson, the media group, since October 2005. Director of Fidelity International, one of the world’s largest fund management companies, and Chairman of its Audit Committee. Deputy Chairman of The Financial Reporting Council. From 1987 to 1991 was Chief Executive of Fidelity International. Until mid 2009, was a Non-Executive Director and Senior Independent Director of Man Group, a FTSE 100 financial services group, and acting Chairman of UKFI. Former Group Executive of Citigroup; from 1969 to 1987 he held a number of senior positions at the bank in Europe and Asia. Aged 68.
Joined the Board in April 2009. Previously Chief Executive of Hermes Pensions Management. Held a number of senior appointments in AMP Asset Management from 1991 to 1998. A Non-Executive Director of Hammerson, Vodafone and Witan Investment Trust, a member of the Norges Bank Investment Management Advisory Board and Chairman of Lincoln’s Inn Investment Committee. A former Chairman of MEPC, the Asian Infrastructure Fund and of the Strategic Investment Board (Northern Ireland) and a former member of the Financial Reporting Council. Aged 66.
Nomination & Governance Committee To keep the Board’s governance arrangements under review and make appropriate recommendations to the Board to ensure that the Company’s arrangements are consistent with best practice corporate governance standards.
Lord Leitch will retire from the Board on 29 February 2012. Sir Julian Horn-Smith and Mr Moreno will retire from the Board on 17 May 2012.
Employees are kept closely involved in major changes affecting them through such measures as team meetings, briefings, internal communications and opinion surveys. There are well established procedures, including regular meetings with recognised unions, to ensure that the views of employees are taken into account in reaching decisions.
The number of days required to be shown in this report, to comply with the provisions of the Companies Act 2006, is 23. This bears the same proportion to the number of days in the year as the aggregate of the amounts owed to trade creditors at 31 December 2011 bears to the aggregate of the amounts invoiced by suppliers during the year.
Governance framework The Board operates through a Governance Framework which is reviewed at least annually to ensure that it remains fit for purpose. During 2011, the Governance Framework was reviewed and updated to reflect the Group Strategic Review and organisational changes. The revised Governance Framework was approved by the Board in December 2011 and comprises: – The Board Governance Framework. This is, in effect, the Board’s operating manual and sets out: – the matters that the Board has reserved to itself including the development and setting of strategy and long term objectives; approval of the medium term plan and financial budgets; capital and structure of capital; significant contracts; and various statutory and regulatory approvals; – terms of reference of, and delegations to, the Board Committees to ensure an appropriate level of independent oversight by the Non-Executive Directors; – delegation of the responsibility for day to day management of the business to the Group Chief Executive; and – the respective roles and responsibilities of each of the Chairman, Group Chief Executive, Senior Independent Director and Non-Executive Directors.
– The Executive Governance Framework. This is the means by which the Group Chief Executive delegates responsibilities at executive level to assist him in carrying out his duties. The Group Chief Executive reserves certain matters to himself and, subject to financial limits, delegates responsibilities to the Executive Directors, his direct reports and other senior executives who collectively make up the Group Executive Committee.
Board size Our aim is to ensure that the size of the Board is sufficient to reflect a broad range of views and perspectives whilst allowing all Directors to participate effectively in meetings. At year end, the Board comprised twelve directors which is within the range agreed by the Nomination & Governance Committee.
In assessing independence, the Committee does not rely solely on the Code criteria but considers whether, in fact, the Non-Executive Director is demonstrably independent and free of relationships and other circumstances that could affect their judgement. It does this with reference to the individual performance and conduct in reaching decisions. It also takes account of any relationships that have been disclosed and authorised by the Board. In the view of the Nomination & Governance Committee, Glen Moreno, who between January and August 2009, was acting Chairman of United Kingdom Financial Investments (UKFI), the body which manages the Government’s shareholding in the Group, continues to exercise his own, and robustly independent judgement, at all times.
– where internal governance arrangements required a ‘four eyes’ approval, these could not be achieved by one person acting in the capacity of both the Group Chief Executive and Group Finance Director. Arrangements were put in place to ensure that either the Chief Risk Officer or Company Secretary provided the necessary second pair of eyes.
On 19 September 2011, we announced the retirement of Lord Leitch as Deputy Chairman of the Group and Chairman of Scottish Widows. Lord Leitch will remain on the Board until 29 February 2012.
On 19 September, the Group also announced that Tim Tookey would stand down as Group Finance Director with effect from the end of February 2012 to pursue interests outside the Group. On 24 February 2012, the Group announced that Tim Tookey would stand down as Group Finance Director with effect from that date.
Time commitments In 2011, as in 2009 and 2010, the time commitment demanded of all Non-Executive Directors was considerable and substantially in excess of the time envisaged in their terms of appointment. The detail set out on page 182 shows the Board meetings that the directors have attended including those called at short notice. There has been no increase to fees since January 2008 to reflect the increased workload and additional time spent on Lloyds Banking Group business.
Executive Directors and senior executives The Nomination & Governance Committee and the Board are responsible for oversight of the process for succession and management development of the most senior executives both at and below Board level, including Executive Directors and members of the Group Executive Committee. The primary responsibility rests with the Group Chief Executive who is responsible for developing and maintaining a succession plan for key leadership positions in the senior executive team. Arrangements are reviewed with the Nomination & Governance Committee at least annually with the latest review taking place in September 2011.
– formulation of an action plan for adoption by the Board.
Some Directors attended Committee meetings as attendees periodically throughout the year. This attendance is not shown in the table.
Members Sir Julian Horn-Smith (until 17 May 2012) Lord Leitch (until 29 February 2012) Glen Moreno (until 17 May 2012) David Roberts Martin Scicluna Anthony Watson
Remuneration To set the principles and parameters of remuneration policy for the Group, and to oversee remuneration policy and outcomes for those colleagues specified in the terms of reference.
Internal control The Board of Directors is responsible for the establishment and review of the Group’s system of internal control, which is designed to ensure effective and efficient operations, quality of internal and external reporting, internal control, and compliance with laws and regulations. It should be noted, however, that such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. In establishing and reviewing the system of internal control, the Directors have regard to the nature and extent of relevant risks, the likelihood of a loss being incurred and the costs of control. It follows, therefore, that the system of internal control can only provide reasonable but not absolute assurance against the risk of material loss.
The Directors and senior management are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all employees by way of published policies and procedures and regular management briefings. A requirement to comply with internal control risk policies is a key component of individual staff objectives expressed in the balanced scorecard. Key business risks are identified, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. In addition, there is an annual control self assessment exercise whereby the key businesses and head office functions review specific controls and attest to the accuracy of their assessments. The assessment covers all enterprise-wide risk management categories and is in accordance with the principles of the Code. As in previous years, this exercise was completed for the year ended 31 December 2011. All returns have been satisfactorily completed and appropriately certified.
The effectiveness of the internal control system is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken around the Group by group risk and group audit. The Audit Committee receives reports from the Company’s auditors, PricewaterhouseCoopers LLP (which include details of significant internal control matters that they have identified), and has a discussion with the auditors at least once a year without executives present, to ensure that there are no unresolved issues of concern.
Auditor independence and remuneration Both the Board and the external auditors have safeguards in place to protect the independence and objectivity of the external auditors. The Audit Committee has a comprehensive policy to regulate the use of auditors for non-audit services. This policy sets out the nature of work the external auditors may not undertake, which includes work which will ultimately be subject to external audit, internal audit services and secondments to senior management positions in the Group that involve decision-making. It also includes the Group’s policy on hiring former external audit staff. For those services that are deemed appropriate for the auditors to carry out, the policy sets out the approval process that must be followed for each type of assignment. The Chairman of the Audit Committee must be consulted regarding potential instructions in respect of allowable nonaudit services with a value above defined fee limits.
Once again, there has been considerable external focus and scrutiny of executive remuneration in the past twelve months. In light of this we have worked as a Committee to ensure that we motivate, incentivise and retain our talent while continuing to be mindful both of the economic outlook and the views of our numerous stakeholders.
We believe that the introduction of a balanced scorecard approach to measure long-term performance from 2012 will enable the Committee to assess the performance of the Company and its senior executives in a consistent and performance driven way. These targets are described on pages 190 and 191.
While there have been no material changes to the overall structure of executive remuneration, we have continued to maintain an open and transparent dialogue with shareholders. This valuable engagement is something we will seek to continue into 2012, as we recognise our responsibilities to the providers of our equity capital in setting fair and appropriate remuneration policies.
The Remuneration Committee carefully considered what size bonus pool would be appropriate to distribute across the Bank as a whole. In making their decision, the Committee took into account the success of the integration programme, the Group’s overall performance and the views of shareholders and the general public. As a result, the bonus pool was reduced by 30 per cent with the greater reductions being applied to more senior staff. Annual incentives for Executive Directors and the Group Executive Committee are down approximately 50 per cent against 2010 on a like for like basis.
The Group has complied throughout the period with the requirements of the UK Corporate Governance Code (previously known as the Combined Code) in relation to Directors’ remuneration. In addition, the report has been prepared in accordance with the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008.
The Committee determines the pensions policy for the Group and advises on other major changes to employee benefits schemes. It also agrees the policy for authorising claims for expenses from the Group Chief Executive and the Chairman. It has delegated power for settling remuneration for the Chairman, the Group Executive Directors, the Company Secretary and any group employee whose salary and annual bonus exceeds a specified amount, currently £750,000. To ensure compliance with the FSA Code of Practice, the Committee approves remuneration for Code Staff and that of senior risk and compliance officers.
All the independent Non-Executive Directors are invited to attend meetings and have the opportunity to comment on proposals and have their views taken into account before the Committee’s decisions are implemented.
– Approval of remuneration and terms of service that fall within the Committee’s terms of reference, including new appointments
Our overall policy objective is met by a focus on the particular aspects detailed below.
Economic profit is a key measure by which we manage our business. This measure takes into account the level of capital required to generate profits as well as the risks taken. The same level of profit generated at lower risk results in higher economic profit. Economic profit also measures risk based on an assessment of how the business will perform through the economic cycle and is a key measure for short term incentives.
We aim to ensure that the totality of remuneration for Executive Directors is competitive against our benchmark groups. These groups are other major UK banks and the top 20 companies in the FTSE 100, reflecting practices in large UK companies across all sectors. We aim to be competitively but conservatively positioned against the market.
Short term funding as % of total funding Payout range set relative to 2014 targets Threshold: 20% Maximum: 15%
Base salary Base salaries are reviewed annually, taking into account individual performance and market information (which is provided by Towers Watson and supplemented with information from Deloitte LLP) and normally adjusted from 1 January of the relevant year. The remuneration committee confirmed during the 2011 review that the FTSE remains the most appropriate comparator group to use to benchmark overall competitiveness of the remuneration package whilst taking particular account of the remuneration practice of our direct competitors, namely the major UK banks.
Incentive awards for Executive Directors are based upon individual contribution and overall corporate results. Incentive opportunity is driven by corporate performance based on profit before tax and economic profit, together with divisional achievement and individual performance. Individual targets relevant to improving overall business performance are contained in a Balanced Scorecard and are grouped under the following headings: – Financial
Shareholding guidelines Directors are required to build up a holding in Lloyds Banking Group shares of value equal to 1.5 times gross salary (2 times gross salary for the Group Chief Executive) and expected to achieve these targets within 5 years of joining the Board. They are required to retain any shares vesting from the share price performance element of the 2010 LTIP and 2011 LTIP for a further two years post vesting. The Group Chief Executive is making significant progress in reaching this target.
The Chairman’s salary remained unchanged in 2011, at £700,000 per annum.
Independent Non-Executive Directors do not have service agreements and their appointment may be terminated, in accordance with the articles of association, at any time without compensation.
Lloyds Banking Group plc FTSE 100 index Rebased to 100 on 31 December 2006
Other cash benefits includes flexible benefits payments (4 per cent of basic salary), payments to certain directors who elect to take cash rather than a company car under the car scheme.
Column (d) is the equivalent transfer value, but calculated as at 31 December 2010 on the assumption that the Director left service at that date.
Benefits from a registered pension scheme are subject to the Lifetime Allowance, currently £1.8 million, which is equivalent to an annual pension of £90,000. Any benefit in excess of this amount will incur a tax charge for the individual. The Lifetime Allowance will decrease to £1.5 million from April 2012. The Group has agreed that if an Executive Director has benefits in excess of the Lifetime Allowance he may cease to accrue benefits in the Scheme and receive a salary supplement as an alternative. This will not cost the Group more than the current arrangements. The Group will not compensate any individual in respect of any tax liability arising from the provision of pension.
Shareholdings held by Mr A Horta-Osório, Mr G T Tate, Mr G R Moreno and Mr T T Ryan are either wholly or partially in the form of ADRs.
The beneficial interests for Mr G T Tate relate to changes to ‘partnership’ and ‘matching’ shares acquired under the Lloyds Banking Group Share Incentive Plan between 31 December 2011 and 6 February 2012, the date of his resignation from the Board of Lloyds Banking Group.
h Exercisable for period of one year from date of leaving.
i Exercisable for period of six months from date of leaving.
Options granted in 2004 became exercisable as the performance condition was met on the re-test. The performance condition vested at 24 per cent for Truett Tate’s March option and at 14 per cent for all other options granted to Executive Directors during 2004.
That the Company’s ranking based on TSR over the relevant period against a comparator group (18 companies including Lloyds Banking Group) must be at least ninth, when 30 per cent of the option will be exercisable. If the Company is ranked first to fifth position in the group, then 100 per cent of the option will be exercisable and if ranked tenth or below, the performance condition is not met.
Mr Tookey’s unvested awards all lapsed upon his departure from the Group on 24 February 2012.
April 2009 EPS: The release of 50 per cent of the shares will be dependent on the extent to which growth in EPS achieves cumulative EPS targets over the three year period from January 2009 to December 2011.
Economic profit: The release of the remaining 50 per cent of shares will be dependent on the extent to which the Group achieves cumulative Economic Profit targets over the three year period from January 2009 to December 2011.
The targets are: EPS Vesting % Absolute improvement in adjusted EPS
Economic profit Vesting % Compound annual growth rate of adjusted EP
March 2011 EPS: Relevant to 331/3 per cent of the award. Performance will be based on 2013 EPS outcome.
The register of Directors’ interests, which is open to inspection, contains full particulars of Directors’ shareholdings and options to acquire shares in Lloyds Banking Group.
Directors’ interests – summary of awards vested, purchases and sales made by directors in 2011 (unaudited)
The directors approved the consolidated financial statements on 27 February 2012.
(Loss) profit for the year – – (2,787) (2,787) 73 (2,714)
Movements in cash flow hedging reserve, net of tax – 716 – 716 – 716
(Loss) profit for the year – – (320) (320) 62 (258)
Movements in cash flow hedging reserve, net of tax – (86) – (86) – (86)
Movements in cash flow hedging reserve, net of tax – (290) – (290) – (290)
Issue of ordinary shares: Issued on acquisition of HBOS 1,944 5,707 – 7,651 – 7,651
Placing and compensatory open offer 3,905 – – 3,905 – 3,905
Proceeds from sale and maturity of financial assets 36,523 45,999 490,561
Acquisition of businesses, net of cash acquired 57(E) (13) (73) 16,227
Cash and cash equivalents at beginning of year 62,300 65,690 32,760
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, available‑for‑sale financial assets, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. As stated on page 174, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts.
The Group has adopted the following new standards and amendments to standards which became effective for financial years beginning on or after 1 January 2011. None of these standards or amendments have had a material impact on these financial statements.
(v) IAS 24 Related Party Disclosures (Revised). Simplifies the definition of a related party and provides a partial exemption from the requirement to disclose transactions and outstanding balances with the government and government‑related entities. The Group has taken advantage of an exemption in respect of government and government‑related transactions that permits an entity to disclose only transactions that are individually or collectively significant. Details of related party transactions are disclosed in note 53.
The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit operates as a venture capital business. These investments are designated at initial recognition at fair value through profit or loss. Otherwise, the Group’s investments in joint ventures and associates are accounted for by the equity method of accounting and are initially recorded at cost and adjusted each year to reflect the Group’s share of the post‑acquisition results of the joint venture or associate based on audited accounts which are coterminous with the Group or made up to a date which is not more than three months before the Group’s reporting date. The share of any losses is restricted to a level that reflects an obligation to fund such losses.
Intangible assets with finite useful lives are reviewed at each reporting date to assess whether there is any indication that they are impaired. If any such indication exists the recoverable amount of the asset is determined and in the event that the asset’s carrying amount is greater than its recoverable amount, it is written down immediately. Certain brands have been determined to have an indefinite useful life and are not amortised. Such intangible assets are reassessed annually to reconfirm that an indefinite useful life remains appropriate. In the event that an indefinite life is inappropriate a finite life is determined and an impairment review is performed on the asset.
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.
Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable. Effective interest rates for financial assets reclassified to the loans and receivables and held‑to‑maturity categories are determined at the reclassification date. Any previous gain or loss on a transferred asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest method or until the asset becomes impaired. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the effective interest method.
(4) Held-to-maturity investments Held‑to‑maturity investments are non‑derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity other than: – those that the Group designates upon initial recognition as at fair value through profit or loss; – those that the Group designates as available‑for‑sale; and
These are initially recognised at fair value including direct and incremental transaction costs and measured subsequently at amortised cost, using the effective interest method, less any provision for impairment.
Impairment allowances are assessed individually for financial assets that are individually significant. Such individual assessment is used primarily for the Group’s wholesale lending portfolios in the Wholesale, Commercial and Wealth and International divisions. Impairment allowances for portfolios of smaller balance homogenous loans such as most residential mortgages, personal loans and credit card balances in the Group’s retail portfolios in both the Retail and Wealth and International divisions that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis.
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
(J) Tangible fixed assets Tangible fixed assets are included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on other assets is calculated using the straight‑line method to allocate the difference between the cost and the residual value over their estimated useful lives, as follows: Premises (excluding land): – Freehold/long and short leasehold premises: shorter of 50 years and the remaining period of the lease
For the Group’s long‑term insurance businesses, the tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax that is payable on equity holders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under current UK tax rules.
Premiums and claims Premiums received in respect of insurance and participating investment contracts are recognised as revenue when due except for unit‑linked contracts on which premiums are recognised as revenue when received. Claims are recorded as an expense on the earlier of the maturity date or the date on which the claim is notified.
(ii) Accounting for non‑participating investment contracts The Group’s non‑participating investment contracts are primarily unit‑linked. These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit‑linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable. Investment returns (including movements in fair value and investment income) allocated to those contracts are recognised in insurance claims.
(iii) Value of in‑force business The Group recognises as an asset the value of in‑force business in respect of insurance contracts and participating investment contracts. The asset represents the present value of the shareholders’ interest in the profits expected to emerge from those contracts written at the balance sheet date. This is determined after making appropriate assumptions about future economic and operating conditions such as future mortality and persistency rates and includes allowances for both non‑market risk and for the realistic value of financial options and guarantees. Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. The asset in the consolidated balance sheet is presented gross of attributable tax and movements in the asset are reflected within other operating income in the income statement.
The Group’s contractual rights to benefits from providing investment management services in relation to non‑participating investment contracts acquired in business combinations and portfolio transfers are measured at fair value at the date of acquisition. The resulting asset is amortised over the estimated lives of the contracts. At each reporting date an assessment is made to determine if there is any indication of impairment. Where impairment exists, the carrying value of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement.
(S) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non‑mandatory balances with central banks and amounts due from banks with a maturity of less than three months.
Note 3: Critical accounting estimates and judgements The preparation of the Group’s financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
In addition, a collective unimpaired provision is made for loan losses that have been incurred but have not been separately identified at the balance sheet date. This provision is sensitive to changes in the time between the loss event and the date the impairment is specifically identified. This period is known as the loss emergence period. In the Wholesale division, an increase of one month in the loss emergence period in respect of the loan portfolio assessed for collective unimpaired provisions would result in an increase in the collective unimpaired provision of approximately £181 million (at 31 December 2010, a one month increase in the loss emergence period would have increased the collective unimpaired provision by an estimated £333 million).
At 31 December 2011, the Group classified £7,646 million of financial assets and £790 million of financial liabilities as level 3. Further details of the Group’s level 3 financial instruments and the sensitivity of their valuation including the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in note 55. Details about sensitivities to market risk arising from trading assets and other treasury positions can be found in the Risk Management section on page 164.
Provision in relation to German insurance business litigation Clerical Medical Investment Group Limited (CMIG) has received a number of claims in the German courts relating to policies issued by CMIG but sold by independent intermediaries in Germany, principally during the late 1990s and early 2000s. CMIG’s strategy includes defending claims robustly and appealing against adverse judgments. The ultimate financial effect, which could be significant, will only be known once all relevant claims have been resolved. The Group has charged a provision of £175 million (see note 54 for more information). Management believes this represents the most appropriate estimate of the financial impact, based upon a series of assumptions, including the number of claims received, the proportion upheld, and resulting legal and administration costs.
Retail offers a broad range of retail financial service products in the UK, including current accounts, savings, personal loans, credit cards and mortgages. It is also a major general insurance and bancassurance distributor, selling a wide range of long‑term savings, investment and general insurance products.
The Wholesale division serves businesses with turnover above £15 million with a range of propositions segmented according to customer need. The division comprises Wholesale Banking and Markets, Wholesale Business Support Unit and Asset Finance.
Commercial serves in excess of a million small and medium‑sized enterprises and community organisations with a turnover of up to £15 million. Customers extend from start‑up enterprises to established corporations, and are supported with a range of propositions aligned to customer needs. Commercial comprises Commercial Banking and Commercial Finance, the invoice discounting and factoring business.
Profit (loss) before tax and fair value unwind 2,797 (1,346) 446 (4,130) 1,465 1,510 742
Other segment items: Additions to tangible fixed assets 189 1,435 2 212 451 806 3,095
Segment external assets as at 31 December 2010 have been restated to reflect the reclassification of certain central adjustments.1
Profit (loss) before tax and fair value unwind 548 (11,442) (337) (3,375) 1,252 954 (12,400)
Share of results of joint ventures and associates 31 – – – – (4) 27
Comprises integration and simplification costs related to severance, IT and business costs of implementation (£1,282 million), EC mandated retail business disposal costs (£170 million), amortisation of purchased intangibles (£562 million) and the effects of liability management. volatile items and asset sales (£74 million).
Effects of liability management, volatile items and asset sales – 1,452 – – – 1,452
Customer deposits, excluding liabilities under sale and repurchase transactions 1.66 1.56 1.29 (6,080) (5,381) (4,410)
Interest payable on liabilities held at amortised cost 2.04 2.22 2.17 (13,837) (15,896) (17,591)
Total interest and similar expense 1.95 2.31 2.34 (13,618) (16,794) (19,212)
During December 2011, the Group completed the exchange of certain subordinated debt securities issued by Lloyds TSB Bank plc and HBOS plc for new subordinated debt securities issued by Lloyds TSB Bank plc. As part of the exchange, the Group announced that all decisions to exercise calls on those original securities that remained outstanding following the exchange offer would be made with reference to the prevailing regulatory, economic and market conditions at the time. These securities will not, therefore, be called at their first available call date which will lead to coupons continuing to be being paid until possibly the final redemption date of the securities. Consequently, the Group is required to adjust the carrying amount of these securities to reflect the revised estimated cash flows over their revised life and to recognise this change in carrying value in interest expense. Included within net interest income is a credit of £570 million in respect of the securities that remained outstanding following the exchange offer.
In December 2011, the Group decided to defer payment of non‑mandatory coupons on certain securities and, instead, settle them using an Alternative Coupon Satisfaction Mechanism on their contractual terms. This change in expected cashflows resulted in a gain of £126 million in net interest income from the recalculation of the carrying value of these securities.
Change in provision for unearned premiums (note 38(2)) 70 156 171
Non‑life insurance gross written premiums can be further analysed as follows: £m £m £m
Gains less losses on disposal of available‑for‑sale financial assets (note 49) 343 399 97
Movement in value of in‑force business (note 30) (622) 789 1,169
On 18 February 2010, as part of the Group’s recapitalisation and exit from its proposed participation in the Government Asset Protection Scheme, Lloyds Banking Group plc issued 3,141 million ordinary shares in exchange for certain existing preference shares and preferred securities. This exchange resulted in a gain of £85 million. During March 2010 the Group entered into a bilateral exchange, under which certain Enhanced Capital Notes denominated in Japanese yen were exchanged for an issue of new Enhanced Capital Notes denominated in US dollars; the securities subject to the exchange were cancelled and a profit of £20 million arose. In addition, during May and June 2010 the Group completed the exchange of a number of outstanding capital securities issued by Lloyds Banking Group plc and certain of its subsidiaries for ordinary shares in Lloyds Banking Group plc. The securities subject to exchange were cancelled, generating a total profit of £318 million for the Group.
In the first half of 2009, undated subordinated securities issued by a number of Group companies were exchanged for innovative tier 1 securities and senior unsecured securities issued by Lloyds TSB Bank plc. These exchanges resulted in a gain of £745 million. In July 2009, dated and undated subordinated securities issued by Clerical Medical Finance plc were exchanged for senior unsecured securities issued by Lloyds TSB Bank plc resulting in a gain of £30 million. In November 2009, as part of the restructuring plan that was a requirement for European Commission approval of state aid received by the Group, the Group agreed to suspend the payment of coupons and dividends on certain of the Group’s preference shares and preferred securities for the two year period from 31 January 2010 to 31 January 2012. This suspension gave rise to a partial extinguishment of the original liability, equivalent to the present value of the suspended cash flows. During December 2009, as part of the Group’s recapitalisation and exit from GAPS, preference shares, preferred securities and undated subordinated securities were exchanged for Enhanced Capital Notes. These exchanges, together with the partial extinguishment of liabilities arising from the suspension of payments of coupons, resulted in a gain of £723 million.
Claims and claims paid: Change in liabilities (note 38(2)): Total non-life insurance (343) (539) (634)
In previous years the Group has included annual management charges on non‑participating investment contracts within insurance claims. In light of developing industry practice, these amounts (2011: £606 million; 2010: £577 million; 2009: £474 million) are now included within net fee and commission income.
Amortisation of acquired value of in‑force non‑participating investment contracts (note 30) 78 76 75
Following changes by the Group to the terms of its defined benefit pension schemes in 2010, all future increases to pensionable salary will be capped each year at the lower of: Retail Prices Index inflation; each employee’s actual percentage increase in pay; and 2 per cent of pensionable pay. In addition to this, during the second half of 2010 there was a change in commutation factors in certain defined benefit schemes. The combined effect of these changes was a reduction in the Group’s defined benefit obligation of £1,081 million and a reduction in the Group’s unrecognised actuarial losses of £171 million, resulting in a net curtailment gain of £910 million recognised in the income statement and a reduction in the balance sheet liability.
Performance-based compensation The table below analyses the Group’s performance‑based compensation costs (excluding branch‑based sales incentives) between those relating to the current performance year and those relating to earlier years.
The Group has procedures that are designed to ensure auditor independence, including that fees for audit and non‑audit services are approved in advance. This approval can be obtained either on an individual engagement basis or, for certain types of non‑audit services, particularly those of a recurring nature, through the approval of a fee cap covering all engagements of that type provided the fee is below that cap. All statutory audit work as well as non‑audit assignments where the fee is expected to exceed the relevant fee cap must be pre‑approved by the Audit Committee on an individual engagement basis. On a quarterly basis, the Audit Committee receives a report detailing all pre‑approved services and amounts paid to the auditors for such pre‑approved services.
During the year, the auditors also earned fees payable by entities outside the consolidated Lloyds Banking Group in respect of the following: £m £m £m
The Group’s principal joint venture investment at 31 December 2011 was in Sainsbury’s Bank plc; the Group owns 50 per cent of the ordinary share capital of Sainsbury’s Bank plc, whose business is banking and principal area of operation is the UK. Sainsbury’s Bank plc is incorporated in the UK and the Group’s interest is held by a subsidiary.
Where entities have statutory accounts drawn up to a date other than 31 December management accounts are used when accounting for them by the Group.
Consideration inclusive of acquisition costs: Issue of 7,776 million ordinary shares of 25p in Lloyds Banking Group plc2 (7,651)
The Group extended vendor financing, on normal commercial terms and negotiated on an arms length basis, to Seadrill to facilitate the acquisition of the rig holding companies. The loan is not contingent on the performance of the oil rigs under construction. Accordingly, as at 31 December 2010, the subsidiaries were derecognised.
For the calculation of diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares, if any, that arise in respect of share options and awards granted to employees. The number of shares that could have been acquired at the average annual share price of the Company’s shares based on the monetary value of the subscription rights attached to outstanding share options and awards is determined. This is deducted from the number of shares issuable under such options and awards to leave a residual bonus amount of shares which are added to the weighted‑average number of ordinary shares in issue, but no adjustment is made to the profit attributable to equity shareholders.
Loans and advances to customers 9,642 124 9,766 9,486 325 9,811
The Group’s Wholesale division had exposure to negative basis asset‑backed securities of £150 million (2010: £1,067 million) which were protected by monoline financial guarantors (note 56).
The unguaranteed residual values included in finance lease receivables were as follows: £m £m
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements and the carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 37.
Debt securities classified as loans and receivables (note 24): Asset‑backed securities 1,448 – 6,957 8,405
Total debt securities classified as loans and receivables before allowance for impairment losses 12,746 26,293
Charge to the income statement (note 12) 8,020 – 49 8,069
For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is included net of amounts amortised up to 31 December 2003.
The recoverable amount of Scottish Widows has been based on a value‑in‑use calculation. The calculation uses post‑tax projections of future cash flows based upon budgets and plans approved by management covering a five‑year period, and a discount rate of 12 per cent (net of tax). The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. Cash flows beyond the five‑year period have been extrapolated using a steady three per cent growth rate which does not exceed the long‑term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.
Movement in the value of in‑force business taken to income statement (note 9) (622) 789
The liabilities in respect of the Group’s UK annuity business are matched by a portfolio of fixed interest securities, including a large proportion of corporate bonds. The value of the in‑force business asset for UK annuity business has been calculated after taking into account an estimate of the market premium for illiquidity in respect of corporate bond holdings. The illiquidity premium is estimated to be 119 basis points as at 31 December 2011 (31 December 2010: 75 basis points).
Cost: Exchange and other adjustments – – – – 5 5
Included within brands above are assets of £380 million (31 December 2010: £380 million) that have been determined to have indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These brands are well established financial services brands and there are no indications that they should not have an indefinite useful life.
Balance sheet amount at 31 December 2011 1,357 1,809 4,507 7,673
Liabilities in respect of securities sold under repurchase agreements 14,389 24,017
Trading and other financial liabilities at fair value through profit or loss 24,955 26,762
Change in liabilities charged to the income statement (note 10) 627 (2,010) (1,383) (451) (1,834)
Liabilities for insurance contracts and participating investment contracts can be split into with‑profit fund liabilities, accounted for using the FSA’s realistic capital regime (realistic liabilities) and non‑profit fund liabilities, accounted for using a prospective actuarial discounted cash flow methodology, as follows: With-profit fund £m
(i) Business description The Group has with‑profit funds within Scottish Widows plc and Clerical Medical Investment Group Limited containing both insurance contracts and participating investment contracts.
Life insurance – The policyholder is insured against death or permanent disability, usually for predetermined amounts. Such business includes whole of life and term assurance and long‑term creditor policies.
(ii) Method of calculation of liabilities The non‑profit fund liabilities are determined on the basis of recognised actuarial methods and consistent with the approach required by regulatory rules. The methods used involve estimating future policy cash flows over the duration of the in‑force book of policies, and discounting the cash flows back to the valuation date allowing for probabilities of occurrence.
Change in provision for unearned premiums charged to income statement (note 8) (70) – (70)
Cash paid for claims settled in the year (485) – (485)
Current estimate in respect of above claims 201 203 285 187 494 517 446 2,333
Liability recognised in the balance sheet 4 5 5 11 31 74 251 381
Note 41: Unallocated surplus within insurance businesses The movement in the unallocated surplus within long‑term insurance businesses over the year can be analysed as follows: £m £m
Total amounts recognised in the balance sheet 957 313 £m £m
At 31 December 2011, the assumed rate of inflation is 3.00 per cent (31 December 2010: 3.40 per cent).
The expected return on scheme assets has been calculated using the following assumptions: Equities and alternative assets 8.3 8.3
Money market instruments, cash and other assets and liabilities 4,936 3,554
The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date at a term and credit rating broadly appropriate for the bonds held. Expected returns on equity and property investments are long‑term rates based on the views of the plan’s independent investment consultants. The expected return on equities allows for the different expected returns from the private equity, infrastructure and hedge fund investments held by some of the funded plans. Some of the funded plans also invest in certain money market instruments and the expected return on these investments has been assumed to be the same as cash.
Fair value of scheme assets 28,828 26,382 23,518 13,693 16,112 15,279
Deferred tax credit (charge) in the income statement 1,121 (671) 2,619
Deferred tax assets Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Group companies have recognised deferred tax assets of £5,862 million (2010: £6,572 million) in relation to trading tax losses carried forward. After reviews of medium‑term profit forecasts, the Group considers that there will be sufficient profits in the future against which these losses will be offset (see note 3).
Deferred tax assets of £733 million (31 December 2010: £227 million) have not been recognised in respect of trading losses carried forward, mainly in certain overseas companies and in respect of other temporary differences in the insurance businesses. Trading losses can be carried forward indefinitely, except losses in Spain which expire after 18 years.
(Release) charge for the year (55) 3,381 – 15 35 3,376
On 29 September 2009 the FSA announced that several firms had agreed to carry out reviews of past sales of single premium loan protection insurance. Lloyds Banking Group agreed in principle that it would undertake a review in relation to sales of single premium loan protection insurance made through its branch network since 1 July 2007. That review will now form part of the ongoing PPI work referred to below.
Litigation in relation to insurance branch business in Germany During the year ended 31 December 2011 the Group has recognised a provision of £175 million in respect of litigation involving Clerical Medical Investment Group Limited in Germany. Further details are provided in note 54.
Vacant leasehold property Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub‑let income, compared to the head rent, and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a biannual basis and will normally run off over the period of under‑recovery of the leases concerned, currently averaging three years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
Other provisions include those arising out of the insolvency of a third party insurer, which remains exposed to asbestos and pollution claims in the US. The ultimate cost and timing of payments are uncertain. The provision held of £38 million at 31 December 2011 represents management's current best estimate of the cost after having regard to actuarial estimates of future losses.
Undated subordinated liabilities 6.625% Undated Subordinated Step‑up Notes (£410 million) a, b, c 1 6
12% Perpetual Subordinated Bonds (£100 million) a 30 21 5.75% Undated Subordinated Step‑up Notes (£600 million) 3 3 7.375% Subordinated Undated Instruments (£150 million) a – 1 8.75% Perpetual Subordinated Bonds (£100 million) a 4 4 8% Undated Subordinated Step‑up Notes callable 2023 (£200 million) a – –
Primary Capital Undated Floating Rate Notes: Series 1 (US$750 million) a, b 175 173
Series 3 (US$600 million) a, b 235 232 13.625% Perpetual Subordinated Bonds (£75 million) a 16 20 11.75% Perpetual Subordinated Bonds (£100 million) 102 102
Total undated subordinated liabilities 1,949 2,002 a In November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from 31 January 2010 to 31 January 2012.
d The fixed rate on this security was reset from 6.05 per cent to 3 month Euribor plus 2.25 per cent with effect from 23 November 2011.
Subordinated Callable Notes 2017 callable 2012 (US$1,000 million) c 192 548 6.305% Subordinated Callable Fixed to Floating Rate Notes 2017 callable 2012 (£500 million) c 22 486 5.50% Subordinated Fixed Rate Notes 2012 (e750 million) 640 657 5.625% Subordinated Fixed to Floating Rate Notes due 2018 callable 2013 (e1,000 million) 902 946 4.25% Subordinated Guaranteed Notes 2013 (US$1,000 million) 636 619 6.45% Fixed to Floating Subordinated Guaranteed Bonds 2023 (e400 million) (Clerical Medical Finance plc) 176 173 5.875% Subordinated Guaranteed Bonds 2014 (e750 million) 713 739 4.375% Callable Fixed to Floating Rate Subordinated Notes 2019 (e750 million) 621 600 6.9625% Callable Subordinated Fixed to Floating Rate Notes 2020 callable 2015 (£750 million) 725 715 11.875% Subordinated Fixed to Fixed Rate Notes 2021 callable 2016 (e1,147 million) d 977 – 10.75% Subordinated Fixed to Fixed Rate Notes 2021 callable 2016 (£466 million) d 467 – 9.875% Subordinated Fixed to Fixed Rate Notes 2021 callable 2016 (US$568 million) d 368 – 10.125% Subordinated Fixed to Fixed Rate Notes 2021 callable 2016 (Can$387 million) d 246 – 13% Subordinated Fixed to Fixed Rate Notes 2021 callable 2016 (Aus$417 million) d 276 –
6.75% Subordinated Fixed Rate Notes 2018 (US$2,000 million) 1,205 1,176 6.5% Dated Subordinated Notes 2020 (e1,500 million) 1,407 1,353 5.75% Subordinated Fixed to Floating Rate Notes 2025 callable 2020 (£350 million) 367 324 6.5% Subordinated Fixed Rate Notes 2020 (US$2,000 million) 1,360 1,202 Subordinated Floating Rate Notes 2020 (e100 million) 87 86 5.374% Subordinated Fixed Rate Notes 2021 (e160 million) 150 139 7.07% Subordinated Fixed Rate Notes 2023 (e175 million) 174 162 4.50% Fixed Rate Step‑up Subordinated Notes due 2030 (e750 million) 463 463 6% Subordinated Notes 2033 (US$750 million) 432 275 Total dated subordinated liabilities 17,946 19,292 a Issued by a group undertaking under the Company’s subordinated guarantee.
b These securities are callable at specific dates as per the terms of the securities at the option of the issuer and with approval of the FSA. In November 2009, as part of the state aid restructuring plan, the Group agreed not to exercise any call options on these instruments for the two year period from 31 January 2010 to 31 January 2012. The interest rate payable on these securities reset during 2011.
Issued on acquisition of HBOS – – 7,775,694,993 – – 1,944
Placing and compensatory open offer – – 10,408,535,000 – – 2,602
Issued under employee share schemes 652,497,658 195,339 – 66 – –
Share subdivision in 2009 At the general meeting held on 26 November 2009 the Company’s shareholders approved the subdivision of the ordinary shares with each ordinary share of 25 pence subdivided into one ordinary share of 10 pence and a deferred share of 15 pence. In addition, the shareholders approved the subdivision of the limited voting ordinary shares with each share of 25 pence subdivided into one limited voting ordinary share of 10 pence and a deferred share of 15 pence.
On 18 February 2010, the Company issued 3,141 million ordinary shares as consideration for the redemption of certain preference shares and preferred securities. During May and June 2010, the Company issued a further 1,158 million ordinary shares in relation to three separate exchanges for preference shares and other subordinated liabilities issued by the Group.
In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or voting rights.
Ordinary shares The holders of ordinary shares (excluding the limited voting ordinary shares), who held 99.9 per cent of the total ordinary share capital as at 31 December 2011, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions of the Company’s articles of association and the restrictions noted below) and on a winding up may share in the assets of the Company.
Preference shares The Company has in issue various classes of preference shares which are all classified as liabilities under IFRS and details of which are shown in note 46.
In January 2010, the Company repurchased and cancelled certain preference shares amounting to £14 million. This resulted in a transfer of £3 million from the merger reserve to the capital redemption reserve and a transfer of £11 million from the merger reserve to the share premium account. In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of Enhanced Capital Notes. This resulted in a transfer of £26 million from the merger reserve to the capital redemption reserve and a transfer of £2,684 million from the merger reserve to the share premium account.
Revaluation reserve in respect of available‑for‑sale financial assets 1,326 (285) (783)
Change in fair value of available‑for‑sale financial assets 2,603 1,231 2,035
Change in fair value attributable to non‑controlling interests – – (1)
Income statement transfer (note 5) 70 932 121 £m £m £m
Retained profits are stated after deducting £33 million (2010: £47 million; 2009: £48 million) representing 58 million (2010 and 2009: 49 million) treasury shares held.
For options granted from August 2001 to August 2004 The performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both dividends and growth in share price) against a comparator group of 17 companies including Lloyds Banking Group plc.
The performance condition was measured over a three year period which commenced at the end of the financial year preceding the grant of the option and continued until the end of the third subsequent year. If the performance condition was not then met, it was measured at the end of the fourth financial year. If the condition was not then met, the options would lapse.
Movements in the number of share options outstanding under the executive share option schemes during 2010 and 2011 are set out below: Number of options
No options were exercised during 2011 or 2010. The weighted average remaining contractual life of options outstanding at the end of the year was 2.9 years (2010: 3.6 years).
Save-As-You-Earn schemes Eligible employees may enter into contracts through the Save‑As‑You‑Earn schemes to save up to £250 per month and, at the expiry of a fixed term of three, five or seven years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 80 per cent of the market price at the start of the invitation.
Lloyds Banking Group executive share plan 2003 The plan was adopted in December 2003 and under the plan share options may be granted to senior employees. Options under this plan have been granted specifically to facilitate recruitment and as such were not subject to any performance conditions. The plan’s usage has now been extended to not only compensate new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in some instances, the grant being made subject to individual performance conditions.
As a consequence of the acquisition of HBOS and the general market turmoil, in March 2009 the Remuneration Committee decided that the performance test for the 2008 awards should be based on the performance of the Group up to 17 September 2008, the date prior to the announcement of the HBOS acquisition. The performance test was on a fair value basis, on the estimated probability, as at that date, of achieving the performance conditions. As a consequence, for all participants, other than those who were Executive Directors at the time the award was granted and a small number of other senior executives, the share awards vested at 29 per cent in March 2011.
If the absolute improvement in adjusted EPS reaches 158 per cent, 25 per cent of this element of the award, being the threshold, will vest. If absolute improvement in adjusted EPS reaches 180 per cent, 100 per cent of this element will vest.
If the compounded annual growth rate of adjusted EP reaches 57 per cent per annum, 25 per cent of this element of the award, being the threshold, will vest. If the compounded annual growth rate of adjusted EP reaches 77 per cent per annum, 100 per cent of this element will vest.
For awards made to Executive Directors, a third performance condition was set, relating to Absolute Total Shareholder Return, relevant to one third of the award. Performance will be measured based on the annualised Absolute Total Shareholder Return over the three year performance period. If the annualised Absolute Total Shareholder Return at the end of the performance period is less than 8 per cent, none of this element of the award will vest. If the Absolute Total Shareholder Return is 8 per cent, 25 per cent of this element of the award, being the threshold, will vest. If the Absolute Total Shareholder Return is 14 per cent or higher, 100 per cent of this element will vest. Vesting between threshold and maximum will be on a straight line basis. The EPS and EP performance conditions will each relate to 33.3 per cent of the total award.
At 31 December 2011, 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 £3 million with four directors and three connected persons (2010: £2 million with six directors and four connected persons; 2009: £2 million with seven directors and four connected persons).
UK Government In January 2009, the UK Government through HM Treasury became a related party of the Company following its subscription for ordinary shares issued under a placing and open offer. As at 31 December 2011, HM Treasury held a 40.2 per cent (31 December 2010: 40.6 per cent) interest in the Company’s ordinary share capital and consequently HM Treasury remained a related party of the Company during the year ended 31 December 2011.
Other government-related entities Other than the transactions referred to above, there were no other significant transactions with the UK Government and UK Government‑controlled entities (including UK Government‑controlled banks) during the period that were not made in the ordinary course of business or that were unusual in their nature or conditions.
Other related party transactions Pensions funds The Group provides banking and some investment management services to certain of the Group pension funds. At 31 December 2011, customer deposits of £63 million (2010: £64 million) and investment and insurance contract liabilities of £928 million (2010: £850 million) related to the Group’s pension funds. During 2011, the Group sold at fair value certain non‑government bonds, equities and alternative assets to Lloyds TSB Group Pension Scheme No 1 for £336 million and to Lloyds TSB Group Pension Scheme No 2 for £67 million.
In addition to the above balances, the Group has a number of other associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2011, these companies had total assets of approximately £11,500 million (2010: £12,216 million), total liabilities of approximately £10,807 million (2010: £11,937 million) and for the year ended 31 December 2011 had turnover of approximately £7,376 million (2010: £3,829 million) and made a net loss of approximately £83 million (2010: net profit of £182 million). In addition, the Group has provided £5,767 million (2010: £3,316 million) of financing to these companies on which it received £106 million (2010: £93 million) of interest income in the year.
FSA investigation into Bank of Scotland In 2009 the FSA commenced a supervisory review into HBOS. The supervisory review has now been superseded as the FSA has commenced enforcement proceedings against Bank of Scotland plc in relation to its Corporate division pre 2009. The proceedings are ongoing and the Group is co‑operating fully. It is too early to predict the outcome or estimate reliably any potential financial effects of the enforcement proceedings but they are not currently expected to be material to the Group.
Regulatory matters In the course of its business, the Group is engaged in discussions with the FSA in relation to a range of conduct of business matters, including complaints handling, packaged bank accounts, savings accounts, product terms and conditions, interest‑only mortgages, sales processes and remuneration schemes. The Group is keen to ensure that any regulatory concerns are understood and addressed. The ultimate impact on the Group of these discussions can only be known at the conclusion of such discussions.
Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year original maturity: Mortgage offers made 7,383 8,113
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £53,459 million (2010: £63,630 million) was irrevocable.
Capital commitments Excluding commitments in respect of investment property (note 28), capital expenditure contracted but not provided for at 31 December 2011 amounted to £296 million (2010: £339 million). Of this amount, £292 million (2010: £282 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
(1) Measurement basis of financial assets and liabilities The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet heading.
Derivative financial instruments 12,850 53,163 – – – – – 66,013
Available‑for‑sale financial assets – – – 37,406 – – – 37,406
Items in course of transmission to banks – – – – – 844 – 844
Liabilities arising from non‑participating investment contracts – – – – – – 49,636 49,636
Derivative financial instruments 7,406 43,371 – – – – – 50,777
Notes in circulation – – – – – 1,074 – 1,074
Liabilities arising from non‑participating investment contracts – – – – – – 51,363 51,363
From available‑for‑sale financial assets to loans and receivables: NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Items in course of transmission to banks 844 844 802 802
Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations in more judgemental areas, in particular for unquoted equities, structured credit, over‑the‑counter options and the Credit Valuation Adjustment (CVA) reserve.
Debt securities in issue and subordinated liabilities The fair value of short‑term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities and for subordinated liabilities is estimated using quoted market prices.
Level 1 portfolios Level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classified as level 1 predominantly comprise equity shares, treasury bills and other government securities.
Bank and building society certificates of deposit 323 43 – 366
Total financial assets carried at fair value 128,609 106,674 7,646 242,929
Liabilities held at fair value through profit or loss (debt securities) – 5,339 – 5,339
Total financial liabilities carried at fair value 3,203 79,223 790 83,216
Bank and building society certificates of deposit – 4,298 – 4,298
Total financial assets carried at fair value 128,708 113,747 7,468 249,923
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements – 14,612 – 14,612
Complex interest rate and foreign exchange products where there is significant dispersion of consensus pricing or where implied funding costs are material and unobservable are classified as level 3.
The Group’s level 3 derivative assets include £1,172 million (31 December 2010: £1,177 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. Movements in the fair value of the derivative are recorded in net trading income.
Level 3 derivative assets also include £14 million (31 December 2010: £96 million) in respect of credit default swaps written on level 3 negative basis asset‑backed securities calculated as set out in the table below: 2011 £m 2010 £m
Gains (losses) recognised in the income statement 199 (56) (667) (524)
Gains recognised in the income statement relating to those assets held at 31 December 2011 203 31 178 412
Gains recognised in other comprehensive income relating to those assets held at 31 December 2010 – 269 – 269
Losses recognised in the income statement relating to those liabilities held at 31 December 2011 (93) (5) (98)
Gains (losses) recognised in the income statement relating to those liabilities held at 31 December 2010 – – –
Included within the gains (losses) recognised in the income statement are gains of £412 million (2010: losses of £597 million) related to financial instruments that are held in the level 3 portfolio at the year end. These amounts are included in other operating income.
Included within the gains (losses) recognised in other comprehensive income are losses of £132 million (2010: gains of £269 million) related to financial instruments that are held in the level 3 portfolio at the year end.
(i) Uncollateralised derivative valuation adjustments, excluding monoline counterparties The following table summarises the movement on this valuation adjustment account during 2011: 2011 £m 2010 £m
Credit and Debit Valuation Adjustments (CVA and DVA) are applied to the Group’s over‑the‑counter derivative exposures with counterparties that are not subject to standard interbank collateral arrangements. These exposures largely relate to the provision of risk management solutions for corporate customers within the Wholesale division.
The combination of a one per cent deterioration in the credit rating of derivative counterparties and a ten per cent increase in LGD increases the CVA by £140 million. Current market value is used to estimate the projected exposure for products not supported by the model, which are principally complex interest rate options that are traded in very low volumes. For these, the CVA is calculated on an add‑on basis (in total contributing £84 million of the overall CVA balance at 31 December 2011).
The risk exposures that are used for the CVA and DVA calculations are strongly influenced by interest rates. Due to the nature of the Group’s business the CVA/DVA exposures tend to be on average the same way around such that the valuation adjustments fall when interest rates rise. A one per cent rise in interest rates would lead to a £369 million fall in the overall valuation adjustment to £563 million. The CVA model used by the Group does not assume any correlation between the level of interest rates and default rates.
The Group has also recognised a Funding Valuation Adjustment to adjust for the net cost of funding certain uncollateralised derivative positions where the Group considers that this cost is included in market pricing. This adjustment is calculated on the expected future exposure discounted at a suitable cost of funds. A ten basis points increase in the cost of funds will increase the funding valuation adjustment by approximately £11 million.
Trading and other financial assets at fair value through profit or loss 523 513 824 828
See note 54 – Contingent liabilities and commitments for further information.
Neither past due nor impaired 32,494 330,727 41,448 146,655 518,830 11,121
Neither past due nor impaired 30,259 339,509 45,058 159,274 543,841 12,545
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale 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 pages 129 to 130.
Debt securities classified as loans and receivables An analysis by credit rating of the Group’s debt securities classified as loans and receivables is provided below: AAA £m
Asset‑backed securities: Corporate and other debt securities 150 – 67 – – 320 537
Asset‑backed securities: Corporate and other debt securities 1,609 856 2,351 341 – 88 5,245
Bank and building society certificates of deposit – 225 162 20 – – 407
Asset‑backed securities: Corporate and other debt securities 1,135 4,824 5,150 913 42 68 12,132