Our reporting We aim to report in an integrated way to reflect the way we operate, while retaining separate sections for our environmental and social performance for ease of reference. As well as reporting our financial results, we also report on our strategy and approach to operating responsibly while taking into account relevant economic, political, social, regulatory and environmental factors.
On behalf of the Board Robin Budenberg Chair Lloyds Banking Group 23 February 2021
Strategic report Our COVID response 01 Chair's statement 04 Group Chief Executive’s review 08 Our business model 12 Key performance indicators 14 Our progress in building a sustainable and responsible business 16 Our external environment 32 Strategic review 2021 36 Our key stakeholders and Board engagement 46 Financial performance overview 52 Risk overview 56
Financial results Summary of Group results 62 Divisional results 73 Other financial information 77
Governance A letter from our Chair 81 Our Board 82 Group Executive Committee 84 Corporate governance report 86
Directors’ report 111 Directors’ remuneration report 115 Other remuneration disclosures 138
Financial statements Independent auditors’ report 206 Consolidated financial statements 215 Parent company financial statements 335
Other information Shareholder information 344 Five year financial summary 346 Forward-looking statements 347 Abbreviations 348 Alternative performance measures 348 Subsidiaries and related undertakings 349 £1.4bn
(4.1)pp Return on tangible equity of 3.7 per cent given lower statutory profit 17.4m +6.1% Digitally active customers continued to increase and we remain the largest digital bank in the UK
+7pp Colleague engagement remains at its highest ever level with our employee engagement index seven points higher than 2019
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 01
During an extraordinarily challenging time we are Helping Britain Recover, as part of our Group purpose of Helping Britain Prosper.
We have an important role to play in Britain’s recovery, working with others to help build an inclusive, greener and more resilient economy for the whole of the UK.
Read more on how we're supporting the UK through these extraordinary times on the pages that follow.
Supporting customers Many people continue to feel the impact of the past year on their personal finances. We have approved around 1.3 million payment holidays for customers who have mortgages, personal loans, credit cards and car finance with us since the start of the outbreak, and are helping our customers to replan their finances.
Our dedicated telephone services, with extended opening hours for the over 70s and NHS workers, have taken around 880,000 calls since the end of March, allowing us to prioritise support for these customers and their urgent needs. We’ve also proactively made over 750,000 calls to check on the wellbeing of our vulnerable customers. These services will continue.
Supporting businesses As a result of the lockdowns, businesses are facing challenges like never before. Many have been forced to close and furlough their staff, while others have had to adapt to external changes. Whatever situation our business customers have faced, we’ve stood by their side.
We’re working with the Government to provide loans and working capital support for the businesses of Britain, at the same time as providing the sectorby -sector expertise needed to help them adapt for success.
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Supporting our colleagues We’re taking every precaution to protect our colleagues. More than 50,000 colleagues worked from home for most of 2020, up from 15,000 before the pandemic, and this will continue, until at least Summer 2021.
Where our colleagues are providing an essential service for the UK, such as in our call centres and branches, we are following social distancing rules, to keep both our colleagues and customers safe.
Supporting communities The effects of coronavirus will remain for some time to come; that’s why we’re providing extra practical and emotional support for the most vulnerable in society.
Having joined the Board in October and taken over the role of Chair from 1 January 2021, I have been hugely impressed with the response of the Group to the COVID-19 crisis and the achievements during the last year. I am particularly proud of our workforce and the continued commitment and dedication in supporting our customers and each other. We provided over £12 billion of lending to businesses through Government-backed schemes and granted around 1.3 million payment holidays to retail customers, providing vital support at a time of crisis.
In September 2020, the Group launched The Big Conversation and since then we have brought together more than 900 people, including industry leaders, local politicians and expert voices in virtual sessions around the country to discuss what the pandemic has meant for them and what support they need to survive and thrive.
Although the next couple of years will be challenging, the pandemic provides a unique opportunity for banks to evidence their importance to customers and the economy and we will continue to play the important role expected of us as the UK’s leading financial services provider. We will help Britain rebuild sustainably by playing our part in the country’s economic recovery.
The Group has been playing a leading role in the immediate national response, supporting customers, colleagues and our communities through the crisis and beyond. Robin Budenberg Chair
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 05
We will have over 6,500 colleagues trained to support customers to build their financial resilience
We will expand our existing ‘Mental Health Accessible’ accreditation for Lloyds Bank across Halifax and Bank of Scotland
We will develop appropriate recovery plans for our customers, supported by 1,100 business specialists
We will ensure our own operations are net zero by 2030
We will become the first major pensions and insurance provider to target halving the carbon footprint of all our investments by 2030
We will maintain our £25.5 million contribution to foundations in 2021
We will support financial inclusion by providing banking to potentially excluded groups of people
Lloyds Banking Group is a customer focused, sustainable, efficient and low risk UK financial services leader with a clear purpose of Helping Britain Prosper. Given the pandemic and our unique position at the heart of the UK economy, our priority for the next phase of our strategy is to focus on Helping Britain Recover.
Strategic Review 2021 is focused on delivering co-ordinated growth opportunities across our core business areas to create the UK’s preferred financial partner for personal customers and the best bank for business. The strategy is supported by further investment in four specific capabilities: a modernised technology architecture, integrated payments, creating a data-driven organisation and reimagined ways of working
Strategic Review 2021: Building the UK's preferred financial partner pages 36 to 45
Helping Britain Recover: We have identified five priority areas, based on where we feel we can make the most difference
Lloyds Banking Group has brought together more than 900 businesses, community members, policy makers and subject-matter experts across the UK’s nations and regions to explore how we can help the UK recover from the impact of coronavirus.
We've partnered with the Confederation of British Industry (CBI), bringing the voices and experience of its 190,000 members to the conversation.
Remuneration Protecting our colleagues and recognising their efforts to support our customers during this unprecedented year has been important to the Group. We were able to confirm to all full-time and part-time permanent colleagues that they would continue to be paid their contracted hours as normal, no matter what their role, how the outbreak affected what they did for the Group or what their personal circumstances were, and did not take any Government funding to pay colleagues.
We have a duty to support our customers, colleagues and communities during this uncertain time and we believe the changes we made to our pay and absence policies during the course of 2020 have ensured that our colleagues received the support they needed during such a challenging year.
Our colleagues and culture The sheer amount of change that people have coped with during 2020 is phenomenal and the role of our colleagues cannot be understated. I have heard of so many wonderful examples of colleagues supporting each other and our customers, and the empathy and dedication our colleagues have shown is a testament to the Group.
There are strong links between governance and establishing a culture that supports longterm sustainable success and I am keen to ensure the Group continues to build a strong reputation in this area.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 07
Board changes We have a strong, diverse and experienced Board, which proved its effectiveness throughout the year. A number of Board changes have been seen during the year, as outlined below.
In addition, during September 2020 both Simon Henry and Juan Colombás retired from the Board. Sarah Legg assumed the role of Chair of the Audit Committee in October.
Group Chief Executive One of my first actions when I joined the Group was to recruit a new Group Chief Executive and I was delighted to be able to announce in November the appointment of Charlie Nunn. Charlie will, subject to regulatory approval, join the Group in August 2021 from HSBC and brings with him significant operational, technology and strategic expertise. I am personally excited about Charlie’s vision for the Group, as well as his passion for our commitment to Helping Britain Recover. The Board and I look forward to working with him to ensure the success of the next stage of development of the Group.
On 30 April 2021, António Horta-Osório will retire as Group Chief Executive and Director of Lloyds Banking Group plc having led the Group for the last ten years. I would like to take this opportunity to pay tribute to the outstanding contribution that António has made to first turning round and then leading the strategic development of the Group over the last decade. His personal commitment and strong vision have driven a period of substantial and successful change in the Group, restoring Lloyds to its pre-eminent position as the UK’s leading financial services provider. During his tenure, he has overseen a comprehensive transformation of the Group's balance sheet, operations, and customer propositions, including the repayment of the UK Government's £21 billion investment and evolution of the Group into the UK's largest digital bank.
As previously indicated, the Board has agreed that during any interim period between António Horta-Osório stepping down and Charlie Nunn joining the Group, William Chalmers, Chief Financial Officer will, subject to regulatory approval, take on the role of acting Group Chief Executive in addition to his ongoing responsibilities as Chief Financial Officer, with the support of Alan Dickinson and myself. It will be critically important to maintain momentum during this period and arrangements will be made to support William in this role and manage his wider responsibilities appropriately.
In addition Lord Blackwell retired from the Board on 1 January 2021 having been a member of the Board for nearly nine years and Chairman since April 2014. He has been instrumental in helping turn the business around since the financial crisis and refocus the business on Helping Britain Prosper. I must thank him for his strong stewardship during this period and sage advice since I joined the Board.
Summary In summary, what is very clear, is that we are operating in an increasingly dynamic and competitive market. Only by truly focusing on the needs of the customer and embracing technology will banks be successful.
Given significant investment and transformation in recent years we are well positioned with strong foundations to support our response to the evolving banking landscape. We intend to further build and adapt our compelling offering for customers, while at the same time delivering a positive societal impact and long-term superior and sustainable returns for shareholders.
Coronavirus has had a profound impact on our lives and the economy but the Group has delivered a resilient performance with continued strategic progress. António Horta-Osório Group Chief Executive
The impact of the coronavirus pandemic on the people, businesses and communities in the UK and around the world in 2020 has been profound. Many countries, including the UK, have seen unprecedented levels of economic contraction as a result of lockdown measures, as well as comprehensive and co-ordinated Government support measures. In this environment, we remain absolutely focused on working with all our stakeholders to support our customers and ensure a sustainable recovery.
The Group’s successful ongoing transformation, continued investment and growing franchise strength positioned us well to face the pandemic. In response to the challenging economic environment, we provided around 1.3 million payment holidays on mortgages, loans, credit cards and motor finance products while we also set up dedicated phone lines for customers over 70 years old and for customers who are working on the frontline in the NHS. We are also providing significant support for our business clients, providing more than £31 billion of gross lending to small and medium sized businesses, including Government-backed lending. Within Insurance and Wealth, we have supported the NHS by providing free additional insurance cover to its workers and by alleviating pressure on GPs with a reduction in medical evidence required for insurance claims.
Once again I would like to express my gratitude to all of our colleagues for their resilience, dedication and hard work throughout 2020. Our people have retained their clear focus on supporting their customers and Helping Britain Prosper in very challenging circumstances. I am proud of everything the Group has done to support the UK economy in 2020. This would not have been possible without the exemplary dedication of our colleagues.
Given our clear UK focus, the Group’s financial performance is inextricably linked to the health of the UK economy and thereby the impact of the coronavirus pandemic. Significant uncertainties remain relating to the pandemic, the third national lockdown and the speed and efficacy of the vaccination programme. Nonetheless, the Group’s purpose, unique business model, competitive advantages and ambitious strategic evolution will ensure that it will be able to Help Britain Recover from the crisis whilst delivering longterm sustainable returns for our shareholders.
The Group’s capital position remains strong with a CET1 ratio of 16.4 per cent before allowing for ordinary dividends and 16.2 per cent after dividends, both ahead of the Board’s ongoing target of c.12.5 per cent, plus a management buffer of c.1 per cent. Given our strong capital position at the year end and the regulator’s clarification that banks may resume capital distributions, the Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the Prudential Regulation Authority's temporary framework on 2020 distributions.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 09
Despite this significant progress, we are only just starting to see the transformation that technology is enabling. Customers will increasingly expect to interact with us in a more effective, agile and personalised way. To compete effectively against new entrants and respond to these evolving customer expectations, we need to continue to transform how we work, replace some of our legacy systems and enhance our use of data across the business. Some of this development will be internal but we will also increasingly use partnerships with specialist technology and fintech providers.
In 2020 we delivered an additional 2.1 million training hours to develop the skills for the future, taking the total to 5.3 million hours over the course of GSR3, ahead of our target. In addition, the proportion of change programmes delivered using agile methodologies has increased to 65 per cent over the course of GSR3, ahead of our target of 50 per cent.
Our 2020 Colleague Survey received almost 50,000 responses and showed positive increases in all main areas, including overall engagement up 7 percentage points to 81 per cent. This reflects the highest level since measurement started in 2011 and is above the UK highperforming norm.
Leading customer experience >17 million digitally active customers >12 million mobile app users digital net promoter score, a year end record high
Digitising the Group 78 per cent of cost base covered by digitisation >£4 billion cumulative technology spend 2018-2020
As the UK's largest mortgage lender, we recognise the vital importance of helping Britain get a home. We have provided close to £9 billion of finance for the social housing sector and lent c.£40 billion to first-time buyers over 2018 to 2020.
Further information on our approach to environmental, social and governance issues can be found in our 2020 Environmental, Social and Governance Report, available on the Group’s website.
Charlie Nunn will be the next Group Chief Executive. He was previously the Global Chief Executive of Wealth and Personal Banking at HSBC and has had a long and successful career in financial services. Charlie will find a warm welcome at Lloyds Banking Group and a deep commitment from all of our people to deliver on our purpose and to Help Britain Recover. I am sure that he will find his time here as fulfilling and fascinating as I have done and I wish him the very best.
We are committed to supporting a sustainable recovery which supports all of the people and regions in our society. In 2021, we will Help Britain Recover by concentrating on five key areas where we can make the most difference, all of which are embedded in our business strategy. This is discussed further in the Strategic Review 2021 section.
Strategic Review 2021 Today's environment continues to evolve and provide new challenges. The macroeconomic environment remains uncertain, whilst we are witnessing increasing societal expectations, an accelerated shift to digital and new technology capabilities in the context of the pandemic driving a step change in ways of working.
Throughout 2020 the management team, in conjunction with the Board, have worked on developing an evolution of our strategy to address these issues. We have made significant progress in recent years, leveraging the unique strengths and assets of the Group, including our purpose driven and customer focused business model, our low risk approach to business, our market leading efficiency and our leading multi-channel propositions, including the largest digital bank and branch network in the UK. This has created the platform for Strategic Review 2021, the next stage of our journey.
The Group has a clear purpose of Helping Britain Prosper, which drives our strategy. Given the pandemic and the challenging macroeconomic environment, our focus for 2021 is Helping Britain Recover. This is in the context of delivering co-ordinated growth opportunities by building the UK’s preferred financial partner for personal customers and the best bank for business. Delivery of the Group's customer focused ambitions in our two main segments, will be underpinned by the enhancement of four core capabilities within our business. These capabilities focus on delivering a modernised technology architecture, building an integrated payments platform, creating a data-driven organisation and implementing reimagined ways of working. Strategic execution in 2021, supported by increased investment, is underpinned by long-term strategic vision in these customer segments and capabilities.
Outlook The impact of the coronavirus pandemic on the people, businesses and communities in the UK and around the world continues to be profound. Significant uncertainties remain, specifically relating to the pandemic and the speed and efficacy of the vaccination programme. I remain confident that the Group’s clear purpose, unique business model, significant competitive advantages and the customer focused evolution of our strategy we have announced in Strategic Review 2021 will ensure that the Group is able to Help Britain Recover and in so doing, help transition to a sustainable economy.
António joined the Board and launched the first Group Strategic Review First Group Strategic Review with the clear aim to become the best bank for customers.
Partnership with Mental Health UK Drawing on his own personal experiences, António shone a spotlight on the importance of good mental health, both within the Group and across the UK corporate world, helping to break down stigmas.
Completion of the Group Strategic Review 3 An ambitious plan, with significant additional investment, successfully delivered a leading customer experience; further digitised the Group; maximised the Group’s capabilities; and transformed ways of working.
The Group faces the future with confidence. This is reflected in our guidance for 2021, based on our current macroeconomic assumptions: Net interest margin to be in excess of 240 basis points
Intention to accrue dividends and resume progressive and sustainable ordinary dividend policy
I would like to again express my thanks to all of my colleagues, without whom the Group's customer focus, resilient financial performance and significant strategic transformation, achieved in very challenging circumstances, would not have been possible.
Significant improvement in customer satisfaction levels Integrated multi-brand, multi-channel model Significant dividends for shareholders and full repayment to the taxpayer Delivered a financially strong business with lower costs as a competitive advantage and superior levels of investment Targeted and strategic growth
A unique customer proposition Enabling us to serve the financial needs of customers in one place. We operate multiple brands through three core divisions: Retail, Commercial Banking and Insurance and Wealth.
We are a customer focused, sustainable, efficient and low risk UK financial services leader with distinctive capabilities
Multi-brand, multi-channel proposition with the UK's largest digital bank and branch network Operating in an integrated way through a range of distribution channels and brands ensures our customers can interact with us when and how they want and enables us to address the needs of different customer segments more effectively.
Differentiated and sustainable customer franchise with leading integrated propositions Our scale and reach across the UK means that our franchise extends to over 25 million customers, with 17.4 million digitally active. We are uniquely positioned to serve our customers’ banking, insurance and wealth management needs in one place through a comprehensive product range informed by customer analysis and insight.
Rigorous execution and management discipline Experience of delivering change in recent years provides benefit as we further transform the business.
Creating competitive advantages We believe that these capabilities provide significant competitive advantage. The Group's significant investment in transformation and digital in recent years, enabled by our efficiency, has positioned us well. Continued investment will remain important to further build this advantage and enable us to continue to deliver for customers while also delivering sustainable and superior returns over the longer-term, as outlined on the accompanying diagram.
We also face a number of internal challenges: Repositioning and growing the business to deliver revenue generation and diversification
As we enter the next phase of our strategy we will build on these capabilities and accelerate the Group's transformation to become the UK's preferred financial partner
Our performance 2020 was a difficult year, with the effects of the coronavirus pandemic and lower interest rates impacting our financial performance, in line with the banking industry as a whole.
Although the economic outlook remains uncertain, our financial strength and business model will ensure that the Group can continue to support its customers and Help Britain Recover.
To ensure colleagues act in the best interests of customers and shareholders, variable remuneration at all levels across the Group is aligned to these priorities and takes into account the Group’s financial performance and specific conduct and risk management controls.
- Colleague engagement – our performance relative to external benchmark scores (10%)
In 2021, to aid comparability with peers, we will report return on tangible equity without adding back the post-tax amortisation of intangible assets.(2020 return on tangible equity would have been 2.3 per cent on the new basis).
In 2021, this key performance indicator will be replaced by operating costs (excl. remediation). This will align to our 2021 balanced scorecard.
Statutory profit after tax was lower in 2020, largely due to increased impairment charges and lower income. 1 Restated to reflect amendments to IAS12.
Underlying profit before tax was lower in 2020, reflecting lower net income and higher impairment charges, partly offset by the Group’s continued progress in cost reductions. 1 Restated to include remediation
Ordinary dividend per share, given the Group’s strong capital position dividends have resumed at the maximum allowed under the Prudential Regulation Authority's temporary framework on 2020 distributions.
Ongoing target: c.12.5 per cent plus a management buffer of c.1 per cent
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 15
Economic profit, a measure of profit taking into account expected losses, tax and a charge for equity utilisation. Economic profit in 2020 was impacted by lower net income received in the year. 2020 basis has been amended in line with changes to reward scheme performance measures, on equivalent basis to prior years 2020 economic profit would be £1,197 million
Total shareholder return reflects share price performance and dividends paid. Our share price decreased significantly in 2020, in line with other UK banks, with no dividend payable in the year given the regulatory restrictions.
Our all channel net promoter score measures the customer perception of day-to-day services across our channels. In 2020, we have seen record satisfaction with an uplift of 2 year-on-year. This encompasses positive contributions from Branch and Digital, with customers appreciating the service provided.
We have made strong progress since we launched the Plan in 2014. In 2020, we have seen the impact of the pandemic reflected in our Helping Britain Prosper plan performance with selected areas unable to reach their targets. This has resulted in the Group achieving 17 out of 22 targets for 2020. Find out more on pages 20 to 31.
From a strategic perspective, reduction in customer complaints confirms our achievements in delivering a leading customer experience. H2 2020 data not available at time of publishing.
Employee engagement is at an all time high and was six points above the norm for top performing UK companies with increases in scores for advocacy, pride and satisfaction. Colleagues were also positive about their wellbeing, process improvements and performance management. Preferences on working arrangements were also captured in our Autumn survey and will inform future working styles.
This indicates how much progress we are making in transforming ways of working.
In 2020, we provided over £2.3 billion of green finance in Commercial Banking, through our Clean Growth Finance Initiative, Commercial Real Estate Green Lending Initiative, Renewable Energy Financing and Green Bond facilitation. This increased our total green finance to over £7.3 billion since 2016. In addition, we have supported clients with over £1.8 billion of Sustainability Linked Loans since 2017.
The largest digital bank in the UK, with our digitally-active customer base of 17.4 million up over 30 per cent since 2017
Our progress in building a sustainable and responsible business 2018 – 2020: What we have achieved over the last three years
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 17
Helping the transition to a sustainable low carbon economy Average number of homes that could be powered as a result of our support of UK renewable energy projects 10.1 million
Helping people save for the future Growth in open book assets that we hold on behalf of customers in retirement and investment products3 £45.6 billion
Supporting businesses to start up and grow Increased amount of net lending to start up, SME and Mid Market businesses >£6 billion
Helping Britain get a home Amount of lending committed to help people buy their first home £39.7 billion
Addressing some of the social, economic and environmental challenges facing the UK was the foundation of our Helping Britain Prosper Plan. Below are the impacts achieved since 2018 against our seven priority performance areas. Further information on progress in each of the priorities can be found on pages 20 to 31 and in our 2020 Lloyds Banking Group ESG Report.
Our ongoing focus on transforming the business and investing in digital have enabled us to respond effectively to the accelerating shift to digital channels brought about by the COVID-19 pandemic, with the benefits of this investment evidenced throughout the crisis.
Continued adoption of new technologies In addition, we have continued to increase our adoption of new technologies and these have allowed us to support our customers at pace. As an example, we have used robotics to process over 90 per cent of Bounce Back Loan applications and, through this, have created significant colleague capacity during a period of increased demand. The use of technology has also created opportunities to further improve operational efficiencies as we modernise our IT and data architecture and improve processes at the same time as prioritising our technology based investment. By the end of 2020, 78 per cent of our cost base was covered by digitisation. This compares to our original GSR3 target of 70 per cent and represents nearly a five and a half fold increase versus the equivalent figure of 12 per cent at the end of 2017. In addition, we have continued to make progress on migrating applications to cloud solutions.
Remain number 1 UK digital bank with Open Banking functionality Unrivalled reach, with UK’s largest branch network serving complex needs Data-driven and personalised customer propositions
Deeper end-to-end transformation targeting 70 per cent of our cost base Simplification and progressive modernisation of our data and IT infrastructure Technology enabled productivity improvements across the business
Supporting our customers Through the use of robotics over 300,000 Bounce Back Loans have been approved with a total value of over £9 billion and an approval rate of around 97 per cent
The COVID-19 pandemic is having significant implications for our colleagues. These include accelerating the transition to new ways of working for the majority of the Group while also challenging the skills that we have sought to develop over the course of this strategic plan. This significant change has also increased our focus on our broader workforce proposition, ensuring our colleagues feel valued and engaged in an uncertain environment.
New ways of working Since March, more than 50,000 colleagues have worked remotely as a result of the pandemic. In order to facilitate this and to improve colleague experiences of working from home, we have enabled the distribution of over 100,000 office items to our colleagues’ homes. In addition, we increased our adoption of remote working tools to increase collaboration and support more agile working practices. At the height of the crisis, we also demonstrated significant operational agility by rapidly redeploying over 2,500 colleagues to customer support functions to respond to elevated customer demand.
In addition to physical and technological support, we have also prioritised the mental health of our colleagues in a period of significant uncertainty and change with regular check-ins throughout the year and increasing access to a number of wellbeing tools. For example, over 14,000 colleagues have made use of the mindfulness app, Headspace, for which the Group provides a free annual subscription.
Key Objectives 2018 to 2020 >£50 billion growth in financial planning and retirement open book assets under administration >1 million new pensions customers >£6 billion of additional net lending to start-ups, SMEs and Mid Market customers
I have worked for the Group for over 20 years and I have never been prouder to say that I work for Lloyds Banking Group; the support for staff (and in turn our customers) throughout the pandemic has been simply exceptional
We have provided indicators next to each area of performance to provide the reader with clear guidance as to which aspect of our ESG performance the section supports as well as an indication of the United Nations Sustainable Development Goals (SDGs) that we support through our activities. Through both our Helping Britain Prosper Plan (HBP) and wider responsible business activities, we’re actively supporting the UN’s sustainable development agenda, working towards the SDGs.
E Environmental Our environmental indicator relates to areas of our performance which have an environmental impact.
S Social Our social indicator relates to areas of our performance indicating our management of relationships with employees, suppliers, customers, and the communities within which we operate.
Our strategy Our goal and approach As a signal of our commitment we set an ambitious goal in 2020, working with customers,
In addition, the Insurance and Wealth division (excluding Wealth Private Banking) have published a target to reach net zero across our full portfolio of investments by 2050, halving their investments’ carbon footprint by 2030.
Risk management The Group has adopted a comprehensive approach to embedding climate-related risks into our Enterprise Risk Management Framework through: Creation of a new principal risk for climate risk, in order to drive dedicated focus and a consistent approach, whilst enhancing Board-level insight
Highlights We continue to make progress in implementing our financed emissions reduction ambition on the path to net zero by 2050 or sooner, working with customers, Government and the market to help reduce the emissions we finance. We calculated our initial estimated view of 2018 financed emissions baseline and developed our first emissions intensity reduction ambition for the power sector. We continue to make progress in the implementation of the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). We have developed three new operational climate pledges which will accelerate our plan to tackle climate change and apply across our operations. We have launched several new green finance products, tools and services in the year.
Our Helping Britain Prosper Plan has served to unite the Group behind an inspiring set of environmental and social impact ambitions which have enabled us to provide significant support for key areas where we believed we could make the biggest difference as a Group. The Helping Britain Prosper plan is underpinned and supported by various additional Environmental, Social and Governance (ESG) performance areas which form a firm foundation for the Group to be a responsible, inclusive, ethical and sustainable company.
For the 2020 reporting period, we have included updates on our Helping Britain Prosper plan objectives as well as disclosing additional ESG aspects of our performance to reflect the evolving information needs of our stakeholders.
Our 2020 performance on our 7 priority Helping Britain Prosper areas can be identified in the following text by this indicator
Selected disclosures related to good governance practices that support conducting our business in a responsible manner are included in this report. Further disclosures related to the governance of the Group can be found on page 86.
We set ourselves seven leadership ambitions to support the UK’s transition to a sustainable future: Business Become a leading UK commercial bank for sustainable growth, supporting our clients to transition to sustainable business models and operations, and to pursue new clean growth opportunities
Insurance Be a leading UK insurer in improving the resilience of customers’ lives against extreme weather exacerbated by climate change
Our own footprint Be a leading UK bank in reducing our own carbon footprint and challenging our suppliers to ensure our own consumption of resources, goods and services is sustainable
Sustainability Fixed Term Deposit and 95 Day Notice Account; and we also structured and co-ordinated the first Sterling Overnight Index Average (SONIA) Sustainability Linked Loan for Affinity Water
We have launched our Responsible Investment Framework in March 2020 and our supporting Stewardship Policy Our Exclusions Policy focuses on companies that have failed to meet our environmental, social and governance standards, namely manufacturers of controversial weapons, UN Global Compact violators and those deriving more than 10 per cent of their revenue from thermal coal and tar sands extraction. We are currently divesting an initial £440 million from these companies, starting with those investments where we have direct control and are working to expand the application of this policy into external pooled funds that underpin our multi-asset funds as well. Early success of our engagement with one of our partner asset managers has led the investment manager to introduce an exclusions policy for all their Europe-domiciled passive funds totalling over £20 billion, leading to an additional divestment of approximately £280 million within our customer pension portfolios Through our shareholder investments we provide direct loans for renewable energy, including for offshore wind and solar energy We are also investing £2 billion of our Pension and Retirement Portfolio Pension Funds into a new fund, the ACS Climate Transition World Equity Fund, co-created with BlackRock that looks to increase investment in companies that are well prepared for the low carbon transition and to reduce exposure to those that are less so
Climate Risk is included as both a principal and emerging risk this year given it is such a new and fast moving area. We continue to ensure our approach for climate risk management has suitable Board-level visibility. The Board has approved a Risk Appetite Statement for climate risk, as well as an interim metric to ensure the Group continues to progress activities at pace, supported by Board-level risk reporting.
continue to refine the Group’s external sector statements, which help articulate appropriate areas of climate-related risk appetite and our approach to the risk assessment of our customers. For more information on the Group’s external sector statements see page 24. As part of the Group's credit risk policy, we have mandatory requirements to consider environmental risks in key risk management activities. In Commercial Banking, Relationship Managers must continue to ensure that sustainability risk is considered for all new and renewal facilities, and specifically commented on where credit limits exceed £500,000. We have also developed and are piloting a tool in Commercial Banking to help qualitatively assess our clients’ physical and transition risks. In Retail, we consider exposure to physical risks, such as flooding, in our mortgages origination criteria and we have also introduced sustainability related criteria into our motor finance businesses. Within Insurance, an assessment of climate-related risks to General Insurance (GI) liabilities is integrated into the internal model governance process. We further developed our weather modelling capabilities in 2020 through completion of a research partnership between the Group's GI Weather Modelling Team and the University of Reading on extreme wind and flood risk in the UK. Sectors with increased climate risk The Group has identified those sectors where we have lending to customers that may likely contribute a higher share of Lloyds Banking Group’s financed emissions (see Table 1). Not all customers in these sectors have high emissions or are exposed to significant transition risks. As discussed within our disclosure, we continue to enhance and refine this work at both counterparty and sector level, considering both risks and opportunities as we look to support our customers' responses to climate change.
Metrics and targets Financed emissions Lloyds Banking Group believes it is appropriate to provide more financial information on our financed emissions, although we also recognise this is a rapidly developing area, with evolving and sometimes limiting data availability, data completeness and calculation methodologies. We expect these to continue to improve in 2021 and beyond, helping us to refine our approaches, estimates and understanding of the climate risk within Lloyds Banking Group’s portfolios. However, in order to enhance disclosure, whilst recognising these limitations, we detail in Table 2 an initial estimated view of the 2018 financed emissions baseline across the Group’s own lending activity (excluding Insurance and Wealth). This will serve as an initial basis for our goal of helping to reduce the emissions we finance by more than 50 per cent by 2030 and to help us better support customers in their transition plans to a low-carbon economy (see Table 2). We selected 2018 as there is more comprehensive company emissions reporting and UK Government Office of National Statistics (ONS) emissions data available at that time. We have used the emerging industry standard for calculating financed emissions developed by the Partnership for Carbon Accounting Financials (PCAF). The baseline is an estimate, as client or asset level emissions data is currently not available in all cases and where appropriate, we have used internal and external data and proxies to fill these data gaps. Given this is a new discipline that will continue to develop and evolve, it is expected that our baseline will change in the future (perhaps materially), which may require restatement. We expect methodologies for calculating financed emissions to mature, with data availability and quality also improving from clients and Government sources. Our initial estimated view of the 2018 financed emissions baseline covers approximately 70 per cent of the Group’s balance sheet (excluding Insurance and Wealth)1 comprised of: Motor vehicle loans (Lex and Black Horse) – at individual vehicle level, vehicle emission intensity and contracted (or estimated) miles driven per annum
Mortgages (Retail UK Mortgages) – from Energy Performance Certificates (EPCs) where available with estimates used for properties without EPC ratings Business loans (Commercial Banking only) – on client-level emissions data and asset-based estimates using ONS UK sector emissions Cash balances – with no associated emissions
For the remaining balance sheet, 26 per cent currently have no method for calculating emissions and 4 per cent do not have data readily available to enable emissions to be calculated.2
We have determined that our power generation portfolio, comprising Commercial Banking large corporate and project finance portfolio facilities, generated financed emissions of 0.7MtCO2e in 2018, with an emission intensity of 141gCO2e/kWh on a drawn basis, covering both UK and EU exposures. This is lower than the UK average grid emissions intensity of 283 gCO2e/ kWh in 2018, due to our market leading support for UK offshore and renewable energy.
Having assessed our Commercial Banking large corporate and project finance power generation portfolio against decarbonisation plans and our commitment to Help Britain Prosper, we are now setting an ambition to reduce the portfolio’s emission intensity to less than 75gCO2e/kWh by 2030* This is in line with the UK’s net zero ambition, but takes into account the combination of UK and European clients in our portfolio. *We have followed the PCAF recommendation to only account for drawn lending exposure in our financed emission disclosure. It is important to highlight that the undrawn portion of the power generation portfolio could result in fluctuations to the emission and power intensity baseline.
Governance Our governance structure provides clear oversight and ownership of the Group’s sustainability strategy and management of climate-related risks. Governance for climate-related risks is embedded into the Group’s existing governance structure and is complementary to governance of the Group’s sustainability strategy.
Achieving these goals will not be easy, and we will need to invest in our buildings over the next decade, supporting the UK to make a green recovery. We will continue to deploy energy efficient technology including LED lighting and improved building controls. We will remove all use of natural gas from our estate, replacing our gas boilers with zero carbon heating technologies and create more sustainable branches in communities across the UK. Many of the technologies we will need to use are still new and we will need to work closely with our partners and supply chain to innovate.
Table 1. Lending1 to customers in sectors at increased risk from the impacts of climate change
Cement, construction materials, chemicals & steel manufacture 317 391 0.06% 0.08%
2019 restated on a consistent basis with 2020. 3. Percentages calculated using total Group loans and advances to customers on a statutory basis, before allowance for impairment losses (£504,603 million at 31 December 2020 and £498,247 million at 31 December 2019 - see page 316).
Progress in 2020 1 Includes Nil emissions for cash balances, which accounted for 8% of the Group’s balance sheet 2 Examples of areas where there is no current method for calculating emissions include: Government securities, derivatives, personal loans, credit cards and reverse repos. Areas where data was not readily available, but coverage may be expanded in the future include: business banking, non-UK mortgages, loans and advances to banks and some assets at fair value through profit and loss.
5 Includes 99% of Commercial Banking business loans, based on drawn lending. The PCAF sector-based approach has been used for the majority of the business loans baseline, using Office of National Statistics (ONS) UK emissions. The business loans method has been applied to project finance (excluding Power project finance) and commercial real estate assets, which will be refined in the future as better data becomes available.
Highlights We have tightened our lending appetite for the coal sector. We have further enhanced our environmental and social risk lending due diligence processes. In 2020, we have developed and piloted a tool in Commercial Banking to help assess our clients' physical and transitions risks. We have established a dedicated Responsible Investment team in our Insurance and Wealth division and have launched our Responsible Investment Framework and Stewardship policy through Scottish Widows.
Lloyds Banking Group sector statements The Group has identified selected sectors and defined specific risk appetites related to our financing activities.
The Group expects all of our customers to comply with applicable international conventions, sanctions and embargoes, legislation, and licensing requirements whilst showing a clear commitment to robust ESG performance and risk management.
Scottish Widows partnered with BlackRock to create a new fund aligned to the goals of the Paris Agreement, helping mitigate climate change risks and benefiting from the opportunities relating to the low carbon transition. We have now initially committed £2 billion from our default pension offering to be invested into this fund – the Climate Transition World Equity fund, which was launched in August. This will enable over 2.6 million pension savers to invest more sustainably.
We are also expanding its use within our wider multi-asset fund range. Compared to benchmark, this fund could be expected to achieve a 50 per cent reduction in carbon emissions intensity and to achieve 60 per cent more revenue from ‘green’ technologies. We continue to integrate ESG factors into the rest of the default pension investment offering, with the underlying funds moving to introduce exclusions on companies which fail to meet our standards on United Nations Global Compact, Controversial Weapons, Thermal Coal and Tar Sands over the next year, as publicised in the Scottish Widows Exclusions Policy.
Sustainability risks and lending As part of the Group's credit risk policy, we have mandatory requirements to consider environmental risks in key risk management activities. In Commercial Banking, Relationship Managers must continue to ensure that sustainability risk is considered for all new and renewal facilities, and specifically commented on where credit limits exceed £500,000.
In 2020, we have developed and piloted a tool in Commercial Banking to help assess our clients’ physical and transition risks.
The Group is a signatory to The Equator Principles, a risk management framework for managing environmental and social risks in Project Finance transactions, such as large scale energy, industrial, or infrastructure projects.
Executive oversight is provided by a Responsible Investment Committee. This Committee, with strong Board support, plays a pivotal role in setting Scottish Widows’ sustainability agenda and provides strategic direction to our responsible investment activity.
Read more on ESG in Lending and Investment practices lloydsbankinggroup.com/who-we-are responsible-business/downloads.html
% of Board members from an ethnic minority background 8.3% NR
% of colleagues who disclose that they have a disability 3.2% 2.8%
Highlights During 2020, we launched our Race Action plan. The Group was the first FTSE 100 company to launch a new public goal to specifically increase Black representation in senior roles to align with the overall UK labour market. We have published our first Ethnicity Pay Gap Report. We have published our annual Gender Pay Gap Report. We achieved the external HamptonAlexander goal of 33 per cent women in the combined Executive Committee and Direct Report population.
Lloyds Banking Group aims to create a fully inclusive environment that is representative of modern-day Britain and where everyone can reach their potential. We continue to invest in making the Group a leading inclusive employer, where the unique differences our colleagues bring to work every day are valued.
Getting this right is at the heart of our purpose to Help Britain Prosper – a more inclusive society is a more prosperous society, and a diverse business is a better business.
In July 2020, our Group Chief Executive, António Horta-Osório launched our Race Action plan. The Group was the first FTSE 100 company to make such a public commitment, which includes a new public goal to specifically increase Black representation in senior roles from 0.6 per cent at senior grades to at least 3 per cent by 2025, to align with the overall UK labour market. We have already delivered a number of activities, including establishing a
To ensure we make robust progress in delivering our plan, we have appointed a dedicated senior leader to lead a Race Action plan team, who will work together with our Race Action plan working group to drive action. We have also appointed 23 Black, Asian and Minority Ethnic colleagues to form a Race advisory panel, who are already providing invaluable input into our plan.
Customer mental health It has never been more important to continue to work to support our customers’ mental health and wellbeing, given the extra pressures the current pandemic has placed upon us all. During the pandemic, we have provided mental health support including funding for The Silverline, who support the over 55s who may be feeling lonely and isolated. In addition to this, we worked in partnership with our Charity Partner Mental Health UK to create bespoke mental health support for our website. Signposting for customers was introduced to mental health support available through our websites, mobile apps and direct mail.
Gender diversity We champion gender equality through promoting a strong pipeline of executive female talent for the future. Our ambitious target to have 40 per cent of senior management roles filled by women by the end of 2020 has seen us advance from 28 per cent in 2014 to 37 per cent at the end of 2020. Our progress has been recognised externally for the second year in the 2020 Bloomberg Gender Equality Index, and for the 9th consecutive year in the Times Top 50 Employers for Women. We have also been recognised by Working Families as a Top 10 Employer for working families. We achieved both the external Hampton-Alexander goals of 33 per cent women in the combined Executive Committee and Direct Report population and 33 per cent female Board representation, and will aim to continue to do so.
Gender identity and sexual orientation We are proud to have created an inclusive and open working environment for our LGBT+ colleagues. Our LGBT+ colleague network, Rainbow, plays a pivotal role in our approach, and with over 5,000 members and supporters, is one of the largest networks of its kind in the UK. In 2020, our Rainbow network celebrated their 10 year anniversary and held a series of virtual Pride events for colleagues spanning ten weeks, reaching over 1,600 colleagues and raising £10,000 for LGBT+ charities.
Read more on our progress and actions on supporting Inclusion and Diversity lloydsbankinggroup.com/who-we-are responsible-business/downloads.html
The Group is committed to providing meaningful support to meet the needs of our customers, aiming to provide positive outcomes and working to mitigate or reduce the risk of financial harm. The COVID-19 pandemic has magnified existing challenges faced by customers, and brought new challenges affecting health, income, and relationships.
Across Mortgages and Motor Finance, we remain committed to giving customers time to recover from the impact of the pandemic without losing their home or vehicle. Additionally, further support was provided to our current account customers, with all customers benefiting from an initial three month interest free buffer on their overdraft.
Highlights To assist our customers during the pandemic, we launched a number of financial, digital and mental health support initiatives. We made it easier for our customers less able to see us in branch, to contact us by launching priority phone lines with increased telephony resource, allowing them to reach us quickly and to avoid the need for unnecessary journeys. We made over 750,000 outbound wellbeing calls to customers to offer support in 2020 through our branch networks, and partnered with Mental Health UK to create a mental health support section to our customer-facing webpages.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 27
Our Apprenticeship strategy The Group has continued with its long-term investment of £10 million over ten years in the Lloyds Bank Advanced Manufacturing Training Centre at the Manufacturing Technology Centre (AMTC) in Coventry, which is on track to support the training and upskilling of around 3,500 apprentices, graduates and engineers by the end of 2024. Through our annual investment in the AMTC, we have trained and upskilled 1,211 manufacturing apprentices, graduates and engineers in manufacturing since 2018.
Supporting businesses with digital skills For over five years, Lloyds Banking Group has evidenced how crucial technology is for small businesses and the digital economy through the Business Digital Index reports. We partner with Be the Business, Google, Microsoft, Small Business Britain and others to support small businesses to gain skills and confidence to both recover and thrive, by adapting their businesses with technology. We have held free workshops, peer to peer networking sessions across all regions of the UK and have a range of free on-demand learning available, helping over 368,000 organisations since 2018, with more in plan for 2021.
Further information on how we are supporting businesses and SMEs as well as our strategic partnerships can be found in the 2020 Lloyds Banking Group ESG Report.
Highlights We have delivered close to £9bn of finance for the Social Housing sector since 2018. 1,900 new homes were built through The Housing Growth Partnership by SME’s through our support. We provided £39.7 billion to first time home buyers since 2018.
As the largest lender to the UK housing sector we recognise the importance of home ownership and that a lack of affordable housing can lead to social disadvantage. Working with more than 200 housing associations across the UK, we have delivered more than £2.5 billion of finance for the social housing sector in 2020 and close to £9 billion since 2018. We also continue to support The Housing Growth Partnership, who provide help and mentoring to small and mid-sized house builders and have built 1,900 new homes across the UK during 2020.
This year we provided £13 billion to firsttime buyers, and across the last three years have provided £39.7 billion of lending, this outcome is significantly above our £30 billion commitment. We have also increased the ways in which we support first time buyers in accessing the property market by welcoming applications from the new Scottish First Homes Fund, making it easier for those with little or no savings to buy their first home.
Further information on how we are helping Britain to get a home can be found in the 2020 Lloyds Banking Group ESG Report.
In January 2020 we announced a new partnership with the Woodland Trust to plant ten million trees over the next ten years expanding the UK’s carbon sink and helping to reforest the UK. Our partnership has three parts.
Supporting Farmers: We are helping farmers and landowners transition to a low carbon future by offering preferential funding when planting more than 0.5ha of new woodland.
Working with Communities: We are supporting the Woodland Trust with their Community Tree Pack scheme.
Funding New Woods: We will be creating 10 brand new 'woods within woods' at existing Woodland Trust sites across the UK.
The digital skills gap Lloyds Bank Academy To facilitate the shift to a more digital economy, the Group has developed the Lloyds Bank Academy. The Academy teaches basic digital and workplace skills through online and face-to face courses, aiming to provide support where, when and how people need it. During 2020 these courses shifted to online webinars due to lockdown restrictions.
The Group has facilitated digital training for 1.8 million people since 2018 through the Academy and the Academy curriculum continues to expand having a breadth of content and partners, including large corporates, charities, credit unions and job seekers. Our insight is used by both Government and other organisations in the UK. Our Consumer Digital Index was viewed in over 85 countries with over 37,000 views online.
Domestic and economic abuse Through the year the UK has seen an increase in reports of economic and domestic abuse. We are proud of the support we have made available to victims and survivors. The introduction of the Domestic and Economic Abuse Team to help victims of financial and economic abuse was an important next step in both raising awareness and supporting our customers.
Read more on Financial resilience initiatives, Lloyds Bank Consumer Digital Index, 2020 Transformation with Tech lloydsbankinggroup.com/who-we-are responsible-business/downloads.html
Helping people save for the future We recognise the importance of savings to build financial resilience and to help tackle disadvantage. We want to make saving for the future as easy as possible and we continue to improve choice, flexibility and control for customers who are investing, saving or planning for retirement. The Group has had a £45.6 billion growth in open book assets1 that we hold on behalf of customers in retirement and investment products since 2018. 1 Growth in assets under administration on our front books
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 29
As one of the UK’s largest corporate donors, we use our scale to reach millions of people and help tackle social disadvantage in communities across the UK.
In addition to adapting many of our community engagement initiatives to virtual delivery, we have responded directly to community needs through new investments. These investments included the expansion of our Mental Health and Money Advice lines, CLIC online chat services run by our Charity of the Year partner Mental Health UK (MHUK), and the provision of mobile devices through a partnership with We Are Digital (See page 28)
Our total community investment in 2020 was £51.2 million and includes our colleagues’ time, direct donations, and a share of the Group’s profits given annually to the Foundations.
Further information related to how we are supporting our community initiatives can be found in the 2020 Lloyds Banking Group ESG Report.
Prior to the pandemic, the Group had approximately 35 per cent of colleagues with an existing agile working arrangement however, due to national lockdown in early 2020, this extended to over 50,000 colleagues working from a home environment. During 2021 we will continue to reimagine ways of working and use behavioural experiments to test our thinking and identify the practicalities of various options.
Colleague mental health Highlights in 2020 related to our colleague mental health initiatives included the continued expansion of our ‘Optimal Leadership Resilience Programme’ to more of our leaders in order to help them build personal resilience. In addition, we continue to promote the ‘Your Resilience’ portal to all colleagues, including new content to support our colleagues with the additional challenges they may face as a result of the pandemic.
Colleague engagement The Group understands that engagement is a two-way process, so each year we ask colleagues to share their views via our independently-run colleague survey, and participate in the annual Banking Standards Board (BSB) Culture Assessment. Our Spring Pulse colleague survey had a 66 per cent response rate and indicated positive reflections related to colleagues feeling supported, the company culture being more positive and caring and indicated an interest by colleagues to explore changing ways of working in the future. Our Autumn survey was completed by 72 per cent of the organisation and showed further increases in pride, satisfaction and overall engagement.
Colleague remuneration A number of key decisions were taken to support colleagues in relation to pay and financial and non-financial recognition. All Group employees receive a competitive and fair reward package. To encourage ownership colleagues are eligible to participate in HMRCapproved share plans. Further information is provided on page 115.
Supporting colleagues to do the right thing Our Values and Behaviours alongside the Financial Conduct Authority’s Conduct rules set out the expectations of colleagues and colleagues are encouraged to make decisions aligned to these. The Group's Code of Ethics and Responsibility is available on our website.
Conduct risk The Group takes a range of mitigating actions with respect to conduct risk and remains focused on delivering a leading customer experience. The Group’s ongoing commitment to fair customer outcomes sets the tone from the top and supports the development of our Values led culture which puts customers at the heart, strengthening links between actions to support conduct, culture and customers and enabling more effective control management.
Customer complaints Our goal, in line with our purpose of Helping Britain Prosper, is to support customers whenever they have cause to complain.
To ensure that we supported our customers, we introduced prioritisation principles to ensure customers in challenging financial situations were prioritised. We reviewed approximately 35,000 complaints and prioritised over 2,300 to our highest category, aiming to make contact with the customer within 24 hours. Where we noted a concentration of complaints, we reviewed our working patterns to ensure those customers were supported.
Protecting customer data and finances Cyber security Customers trust us to keep their money and data safe, and the Group deploys sophisticated technology to protect both. We recognise the importance of secure behaviours and continue to educate our customers and colleagues on cyber threats.
Fraud and financial crime The financial crime landscape is undergoing unprecedented change in terms of both regulatory reform and evolving crime threats. The Group’s adoption of a risk-based approach to managing and mitigating fraud and financial crime risk ensures compliance with applicable regulations via a control framework which focuses on those customers, products, channels, and jurisdictions that carry heightened risk.
Further information related to how we are conducting our business responsibly can be found in the 2020 Lloyds Banking Group ESG Report.
Read more on information related to our progress in Fraud and Financial Crime initiatives lloydsbankinggroup.com/who-we-are responsible-business/downloads.html
The Group requires suppliers to adhere to relevant Group policies, and suppliers are additionally required to comply with our Code of Supplier Responsibility which outlines our expectations for responsible business, sustainability practice and behaviour. Our suppliers are asked in addition to this, to comply with specific third-party supplier policies as applicable to the services they provide to the Group.
Tax Appropriate, prudent and transparent tax behaviour is a key component of corporate responsibility. Tax is one of the ways in which businesses contribute to the societies in which they operate, and we are proud to be among the UK’s highest payers of corporate taxes.
In 2020 we paid £2.1 billion of cash taxes. This was primarily on business profits, VAT on goods and services needed to run our business, bank levy and employer social security on staff salaries. In addition, we collected £1.9 billion of cash taxes primarily from payroll taxes and customer product taxes. We comply with the HMRC Code of Practice on Taxation for Banks.
Additional information on how we are conducting our business responsibly can be found in the 2020 Lloyds Banking Group ESG Report.
Read more on how we are conducting our business responsibly lloydsbankinggroup.com/who-we-are responsible-business/downloads.html
Supplier management – Reflecting the needs of our stakeholders, page 51 – Code of Supplier Responsibility who-we-are/working-with-suppliers/ responsible-sourcing-suppliermanagement. html
Environmental (TCFD) statement – Reflecting the needs of our stakeholders, pages 49 and 50
– Helping the transition to a sustainable low carbon economy, page 20
– Supporting our Colleagues page 29 – Championing inclusion & diversity, page 25
The policies mentioned above form part of the Group’s Policy Framework which is founded on key risk management principles. The policies which underpin the principles define mandatory requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2020.
The economy could perform better than this central expectation, if there is a quicker impact of vaccines on the ability to ease activity restrictions or a sudden release of unexpected savings that some households have accrued. On the other hand, difficulties in deploying effective vaccines and consequences on spending plans of the sharp rise in Government and companies' debt could lead to an even weaker economic recovery than expected. Uncertainty for the longer-term outlook has also increased, around the ability of productivity growth to improve, the impact of increased indebtedness on future interest rates and Government policy reaction to the deep and unequal societal impacts of the COVID-19 recession.
Market dynamics The 2020 recession has been unlike any previous recession, driven by mandated restrictions on activity focused on sectors where social contact is highest, but accompanied by unprecedented policy support. The younger and lower-paid have been at greatest risk of lost employment or reduced income, while some others have had their financial position improved by a period of continued income but reduced spending.
This recession has impacted our markets very differently to previous recessions. Consumer credit fell sharply as spending was constrained, but growth in households’ deposits was buoyed to over 10 per cent from 4 per cent in 2019. Mortgage balance growth slowed only slightly to 3.0 per cent from 3.4 per cent in 2019, companies lending rose strongly by over 9 per cent driven by the Government’s guaranteed lending schemes, and companies deposits growth was also boosted to a very strong 28 per cent. The rise in unemployment, of 1.2 per cent by November has been much less than would normally be expected for such a deep fall in GDP, due to Government support via the Coronavirus Job Retention Scheme and the Jobs Support Scheme. The housing market has also been more buoyant through the second half of 2020 than expected, with prices rising by almost 6 per cent in 2020, benefiting from employment support, from the temporary cut in stamp duty, and from unexpected households’ savings.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 33
Our response During the COVID crisis, we have been fully focused on providing the necessary financial and practical support in an empathic way to our personal and business customers.
In addition to these more immediate priorities, we have continued to invest in our capabilities, improve our service and support, develop new propositions and deliver a number of significant enhancements, especially to the digital propositions available to our personal and business customers.
Highlights COVID-19 has profoundly impacted our customers’ financial and nonfinancial circumstances, while also accelerating some underlying behavioural shifts Customers are increasingly turning to digital channels for their simpler banking needs Against the challenging backdrop caused by COVID-19, we have provided significant financial and nonfinancial support to our customers, while also ensuring continued good access to banking services and maintaining investment in enhancing our customer propositions We will continue to respond to increasing expectations for speed, convenience, control and personalisation and deepen relationships with our customers and clients across our unique integrated banking, insurance and wealth offering
Highlights Our competitive landscape continues to broaden with an increasing number of digital-only providers, although the current environment has increased scrutiny on the profitability and sustainability of these business models Established competitors continue to re-focus on core business areas, with some restructuring exercises accelerated to offset increasing revenue headwinds in the low-rate environment. More diversified peers have benefited through the COVID-19 crisis to date due to a reduced reliance on interest income and increased market volatility Threat from big-tech and large international peers remains
Finally, we continue to see a threat from leading technology companies and international incumbents, with these well positioned to potentially capture opportunities in the UK market with digital only offerings, and we have seen some emerging signs of this.
Our response We continue to respond effectively to the threats posed by increasing levels of competition and a more challenging operating environment by offering products and services that our customers value.
Across our core markets we have remained open for business across all channels at a time when our customers have needed support, in line with our purpose of Helping Britain Prosper. Our multi-channel offering, including our leading branch network, allows us to reach a broad variety of customers and enables them to interact with us in whichever manner they prefer. This model, combined with the breadth of our offering as the UK's only integrated financial services provider, drives customer value, engagement and trust. This remains an important competitive advantage, which we will continue to strengthen and enhance, as we are looking to further deepen relationships with our customers through delivering holistic propositions across Retail, Insurance and Wealth.
Beyond this, more traditional competitors have continued to re-focus on core business areas while also improving their own digital offerings. During the COVID-19 crisis, peers with more diversified revenue streams that are less dependent on interest income have tended to perform more resiliently, although the sustainability of these trends is uncertain given market volatility levels. In addition, some peers have accelerated existing restructuring exercises as a means to offset future revenue headwinds.
Market dynamics The regulatory response to the COVID-19 pandemic has seen increased regulatory intervention and prioritisation of regulatory requirements relating to the fair treatment of customers. Key areas of focus for 2021 are below: Customer treatment Fair treatment of customers continues to be a priority for the FCA, with particular focus on those in vulnerable circumstances as well as long standing customers.
Other A number of other regulatory initiatives are underway which seek to address, amongst other things; operational resilience, climate change, general insurance pricing, onshoring EU regulations, strong customer authentication, culture and fraud. The Group also continues to respond to regulatory initiatives in respect of the COVID-19 pandemic.
Our response As a Group we always seek to comply with all applicable regulation. Given the Group’s customer focused, sustainable and low risk business model, it is well placed to meet these requirements and welcomes the positive effect that they have on the industry, its customers and other stakeholders.
Increased volume of new regulation and market reviews continue to be issued, with further regulatory changes anticipated
Banks have also continued to invest significantly in their data capabilities in order to harness insights and utilise these in order to further improve customer experience. By having a better understanding of customer trends and expectations, banks are able to increase their relevance and offer greater levels of personalisation, replicating experiences that are commonplace in other digitally focused industries. The increased focus on the sharing and utilisation of data has created a growing onus on the safeguarding of this, with this of particular importance given that trust remains a key differentiator between established banks and newer, digital-only financial service providers.
Our response To support our position as the largest digital bank in the UK, we have continued to invest heavily in technology and digital initiatives to ensure that we can continue to deliver a leading customer experience across our differentiated multi-brand, multi-channel model. While the COVID-19 pandemic has led to some slowdown in overall investment spend, we have continued to prioritise digital initiatives, with our technology spend remaining weighted towards creating new capabilities and enhancing existing ones to improve the overall customer experience. During the course of the year we have continued to improve our digital functionality and have simplified digital journeys for our customers, and we expect to further develop these areas in 2021 with a customer-centric pipeline of updates.
During the course of 2020, we have also continued to embrace the use of new technologies to improve processes and deliver productivity enhancements, which in turn deliver improved experiences for both customers and colleagues.
Overview The pace of digital adoption has continued to accelerate in recent years. This has been underpinned by increasing similarities in customer behaviours and preferences across multiple geographies, heightened expectations of service based on experiences outside of financial services and continued improvements in functionality and capabilities within digital channels. Moreover, the pace of change has accelerated significantly in 2020 as lockdown measures reduced interactions through physical channels, despite these remaining available to customers should they be needed. This trend appears to have continued throughout the year, suggesting a more profound shift rather than a temporary one.
Given the ongoing shift to digital, ensuring that customer data remains safe is becoming increasingly important. We are therefore continuing to invest in the resilience and security of our systems.
Review of strategic progress and look ahead to the next strategic plan As part of our strategic cycle, the Board and Executive Management team attend an annual two-day strategy meeting.
In light of this, the Board and Executive Management team agreed in June 2020 that the Group's purpose should be firmly embedded at the heart of our strategy, with our immediate focus on Helping Britain Recover framing our strategic plan for 2021 as well as the associated priorities regarding our customer propositions, colleagues and Group capabilities.
Finalisation of strategy and communication Teams across the Group then helped translate these priorities into more detailed initiatives, ensuring that Helping Britain Recover remains the key focus.
Our strategic planning process We regularly review our strategy in light of our changing operating environment to ensure that our focus remains the right one for our customers, colleagues, shareholders and broader society. Over the past two years we have considered how we can build on the Group’s successful transformation, with a defining purpose further embedded in a refreshed strategy that can be at the heart of Britain’s recovery while delivering enduring value to all our stakeholders.
Why the change? Since 2011, we have significantly transformed our business for the benefit of our customers and other key stakeholders, while also positioning us well to succeed in a digital world. We are not complacent, however, and recognise that we need to continually evolve in response to increasing customer and societal expectations, new technologies and a rapidly changing competitive environment. Most importantly, we also recognise that we have a critical role to play in Helping Britain Recover from the COVID pandemic.
The UK’s preferred financial partner Through delivery of the strategy we intend to create the preferred financial partner for personal customers and the best bank for business. Delivery of our customer-centric ambitions will be supported by accelerating the Group’s transformation, with particular focus on four capabilities: Delivering a modernised technology architecture Building an integrated payments platform Creating a data-driven organisation Implementing reimagined ways of working
Our superior cost structure has enabled us to maintain high levels of strategic investment. We will invest around £0.9 billion this year to support the Strategic Review 2021 initiatives and the long-term strength of the business.
Helping Britain Recover We recognise that the focus of the Group's purpose must evolve in response to the current environment and changing customer needs and expectations.
With the evolution of our strategy, we will further embed our purpose across all of our activities. This will ensure we contribute to creating an environmentally sustainable and inclusive future for the UK and by doing so build a successful and sustainable business.
The global pandemic will have lasting social and economic effects on the United Kingdom. Its impact has been felt by everyone, whether through financial hardship, reduced choices, mental distress or personal loss.
Our focus will therefore be to Help Britain Recover, and we are committed to working with others in five areas where we can make the most difference.
We will help rebuild households’ financial health and wellbeing We remain committed to supporting our customers to become financially resilient and to plan and save for the future. We will provide practical support, and flexibility where possible, to help our customers facing financial difficulty to get back on track and help as many customers as we can to stay in their own home.
In 2021, we will: Expand the funding available under our green finance initiatives from £3 billion to £5 billion, to support businesses to transition Launch a new goal to ensure our own operations are net zero by 2030 Become the first major pensions and insurance provider to target halving the carbon footprint of all our c.£170bn investments by 2030 on our path to net zero by 2050 Introduce a flagship fossil fuel-free fund to support green growth, allowing pension savers to choose to invest in UK companies pursuing a positive environmental impact
Why this is important The COVID-19 pandemic has accelerated a number of pre-existing shifts in customer behaviours and preferences, while also starkly demonstrating financial vulnerabilities affecting customers of all ages across the UK. As the UK’s largest financial services provider, we have a unique opportunity to meet more of our customers’ broader financial needs and improve their overall resilience throughout their lifetime, with personalised and valueadding products and services that are relevant to them.
Measures of success: Net open book mortgage growth in 2021 Maintain record all channel net promoter score in 2021 Increase priority segment customers with needs met by both Retail and Insurance and Wealth Positive annual net new money in Insurance and Wealth open book assets; to deliver a £25 billion increase by 2023
Enable financial resilience and wellbeing through dedicated customer assessment and support Consistent with our broader societal and strategic focus on Helping Britain Recover, we will use our unique position as the UK’s only integrated financial services provider to address both the short-term financial challenges facing our customers and build longer-term resilience, with products and services relevant to their changing needs.
Significantly deepen relationships with priority segments through enhanced journeys and new capabilities We have the largest personal customer franchise for financial needs in the UK, with approximately 50 per cent of UK adults having a relationship with the Group and 17.4 million digitally-active customers. We have a considerable opportunity to build on these strong foundations and significantly deepen our customer relationships, especially within our priority segments.
We will meet more of our customers’ broader banking, insurance and wealth needs throughout their lifetime, making better use of our unique scale and data insights to develop a more personalised approach and offering products and services that meet their specific needs at a time and via channels that are relevant to them. Consistent with this focus, we will make a number of further enhancements to our customer journeys, building on the significant improvements already delivered during our most recent strategic plan.
Digitise to reduce cost to serve We have a strong track record in simplifying customer processes to improve their overall experience and satisfaction, while also capturing operational efficiencies and cost savings. Looking ahead, we remain focused on improving the experience of all our customers, with increasing levels of datadriven personalisation being accompanied by other improvements that provide them with richer insights and put them more in control of their finances.
To achieve this and drive further improvements in operational efficiency, in 2021 we will continue to utilise the latest technologies to digitise key customer journeys and support greater levels of self-service, while also migrating high volume telephony users to digital services to reduce failure demand and improve the customer experience. In doing this, we recognise that our multichannel approach remains important for a large number of our customers.
We will therefore continue to offer our customers a seamless experience across channels, with our branch network increasingly optimised to meet more complex needs. Taking all these elements together, in 2021 we are aiming to maintain our record all channel net promoter scores, following the all-time highs that were achieved in 2020.
Long-term vision Leading digital SME bank; disciplined and strengthened large client proposition 2021 investment focus To achieve our vision and become the best bank for all UK businesses, while also supporting a more sustainable UK economic recovery, we have identified three key areas of strategic focus and investment for 2021: Enhance SME channel and service with increased digitisation Automate recovery support and finance the green transition Strengthen Corporate and Institutional product capabilities
Enhance SME channel and service with increased digitisation SMEs play a vital role in the UK economy and we have remained steadfast in our support to them, having achieved significant market share growth in recent years. We will build on this track record by ensuring that our products and services continue to respond effectively to their evolving needs.
As SMEs increasingly turn to digital channels for speed, convenience and control, we will expand our end-to-end digital origination for simple products, while also enhancing self-service capabilities for day-to-day banking, with priorities in 2021 including the delivery of a self-serve platform with automated decisioning for Asset Finance products. Looking beyond banking, we will extend the capabilities of our accountancy solution for SMEs, while also making this available to more clients. Through these initiatives, in 2021 we expect to achieve at least 50 per cent growth in SME products originated via a digital source and to increase our SME and Retail Business Banking digital net promoter score by 5 points by 2023.
We will also continue to help fund sustainable housing development, with other priorities including supporting the creation of national sustainability standards for new-build housing and working with housing associations to improve the energy efficiency of social housing accommodation.
We already provide our Corporate and Institutional clients with a personalised service proposition and tailored support: an approach which was incredibly effective as the impacts of the pandemic were felt very differently across the portfolio. We will build on these foundations by improving the alignment of our coverage model and creating an ecosystem for Corporate and Institutional clients. In addition we will modernise our markets capabilities, with areas of focus including the upgrading of our FX platform and digitisation of our rates capability. Through these initiatives, we are looking to profitably improve our share in markets products for core clients in 2021.
Why this is important In order to remain relevant to our customers and retain our cost leadership position in an increasingly competitive operating environment, we will need to continue modernising our technology architecture. Through this, we aim to deliver a further step change in agility and responsiveness to customer trends, while also supporting our broader strategic priorities around enhanced data insights, improved customer experience and operational resilience and efficiency.
In doing this, we will build on the next generation capabilities and insights that we are already developing through strategic partnerships with specialist partners such as Google Cloud, Thought Machine, Microsoft Azure and Form3, as well as the new insights and capabilities that we are developing ourselves.
While our adoption of a cloud-based technology architecture is likely to be an ongoing area of focus into the long-term, we are confident that this will drive a step change in our customer propositions and efficiency.
In doing this, it is vitally important that our core systems and customer data remain protected and that operational continuity is maintained. To gain comfort in this regard, we will initially conduct a focused, pilot migration of our own back-book customers to the new cloud-based architecture in 2021. This will help us identify potential issues that can be effectively addressed before we replicate this migration on a much larger scale.
By the end of the year, we are aiming to have achieved a c.40 per cent reduction in applications from our legacy architecture through this pilot exercise and to have safely migrated approximately 400,000 customer accounts to the new bank architecture.
Our success in delivering these targeted milestones in 2021 will, in turn, help determine the pace and scale of our approach as we simplify our legacy estate, with a view to capturing the significant medium-term opportunities available to us, including transformed customer experiences and improved operational agility.
Further broaden self-service capabilities through digitisation In recent years we have made significant progress in the development of our technology platform and capabilities, having invested over £4 billion cumulatively in these strategic priorities by the end of 2020. This investment has, in turn, played a fundamental role in helping us to deliver a leading customer experience and in improving our operational agility, resilience and efficiency.
Our successes in these areas are reflected, amongst other things, in our digital net promoter scores, which reached a record high in 2020, our year-on-year reductions in net costs, and our ability to now make simple changes to our digital propositions intraday, as opposed to our previous 30 day release cycles.
Prove and leverage public cloud to create foundations for future technology architecture To support our long-term strategic vision of building and operating an efficient, scalable and resilient cloud-based architecture, we will increase our investment in R&D to assess the customer and business benefits that nextgeneration technologies could have on the organisation. In 2021 we will initially focus on proving the appropriateness of public cloud for our specific customer and operational needs, with a view to assessing how this can be leveraged to create the foundations for our future technology architecture and drive the next phase of our operational transformation.
Why this is important In recent years digital payments have grown significantly, fuelled by the rapid rise in online shopping and e-commerce, as well as increased demand for speed, convenience, security and choice. Looking ahead, these trends are expected to continue, with the ability to offer a leading payments proposition vital in capturing this significant growth opportunity in the face of increased competitive disruption.
Long-term vision Seizing the payments growth opportunity in our customers' channel of choice 2021 investment focus For 2021 we have identified three key areas of focus: Enhance card e-commerce and international payments experience to drive increased customer usage Build capability and integration of new cash management and payments platform Enhance merchant services proposition with improved distribution capabilities
In addition, we have strong participation across the payments ecosystem, ranging from more traditional debit and credit card methods across our High Street banking brands to more emerging and innovative methods across APIs and Open Banking. To capture this opportunity, we will enhance the consumer payments experience, with a focus on speed, convenience, choice and security.
Amongst other developments, in 2021 we will continue to expand real-time push notifications and will look to translate improvements in customer experience into improved loyalty, with a range of customer rewards and offers that are targeted, based on our rich data insights. Through these initiatives, our objective for 2021 is to maintain our leading share of card spend, with a longerterm objective of achieving market share growth in credit card spend from 2022.
Build capability and integration of new cash management and payments platform During the course of our most recent strategic plan, we significantly invested in the development of a new cash management and payments platform with leading API functionality for our corporate clients. To capitalise on this past investment, meet additional client needs across cash management and payments, and address the growing demand for payment solutions that are increasingly integrated into our clients’ clients' business flows, we will continue to enhance our platform capabilities.
Why this is important As the UK’s largest financial services provider, processing approximately 14 billion customer transactions and interactions in 2020 alone, we have access to a wealth of customer data. In an increasingly competitive market, it is vital that we are able to appropriately use this data to create insights that deliver better customer outcomes and strengthen our own risk management processes.
Measures of success: Increase in meeting personal customer needs using advanced analytics (e.g. 20 per cent increase in home insurance needs met) >10 per cent increase in fraud detection rates from expansion of machine learning 50 per cent return on investment from year 1 investment in advanced analytics
We will continue to enhance our data and advanced analytics capabilities to deliver better customer and business propositions. Through data-driven marketing we are already able to meet 20 per cent of customer needs, with the use of appropriate data insights helping to ensure that our propositions are more targeted to genuine needs and, through this, lead to better customer outcomes and response rates.
Deliver organisational reform of data strategy and management, supporting collaboration In order to realise these significant customer and organisational benefits, we will need to access our data more efficiently and flexibly, while also ensuring that we adhere to the highest standards of data management and protection. To achieve this, we will implement organisational changes in respect of our data strategy and management and will establish centralised centres of excellence to help drive innovation and develop best data practice that can be consistently deployed across the Group.
To achieve this and ensure that our culture continues to accurately reflect our purpose, we will rollout a new behaviours framework and aligned purpose driven values. Our colleagues continue to demonstrate great determination, flexibility and mutual support during the pandemic as they adapt to new circumstances and new ways of working. We recognise the importance of retaining the positive learnings and behaviours from this challenging period as we continue to explore new ways of working.
During the pandemic, we increased the support available to our colleagues for their physical and mental health, with the wellbeing of our people remaining a key priority going forward. Through all of these initiatives, we are aiming to maintain our leading employee engagement scores in 2021 and beyond.
Build career pathways to attract and retain a more diverse, skilled and future ready workforce We were the first FTSE100 company to introduce targets for senior roles held by female and Black, Asian and Minority Ethnic colleagues and have made significant progress towards these ambitious goals. We will build on this, with the goal of ensuring our workforce is more diverse and mirrors the society we serve. Consistent with this, we will increase female and Black, Asian and Minority Ethnic representation at the most senior levels, with the aspiration of increasing this to 50 per cent and 13 per cent respectively by 2025.
As our business becomes increasingly technology-driven, we will need to continue attracting and developing future skills. We have already exceeded our recent colleague training targets and reduced our dependency on external contractors.
Measures of success: Maintain leading Employee Engagement Index Aspiration of 50 per cent of senior roles held by women and 13 per cent senior roles held by Black, Asian and Minority Ethnic colleagues by 2025 8 per cent reduction in office space in 2021, with c.20 per cent cumulative reductions by 2023.
We will build on this, with a range of initiatives designed to help us attract targeted skills. We will also continue to encourage our colleagues to develop future-ready skills, while providing them with tailored and easily-accessible content to achieve this. In addition, we recognise that new ways of working, hybrid workplaces and more agile working patterns will also require softer skills and leadership capabilities, and we will work with all our colleagues to ensure they have the right foundations to succeed in this new normal.
We will also reduce our own carbon footprint, with key initiatives including improved energy efficiency across our office and branch real estate, new ways of working and reduced travel requirements. Consistent with this focus, we have set a target of achieving net zero carbon operations by 2030.
COVID-19 response The Group’s response to the COVID pandemic has been a central focus for the Board since the start of the outbreak. The Board has sought to take all possible steps to support customers through these challenging times.
The Board considered and approved the Group’s vital role in the Government’s COVID related business loan schemes, which provided funding to a range of client businesses across a number of economic sectors. Customer payment holidays were also introduced, complementing other means of Group support, including removing fees for missed payments and access to fixed term accounts without charge.
The Board supported further key actions, including the launch of two initiatives with digital inclusion training provider, We Are Digital. These included providing tablet devices free of charge to over-70s isolated by COVID, and a dedicated phone line giving vulnerable customers support in staying connected with digital activities, including managing online banking. The Board was also keen that the Group play a part in tackling the isolation many feel as a result of the crisis. The Group was therefore pleased to partner with Age UK in providing The Silver Line, a 24/7 helpline for those aged 55 and over who may be feeling lonely or isolated.
The essential nature of a deep understanding of challenges faced by customers in financial difficulty was also highlighted by the pandemic. The Board was updated regularly on the needs of these customers, which resulted in the provision of additional support. This included increasing our capacity to serve customers who needed the help of a colleague, and delivering related self-serve functionality where preferred by customers.
Customer feedback Customer feedback is always a priority for the Board. Regular updates are provided which give valuable insight into the Group’s performance in delivering on our customer-related objectives, and on improving customer outcomes.
The Board recognises the importance of understanding our performance in supporting customers, including how the Group performs relative to our peers. Related updates covered a range of internal and external measures, including customer indices and market share updates. Such updates provided important insight, and enabled the Board to recommend suitable customer related actions.
These ambitions seek to address the changes in priorities for our stakeholders, including our customers, as the country emerges from the pandemic.
The Board oversaw the development of these ambitions, which aim to make sure the Group’s purpose remains aligned to a changing society, fully integrating our societal objectives with our business objectives. Read more on the Board’s role in this process on page 49.
More detail COVID-19 response Read more on pages 1 to 3 Helping Britain Recover Read more on pages 38 to 39 Technology transformation Read more on page 18
The Board is responsible for the long-term success of the Company, setting and overseeing the culture, purpose, values and strategy of the Group. The Board’s understanding of stakeholders’ interests is central to these responsibilities, crucial to the Company’s success, and informs key aspects of Board decision-making as set out in this statement.
The Board’s deep understanding of customers’ needs is vital in setting and achieving the Company’s goals. Customer needs and a customer-centric approach remain therefore a key consideration in Board decisions.
This statement also provides details of how the Directors have engaged with and had regard to the interests of our key stakeholders.
The Group places great importance on making sure shareholders are effectively briefed on strategic and financial progress, in addition to considering their valued feedback. Comprehensive disclosure is provided with results and, given the increasing focus of investors on ESG matters, we now issue a specific ESG-focused presentation for investors ‘Our approach to ESG’.
The Group undertook more than 340 institutional investor meetings in 2020, many of which were with management, and also hosted a retail investor event. In addition, various Non-Executive Directors engaged directly with shareholders through the year, including the Chair and the Remuneration Committee Chair. Meetings held by the Chair largely focused on corporate strategy, governance and sustainability, while the Remuneration Committee Chair consulted extensively on the new remuneration policy, both pre and post the 2020 AGM.
Board members are also kept up to date on market views and shareholder sentiment by Investor Relations, including an annual presentation with the Group’s corporate brokers on market dynamics and corporate perception. The Board’s Nomination and Governance Committee considers correspondence received from institutional shareholders, with feedback provided to the Board on material retail shareholder correspondence.
The Annual General Meeting The Board recognises that the Annual General Meeting (‘AGM’) is an important opportunity for shareholders, institutional and retail alike, to hear from and engage with the Board.
Given the importance of the AGM in shareholder engagement, the Board continues to consider what will be possible for the 2021 meeting. The Board is especially keen to make sure the best possible engagement is safely available for shareholders.
Future strategy The Board considered the development of the next phase of the Group’s strategy, to be implemented during 2021. To help in this, dedicated sessions were held with the Executive in both June and November, to shape strategic priorities and agree how these would be implemented.
More detail Annual General Meeting Read more on page 344 Appointment of new Chair Read more on page 99 Appointment of new Chief Executive Read more on page 99 Future strategy Read more on pages 36 to 45
The Board recognises the importance of understanding the priorities of different shareholder groups when developing and implementing strategy, with ongoing engagement with both institutional and retail shareholders.
These were hard decisions for the Board. They involved balancing the interests of our shareholders, for whom regular distributions are important, and those of our customers, many of whom needed additional support during the pandemic.
The Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the Prudential Regulation Authority's temporary framework on 2020 distributions.
The decision is supported by the regulator, and follows extensive shareholder feedback and discussion with other stakeholders. Read more about our approach to dividends on page 68.
The Board considers that maintaining open dialogue is crucial in informing its thinking, allowing Directors to hear first-hand the varied colleague views on the matters most important to them, and to the Group.
During the year the Board communicated with colleagues through a number of means. These included informal colleague lunch and breakfast meetings, held by the Group Chief Executive and the Chair, and attended by Non-Executive Directors.
The Board considers these arrangements invaluable in giving them an understanding of the views of the workforce and encouraging meaningful dialogue between the Board and the workforce.
Meetings were also held throughout the year between Group representatives and our recognised unions.
Culture acceleration Following engagement, cultural acceleration initiatives have been a focus for the Board as the Group looks to accelerate the cultural change started in 2019.
Diversity The Board believes a diverse workforce is vital to the Group’s success, and values the differences each colleague brings to their role, making the Group stronger and better able to meet the needs of our customers.
In support of this the Board approved in July 2020 the introduction of our Race Action plan, designed to drive race related cultural change, recruitment and progression across the Group. The plan will be taken forward by a dedicated team, who will work with a newly formed Race Advisory Panel to further develop and implement the plan over the coming year.
The Board took steps to ensure along with the Executive that colleague wellbeing was prioritised. Resources were made available to help colleagues in adjusting to the changing circumstances, including support in areas such as work life balance, health and financial management.
Helping Britain Recover The Board has given much focus to overseeing the development of the Group’s Helping Britain Recover ambitions. This continues our strategy of Helping Britain Prosper, designed to play a part in the UK’s recovery from the COVID pandemic, and is discussed in more detail below.
The views of stakeholders have informed the development of these ambitions, which aim to integrate fully the Group’s societal objectives with its business objectives, and will be key in the next phase of our strategy.
Environmental ambitions During the year the Board approved an ambitious goal, working with customers, Government and the market to help reduce the carbon emissions the Group finances by at least 50 per cent by 2030. With the Group's 2030 carbon emission reduction goal for our own operations met, the Board also considered the development of new internal carbon, energy and travel targets. Consideration was also given to the development of several new green finance products, tools and services.
As well as grant funding, the Foundations offer charities additional support, with mentoring, learning, training and networking support also provided.
More detail Environmental ambitions Read more on pages 20 to 24 Helping Britain Recover Read more on pages 38 to 39 Charitable Foundations Read more on page 29
The Board considered it vital that the Group as one of the UK’s main financial services providers plays a key role in the country’s plan to rebuild the economy.
The Big Conversation brought together many of the Board’s key stakeholders, including businesses, community members, policy makers and subjectmatter experts across the UK’s nations and regions. Focus was given to discussing the support and policy interventions that these stakeholders considered necessary for a strong recovery from the pandemic.
After considering recommendations from the Executive, built around feedback from stakeholders, the Board concluded the plan would focus on five key areas of stakeholder priority. These included Help rebuild households’ financial health and wellbeing, Support businesses to recover, adapt and grow, Expand availability of affordable and quality homes, Accelerate the transition to a low carbon economy and Build an inclusive society and organisation.
In 2021, we’ll continue to listen to our key stakeholders from across the UK to understand what local communities and economies need to emerge from the pandemic stronger and more resilient.
As one of the largest financial services providers in the UK, the Group has a presence in almost every community. As such, the Group places great importance on engagement and action to help these communities prosper, and build a more sustainable future. This has been a core consideration for the Board in the development of the Group’s next strategic phase.
Senior leaders worked closely with the FCA, PRA and representatives of HM Treasury to agree the Group’s participation in the COVID related support schemes, keeping the Board apprised of all developments.
Regulatory agenda The Chair and individual Directors, in particular the Chairs of the Board’s Committees, have in the ordinary course of business had continuing discussions with the FCA and PRA on a number of aspects of the regulatory agenda.
The Board in turn reviewed regular updates on this and wider Group regulatory interaction. This provided a view of key areas of regulatory focus, alongside progress being made in addressing key regulatory priorities.
Board members proactively engage with the regulators across all these areas, in addition to a standing programme of monthly updates, including to the Board’s Risk Committee.
More detail COVID-19 response Read more on pages 1 to 3 Environmental ambitions Read more on pages 20 to 24
As a signal of the Group’s commitment to sustainability, the Board approved an ambitious goal to reduce the emissions we finance by 2030, on the path to net zero by 2050 or sooner.
Achieving these goals will not be easy, and the Board recognises the Group will need to take a number of actions.
Some initiatives were however approved for 2020, including the launch of a number of green finance products, tools and services. These included the Green Buildings Tool, a free to use insight tool, launched specifically for Commercial Banking clients. The tool helps clients identify energy efficiency improvements relating to both commercial and residential buildings, along with the associated costs and benefits of those improvements.
The tool also complements the existing Green Lending Initiative in the real estate and housing sectors, and our Clean Growth Finance Initiatives across all of Commercial Banking’s sectors.
The Board was also pleased that the Group was able to launch its Green Living and Eco Home Hub for Halifax and Lloyds Bank customers. This online tool is first in the market amongst lenders, providing mortgage customers with a tailored action plan on home improvements which can help improve sustainability.
Further initiatives included the introduction of the Sustainability Fixed Term Deposit and 95 Day Notice Accounts, where deposited funds are used to support sustainability ambitions.
The Board will continue to oversee initiatives to help the Group achieve its sustainability goals, which will form a core part of the Group’s strategy in the coming years.
The Board and the Group continue to maintain strong, open and transparent relationships with our regulators and Government authorities, including key stakeholders such as HMRC and HM Treasury.
Liaison with regulators and Government is an ongoing priority, at all levels of the organisation, allowing the Board to ensure the Group’s strategic aims align with the requirements of these important stakeholders.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 51
As such the Board regularly considered supplier feedback on the Group’s processes, ensuring areas of potential improvement were acted upon.
Supplier framework A Board-approved framework ensures the most significant supplier contracts receive the approval of the Board.
Supplier payment The Board recognises that late payment of suppliers can represent a significant financial impact for them.
As such the Board seeks to ensure the Group’s supplier payment practices continue to meet wider industry standards.
Supply Chain Resilience The impacts of the COVID crisis have been no less material within the Group’s supply chain, with the Board keen to ensure these important relationships were not unduly impacted. The Board has also been mindful of the effects of the EU Exit on the Group’s supply chain, as the UK approached the deadline of the related transition period.
Related updates were considered on the work of the Group’s Supply Chain Resilience programme. This along with the Supplier Framework provided valuable assurance on the Group’s most critical supplier relationships, including those located in the EU. In particular the Board considered the work of the Group’s Incident Management process and the contribution from sourcing and supply chain SME’s from across the Group, an important means of support to key suppliers in managing the impacts of COVID on their relationships with the Group.
Modern slavery The Board continues to have a zero tolerance attitude towards modern slavery in the Group’s supply chain, receiving updates on progress made in the ongoing enhancements to our supplier practices.
These included measures which address the risk of human trafficking and modern slavery in our wider supply chain.
As part of how the Group can continue to Help Britain Recover, the Board agreed that digital investment played a key role, enabling the Group to best adapt to and support our stakeholders’ developing priorities.
Progress overseen by the Board has included the mobilising of the Group’s new Cloud Centre of Excellence, an important step in harnessing the opportunities cloud technology presents.
The Board held two deep dive sessions in June and October to review the Group’s cloud strategy in detail. This allowed debate and challenge of the risks and further development of plans. The Board also participated in an insights programme on cloud technology to augment their current knowledge and understanding.
The Board has also overseen progress in the Group’s use of external platforms, key in establishing our cloud services. The Board’s IT and Cyber Advisory Forum has assisted in this by reviewing detailed aspects of the cloud strategy.
The Board recognises the importance of its role in overseeing these relationships, which are integral to the Group’s future success.
The Group’s balance sheet remains very strong. Loans and advances to customers were flat on prior year at £440 billion. This includes an increase in open mortgage book net lending of £7.2 billion in the year, with £6.7 billion growth in the fourth quarter, reflecting the strength of the UK housing market. Total customer deposits increased by £38.9 billion in the year, to £450.7 billion. Retail current account growth was £20.5 billion in 2020 and ahead of the market, driven by lower levels of customer spending during the pandemic and inflows to the Group’s trusted brands. Commercial Banking current account growth also illustrates the Group's strong customer relationships and a proportion of the Government-backed lending being retained on deposit by SME customers.
Return on tangible equity - new basis 2.3% 6.6% (4.3) pp
2 Excludes repos of £9.4 billion (31 December 2019: £9.5 billion).
4. CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital treatment of intangible software assets. The benefit through CET1 capital is reflected through the MREL and leverage ratios.
£1,991 million Underlying profit decreased by 53 per cent c.£40 billion Exceeded target of mortgage lending to first time buyers by over 30 per cent across 2018 to 2020
#1 Maintained largest branch network with around 90 per cent of branches remaining open during pandemic 76/ 67 Record highs of net promoter scores across branch and digital
Improved customer experience reflected in increased branch and digital net promoter scores reaching record highs
Digitising the Group Supporting customers in financial difficulty with more accessible support through digital channels for the first time 5 million customers now receiving push notification alerts helping them manage their finances (up 80 per cent)
£37 billion increase in deposits, reflecting the strength of the Group's trusted brands in an uncertain environment
Transforming ways of working Over 2,500 branch colleagues redeployed to support customers through the pandemic, whilst over 21,000 colleagues were able to work from home and over 13,000 laptops distributed to colleagues across the Retail Bank 1,000 strong Branch Financial Assistance team created to support customers in financial difficulty
Operating costs flat, with efficiency savings offsetting an increase in costs related to supporting customers during the coronavirus pandemic. Remediation costs decreased 47 per cent on prior year to £125 million
Impairment increased significantly to £2,384 million, primarily driven by the charge in the first half of the year reflecting a material deterioration in the economic outlook as a result of the coronavirus pandemic
Customer lending increased 2 per cent with increased mortgage activity, including open book growth of £6.7 billion in the fourth quarter and support for Business Banking customers, partly offset by lower unsecured balances
Customer deposits increased 15 per cent with strong inflows to the Group's trusted brands and lower spend activity, along with increased Bounce Back Loan driven deposits
Risk-weighted assets up 1 per cent, with credit migration and model changes offset by lower unsecured balances
£96 million Underlying profit decreased by 95 per cent 19 per cent market share of SME lending >£6.0 billion net SME and Mid Market lending target exceeded
SME mentoring service launched in partnership with Be The Business to help clients recover from the pandemic
Digitising the Group First globally to implement SWIFT GPI Instant, increasing the speed and transparency of cross-border payments
Rapid deployment of robotics to automate the opening of Bounce Back Loans, enabling over 300,000 loans with a value of over £9 billion to be opened since May and supported over £1 billion on the first day following the launch
Actively supported clients with over £12 billion of Government-backed lending, in addition to c.34,000 capital repayment holidays and c.22,000 fee-free overdrafts as part of the Group's £2 billion COVID-19 fund
Supported £3.7 billion of investment in the UK manufacturing sector and participated in the completion of a number of UK Export Finance backed Export Development Guarantee transactions to the syndicated value of £4.4 billion to support clients' trading ambitions, whilst helping c.15,000 SMEs export for the first time over the past three years
Financial performance Net interest income of £2,357 million, down 18 per cent on prior year, reflecting competitive asset markets, lower deposit income due to bank rate reductions partly offset by ongoing business optimisation across assets and liabilities
Other income decreased by 9 per cent to £1,292 million, primarily driven by lower transaction banking income as a consequence of coronavirus-related impacts on customer trading volumes, with markets income remaining resilient
Impairments increased to £1,464 million, reflecting a significant deterioration in the Group's economic outlook, as well as a small number of single name charges
Customer lending was lower at £86.2 billion, with higher lending in SME driven by Government-backed lending, more than offset by lower Corporate and Institutional lending due to the continued optimisation of the asset portfolio
Insurance and Wealth offers insurance, investment and wealth management products and services. It supports over 10 million customers with assets under administration of £172 billion and annualised annuity payments of over £1.1 billion. The Group continues to invest significantly in the development of the business, with the aims of capturing the considerable opportunities in pensions and financial planning, whilst meeting more of our customers’ financial needs and improving their financial resilience throughout their lifetime.
£338 million Underlying profit decreased by 68 per cent 69 per cent Growth in open book AuA over the GSR3 period 15 per cent Achieved GSR3 target market share in workplace pensions 1.5 million new pension customers in GSR3 period
For 16 years, Scottish Widows has been researching the savings habits of women in the UK. Tracking retirement planning over the years means we can see patterns of behaviour evolve over a long period of time.
Scottish Widows is continuing its call for a series of pension reforms to remove the persistent barriers to more women saving more money for retirement. This includes enhanced pensions for those on maternity leave, the mandatory inclusion of pensions in divorce proceedings and scrapping the minimum earnings threshold for of autoenrollment to make pensions more inclusive for part-time workers.Saving for the future
Digitising the Group Launched Scottish Widows app in the fourth quarter to c.500,000 customers. Customers are able to engage with their retirement planning, representing a key strengthening of the Group's proposition
Single Customer View expanded to include stockbroking portfolios with c.6.5 million customers able to access their insurance and wealth products alongside their bank account, up from over 5 million at the end of 2019
Financial performance Underlying profit fell to £338 million, driven by impact of reduced market activity, lower non-recurring items and adverse assumption changes in 2020 (versus net positive in 2019) Sales in individual annuities, non-branch protection, and workplace, planning and retirement, excluding auto-enrolment step-ups, have increased despite pandemic headwinds Life and pensions experience and other items includes adverse impacts from assumption changes (further details of which are included in Other Financial Information) and the response to the Asset Management Market Review General insurance combined operating ratio remains strong at 85 per cent in the context of absorbing £36 million claims due to storms in 2020. Total gross written premiums remain resilient despite the reduction in branch footfall Reduction in Wealth income reflects the transfer of business to Schroders Personal Wealth in 2019, and lower net interest income as a result of the lower rate environment. Stockbroking other income more than double prior year Costs reduced by £80 million, c.£60 million of which reflects the transfer of business to Schroders Personal Wealth
As a Group, we are open, honest and transparent with colleagues working in collaboration with business areas to: support effective risk management and provide constructive challenge share lessons learned and understand root causes when things go wrong consider horizon risks and opportunities
Connectivity of risks and our strategic risk management framework The unprecedented events of this year have demonstrated how individual risks in aggregate can place significant pressure on the Group's strategy, business model and performance. It is essential that we not only manage our individual risks, but understand how emerging and strategic risks are connected, and how they impact either existing principal risks or create new risks. By doing so we can ensure we continue to respond dynamically and protect our customers and support our colleagues and stakeholders.
Connectivity of risks is very much at the forefront of the Group’s thinking and additional work is being launched in 2021 to further embed this into our risk management framework.
Governance is maintained through delegation of authority from the Board down to individuals. Senior executives are supported by a Committee based structure which is designed to ensure open challenge and enable effective decision-making. More information on our Risk Committees can be found on pages 150 to 152.
Emerging Risk A future internal or external event or trend, which could have a material positive or adverse impact on the Group and our customers, but where the probability, timescale and/ or materiality may be difficult to accurately assess.
All of the Group's principal risks, which are outlined on this page, are reported regularly to the Board.
Capital Capital build was adversely impacted by impairment provisions in 2020, however the year end capital position is significantly strengthened due to the earlier reversal of the 2019 full year ordinary dividend accrual and enhanced IFRS 9 transitional relief, which partially offset the increase in impairment provisions. Closing CET1 ratio of 16.21 per cent (15.01 per cent excluding transitional relief). The Group’s capital requirements have reduced in 2020 due to lower Pillar 2A requirements and the reduction in the UK countercyclical capital buffer rate in response to the impact of COVID-19. The Group therefore has significant headroom to absorb further potential losses and to continue to support households and businesses as they recover from the COVID-19 pandemic. Insurance underwriting Lower market activity as a result of the pandemic and noting the one-off 2019 benefit from workplace auto-enrolment step-ups, saw Life and Pensions present value of new business premium fall to £14.5 billion in 2020 (2019: £17.5 billion). Near-term underwriting risk increased, reflecting policyholder behaviour on workplace savings products. Significant amounts of life and morbidity risk continued to be re-insured. No material change to General Insurance underwriting risk in 2020, with total gross written premium falling slightly to £662 million (2019: £671 million) due to the reduction in branch footfall. Change/execution The Change/execution risk profile has remained stable in the year. The Group’s change portfolio was reprioritised at pace to support critical and COVID-19 related activities. Enhanced, targeted control monitoring was implemented to ensure safe delivery of change during the year. Conduct The Group has adapted quickly to the impacts of the pandemic, providing significant support to impacted customers. Comprehensive preparations have been undertaken to help identify and further support those customers in financial difficulty. Data The Group continues to improve its capabilities in the management of data risk, with an improvement seen in the regular half yearly capability assessment.
Areas of improvement include delivery of a new data risk and control library, embedding data by design and ethics principles into the data science lifecycle, increasing capabilities and broader awareness. Governance Governance risk has remained stable, despite the need for accelerated decision-making and a significant increase in the amount of remote working, together with a number changes to GEC and Board members throughout the year. Ensuring appropriate and efficient governance remains a key priority. People 2020 has seen increased colleague workloads and significant changes to ways of working, with more than 50,000 colleagues working from home. Improved colleague sentiment demonstrates that the extensive support measures deployed by the Group, with a continued focus on colleague wellbeing and resilience, are helping to mitigate these risks. Operational resilience Business continuity plans have proved resilient, with particular attention applied to heightened risks in the supply chain.
Operational Despite anticipated heightened operational risks in the areas of cyber, fraud and technology, the volume of operational loss events has remained broadly consistent in 2020 compared to 2019. Model Model risk has increased due to the nature and uncertainty of the economic outlook. The effect of Government-led customer support initiatives have weakened established relationships between model inputs and outputs, reducing the ability to forecast using models alone. While underlying model drivers are expected to remain valid in the longerterm, year end impairment reporting contains a greater element of governed judgement to reflect current conditions.
Regulatory and legal Regulatory risk has been impacted by a small number of instances of non-compliance, requiring forbearance from regulators. Forbearance requirements have been due to the reprioritisation of resource to support the provision of essential services to customers and to respond to new regulatory requirements, such as payment holidays. Legal risk has been impacted by the UK’s exit from the EU, in particular continued uncertainty of the future UK legal and regulatory financial services framework. Strategic Strategic risk is a significant source of risk for the Group, influencing the Group’s strategy, business model, performance and risk profile. The development of our strategic risk framework is a key priority for the Group. Significant work has been undertaken during 2020 to understand the risk implications of the Group’s strategy and the key drivers of strategic risk. These are outlined in more detail on the following pages and will be further developed and embedded across the Group during 2021.
The Board Risk Committee approved the Group’s enhanced definition for emerging risks in October 2020.
Internal working groups have been established to regularly scan the horizon and identify emerging risks. In addition the working groups have sought to analyse the impact of material events, such as COVID-19, on those trends and assess whether those have accelerated the impact of existing risks on our customers, colleagues and wider stakeholders.
People, ways of working and skills: Trends include the significant acceleration in remote working due to COVID-19 and higher demand for workers with digital and analytical skills.
Our understanding of the relationship and impact amongst emerging risks, strategic responses and principal risks played a key role in the development of our strategy. This was supplemented with engagement across the Group’s businesses and functions, to establish a strong understanding of the Group’s strategic challenges.
Significant investment is planned to reimagine our customer offerings. Transforming our technology architecture, appropriately and securely using data science and upskilling our colleagues, we aim to deliver a holistic proposition, together with an excellent customer experience.
Emerging risks are assessed through an impact/likelihood matrix whereby the most pertinent trends are considered when shaping and refreshing our major strategic priorities and responses.
Key emerging risks are outlined in more detail in pages 147 to 149 of the risk management section.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 59
– Potential failure to address customers’ personal and financial resilience needs
Desire to establish and build market share in sustainable sectors Impact of evolving regulatory requirements Shifting consumer and colleague expectations
– Recruitment and retention of customers and colleagues dependent on the Group's response to evolving societal expectations
Structural challenge for Group’s business model and revenue streams due to low growth and low or negative interest rates
– Risk of disrupting traditional banking models, creating unfavourable customer responses
– Inability to sufficiently diversify income streams to mitigate the challenges of a low growth environment
Managing through ageing platforms Complex and inefficient technology architecture and systems
Changing consumer behaviour, with customer expectations increasingly shaped by their experiences elsewhere Larger and more diverse threat landscape Skills requirements in response to changing environment
– Failure to keep pace with peers and competitors poses potential for loss of income
– Evolution of colleague skills to deliver and maintain new systems, processes and transitioning to the cloud
Around 1.3 million payment holidays granted to retail customers and 34,000 capital repayment holidays to small businesses and corporates to alleviate temporary financial pressures whilst also supporting a number of Corporate and Institutional clients with Covid Corporate Financing Facility advances
Trading surplus of £6.4 billion, a reduction of 27 per cent although providing significant capacity to absorb impairment impact of the coronavirus crisis
Impairment charge of £4.2 billion, including £3.8 billion in the first half, primarily reflecting a significant deterioration in the economic outlook and including a management overlay of £400 million applied in the second half, given ongoing uncertainties as a result of coronavirus
Statutory profit before tax of £1.2 billion and statutory profit after tax of £1.4 billion, both impacted by lower income and the increased impairment charge; tangible net asset value per share of 52.3 pence
Open mortgage book up £7.2 billion in the year, including £10.2 billion in the second half and with a strong pipeline
Board has recommended a final ordinary dividend of 0.57 pence per share, the maximum allowed under the regulator’s guidelines
Build a leading digital SME proposition and a disciplined and strengthened Corporate and Institutional client offering, enabling the Group to be the best bank for business
Improving profitability with statutory return on tangible equity of between 5 and 7 per cent (on the new basis)
Trading surplus for the year was £6,440 million, a reduction of 27 per cent on 2019, reflecting the challenging external environment. Net income was down 16 per cent to £14,404 million, driven by both lower net interest income and lower other income. The Group has maintained its focus on delivering cost savings, with total costs down 4 per cent, while continuing to invest in the Group’s digital propositions.
The Group’s balance sheet remains very strong. Loans and advances to customers were flat on prior year at £440 billion. This includes an increase in open mortgage book net lending of £7.2 billion in the year, with £6.7 billion growth in the fourth quarter, reflecting the strength of the UK housing market. Total customer deposits increased by £38.9 billion in the year, to £450.7 billion. Retail current account growth was £20.5 billion in 2020 and ahead of the market, driven by lower levels of customer spending during the pandemic and inflows to the Group’s trusted brands. Commercial Banking current account growth also illustrates the Group’s strong customer relationships and a proportion of the Government-backed lending being retained on deposit by SME customers.
The Group’s CET1 capital ratio post dividend increased 242 basis points over the year, from 13.8 per cent (on a pro forma basis) to 16.2 per cent, or 16.4 per cent pre dividend accrual.
The Group manages the risk to its earnings and capital from movements in interest rates centrally by hedging the net liabilities which are stable or less sensitive to movements in rates. As at 31 December 2020 the Group’s structural hedge had an approved capacity of £210 billion (increased from the prior year reflecting account management and core deposit growth in 2020), a nominal balance of £186 billion (31 December 2019: £179 billion) and a weighted-average duration of around two and a half years (31 December 2019: around three years). The Group generated £2.4 billion of gross income from the structural hedge balances in 2020 (2019: £2.7 billion). In 2021, based on current economic assumptions, the Group expects c.£60 billion of maturities and c.£400 million lower income from the structural hedge, with lower maturities in 2022 and 2023.
Other income includes a gain of £149 million (2019: £185 million) on the sale of gilts and other liquid assets. 2019 also benefited from the nonrecurrence of a £50 million performance related earn-out following the sale of Vocalink.
Operating lease depreciation reduced to £884 million (2019: £967 million) as a result of the continued impact of a smaller Lex fleet size, combined with the benefit of resilient used car prices.
The Group now expects operating costs to reduce further to c.£7.5 billion in 2021.
Observed credit quality remains stable with the flow of assets into arrears, defaults and write-offs remaining at low levels. The Group has built a significant ECL allowance in the expectation that when the support schemes unwind, insolvencies and unemployment will consequently increase. The Group’s total ECL allowance across all asset classes has increased from £4.2 billion to £6.9 billion in the year, with the majority of the increase in provisions established for up to date assets in Stage 1 and Stage 2. This increase was established in the first half of 2020 in response to changes in the Group’s economic outlook. Subsequent improvements to the economic outlook are redicated upon coronavirus vaccine developments which have emerged, reversing some of the ECL increases in the second half, including in the fourth quarter.
Gross asset quality ratio 0.99% 0.37% 62bp 1 Represents charge excluding impact of updating for economic outlook in 2020.
Stage 2 gross loans and advances to customers 60,514 38,440 57
Stage 2 loans and advances to customers as % of total 12.0% 7.7% 4.3pp
Stage 2 ECL allowances2 as % of Stage 2 drawn balances 4.5% 3.7% 0.8pp
Stage 3 gross loans and advances to customers 9,089 8,754 4
Stage 3 loans and advances to customers as a % of total 1.8% 1.8% –
Stage 3 ECL allowances2 as % of Stage 3 drawn balances3 28.1% 22.5% 5.6pp
Total ECL allowance on loans and advances to customers2 6,832 4,142 65
The resulting ECL on drawn and undrawn loans and advances to customers of £6.8 billion represents 1.4 per cent coverage of gross loans and advances to customers, up 0.6 percentage points from 0.8 per cent at 31 December 2019. The ECL allowance remains high by historical standards and consistent with the Group’s updated macroeconomic projections, assumes that a large proportion of expected losses will crystallise over the next 12 to 18 months as support measures subside and unemployment increases.
Stage 2 loans and advances increased to £60.5 billion (31 December 2019: £38.4 billion), equivalent to 12.0 per cent (31 December 2019: 7.7 per cent) of total loans and advances to customers, as a result of the deterioration in economic outlook. Of these, 89 per cent are up to date (31 December 2019: 79 per cent, 30 September 2020: 89 per cent). Stage 3 loans and advances as a proportion of the portfolio have remained stable at 1.8 per cent in 2020 with limited increase in flows to default, given the availability of Government support and payment holidays. Approximately 90 per cent of payment holidays have now recommenced payment, with only £5.8 billion outstanding as at 16 February 2021. At 31 December £6.4 billion remained outstanding, of which 31 per cent was included in the £60.5 billion of Stage 2 assets. If those Retail customers in Stage 1 with payment holidays still in place at 31 December 2020 were moved to Stage 2, the impact on ECL would be less than £50 million.
2 Automotive dealerships includes Black Horse Motor Wholesale lending (within Retail Division).
Lloyds Banking Group Annual Report and Accounts 2020 65 Strateg ic rep ort
The Group has approved c.337,000 loans with a total value of £12.4 billion to customers under Government-backed loan schemes including c.327,000 loans totalling £9.3 billion approved under the Bounce Back Loan Scheme.
Return on tangible equity – new basis1 2.3% 6.6% (4.3)pp 1 Calculation shown on page 79.
Further information on the reconciliation of underlying to statutory results is included on page 77.
Volatility and other items at a net loss of £361 million in 2020 comprised £59 million of negative market volatility and asset sales, £69 million of amortisation of purchased intangibles and £233 million of fair value unwind. Market volatility and asset sales included £222 million of negative insurance volatility, driven mainly by falling equity markets and a loss of £106 million relating to liability management exercises largely occurring in the fourth quarter. This was offset against positive banking volatility of £392 million, primarily reflecting exchange rate and interest rate movements. Comparatives for 2019 include a one-off charge for exiting the Standard Life Aberdeen investment management agreement.
Liquidity coverage ratio5 136% 137% (1)pp 1 Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
Loans and advances to customers were stable at £440.2 billion (31 December 2019: £440.4 billion). Within Retail, the open mortgage book increased by £10.2 billion in the second half of 2020 with £6.7 billion in the fourth quarter, reflecting the strength of the UK housing market. Commercial Banking loans, including Retail Business Banking, reduced by £2.2 billion in 2020 as the continued optimisation of the portfolio and reduced revolving credit facilities balances more than offset support provided to clients through Government-backed lending schemes.
2 CET1 ratios at 31 December 2020 include an increase of 51 basis points following the implementation of the revised capital treatment of intangible software assets. The benefit through CET1 capital is reflected through the total capital, MREL and leverage ratios.
The increase in the CET1 ratio of 118 basis points in the fourth quarter (pre dividend accrual) reflected underlying profitability, risk-weighted asset reductions and the introduction of the revised capital treatment of intangible software assets.
The PRA is consulting on a proposal to reverse the revised capital treatment of software assets (which currently follows EU capital regulations). Should the PRA proceed with their proposal then the reinstatement of the original requirement to deduct these assets from capital will come into force during 2021. This could lead to a c.50 basis points reduction in the Group’s CET1 capital ratio (net of a reduction in associated RWAs), and based on the position at 31 December 2020 the ratio would reduce to 15.7 per cent.
The Group applies the revised IFRS 9 transitional arrangements for capital as set out under current capital regulations. The arrangements provide for temporary capital relief for the increase in accounting impairment provisions following the initial implementation of IFRS 9 (‘static’ relief) and subsequent relief for any increases in Stage 1 and Stage 2 expected credit losses since 1 January 2020 (‘dynamic’ relief). The transitional arrangements do not cover Stage 3 expected credit losses.
Risk-weighted assets reduced by £0.7 billion over the year from £203.4 billion to £202.7 billion. Increases were from credit migrations and model calibrations (c.£2.5 billion); regulatory changes, including the revised capital treatment of intangible software assets (net £2.2 billion); and other movements, including Retail model updates (c.£1.9 billion). In addition, there were increases in risk-weighted assets attributable to deferred tax assets and the risk-weighted element of the Group’s investment in Insurance following the increase in the Group’s capital base (£1.6 billion). These were more than offset by reductions in lending balances outside Government-backed schemes (£3.6 billion) and optimisation activity undertaken in Commercial Banking (c.£5.3 billion).
Whilst credit migration in 2020 has been less than expected, it is expected to have a fuller impact in 2021 and into 2022, consistent with economic forecasts. It is also expected that a material part of the Group’s IFRS 9 dynamic relief that built up during 2020 will unwind in 2021 with the remainder expected to largely unwind in 2022, impacting CET1 ratios. As a result, based on current economic forecasts, the Group expects capital build in 2021 to be impacted by the expected unwind of IFRS 9 transitional relief, as well as profitability.
The deferral of the UK implementation of the remainder of CRR 2 means that expected risk-weighted asset inflation driven by changes to the new standardised approach for calculating counterparty credit risk exposure (SA-CCR) will now impact in 2022, with no significant regulatory changes expected in 2021, other than the PRA’s proposed reversal of the revised treatment of software assets. Given these movements, as well as continued optimisation in the Commercial Banking portfolio, the Group expects risk-weighted assets in 2021 to be broadly stable on 2020, but with headwinds from regulatory changes in 2022.
The Board’s view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties remains at c.12.5 per cent, plus a management buffer of c.1 per cent.
The transitional total capital ratio increased to 23.3 per cent (31 December 2019: 21.5 per cent on a pro forma basis) and the Group’s transitional minimum requirement for own funds and eligible liabilities (MREL), which came into force on 1 January 2020, is 36.4 per cent (31 December 2019: 32.6 per cent on a pro forma basis). The UK leverage ratio increased to 5.8 per cent.
Dividend Following a request made by the PRA to large UK banks in March 2020, the Group suspended the payment of dividends on ordinary shares for the remainder of the year and cancelled the payment of the final dividend for 2019. These actions were undertaken as a precautionary measure to preserve capital as the spread of the coronavirus pandemic led to a UK-wide lockdown, with the potential to create a significant and prolonged downturn.
The PRA has additionally noted its intention to provide a further update on distributions ahead of the 2021 half year results for the large UK banks. It is expected that the PRA will take account of the outcome of the first stage of the Bank of England 2021 solvency stress test exercise in informing its approach to half year distributions. Ahead of the update at half year, dividends may be accrued for via capital, provided this is undertaken on an appropriately prudent basis, but may not be paid.
The Board remains committed to future capital returns. In 2021, the Board intends to accrue dividends and resume its progressive and sustainable ordinary dividend policy with the dividend at a higher level than 2020. As normal, the Board will give due consideration at year end to the size of the final dividend payment and any return of surplus capital in addition to the ordinary dividend, based on circumstances at the time.
Tangible net assets per share 52.3p 50.8p 1.5p 1 Excludes reverse repos of £58.6 billion (31 December 2019: £54.6 billion).
3 The CET1, MREL and leverage ratios and risk-weighted assets at 31 December 2019 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The CET1 ratio pre IFRS 9 transitional relief reflects the full impact of IFRS 9, prior to the application of transitional arrangements. Excluding dividend accrual, the CET1 ratio at 31 December 2020 was 16.4 per cent.
Statutory profit (loss) before tax 792 1,036 (676) 74 1,446 50 1,294 1,603
Return on tangible equity – existing basis 7.2% 7.4% (4.8%) 5.0% 11.0% (2.8%) 10.5% 12.5%
3 Risk-weighted assets at 30 June 2019 and 31 December 2019 are reported on a pro forma basis reflecting the Insurance dividend paid to the Group in the subsequent reporting period.
Ordinary shares in issue, excluding own shares 70,812m 70,776m – 70,735m – 70,031m 1 1 Primarily Europe.
SME loans and advances including Retail Business Banking 40.6 32.1 26
ther inform ation 1. Reconciliation between statutory and underlying basis financial information The tables below set out the reconciliation from the statutory results to the underlying basis results, the principles of which are set out in the basis of presentation.
Other income, net of insurance claims 4,377 165 (27) – 4,515
Underlying trading surplus 6,440 8,822 1 In the year ended 31 December 2020 this comprises the effects of market volatility and asset sales (loss of £59 million); the amortisation of purchased intangibles (£69 million); restructuring (£521 million, including severance costs, property transformation, technology research and development, regulatory programmes and merger, acquisition and integration costs); and fair value unwind (losses of £233 million).
2 In the year ended 31 December 2019 this comprises the effects of market volatility and asset sales (gains of £126 million); the amortisation of purchased intangibles (£68 million); restructuring (£471 million, including severance, property optimisation, technology research and development, regulatory programmes and merger, acquisition and integration costs; and fair value unwind (losses of £275 million).
3 The Group’s insurance businesses’ income statements include income and expense attributable to the policyholders of the Group’s long-term assurance funds. These items have no impact in total upon profit attributable to equity shareholders and, to provide a clearer representation of the underlying trends within the business, these items are shown net within the underlying results.
Banking net interest margin (%) 2.52 2.88 1 Excludes reverse repos.
Insurance volatility movements in 2020 were largely driven by significant movements in global equity markets, credit spreads and interest rate movements. Although the Group manages its exposures to equity, interest rate, foreign currency exchange rate, inflation and market movements within the Insurance division, it does so by balancing the importance of managing the impacts on both capital and earnings volatility. For example, equity market movements are hedged within Insurance on a Solvency II capital basis and whilst this also reduces the IFRS earnings exposure to equity market movements, the hedge works to a lesser extent from an IFRS earnings perspective.
4. Changes in Insurance assumptions The following impacts from assumption changes are included within Insurance and Wealth other operating income.
The above table excludes a c.£91 million benefit from methodology changes recognised in the first half of 2020.
Under the existing definition of return on tangible equity, statutory profit after tax is adjusted to remove profit attributable to non-controlling interests and other equity holders and to add back the post-tax amortisation of intangible assets, before being divided by average tangible equity. Under the new basis, the post-tax amortisation of intangible assets is no longer added back. Going forward the Group will adopt this revised basis in order to aid comparability across the banking sector.
Total number of employees 61,576 63,069 1 2019 figures restated to reflect the Group’s current structure.
Governance A letter from our Chair 81 Our Board 82 Group Executive Committee 84 Corporate governance report 86 Directors’ report 111 Directors’ remuneration report 115 Other remuneration disclosure 138
As I write my introduction to this Corporate Governance Report, the pandemic continues to have a major impact on society and on how companies operate. In these times, the Board believes that good governance and stakeholder engagement are more important than ever and key to the Group achieving its purpose of Helping Britain Prosper and to the successful delivery of its strategy. Further information about our oversight of the Group’s response to the pandemic can be found on pages 90 to 91.
Succession planning Succession planning, both in respect of Non-Executive Directors and the executive, is a key component of good governance and was in focus during 2020 when the Board approved the appointment of a new Group Chair and Group Chief Executive. Further information about these appointment processes and succession planning can be found on pages 99 to 100.
Anita Frew retired as Deputy Chair and a Non-Executive Director at the Company’s AGM in May 2020 and was succeeded by Alan Dickinson. As part of these changes, Nick Prettejohn took on Alan's previous role as Chair of the Board Risk Committee for a limited time. Catherine Woods succeeded Nick Prettejohn in that role on 1 January 2021. Simon Henry retired as a Non-Executive Director in September and was succeeded as Chair of the Audit Committee by Sarah Legg. Anita and Simon both made significant contributions to the Board and left with our thanks and best wishes.
Board evaluation The Board carried out an annual evaluation of its effectiveness during the year. This year’s was an internal evaluation overseen by the Nomination and Governance Committee. The process which was undertaken, and the findings of the review, can be found on pages 94 to 95, together with information about our progress against the 2019 review actions.
Corporate Governance Code During the year under review, the UK Corporate Governance Code 2018 applied to the Company. Our statement of compliance with the Code and a summary of the requirements of the Code can be found on pages 96 to 97. Details of the Group’s approach to workforce engagement and further information on this can be found on page 48.
Skills, experience, and contribution: Extensive financial services and investment banking experience Strong governance and strategic advisory skills to companies and government Regulatory, public policy and stakeholder management experience Robin spent 25 years advising UK companies and the UK Government while working for S.G. Warburg/UBS Investment Bank, and was formerly Chief Executive and Chairman of UK Financial Investments (UKFI), managing the Government’s investments in UK banks following the 2008 financial crisis. He was awarded a CBE in 2015 for services to the taxpayer and the economy, and is a qualified Chartered Accountant.
Skills, experience, and contribution: Highly regarded retail and commercial banker Strong strategic, risk management and core banking experience Regulatory and public policy experience Alan has 37 years’ experience with the Royal Bank of Scotland, most notably as Chief Executive of RBS UK. Alan was formerly Chairman of Urban&Civic plc and of Brown, Shipley & Co. Limited, a Non-Executive Director and Chairman of the Risk Committee of the Nationwide Building Society and of Willis Limited, and a Governor of Motability. Alan is a Fellow of the Chartered Institute of Bankers and the Royal Statistical Society.
External appointments: Non-Executive Director of the England and Wales Cricket Board.
External appointments: Chair of the Campaign Advisory Board, King’s College, Cambridge University and Honorary Vice President of the Hong Kong Society for Rehabilitation.
External appointments: Senior Advisor to Greenhill Europe, a Trustee of The Lovington Foundation and Chairman of the Board of Visitors of the Ashmolean Museum.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 83
Skills, experience, and contribution: Extensive experience in and understanding of both retail and commercial banking Drive and commitment to customers Proven ability to build and lead strong management teams António previously worked for Citibank and Goldman Sachs and held various senior management positions at Grupo Santander before becoming its Executive Vice President and member of the Group’s Management Committee. He was Chief Executive of Santander UK.
External appointments: Non-Executive Director of EXOR N.V., Fundação Champalimaud and Sociedade Francisco Manuel dos Santos in Portugal, a member of the board of Stichting INPAR Management/ Enable and Chairman of the Wallace Collection.
Skills, experience, and contribution: Significant board level strategic and financial leadership experience Strategic planning and development, mergers and acquisitions, equity and debt capital structuring and risk management William has worked in financial services for over 25 years, and previously held a number of senior roles at Morgan Stanley, including Co-Head of the Global Financial Institutions Group and Head of EMEA Financial Institutions Group. Before joining Morgan Stanley, William worked for JP Morgan, again in the Financial Institutions Group.
Skills, experience, and contribution: Background in retail and associated sectors, including financial services Strong board governance experience, including investor relations and remuneration Considerable experience of boards at both executive and non-executive level Passionate advocate of customers, the community and financial inclusion Sara’s previous appointments include Managing Director of Argos, various senior positions at J Sainsbury plc, Lead NonExecutive Director at the Department for Work and Pensions, a Non-Executive Director of United Utilities Group as well as a number of senior management roles for Abbey National and Mars Confectionery.
Full biographical details of each director are available on lloydsbankinggroup.com/ who-we-are/group-overview/directors-andgovernance. html
Juan Colombás – retired from the Board on 18 September 2020.
Simon Henry – retired from the Board on 30 September 2020.
Lord Blackwell – retired from the Board on 1 January 2021.
António joined the Board as an Executive Director in January 2011 and became Group Chief Executive in March 2011. Read his biography on page 83
Skills and experience Vim joined the Group in 2011 and is responsible for Retail products and distribution, customer services and brands and marketing. Vim has worked in financial services for over 20 years and prior to joining the Group, spent 12 years at Santander UK in a range of roles. Vim is a Chartered Accountant, and sits on the UK Finance Board, the FCA’s Practitioner Panel and supports HM Treasury’s Financial Inclusion Policy Forum and the Money and Pensions Service Advisory Group.
Skills and experience Kate was appointed Group General Counsel in January 2015 and Group Company Secretary in July 2019. Kate joined the Group in 2005 from Linklaters, where she was a corporate lawyer specialising in mergers and acquisitions transactions. Before her current role, Kate held a number of senior positions including Deputy Group General Counsel and General Counsel for Group Legal. Kate is a trustee of the Lloyds Bank Foundation for England and Wales and is a NonExecutive Director of Scottish Widows.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 85
Skills and experience Letitia joined the Group in 2014, undertaking Conduct, Compliance and Operational Risk roles across various divisions before being appointed as the Group Director, CCOR in 2016. Letitia is also a NonExecutive Director of Lloyds Bank Corporate Markets plc. Prior to joining the Group, Letitia was Chief Risk Officer at Kleinwort Benson Private Bank. She previously worked at RBS for 11 years, latterly as the Chief Risk Officer of the Wealth Division. Letitia is a qualified accountant with a background in forensic accountancy.
Skills and experience David was appointed Group Director, Commercial Banking in September 2017 responsible for supporting corporate clients from SMEs through to Large Corporates and Financial Institutions. David started his career with Lloyds Bank in 1984 on the graduate programme and has held key leadership roles across the Group. Immediately prior to his current role he was Group Director Retail and Consumer Finance. David is a Fellow of the Chartered Institute of Bankers, Group Executive Sponsor for Disability and Chairs the Wellbeing leadership group for Business in The Community.
Skills and experience Andrew joined the Group in September 2018, as Group Corporate Affairs Director, with responsibility for internal and external communications, reputation management and public affairs. Prior to joining the Group, Andrew was Senior Managing Director and Global Head of Financial Services for the strategic communications segment of FTI Consulting.
C Chair 1 Juan Colombás retired from the Board on 18 September 2020. 2 Robin Budenberg joined the Board and respective Committees on 1 October 2020 and became Chair of the Nomination and Governance Committee on 1 January 2021. 3 Alan Dickinson succeeded Anita Frew as Deputy Chair on 21 May 2020. 4 Anita Frew retired from the Board on 21 May 2020.
12 Unable to attend due to another business commitment. 13 Where a Director is unable to attend a meeting s/he receives papers in advance and has the opportunity to provide comments to the Chair of the Board or to the relevant Committee Chair.
The Board recognises the need to be adaptable and flexible to respond to changing circumstances, such as switching to virtual meetings because of the pandemic, and to emerging business priorities, while ensuring the continuing monitoring and oversight of core issues, such as the impact of, and the Group’s response to, the pandemic.
The process of escalating issues and agenda setting is reviewed at least annually as part of the Board evaluation with enhancements made to the process, where necessary, to ensure it remains effective.
1 Data as at 31 December 2020 (and therefore includes Lord Blackwell). 2 Non-Executive Directors; during 2021 the Group will be reviewing its skills matrix to explicitly consider environmental and climate change skills and experience. 3 Comprising Lord Blackwell (who retired from the Board on 1 January 2021), António Horta-Osório
Ethnic diversity The Board currently meets the recommendation of the Parker Review of at least one member of the Board (8.3% of the Board as at 31 December 2020) being of Black, Asian or Minority Ethnic background, and the Group intends to continue to meet that recommendation.
Governance Framework seeks to ensure that decisions are made by management under the correct authority. In the rare event of a Director being unable to attend a meeting, wherever possible the Chair of the meeting discusses the matters proposed with the Director concerned, seeking their views. The Chair subsequently represents those views to the meeting.
A full schedule of matters reserved can be found at com/who-we-are/group-overview/ corporate-governance.html
Robin Budenberg, an experienced NonExecutive Director with extensive financial services experience, received a tailored induction that focused on the Group’s culture and values, stakeholders, strategy, structure, operations and governance. As Chair Designate, Robin worked closely with Lord Blackwell, the Group’s former Chairman, in ensuring an effective handover of responsibilities.
– Strategic challenges facing the Group (including, for example, the impact of COVID-19 and the operational and conduct challenges it presents and targets and risks associated with managing the Group’s response to climate change)
During 2021, Robin will continue his programme of visits (either in person or virtually) with customers, service providers and key stakeholders across the retail, commercial and insurance sectors to build upon and deepen his understanding of the customer offering and experience. Robin will continue to develop his knowledge of the Group and its people through site visits (either in person or virtually) to the Group’s regional offices as well as through focused discussions with smaller teams and individual colleagues.
Considered the operation and effectiveness of the remuneration policy Stakeholder groups
Considered workforce engagement mechanisms and engagement results Strategic priorities Stakeholder groups
Discussed financial support for businesses through Government-backed schemes Strategic priorities Stakeholder groups
Discussed the annual review of customer conduct framework and risk Strategic priorities Stakeholder groups
Discussed the regular finance report, forecasts and capital and liquidity positions
Approved a request from the PRA on suspension of dividend payments for 2020 Stakeholder groups
Deep dive on ways of working post pandemic Strategic priorities Stakeholder groups
Deep dive on economics and financial impacts Strategic priorities Stakeholder groups
Two day meeting to review the Group’s strategy and progress Strategic priorities Stakeholder groups
Reviewed an annual update on pension scheme and valuation Stakeholder groups
Details of the deep dive sessions that were held in 2020 are set out in the key focus areas section on page 88 and this page 89. In addition, detailed updates were received from Scottish Widows Group Limited and Lloyds Bank Corporate Markets plc and joint discussions held with Scottish Widows Group Limited.
Approved an update to the statements on Modern Slavery and Human Rights Stakeholder groups
Considered updates on the Group’s progress towards resolvability as required under the Bank of England Resolvability Assessment Framework Stakeholder groups
Discussed the FCA firm evaluation letter and agreed ownership of actions Stakeholder groups
Discussed the outcome of the annual Board evaluation and agreed actions arising from it Stakeholder groups
Discussed the update on Banking Standards Board 2019 survey Stakeholder groups
Considered cloud services strategy and cyber security Strategic priorities Stakeholder groups
The Prime Minister announced plans to gradually ease restrictions and contact tracing systems went live in England and Scotland 3 February – the Group invoked its incident management process to co-ordinate Group activity relating to the coronavirus with the incident team providing weekly updates to the Group Executive Committee.
28 April – the Board Risk Committee extensively discussed the impact of the pandemic at its meeting. The Audit Committee discussed at its meeting the Group’s draft Q1 interim management statement (including COVID-related disclosures) and recommended that the Board approve the statement.
4 March – the Board considered the first of many updates dedicated to the Group’s response to the pandemic focusing on business continuity plans to ensure that the Group could continue to serve customers and co-ordination of responses to a series of localised scenarios.
5 March – the Board reviewed an update from the Group Corporate Treasurer on the Group’s funding position and capital contingency level.
26 March – the Board Risk Committee discussed the Group’s operational response to the pandemic and highlighted the importance of continued focus on customers and colleagues (in particular colleague mental and physical wellbeing) and regular communication to colleagues as well as contingency planning on the Group’s ways of working.
31 March – the Board met at short notice to discuss the PRA’s request to banks to suspend dividend payments and share buybacks. The Board agreed to suspend dividends and buybacks on ordinary shares until the end of 2020.
19 May – the Board Risk Committee discussed the impact of the pandemic with a focus on the economic impact.
20 May – the Board discussed a proposed multi-step transition back to the office in line with Government guidance and noted the importance of wellbeing desks for colleagues struggling to work from home and of support for customers, in particular personal customers in financial difficulty and SMEs.
“Rule of six” was introduced as cases started rising again with local restrictions imposed; schools returned
Easing of restrictions continued as restaurants, pubs and hotels could open and two households could meet indoors; face coverings were introduced; the number of cases appeared to have stabilised
Tier regulations came into effect with differing levels of restrictions as the NHS came under pressure due to the “second wave”
24 June – the Board considered an update from the Group Chief Executive at its Board meeting, including on COVID transition planning, payment holidays and the impact of the pandemic on colleague ways of working.
24 September – the Board discussed at its meeting customer sentiment through the pandemic, and colleague ways of working, during the pandemic and on the Group’s customer support measures.
29 July – the Board reviewed a specific paper on SME customers and participated in a deep dive on ways of working after the pandemic. The Board also considered a summary of key feedback and viewpoints relating to the wider workforce and the Group’s further response to the pandemic in respect of actions taken to support colleagues and Pulse Survey results. The Board approved the Group’s half-year news release, which included revised 2020 guidance.
6 August 2020 – the Board considered a briefing on the Bank of England’s Financial Stability Report, which provided an update to its previous desktop stress test and commentary on the ability of banks to withstand the current economic stress.
9 December – the Board took part in a deep dive on economic forecasts, including a focus on the impact of the pandemic on the economy and digital structural transformation and assumptions around vaccine roll-out.
6 October – the Board discussed on a Board call an update on analysis of economic scenarios and the underlying assumptions in relation to the pandemic and the UK's exit from the EU ahead of the release of the Group’s Q3 interim management statement later that month.
January 2020 The Board endorsed a number of Culture Change Acceleration initiatives.
These focus on greater empathy, promoting empowerment and simplicity, pioneering new ways of working to remove barriers to cultural change, encouraging contrary positions to be advocated to promote rounded decision-making and reviewing the tone of our communications.
The Group Chief Executive established an executive Culture Working Group to oversee the Culture Change Acceleration initiatives.
Colleague response to the pandemic demonstrated how the Group was able to adapt and work together to support our customers, colleagues and communities through rapid decision-making.
The Board provides oversight and direction in relation to culture activities and believes that establishing the right culture is important to ensure we are building an environment where colleagues are empowered and inspired to do the right thing for customers.
New ways of working have been pioneered, tested and implemented to support and embed our culture change, enabled by the accelerated delivery and adoption of technology improvements to support remote working and collaboration.
All indices and metrics have risen since 2019: Employee engagement index 81 per cent (up 7 pts)
June 2020 The Board received highlights from the colleague Pulse Survey designed to help leaders to understand the impact of the pandemic on colleague sentiment and behaviours.
July 2020 The Board evaluated progress on the Culture Change Acceleration initiatives that incorporated the impact of the pandemic.
November 2020 The Board discussed a further update on the progress made across the Culture Change Acceleration initiatives and proposed 2021 Culture Change Acceleration Plan to embed improvements and accelerate transition towards our desired culture.
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Risks affecting the Ring-Fenced Banks are considered and managed from the RingFenced Banks’ perspective – including maintenance of the capital adequacy and liquidity of the Ring-Fenced Banks.
Group Structure The subsidiaries of the Group are structured into the following sub-groups under Lloyds Banking Group plc providing effective governance for the business undertaken in each sub-group: Ring-Fenced Banks sub-group containing Lloyds Bank plc and Bank of Scotland plc (including the Halifax and MBNA businesses), serving both their UK personal and commercial customers.
Non Ring-Fenced Bank sub-group – Lloyds Bank Corporate Markets plc – which provides products and services to Group customers that are not allowed within the ring-fence as well as serving Financial Institutions customers and holding certain of the Group’s subsidiaries and branches outside the UK.
The Ring-Fenced Bank Boards have three additional independent NonExecutive Directors to the Group Board: Nigel Hinshelwood (Senior Independent Director), Sarah Bentley and Brendan Gilligan. These Ring-Fenced Bank only directors are independent of the management and the rest of the Group and play a crucial role in the governance structure, with an enhanced role in managing any potential conflicts between the Ring-Fenced Banks and the Group.
In addition, in January 2021 the Board approved a Risk Appetite metric for climate risk to ensure the Group continues to progress activities at pace.
The Board Risk Committee receives regular detailed updates regarding the Group’s climate risk management and key developments and will continue to closely monitor climate change and sustainability risks, looking at the impact on both the Group and our customers, and the delivery of the Task Force on Climate-related Financial Disclosures (TCFD) recommendations and other commitments.
The Audit Committee considers climaterelated disclosures in the Group’s financial statements.
Board oversight of Inclusion & Diversity initiatives The Board believes an inclusive and diverse workforce is vital to the Group’s success, and values the differences each colleague brings to their role, making the Group stronger and better able to meet the needs of our customers.
In support of this the Board approved in July 2020 the introduction of our Race Action plan, designed to drive racerelated cultural change, recruitment and progression across the Group.
Climate change impacts are becoming ever clearer and need urgent action. The Group has ambitious plans to further reduce our own emissions and those we finance.
Board evaluation How the Board performs and is evaluated The annual evaluation, which is facilitated externally at least once every three years, provides an opportunity to consider ways of identifying greater efficiencies, maximising strengths and highlighting areas of further development to enable the Board continuously to improve its own performance and the performance of the Group.
If Directors have concerns about the Company or a proposed action which cannot be resolved, their concerns are recorded in the Board minutes. Also on resignation, Non-Executive Directors are encouraged to provide a written statement of any concerns to the Chair, for circulation to the Board. No such concerns were raised in 2020 and up to the date of this report.
December 2020 to January 2021 Report prepared by the Group Company Secretary based on the questionnaire results and matters raised in individual meetings.
Final report reviewed at a meeting of the Board, following its consideration by the Nomination and Governance Committee.
The evaluation concluded that the performance of the Board, its Committees, the Chair and each of the Directors continues to be effective.
All Directors demonstrated commitment to their roles and contributed effectively. The Board is also regarded as very able, collegiate and well-run, with an open and supportive culture and strong governance relating to risks and controls and managing the regulatory requirements of the ring-fencing regime.
Call for further strategic, forward-looking discussion. Further refine Board and Committee meetings in terms of timings, agendas, papers and discussions to permit greater strategic and forward-looking discussion and debate.
Board papers Improve quality of Board papers. Sharpen the focus of papers to: show more of the thinking behind proposals, including trade-offs and options considered and give unvarnished accounts, always sharing bad news as well as good.
be less formal and shorter. make the ‘ask’ of the Board clearer in the paper, together with the reason Board approval was requested, rather than delegating authority to a committee or elsewhere.
Training Further formal technical training for members of Boards and Committees.
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Ring-fenced governance requirements require individual Directors, the Chair and Committee Chairs to manage meetings, to ensure all Directors can contribute fully and effectively.
Agendas and papers are carefully structured to provide clarity in relation to the action required for each entity.
Strategy The Board’s detailed engagement in the formulation of strategy is seen as a key strength, with the strategy days playing an important role in this.
Control relaxations focused on user experience, while maintaining compliance with Bank of England security framework.
Control effectiveness review All key controls are recorded and assessed on a regular basis, either in response to triggers or at a minimum annually. Control assessments consider both the adequacy of the design and operating effectiveness. Where a control is not effective, the root cause is established and action plans implemented to improve control design or performance. Control Effectiveness against all residual risks is reported and monitored via the monthly Consolidated Risk Report (CRR). The CRR is reviewed and independently challenged by the Risk Division and provided to the Risk Division Executive Committee and Group
Under the leadership of the Group Chief Executive, William Chalmers makes and implements decisions in all matters affecting the management of financial resources. He provides specialist knowledge and experience to the Board. Together with António Horta-Osório, William Chalmers designs, develops and implements strategic plans and deals with day-to-day operations of the Group.
E. All policy and practice relating to Group colleagues is developed and implemented in a way which is consistent with the Group’s purpose and values, with the Board receiving regular updates on matters relevant to colleagues. The Board has appointed Alan Dickinson as its whistleblowing champion, with responsibility for overseeing the integrity, independence and effectiveness of the Group’s whistleblowing procedures. In addition, the Audit Committee reviews reports on whistleblowing to ensure there are arrangements in place which colleagues can use in confidence to report relevant concerns, as discussed on page 104 and reports on its review to the Board.
F. The Chair has overall responsibility for the leadership of the Board and for ensuring its effectiveness in all aspects of its operation. These responsibilities are formalised within the Corporate Governance Framework. Lord Blackwell and Robin Budenberg were both independent on appointment.
M. The Board has delegated a number of responsibilities to the Audit Committee, including oversight of financial reporting processes, the effectiveness of internal controls and the risk management framework, whistleblowing arrangements and the work undertaken by the external and internal auditors. The Audit Committee reports regularly to the Board on its activities, and its report for 2020, confirming how it has discharged its duties can be found on pages 101 to 104.
O. The Board is responsible for the Group’s risk management and internal controls systems, including the determination of the nature and extent of risk the Company is willing to take. Risk is further managed through the Board approved Risk Control Framework, as discussed in the risk management report on pages 144 to 204. The Audit Committee assumes further responsibility for the effectiveness of internal controls, with the Board Risk Committee assuming responsibility for the review of the risk culture of the Group, ensuring the correct ‘tone from the top’ in respect of risk management. The related Directors’ Viability Statement can be found on pages 112 to 113 and confirmation that the business is a going concern can be found on page 113.
P. The Group is committed to offering all colleagues a reward package that is competitive, performance-driven and fair and its Remuneration Policy is designed to promote the long-term and sustainable success of the Company. The Directors’ Remuneration Report on pages 115 to 142 provides further details regarding the remuneration of Directors. The current Remuneration Policy can be found in the 2019 Annual Report and Accounts and remains unchanged since last approved by shareholders at the 2020 AGM.
Succession planning My introduction to the Governance Report on page 81 highlighted a number of changes to the Board and its Committees during the year; all of these have been overseen by the Committee. Strong succession planning has been a key focus in helping to ensure the appropriate mix of skills, experience and backgrounds has continued. Further details on the Committee’s approach to succession planning can be found on page 100.
As indicated in last year’s report, Catherine Woods formally joined the Board on 1 March 2020, as a Non-Executive Director. Anita Frew retired from the Board at the AGM in May as planned, with Alan Dickinson succeeding her as Deputy Chair in addition to his existing role of Senior Independent Director. Nick Prettejohn temporarily took on Alan’s role as Chair of the Board Risk Committee, with this role having now passed to Catherine Woods with effect from 1 January 2021. Simon Henry retired as a Non-Executive Director in September, with Simon’s role as Audit Committee Chair passing to Sarah Legg. The experience which Catherine and Sarah bring to the Board, made them ideal candidates to Chair these important Committees. As announced on 29 January 2021, Sara Weller will retire from the Board, and as Chair of the Responsible Business Committee, at the AGM in May 2021. Amanda Mackenzie will take on the role of Chair of the Responsible Business Committee following Sara’s retirement.
Board effectiveness and training As referred to in my introduction to the Governance Report on page 81, this year an internal Board Evaluation has been undertaken, overseen by the Committee. The Committee also considered, and recommended to the Board, actions arising from the previous internal review undertaken in 2019. Full details are provided on pages 94 and 95. The 2021 Board Evaluation is currently expected to be facilitated externally, in line with the recommended approach set out in the UK Corporate Governance Code.
Annually, as part of the Board Evaluation, the Committee also undertakes a review of its own effectiveness. The findings of this review, which were considered by the Committee at its meeting in January 2021, found that the Committee had met its key objectives and carried out its responsibilities effectively.
Q. How will your appointment, and that of the new Group Chief Executive, further complement these qualities? At the time of my appointment, Lord Blackwell commented on my knowledge of the Group combined with broad experience in both financial services and other strategic roles. This, together with Charlie Nunn’s vision for the Group, passion and commitment to our purpose of Helping Britain Recover and Prosper, and his track record which brings world class operational, technology and strategic expertise, will all help build on the strengths of the existing management team in continuing to drive forward the strategic transformation of the Group.
Q. What are the key areas of focus for the Committee in 2021? Given the remit of the Committee, the core areas of focus for 2021 will continue to be succession planning at both Board and executive level, managing Board (and Committee) composition and skills, driving diversity and inclusion at Board level and beyond, and overseeing Board effectiveness.
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The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year. The Committee’s terms of reference can be found at www.lloydsbankinggroup.com/who-weare /group-overview/corporate-governance. html
Appointment Process – Chair and Group Chief Executive Following the announcement of Lord Blackwell’s intention to retire, the Board initiated a search process at the start of 2020, led by the Senior Independent Director, to identify his successor. Following a competitive tender process, Heidrick & Struggles were appointed to assist the Board in identifying a diverse list of potential candidates with the experience and personal qualities to become Chair. The Senior Independent Director kept the Board and the Committee informed on progress, with regular discussions being held throughout. A long list of candidates was considered and narrowed down to a diverse short list. All interested candidates had preliminary meetings with the Senior Independent Director and were interviewed by Heidrick & Struggles. Further detailed consideration of each of the interested candidates led to a final shortlist of three for interview, with each being scored and assessed formally against defined competencies. Robin Budenberg was identified as the preferred candidate on the basis of his broad experience in both financial services and other strategic advisory roles, combined with his knowledge of the Group and leadership qualities. Lord Blackwell was not involved in the selection or appointment of his successor.
Throughout each of these formal, rigorous and transparent appointment processes, consideration was given to a broad range of factors such as merit and objective criteria, consideration of diversity of gender, social and ethnic backgrounds, cognitive and personal strengths, and the Group’s future strategic direction. Neither search firm has any further connection with the Group or individual Directors beyond undertaking search and recruitment related activity.
The Board places great emphasis on ensuring that its membership reflects diversity in its broadest sense. Consideration is given to the combination of demographics, skills, experience, race, age, gender, educational and professional background and other relevant personal attributes on the Board to provide the range of perspectives, insights and challenge needed to support good decision-making.
New appointments are made on merit, taking account of the specific skills and experience, independence and knowledge needed to ensure a rounded Board and the diverse benefits each candidate can bring to the overall Board composition.
Objectives for achieving Board diversity may be set on a regular basis. In January 2021 the Board considered and approved updates to aspirations set out in the Board Diversity Policy relating to gender diversity and the number of senior roles held by Black, Asian and Minority Ethnic executives.
On gender diversity the Board is committed to maintaining at least three female Board members and over time will aim to reach 50 per cent female representation on the Board to match the 50 per cent ambition that the Group has set for female senior roles.
The Group has also set a target of 13 per cent of senior roles to be held by Black, Asian and Minority Ethnic executives by 2025. The Board currently meets, and will aim to continue to meet, the objectives of the Parker review with at least one Black, Asian and Minority Ethnic Board member.
As at 31 December 2020, female representation within Group Executive Committee and their direct reports was 32.3 per cent in total (with 26.7 per cent for Group Executive Committee and 33.0 per cent for their direct reports ). Female representation across all senior roles was 37.0 per cent, and Black, Asian and Minority Ethnic representation in senior roles was 7.7 per cent. The Group also launched its Race Action plan during 2020, which aims to drive cultural change, recruitment and progression across the Group, including a new public goal to increase Black representation in senior roles from 0.6 per cent to at least 3 per cent by 2025, aligning the Group with the overall UK labour market. Further details of the Race Action plan, and the Group’s further achievements in championing inclusion and diversity in its widest sense can be found on pages 25.
Succession Planning Effective succession planning is a key component of good governance. With the appointment of a new Chair and the announcement of a new Group Chief Executive during the year, this has been a particular area of focus for the Committee. The arrangements being put in place to cover any interim period before Charlie Nunn joins the Group help illustrate how effective succession planning can be used to address short-term requirements. Effective succession planning also contributes to the ability of the Group to deliver on its strategic objectives by ensuring the desired mix of skills and experience of Board members now and in the future. The Board is also committed to recognising and nurturing talent within the executive and management levels across the Group to ensure that the Group creates opportunities to develop current and future leaders.
The Committee also continued to consider the adequacy of succession arrangements for key senior management roles. During the year, additional focus was given to development plans together with cultural and capability assessments, which will help nurture talent and drive cultural transformation across the Group, and support the ongoing delivery of the Group’s strategy.
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The strength of the Group's internal control environment and our ongoing commitment to improving this end to end will be key in supporting the Group's ongoing transformation.
Sarah Legg Chair, Audit Committee audit and external audit. These issues are also discussed in detail on the final page of the report.
All members of the Committee are independent Non-Executive Directors with competence in the financial sector, and their biographies can be found on pages 82 to 83.
Overseeing the important relationship with the Group’s external auditor, and ensuring a smooth transition to our new external auditor, Deloitte.
Introduction I am pleased to report, for the first time since assuming the role of Chair of the Audit Committee, on how the Committee has discharged its responsibilities during what has and continues to be very challenging times. I assumed the role of Chair of the Committee in October 2020, following a comprehensive handover of responsibilities from Simon
The Group’s impairment provision is dependent on management’s judgements on matters such as future interest rates, house prices and unemployment rates, as well as its assessment of a customer’s current financial position and whether the exposure has suffered a significant increase in credit risk.
The allowance for impairment losses on loans and advances to customers at 31 December 2020 was £5,760 million (2019: £3,259 million).
During the year, the Committee has challenged both the level of provision held by the Group, and the judgements and estimates used to calculate the provision.
Management judgement is used to determine the population likely to be impacted by conduct risk matters, the cost of remediation and, where appropriate, any related administration costs.
During 2020, the Group made provisions of £464 million (2019: £2,895 million), including £85 million for PPI (2019: £2,450 million).
Conclusion: The Committee agreed with management’s judgement that the deferred tax assets were appropriately supported by forecast taxable profits, taking into account the Group’s long-term financial and strategic plans. The disclosures relating to deferred tax are set out in note 35: ‘Deferred tax’ of the financial statements.
Conclusion: The Committee was satisfied that the provisions and disclosures made in respect of uncertain tax positions were appropriate. The relevant disclosures are set out in note 46: ‘Contingent liabilities, commitments and guarantees’ of the financial statements.
Financial Reporting During the year, the Committee has spent a significant amount of time discussing the financial reporting implications of the COVID-19 pandemic, and in particular its impact upon the Group’s loan loss provisions, the fair value of its financial instruments and the assessment of the carrying value of its deferred tax asset, goodwill and other intangible assets. These are discussed below in more detail, together with other key issues which have impacted the Group’s financial statements in 2020.
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Conclusion: The Committee was satisfied that management had used appropriate assumptions that reflected the Group’s most recent experience and were consistent with market data and other information.
At 31 December 2020, the Group’s VIF asset was £5,617 million (2019: £5,558 million) and its liabilities arising from insurance contracts and participating investment contracts were £116,060 million (2019: £111,449 million).
Conclusion: The Committee was satisfied that the assumptions used to calculate the VIF asset and liabilities arising from insurance contracts and participating investment contracts were appropriate. The disclosures are set out in notes 23 and 30.
Focus within the Group remains on operating a strong Financial Control Framework, ensuring that appropriate controls are in place. Balance sheet substantiation forms a key component of this framework, with regular reporting to Senior Management on its effectiveness. Where control issues do arise, they are addressed appropriately.
Balance Sheet Substantiation and Control forms part of the Group’s wider risk management process, detailed on pages 144 to 204.
Regular updates are given to the Committee on the status of key balance sheet substantiation metrics and key control issues.
During the year the Committee reviewed key balance sheet substantiation metrics, covering ownership of general ledger balances, reconciliation, and independent quality review status. The Committee noted the improvement in these metrics over the last few years. The Committee also considered a summary of a small number of specific key control matters, including remediation thereof.
Conclusion: The Committee was satisfied with the approach to Balance Sheet Substantiation and Control.
Risk management and internal control systems Full details of the internal control and risk management systems in relation to the financial reporting process are given within the risk management section on pages 144 to 204. Specific related matters that the Committee considered for the year included: The effectiveness of systems for internal control, financial reporting and risk management
Risk-weighted assets (RWA) and regulatory reporting In 2019, the Committee commissioned work to commence on external RWA Assurance and a programme of agreed internal second and third line activity. In addition to this, following the industry wide Dear CEO letter on Regulatory Reporting, management also commissioned a programme to review and strengthen the quality of Regulatory Reporting across the Group. Management provided regular updates to the Committee over the year. These highlighted the progress made in both the development of a principles based framework and improvements in the reporting control environment across a number of regulatory reports.
Considered the major findings of significant internal audits, and management’s response
Monitored the progress of internal audit’s coverage of key risk themes across the Group, including Delivery of Strategic Change, Cyber & Information Security, Data Management, Operational Resilience, Third Party Management and Credit Risk Management
The Committee reported on its consideration of whistleblowing arrangements to the Board. The Committee also continued to operate an interim sub-committee to consider whistleblowing cases where allegations relate to Material Risk Takers or Senior Managers, and to oversee improvements being made to the Group’s whistleblowing arrangements.
Auditor independence and remuneration Both the Board and the external auditor have policies and procedures designed to protect the independence and objectivity of the external auditor. In January 2020, the Committee amended its non-audit service policy (the Policy) to reflect changes to the FRC’s rules on auditor independence and to require Deloitte, who will be appointed as the Group’s auditors during 2021, to comply with the Policy.
In addition to detailing those services that the Committee prohibits the external auditor from providing to the Group, the Policy preapproves certain services provided the fee is below a threshold; all other permitted services must be specifically approved in advance by the Committee. The Policy will be reviewed again in April 2021. Prior to engagement of the auditor for a permitted service, the Policy requires that senior management confirms whether the Committee has pre-approved the service or specific approval is required. The total amount of fees paid to the auditor for both audit and non-audit related services in 2020 and further information on the Policy is disclosed in note 12 to the financial statements.
The Committee oversees the relationship with the external auditor including its terms of engagement and remuneration, and monitors its independence and objectivity; PwC was the Group’s auditor for the year ended 31 December 2020. Mark Hannam has been PwC’s senior statutory audit partner for the Group and the Company since the beginning of 2016, and attends all meetings of the Committee. During 2020, the Committee reviewed PwC’s audit plan, including the underlying methodology, and PwC’s risk identification processes. In its assessment of PwC’s performance and effectiveness, the Committee has considered: PwC’s interactions with the Committee; the responses to a questionnaire issued to the Group’s businesses, Finance, Risk and Internal Audit; and the Financial Reporting Council’s (FRC) Audit Quality Inspection Report published in July 2020. In addition, the FRC’s Audit Quality Review team reviewed PwC’s audit of the Group’s 2019 financial statements as part of its latest annual inspection of audit firms. The Committee received a copy of the findings and discussed them with PwC. While there were no significant findings, some areas of PwC’s audit procedures were identified as needing limited improvements only. The Committee concluded that it was satisfied with the auditor’s performance.
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Focusing on the operational resilience of the Group and strengthening of the Group’s control environment
Reviewing the Group’s response to the heightened People risks, and colleague impacts, of the pandemic
Continued focus on the Group’s management of customer rectifications and complaints
Introduction I was delighted to take on the role of Chair of the Committee with effect from 1 January 2021, and am pleased to report on how the Committee has discharged its responsibilities throughout 2020.