We have taken further steps towards this goal this year. As well as reporting our financial results, we also report on our approach to operating responsibly and take into account relevant economic, political, social, regulatory and environmental factors.
Governance A letter from our Chairman 52 Board of Directors 54 Group Executive Committee 56 Corporate governance report 58 Directors’ report 81 Directors’ remuneration report 84 Other remuneration disclosures 103
The UK financial services sector continues to face a number of near term challenges. The economic environment remains uncertain, the level of regulatory change remains high, competition continues to be fierce and the pace of technological change requires continuing innovation while posing new threats from data and cyber security. This reinforces our conviction that our differentiated, customer focused, simple and low risk business model is the right approach. It has helped us deliver over the last few years and will, I believe continue to do so going forward.
However, the rapid pace of technological change also brings new opportunities to improve our service to customers with faster, more convenient and more extensive propositions tailored to meet their needs. To meet our customer needs effectively in this new world we will need to transform our business operations while building on our traditional strengths. As a Board we have spent considerable time over the past two years discussing the path we need to follow to succeed as a ‘Bank of the Future’. This provided a solid base for us to develop the next phase of our strategy with the senior management team. The transformation we have now embarked on will ensure we maintain the core values of the past while equipping us to succeed in the future. It will also ensure we use all our capabilities across the Group to serve our customer needs seamlessly as an integrated financial service provider. The pace and scale of this transformation will be challenging to every bank, but we have a very strong foundation from which to move forward. I am confident that our new strategy will provide the capabilities to continue to deliver for customers, colleagues and shareholders and support the communities in which we operate.
We are enormously proud of this role. Through our products and services, we have been helping the people, businesses and communities of Britain for more than 250 years. But we want to do even more; we want to
Lloyds Banking Group Annual Report and Accounts 2017 03 be a bank for Britain. Our Helping Britain Prosper Plan takes us beyond our business as usual activities by using our scale and reach, and unites our Group to meet some bold commitments. When Britain prospers we prosper, so the Plan is an important investment in our long-term success.
Our responsible, inclusive and diverse culture ensures our colleagues consistently do the right thing for customers. Over the last year we have taken steps to become even more transparent in the way we communicate with all our stakeholders. Of course, there is always more to do and getting this culture right is critical to our success in an increasingly competitive environment.
Communities I am extremely proud of the way we support communities across the country and help British people and businesses prosper and am pleased that so many of our colleagues have once again taken the time to volunteer and raise funds for charities and community groups. Over the course of 2017 our colleagues donated 260,000 hours of their time by sharing their skills and experience to help make sustainable differences to local charities, schools, colleges and businesses.
Despite the uncertain environment, the Group has reported increased statutory and underlying profits, strong capital generation, has announced an increased ordinary dividend and intends to implement a share buyback.
Outlook There is of course much more to do as we face into a rapidly changing and challenging world. However, given our clear strategy and approach to transforming the business, our strong track record of delivery, our customer focused values and the dedication and commitment of our colleagues, we have all the components to succeed - building a great British institution we can all be proud of.
Payments £14 trillion of payments processed in 2017 = 7 x UK GDP
Financial performance We have delivered another year of strong financial performance in 2017 with increased profits and returns on both a statutory and underlying basis, strong capital generation and increased capital returns.
In line with our progressive and sustainable ordinary dividend policy, the Board has recommended a final ordinary dividend of 2.05 pence per share, taking the total ordinary dividend for 2017 to 3.05 pence per share, up 20 per cent on 2016. Given our strong capital generation the Board has also announced its intention to implement a share buyback of up to £1 billion, equivalent to up to 1.4 pence per share.
Strategy overview As we look to the future, we see the external environment evolving rapidly. Changing customer behaviours, the pace of technological evolution and changes in regulation all present opportunities. Given our strong capabilities and the significant progress made in recent years we believe we are in a unique position to compete and win in this environment by developing additional competitive advantages. We will continue to transform ourselves to succeed in this digital world and the next phase of our strategy will ensure we have the capabilities to deliver future success.
Delivering a leading customer experience We will drive stronger customer relationships through best in class propositions while continuing to provide our customers with brilliant servicing and a seamless experience across all channels. This will include: remaining the number 1 digital bank in the UK with open banking functionality; unrivalled reach with UK’s largest branch network serving complex needs; and data-driven and personalised customer propositions.
Transforming ways of working We are making our biggest ever investment in people, increasing colleague training and development by 50 per cent to 4.4 million hours per annum and embracing new technology to drive better customer outcomes. The hard work, commitment and expertise of our colleagues has enabled us to deliver to date and we will further invest in capabilities and agile working practices. We have already restructured the business and reorganised the leadership team to ensure effective implementation of the new strategy.
Capital generation is expected to remain strong with 170-200 basis points of capital generation per year pre dividend and as a result we expect to deliver progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders.
Underlying profit of £8.5 billion, an increase of 8 per cent on 2016
Completed the acquisition of prime credit card business MBNA and announced the acquisition of Zurich’s UK workplace pensions and savings business
Performance is assessed against a balanced scorecard of objectives across five areas (customer, people, control environment, building the business, finance) which are reviewed on a regular basis. Executive management are also eligible to participate in a long-term incentive plan (the Group Ownership Share plan), which encourages delivery of superior and sustainable long-term returns for shareholders, whilst supporting the Group’s aim of becoming the best bank for customers, colleagues and shareholders and helping Britain prosper. KPIs that are directly linked to remuneration are marked with this symbol.
Our common equity tier 1 ratio remains one of the strongest of the major UK banks.
The statutory return on tangible equity increased in 2017 as the gap between underlying and statutory profit continues to reduce.
Given our UK focus, our prospects are closely linked to the strength of the UK economy
Given our simple, low risk business model, we are well placed to meet these requirements and welcome the positive effect that they will have on the industry, its customers, and other stakeholders.
Opportunities Strong customer satisfaction scores demonstrate our ability to provide products and services that our customers value but it is imperative that we keep pace with market developments in order to maintain relevance with our customer base.
Opportunities As the UK’s largest digital bank, further technological improvements are an important enabler of enhancing the customer experience. The increasing use of intelligent systems provides an opportunity to respond to customers’ growing expectations for personalisation and relevance, while the automation of simple transactions increases our capacity to focus on complex, value adding transactions. In addition, the use of technology provides organisational benefits in terms of efficiency, our ability to respond to an evolving operating environment, as well as aiding risk taking decisions and mitigating fraud.
While the extent to which non-traditional lenders and tech giants will attempt to disintermediate our markets is unclear, intensified competition within our markets is likely. This will place pressure on income and margins across the sector and place an increasing focus on innovation.
Our business model Intrinsic strengths and challenges We have several distinctive competitive strengths, which enable us to create sustainable value for our stakeholders.
Market leading efficiency position Our simpler operating model and focus on operational efficiency provide a cost advantage which benefits both customers and shareholders.
Our Helping Britain Prosper Plan, launched in 2014, takes us well beyond business as usual by setting measurable targets in the areas where we can make the biggest difference.
Our business areas are structured according to the products and services we provide to best serve our customers’ financial needs.
We are now the UK’s largest digital bank, with 13.4 million online customers and a mobile customer base of 9.3 million
We have maintained our cost leadership position amongst UK high street banks
We are creating an honest and open environment where colleagues feel valued, reflected in all-time high colleague engagement scores that are also above the norm for high performing organisations
We have made significant progress against our strategic priorities over the last three years and are well positioned as we head into the next chapter of our strategy.
Operating costs reduced every year during the course of the last six years (excluding the impact of MBNA in 2017)
The Board debated the transformation required to become ‘Bank of the Future’ and underpin our continued competitiveness in each of these scenarios. This provided a solid foundation for us to develop the next phase of our strategy.
At the same time, executive management and the Board have been engaged in the development of the communication plan, to ensure that all our stakeholders clearly understand the strategy and what it means for them.
Tailoring our multi-channel approach We will build on the strength of our multichannel model by responding to the evolving ways in which our customers are choosing to interact with us, ensuring that they continue to benefit from seamless multi-channel services in a way that best fits their needs.
Our customers are increasingly choosing digital channels to meet their simple banking needs. We will therefore continue to invest in the development of new digital technologies, to enable the delivery of best-in-class selfserve functionality for these simpler needs. We will also provide new customer tools to increase confidence and trust in using our digital channels.
Key objectives for 2020 We are making our biggest ever investment in people and by transforming our ways of working, we are aiming to achieve a culture of inclusiveness and collaboration, while also upskilling our colleagues for future needs and new career paths.
Developing a compelling colleague proposition In order to attract, develop and retain the skills we need in the future as well as embed our desired culture, we will also make a number of positive changes to the processes, systems and the physical environment that directly affect our colleagues. This will include the simplification of the organisation to make it less hierarchical, providing our colleagues with clearer career paths, more flexibility and greater mobility across the Group. Other initiatives to support this aim include improvements to our performance management process to create a better balance between past performance evaluation and future development.
+£6 billion of additional net lending to start-ups, SMEs and Mid Markets the acquisition of Zurich’s UK workplace pensions business. To access faster growing segments and improve customer experience, we will enhance our distribution model across both intermediary and direct channels.
Transforming our business to meet customers’ needs, including the 13.4m banking digitally
You can read more about the Group Policy framework and how these Policies are monitored and embedded on page 111
This year, we delivered £13 billion of lending to help first-time homebuyers, created more than 1,200 new apprenticeship positions in the Group and provided support and guidance to help almost 89,000 customers plan for retirement. Through our support for the School for Social Entrepreneurs we helped a further 260 social entrepreneurs start or grow their businesses. We also made good progress against our target to train 1.8 million individuals, businesses and charities in digital skills by 2020, having trained more than 708,000 in 2017.
Addressing the issues that matter most This year we asked our stakeholders – including colleagues, customers, investors, community groups, special interest groups and opinion formers – to participate in our materiality survey, to help us shape our reporting.
They were particularly interested in issues related to how the Group is run; building trust; supporting communities and society; economic performance and contribution; responsible and accessible products; human rights, diversity and equality; and people management and development.
We have structured our responsible business reporting around our key stakeholder groups. The issues they prioritised are listed at relevant points to help you find those of most interest to you.
We continue to promote I&D through our Group Executive Committee. Several of our senior executives are I&D sponsors, and an Operational Committee overseas how our I&D plans are implemented.
We have committed to ensure that women hold 40 per cent of our senior roles by 2020, and to help reach this target we monitor gender diversity on candidate lists for senior appointments. Over 400 women have now completed our Women in Leadership programme, with 100 achieving promotion. We’ve continued to develop and promote our Authentic Leadership Programme for Black, Asian and Minority Ethnic leaders. We foster cultural awareness through promoting role models and communication campaigns.
Health, safety and wellbeing We care about the physical and mental health, safety and wellbeing of our colleagues. We provide them with a growing range of health and wellbeing resources, including company paid private medical cover, occupational health services and an employee assistance programme. We publish advice about health topics on our intranet and actively encourage colleagues to support external health and wellbeing campaigns.
CREATING MORE APPRENTICESHIPS WITHIN OUR GROUP During 2017, we created more than 1,200 apprenticeship positions within the Group, bringing the total to more than 5,500 since 2012. Around 44 per cent of the new apprenticeships were taken up by external candidates from some of the UK’s most disadvantaged areas. We are proud of the fact that many of our apprentices flourish with us after qualification including Vickie McRae, a mother of two who joined the Group in 2015.
We help and educate customers to improve their own banking and data security and champion industry-wide public information campaigns, including Take 5, a national education and awareness campaign. We offer support to colleagues to protect our customers and they can access our AntiMoney Laundering and Counter Terrorist Policies and specialist training if required.
Looking ahead, our key priorities are to further strengthen our cyber defences and to meet the requirements of the upcoming EU General Data Protection Regulation which will apply from May 2018.
We met our 2017 target to provide £1 billion in funding support for the manufacturing sector and launched a £500 million fund to help manufacturers access asset finance to invest in new capital to improve productivity. We’ve also supported more than 500 apprentices, graduates and engineers at the Lloyds Bank Advanced Manufacturing Training Centre in Coventry.
We want all customers to have easy access to our products and services. We’ve worked hard to track vulnerable customers’ needs, particularly in our Community Bank, and developed a Group-wide dashboard to identify emerging vulnerability trends. In 2017, our specialist support team helped 1,900 customers with cancer, through financial advice and with medical and emotional support from our partners Macmillan. To help colleagues do more for vulnerable customers, we provided 90,000 hours of vulnerability training.
Responsible conduct and culture We are building a responsible, inclusive and diverse culture based on our values, which help colleagues consistently do the right thing for customers. The 2017 launch of our Group and leadership behaviours has given colleagues clear guidance about how to live our values at work. Throughout the year we reinforced our values and behaviours through numerous initiatives and embedded the behaviours in our processes and policies.
We equip and encourage colleagues to work in line with our values, our Code of Responsibility and all other standards relevant to their role. We also encourage them to speak up, challenge and act if they witness or suspect wrongdoing by contacting our Colleague Conduct Management Team or using our independent whistleblowing service ‘Speak Up’, which is accessible by phone, online or mobile app. During 2017, colleagues reported 372 concerns of which 181 were progressed to investigation. 57 per cent of the concerns investigated were upheld and remedial action taken where appropriate.
Shareholders Engaging with our shareholders helps us understand their issues, shape our strategic thinking and improve our corporate reporting. We held more than 800 meetings with investors in 2017, including a number with SRI investors. We also ran a number of webinars, roadshows and meetings to update shareholders, investment analysts and ratings agencies about our performance.
Communities We invest in local communities across Britain to help them prosper economically and build social cohesion by tackling disadvantage.
Financial education and inclusion Our award winning Money for Life programme is specifically designed to help vulnerable 16-25 year olds to improve their financial competencies. Since the programme was relaunched in October 2016 we have engaged more than 450,000 young people and over 11,300 money masterclasses have been delivered face-to-face in youth centres across England, Wales, Scotland and Northern Ireland. In addition to this colleagues have delivered financial literacy sessions in primary and secondary schools in local communities. Thanks to our ‘StandingOut’ programme we remain one of the largest providers of school and academy governors in Britain, with 577 colleagues currently involved.
Our charity partner In 2017 we raised £4.8 million for Mental Health UK. This money will have a significant impact across the UK and has funded the first helpline dedicated to supporting people experiencing mental health and money management issues, which was launched in November 2017. We also aim to increase awareness and reduce the stigma associated with mental health so that our colleagues can support themselves, each other and our customers.
This year, our overall carbon emissions were 292,848 of CO2e, a decrease of 14 per cent year-on-year and of 48 per cent against our 2009 baseline. This is mainly attributable to the reduction in consumption of gas and electricity, which make up the largest proportion of our emissions, as a result of our extensive energy management programme. In 2017, we also reduced the CO2e related to our business travel by promoting our ‘No Travel Week’, encouraging travel alternatives and the successful roll out of ‘WebEx’, Group-wide.
Read more about our emissions in the Directors’ report on page 83
The impact of climate risk We welcome the recommendations of the Financial Stability Board Taskforce on Climate-related Financial Disclosures (TCFD) and have mapped our approach to them. We are developing a strategy and implementing processes to: Assess the materiality of climate risk across our business Identify and define a range of scenarios, including relevant physical and transition risk Evaluate the business impacts Identify potential responses to manage the risks and opportunities
We need to use scarce natural resources more sustainably, manage our environmental impacts and support our customers by financing opportunities created by the transition to a low carbon economy.
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Our climate related financial disclosures Our strategy In 2017, we reviewed how we integrate environmental sustainability into our strategy and risk management processes, taking advice from external advisors and working with all parts of the business to understand work already in plan and where we need to do more. We are committed to supporting the transition to a low carbon economy through our financial products and services, including renewable energy services.
Governance of climate change The Responsible Business Committee, a sub-committee of the Board, will take overall responsibility for the Group’s climate-related impacts and risks from 2018. It is chaired by an Independent Director, Sara Weller, and meets regularly throughout the year. We have refocused our executive-level Responsible Business Management Committee to become our Sustainability Committee and will ensure that colleagues with operational responsibilities across the Group’s key divisions are actively involved in the development and implementation of a comprehensive environmental sustainability strategy. Discussions involving these Committees and the Commercial Banking leadership team were held in 2017 to start to examine the strategic implications of environmental challenges, including climate change.
Our target is to reduce our overall CO2e by 60 per cent by 2030 and 80 per cent by 2050, in line with the UK’s emission reduction targets. This follows a science-based target setting methodology. As part of our Green Loan Initiative, our target is to fund 5 million square feet of commercial real estate to become more energy efficient by 2020, the equivalent of five London Shards. We have set a new target to help provide power for 5 million homes through our investment in renewable energy by 2020.
Retail complaint volumes (excluding PPI) down 17 per cent compared to 2016.
Delivering sustainable growth Successfully completed the acquisition of MBNA from Bank of America, consolidating the Group’s position as Britain’s largest prime credit card issuer, with 25 per cent market share of balances.
Operating costs increased 2 per cent to £4,857 million. Excluding MBNA, costs decreased by 1 per cent driven by efficiency savings partly offset by increased investment spend and pay related growth.
Creating the best customer experience Awarded Business Bank of the Year at the FDs’ Excellence Awards for the 13th consecutive year; scoring highest against peers across all three assessment criteria; service, relationship managers and value for money.
Delivering sustainable growth Following the launch of the Green Loan Initiative in 2016, the Group has provided in excess of £0.5 billion of green lending, improving the energy efficiency of over 5 million square feet of real estate.
SME lending up 2 per cent, outperforming the market and providing valuable support to the economy.
Financial performance Underlying profit increased 5 per cent to £2,489 million, driven by income growth and active cost management, delivering improvement in cost:income ratio to 45.8 per cent.
Operating lease depreciation reduced due to lower accelerated charges compared with 2016.
Funding for UK manufacturers £bn 1 Proportion of Group underlying profit excluding run-off and central items.
Becoming simpler and more efficient Simplifying insurance systems and processes through long-term partnerships with Diligenta and Jardine Lloyd Thomson, enabling customers to better manage their policies with Scottish Widows.
Since market entry in 2015, we have written £2.5 billion of bulk annuity business (of which £0.6 billion in 2017) and continue to see significant demand from UK defined benefit pension schemes using bulk annuities to manage risk.
The total underwritten household premiums decreased by 12 per cent reflecting the highly competitive marketplace, despite achieving an increase in underwritten new business premiums of 12 per cent supported by the new flexible Direct proposition launched during 2016.
Strong control framework The Group’s Risk Management Framework is the foundation for the delivery of effective risk control and ensures that the Group risk appetite is continually developed and adhered to.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 33
This has the potential to impact, for example, the resource and investment available to allocate to the Group’s strategic priorities.
The Group will continue to focus on change execution whilst keeping pace with developments to meet new and evolving customer needs.
We continue to optimise our approach to operational resilience by enhancing systems that support the Group’s critical business processes, evolving controls within new technologies and channels, and making significant investment to improve data privacy, including the security of data.
We must ensure that an unexpectedly fast pace of change, which may accelerate customer disintermediation, does not lead to our involvement in anti-competitive practices, or prevent certain customer groups from having equal access to our products and services.
Increased legislative requirements, such as ring-fencing legislation, Payment Services Directive 2 (PSD2), Open Banking and General Data Protection Regulation (GDPR).
We respond as appropriate to impending legislation, regulation and associated consultations and participate in industry bodies. We continue to be subject to significant ongoing and new legislation, regulation and court proceedings.
The most significant risks which could impact the delivery of our long-term strategic objectives and our approach to each risk, are detailed below.
The risk that parties with whom we have contracted, fail to meet their financial obligations (both on and off balance sheet).
Example Adverse impact on profitability due to an increase in impairment losses, write downs and/or decrease in asset valuations which can occur for a number of reasons, including adverse changes in the economic, geopolitical and market environment. For example, low interest rates have helped customer affordability, but there is a risk of increased defaults as interest rates rise.
Credit policy, incorporating prudent lending criteria, aligned with Board approved risk appetite, to effectively manage risk.
Impairments remain below long-term levels and are expected to increase as the level of write-backs and releases reduces and impairments normalise.
Key risk indicators Impairment charge Impaired assets £795m £7,841m 2016: £645m 2016: £8,495m
Principal risks and uncertainties are reviewed and reported regularly. This year we have added a new principal risk, model risk, to reflect the Group’s increasing use of analytics and models to make decisions.
We face significant operational risks which may disrupt services to customers, cause reputational damage, and result in financial loss. These include the availability, resilience and security of our core IT systems, unlawful or inappropriate use of customer data, theft of sensitive data, fraud and financial crime threats, and the potential for failings in our customer processes.
Example The dynamic threat posed by cyber risk to the confidentiality and integrity of electronic data or the availability of systems.
Significant investment in compliance with GDPR and Basel Committee on Banking Supervision standards.
Conduct risk can arise from a number of areas including selling products to customers which do not meet their needs; failing to deal with customers’ complaints effectively; not meeting customers’ expectations; failing to promote effective competition in the interest of customers; and exhibiting behaviours which could impact on the integrity of the market or undermine wider regulatory standards.
Example A worsening macroeconomic environment could lead to adverse financial performance, which could deplete capital resources and/ or increase capital requirements due to a deterioration in customers’ creditworthiness.
Close monitoring of capital and leverage ratios to ensure we meet regulatory requirements and risk appetite.
Comprehensive stress testing analyses to evidence capital adequacy under various adverse scenarios.
2 CET1 ratio after ordinary dividends and share buyback. 2016 adjusted for MBNA.
Holding liquid assets to cover potential cash and collateral outflows and to meet regulatory requirements. In addition, maintaining a further pool of assets that can be used to access central bank liquidity facilities.
Undertaking daily monitoring against a number of market and Group-specific early warning indicators.
We maintain a strong funding position in line with our low risk strategy and the loan to deposit ratio remains within our target range. Our funding position allows the Group to grow targeted business segments and better address our customers’ needs.
Key insurance underwriting risks within the Insurance business are longevity, persistency and property insurance. Longevity risk is expected to increase as our presence in the bulk annuity market increases.
Key risk indicators Insurance (Life and Pensions) present value of new business premiums £9,951m 2016: £8,919m
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 37
Structural hedge programmes implemented to manage liability margins and margin compression.
Against a background of increased regulatory focus on governance and risk management, the most significant challenges arise from meeting the requirements to ring-fence core UK financial services and activities from January 2019 and further requirements under the Senior Manager & Certification Regime (SM&CR).
Programme in place to address ring-fencing. In close and regular contact with regulators to develop and deploy our planned operating and legal structure.
Summary of Group results 39 Divisional results 45 Other financial information 49
1 Net of profits on disposal of operating lease assets of £32 million (2016: £58 million).
Other income was £6,205 million, an increase of 2 per cent in the year. The increase reflected continued growth in the Lex Autolease business, the £146 million gain on sale of the Group’s interest in Vocalink and £274 million (2016: £112 million) of gains from the sale of £14 billion of gilts and other available-for-sale assets (2016: c.£5 billion). The increase was partly offset by lower income from the run-off portfolio and reduced income from bulk annuities reflecting the timing of transactions.
In 2017 the Group continued to focus on tight cost control while investing significant amounts in developing its digital capability, improving the branch network and simplifying processes. The Simplification programme has achieved the annual run-rate savings target of £1.4 billion since 2014, ahead of the original £1 billion target.
Overall credit performance in the UK Retail mortgage book remains stable. The average indexed loan to value (LTV) improved to 43.6 per cent (31 December 2016: 44.0 per cent) and the value of lending with an indexed LTV of greater than 80 per cent fell to £30.7 billion (31 December 2016: £32.4 billion). Impaired loans as a percentage of closing advances were 1.3 per cent (31 December 2016: 1.4 per cent).
The UK Motor Finance book continues to benefit from conservative residual values and prudent provisioning and impaired loans as a percentage of closing advances were stable at 1.0 per cent. The credit card book also continued to perform strongly with the MBNA portfolio performing in line with the Group’s expectations. Impaired credit card balances as a percentage of closing advances improved to 2.3 per cent (31 December 2016: 3.1 per cent).
The Commercial Banking portfolio continues to benefit from effective risk management, a resilient economic environment and continued low interest rates. Impaired loans as a percentage of closing advances reduced to 1.9 per cent (31 December 2016: 2.1 per cent).
Statutory profit before tax increased 24 per cent to £5,275 million (2016: £4,238 million) driven by higher underlying profit and lower volatility and other items. Statutory profit after tax increased by 41 per cent to £3,547 million (2016: £2,514 million).
The PPI charge of £1,650 million included an additional £600 million in the fourth quarter reflecting an increase in expected weekly complaints from 9,000 to 11,000, which is the average level of complaints for the last nine months. The outstanding balance sheet provision at 31 December 2017 was £2.4 billion.
The other conduct provisions of £865 million included an additional £325 million charged in the fourth quarter which covers a number of items including packaged bank accounts, arrears handling and smaller legacy issues.
1 Excludes reverse repos of £16.8 billion (31 December 2016: £8.3 billion).
The loan to deposit ratio was broadly stable at 110 per cent. Wholesale funding reduced by 9 per cent to £101 billion compared with £111 billion at 31 December 2016. In addition, the Group made use of central bank funding schemes and by the end of 2017 the Group had fully utilised its £20 billion capacity from the Bank of England’s Term Funding Scheme.
The Group’s CET1 ratio has strengthened to 15.5 per cent on a pro forma basis before ordinary dividends and the share buyback. After ordinary dividends and allowing for the share buyback, the CET1 ratio remains strong at 13.9 per cent.
As reported in the Q3 IMS, the Group’s Pillar 2A CET1 requirement has increased by 0.5 per cent to 3 per cent. In addition, the Countercyclical Capital Buffer on UK exposures will be introduced during 2018 and the Systemic Risk Buffer will come into effect in early 2019. The Group is also pleased to announce that the PRA has now completed its annual review of the Group’s PRA Buffer requirement. As a consequence, the Board’s view of the level of CET1 capital required is c.13 per cent plus a management buffer of around 1 per cent. The Group’s CET1 ratio as at 31 December 2017, including the Insurance dividend and after the ordinary dividend and allowing for the share buyback, was 13.9 per cent.
The Group’s total capital ratio remains strong at 21.2 per cent which, when combined with eligible senior unsecured securities issued by Lloyds Banking Group plc, has left the Group well positioned to meet its Minimum Requirement for Own Funds and Eligible Liabilities (MREL) from 2020.
2 Excludes repos of £2.6 billion (31 December 2016: £2.5 billion).
4 The 2017 capital and leverage ratios do not, unless otherwise indicated, recognise the share buyback as this will be reflected in 2018.
Impaired loans as % of closing advances 1.9% 2.1% (0.2) pp
3 The customer segment balances include lower risk loans that were originated by Commercial Banking and subsequently sold to the Insurance business to back annuitant liabilities. These loans are reported in Central items but have been included in this table to aid comparison with prior periods.
Experience and other items contributed a net benefit of £358 million (2016: £202 million), including benefits as a result of changes to longevity assumptions. These include both experience in the annuity portfolio and the adoption of a new industry model reflecting an updated view of future life expectancy.
The lower income and costs reflect further reductions in the run-off portfolios. The run-off portfolio largely comprises the Group’s Irish mortgage book and a number of other corporate and specialist finance portfolios.
Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions and the Group’s private equity business, Lloyds Development Capital.
Total income increased to £825 million (2016: £546 million) largely as a result of the gains on sales of liquid assets including gilts of £274 million (2016: £112 million) and the gain of £146 million on the sale of the Group’s interest in Vocalink.
Non-banking net interest income largely comprises subordinated debt costs incurred by the Insurance business. Non-banking assets largely comprise fee based loans and advances within Commercial Banking and loans sold by Commercial Banking and Retail to Insurance and Wealth to back annuitant liabilities.
Non-banking items: Fee based loans and advances (8.1) (7.4) (7.4) (8.5) (9.4)
Tangible net assets per share The table below sets out a reconciliation of the Group’s shareholders’ equity to its tangible net assets.
Add back amortisation of intangible assets (post tax) (£m) 219 174
Add back amortisation of purchased intangible assets (post tax) (£m) 101 299
A letter from our Chairman 52 Board of Directors 54 Group Executive Committee 56 Corporate governance report 58 Directors’ report 81 Directors’ remuneration report 84 Other remuneration disclosures 103
The Group’s strategic transformation On 16 May 2017, the Group returned to full private ownership after the government sold its remaining stake. The sale demonstrated the successful delivery of the Group’s strategy to transform itself into a simple, low risk, UK focused retail and commercial bank. Since the government first acquired shares in 2009, the Group has repaired its balance sheet, reduced its cost base, cut complexity and international exposure, built and sold TSB, and addressed legacy issues. The Group returned to profitability in 2013 and resumed paying dividends in 2014.
However, we are not complacent. While we are proud of the progress we have made over the last few years, we recognise we now have an equally challenging task to transform Lloyds Banking Group into a bank that can deliver outstanding service for customers in the future technology environment and play our full role in helping Britain prosper. The Board has spent considerable time over the past two years working with the executive team to understand the requirements to compete successfully as the ‘Bank of the Future’, and to translate that into the new strategic plan announced with our results. The oversight of this new transformation programme, including the associated cultural changes that will be required, will be a major focus of our ongoing governance activities.
Diversity Being able to attract, develop, fully utilise and retain top talent is highly important to us, ensuring everyone has the opportunity to progress and realise their potential. For this reason, the Group has made a commitment to be a leader in diversity, removing the barriers that stand in the way of equal opportunity.
Good governance is vitally important as it underpins the delivery of our strategy to help Britain prosper and become the best bank for customers, colleagues and shareholders. Lord Blackwell Chairman
The Board sees it as an important objective for its membership to reflect diversity in its broadest sense. A mix of different backgrounds and experience on the Board, as in the executive team, is important in providing a range of perspectives, insights and challenge needed to support good decision making.
In addition to this, the Group recognises the importance of the diversity of colleagues, reflecting the diversity of our customers, to allow us to better understand customers’ needs and create deeper relationships.
The emerging analysis was debated at a two day offsite session involving both the Board and Group Executive Committee in June 2016, and led to the conclusion that a major transformation would be required in evolving our customer propositions, re-engineering our core business processes to incorporate new technology, changing our ways of working and developing new skills and capabilities.
These conclusions were then developed into a programme of change initiatives which were discussed and reviewed in subsequent Board deep dive sessions and, as a whole, in the joint Board and Executive offsite meeting in June 2017.
Comprising Directors with the right mix of skills and experience, the Board is collectively responsible for overseeing delivery of the Group’s strategy.
Skills and experience: Deep financial services knowledge including in insurance and banking
Lord Blackwell initially joined the Board as Chairman of Scottish Widows Group. He was previously Senior Independent Director and Chairman of the UK Board for Standard Life and Director of Group Development at NatWest Group. His past Board roles have included Chairman of Interserve plc, and Non-Executive Director of Halma plc, Dixons Group, SEGRO and Ofcom. He was Head of the Prime Minister’s Policy Unit from 1995 to 1997 and was appointed a Life Peer in 1997. He has an MA in Natural Sciences from the University of Cambridge, a Ph.D in Finance and Economics and an MBA from the University of Pennsylvania.
Appointed: December 2010 (Board), May 2014 (Deputy Chairman), May 2017 (Senior Independent Director)
Anita was previously Chairman of Victrex plc, the Senior Independent Director of Aberdeen Asset Management and IMI plc, an Executive Director of Abbott Mead Vickers, a Non-Executive Director of Northumbrian Water and has held various investment and marketing roles at Scottish Provident and the Royal Bank of Scotland. She has a BA (Hons) in International Business from the University of Strathclyde, a MRes in Humanities and Philosophy from the University of London, an Honorary DSc for contribution to industry and finance from the University of Cranfield and an Honorary Doctorate in Management and Finance from the University of Aberdeen.
External appointments: Chairman of Urban&Civic plc and a Governor of Motability.
Skills and experience: Extensive international corporate experience, especially in financial markets
External appointments: Senior Advisor to Greenhill Europe and Chairman of the Trustees of the Lovington Foundation.
Skills and experience: Extensive experience in retail banking, insurance and consumer finance
Stuart is a former Non-Executive Director of TSB Banking Group plc, TSB Bank plc, LV Group, Virgin Direct and Vitality Health (formerly Prudential Health). He was also a Senior Independent Director of Swinton Group Limited. In his executive career, he was President and Chief Operating Officer of Aspen Insurance after spending nine years with General Electric, as Chief Executive Officer of the UK Consumer Finance business then President of GE Capital China. Before that he was Chief Executive Officer of Tesco Personal Finance and Director of UK Retail Banking at the Royal Bank of Scotland. He was a Council member of The Royal Institute for International Affairs (Chatham House). He has an MA in Economics from the University of Aberdeen and an MBA from the University of California.
Skills and experience: Background in retail and associated sectors, including financial services
Worked in financial services in the UK and overseas for over 25 years
George was an Executive Director and Chief Financial Officer of RSA Insurance Group, the former Head of Capital Management of Zurich Financial Services and Chief Financial Officer of its UK operations as well as holding various senior management positions at Prudential. He is a Non-Executive Director of Scottish Widows. George is a Chartered Accountant and has a history degree from the University of Cambridge.
Appointed: November 2013 (Board), January 2011- September 2017 (Chief Risk Officer), September 2017 (Chief Operating Officer)
Juan was appointed to the role of Chief Operating Officer in September 2017 and is responsible for leading a number of critical Group functions and driving the transformation activities across the Group in order to build the Bank of the Future. Prior to this he served as the Group’s Chief Risk Officer and was responsible for developing the Group’s risk framework, recommending the Group’s risk appetite and ensuring that all risks generated by the business were measured, reviewed and monitored on an ongoing basis. He was previously the Chief Risk Officer and an Executive Director of Santander’s UK business. Prior to this, he held a number of senior risk, control and business management roles across the Corporate, Investment, Retail and Risk Divisions of the Santander Group. Until September 2017 he was the Vice Chairman of the International Financial Risk Institute. Juan has a BSc in Industrial Chemical Engineering from the Universidad Politécnica de Madrid, a Financial Management degree from ICADE School of Business and Economics and an MBA from the Institute de Empresa Business School.
overnance Financial results 1. Kate Cheetham Group General Counsel (GEC attendee)
Antonio joined the Group in 2011 as head of the Wealth and International division and Group Corporate Development, leading the Group’s strategic review and subsequent programme of reducing non-core assets and exiting international locations. From 2013, he assumed the role of Group Director, Consumer Finance & Group Corporate Development, leading the division’s growth strategy whilst completing the sale of TSB. At the end of 2015 he was appointed Chief Executive, Scottish Widows and Group Director, Insurance and during 2017 he also assumed responsibility for the Wealth Division. Antonio is also Group Executive Sponsor for Emerging Talent. Antonio joined the Group from Santander, where he had worked in a number of different leadership roles and jurisdictions since 1998. He was part of the management team that completed the take-over of Alliance & Leicester and Bradford & Bingley; and was Chief Financial Officer of Santander UK. Before Santander, Antonio spent over nine years at Arthur Andersen.
Stephen was appointed Chief Risk Officer in September 2017. He joined the Group in May 2011 as Chief Credit Officer for Wholesale, Commercial and International. In October 2012 he became Risk Director, Commercial Banking Risk and was also a member of the Commercial Banking Management Group. Prior to joining the Group Stephen was Chief Risk Officer at Barclays Corporate and prior to that was Chief Credit Officer for the UK Retail and Corporate business in Barclays. In a 21-year career at Barclays, Stephen undertook a variety of roles in the front office and risk. He was also a member of the Group Risk Executive team and a Chair of Group Credit Committees. Stephen is also the Group’s Executive Sponsor for Gender Diversity and Equality.
1 Lord Lupton joined the Board and respective Committees on 1 June 2017.
3 Simon Henry succeeded Nick Luff as Audit Committee Chairman with effect from 1 May 2017.
4 Stuart Sinclair was appointed to the Responsible Business Committee with effect from 1 April 2017.
Strategic thinking 9 out of 9 8 out of 9 3 out of 9 6 out of 9 4 out of 9 8 out of 9 8 out of 9
Cloud strategy, which supports the transformation of the Group’s IT architecture
Integrating MBNA In the immediate period following the Group’s announcement of its milestone acquisition of MBNA in December 2016, work commenced to achieve regulatory approval from both the Competition & Markets Authority (CMA) and the Financial Conduct Authority (FCA), and also to prepare for the first day of legal ownership, known as ‘Completion’. Unconditional CMA approval was achieved on 5 May 2017 and FCA approval of the Group’s Change in Control application was received on 19 May 2017.
The role of a director and statutory duties, including Companies Act liabilities, Listing Rules, Disclosure Guidance and Transparency Rules and SEC Rules
Ongoing programme of meetings, deep dives and training sessions developed in respect of the non ring-fenced bank, including: Meetings with senior management
Further to the launch of mobile branches which serve local communities, an example was displayed at the 2017 AGM. More information regarding mobile branches can be found on page 23.
The Group intranet is used by the Directors to communicate with colleagues. During the year, this has included: – podcasts and videos detailing full year and half year results and details of the transformation within the Group and future plans; – Q&A sessions with the Group Chief Executive, where selected colleagues were given the opportunity to put questions directly to him; and
– annual end of year message to all colleagues from the Chairman.
Colleague feedback sessions are arranged on a regular basis where colleagues join the Chairman for informal discussion over lunch or dinner. These took place during the year in various locations, including Dunfermline, London, Bristol, Liverpool and Jersey.
Members of the Board have visited several Group offices and service centres during the year including Chester, Reading, Swindon and Edinburgh.
In July Lord Blackwell visited Liverpool, splitting his time between meeting colleagues and charities supported by the England and Wales Foundation.
The Board engages with the work of the Foundations through the Responsible Business Committee. See page 80 for more information.
Almost 260,000 hours of volunteering by colleagues were delivered in 2017, of which 44 per cent were skills-based volunteering. More than 5,000 colleagues took part in volunteering over the period of a week in the Group’s Give & Gain volunteering campaign.
Whistleblowing continues to be a topic of public and regulatory concern; it is essential that colleagues feel confident reporting wrongdoing and are able to trust the process. A healthy culture encourages asking questions, raising concerns and admitting mistakes. This type of culture influences employee actions, decision-making and behaviour. In the reporting period, Speak Up has been embedded into Group culture through communication and awareness campaigns, training to all colleagues and the leadership team regularly considering speak up arrangements as part of its annual review of the system of internal control.
The Executive Directors make decisions within clearly defined parameters which are documented within the Corporate Governance Framework, although where appropriate, any activities outside the ordinary course of business are brought to the full Board for their consideration, even if the matters fall within the agreed parameters. The Corporate Governance Framework helps to ensure that decisions are made by the management with the correct authority.
The right processes in place to deliver on our strategy During the year, there were 10 scheduled Board meetings, with details of attendance shown on page 58. In addition to formal meetings, the Board meets as necessary to consider matters of a time-sensitive nature. The Chairman and the Chairmen of each Committee ensure Board and Committee meetings are structured to facilitate open discussion, debate and challenge. Through their opening remarks, the Chairmen set the focus of each meeting.
In the rare event of a Director being unable to attend a meeting, the Chairmen of the respective meetings discusses the matters proposed with the Director concerned, seeking their support and feedback accordingly. The Chairman subsequently represents those views at the meeting.
A full schedule of matters reserved for the Board and Terms of Reference for each of the Committees can be found at www.lloydsbankinggroup.com
The 2017 review sought the Directors’ views on a range of topics including: strategy; planning and performance; risk and control; Board composition and size; balance of skills and experience; diversity; culture and dynamics; the Board’s calendar and agenda; the quality and timeliness of information; and support for Directors and Committees.
Many Directors commented favourably on the performance of the Board as a whole, describing it as hardworking, conscientious, expert, questioning and highly engaged. Highlights mentioned by several Directors were the continued value of deep dives, the offsite strategy session (described by one Director as a ‘model of open discussion’); the openness of Executives to interacting with the Board members and sharing issues, the discussion on executive succession; the process for keeping the Board aware of important issues which arise between meetings; the further development of Group Internal Audit; the usefulness of the Risk Sub-Committees and the Cyber Security Advisory Panel and the Non-Executive Director only discussions. Directors also spoke highly of the work done by the Chairman and the Chairmen of the Committees in structuring agendas and ensuring that business is covered at the meetings.
Points raised in the 2017 Board effectiveness review The review identified a number of areas for improvement in the Board’s effectiveness.
Non-Executive Director recruitment While there was general agreement that the balance of skills within the Board was good, a number of Directors asked that the following experience be borne in mind for future recruitment of Directors (to supplement the experience of the current Directors in these areas): major change management; finance; accounting and data.
Questionnaires issued to all Directors by the Company Secretary for completion.
Final report discussed at a meeting of the Board. The Board discussion was subsequently considered by the Nomination and Governance Committee.
Actions to be recommended to the Board by the Nomination and Governance Committee to reflect the Board discussion in January.
Progress against the 2016 internal Board effectiveness review During the year, work focused particularly on the quality and quantity of papers and to the linkage of agenda items to the ‘Bank of the Future’ strategy. A summary of the Board’s progress against the actions arising from the 2016 effectiveness review are set out below.
More frequent linkage to strategy in the regular business of the Board.
Executive summaries have been shortened and a brief section on debate and challenge has been included; Revised Board template and clear guidance in place in respect of both papers submitted to meetings and presentations given during meetings.
Continued progress on focusing material and presentations on key issues for the Board.
The UK Corporate Governance Code 2016 (the ‘Code’) applied to the 2017 financial year. The Group confirms that it applied the main principles and complied with all the provisions of the Code throughout the year. The Code is publicly available at www.frc.org.uk.
The Group has adopted the UK Finance Code for Financial Reporting Disclosure and its 2017 financial statements have been prepared in compliance with its principles.
Lord Blackwell leads the Board and promotes the highest standards of corporate governance. He sets the Board’s agenda and builds an effective and complementary Board. The Chairman leads Board succession planning and ensures effective communication with shareholders.
António Horta-Osório manages and leads the Group on a day-to-day basis and makes decisions on matters affecting the operation, performance and strategy of the Group’s business. He delegates aspects of his own authority, as permitted under the Corporate Governance Framework, to other members of the Group Executive Committee. He provides leadership and direction to senior management and coordinates all activities to implement the strategy and for managing the business in accordance with the Group’s risk appetite and business plan set by the Board.
As Deputy Chairman, Anita Frew would ensure continuity of chairmanship during any change of chairmanship. She supports the Chairman in representing the Board and acting as a spokesperson. She deputises for the Chairman and is available to the Board for consultation and advice. The Deputy Chairman represents the Group’s interests to official enquiries and review bodies.
A3. Role of the Chairman The Chairman has overall responsibility for the leadership of the Board and for ensuring its effectiveness.
The Non-Executive Directors challenge constructively and help develop and set the Group’s strategy.
The Chairman considers any new external appointments which may impact existing time commitments.
Non-Executive Directors are required to devote such time as is necessary for the effective discharge of their duties. The estimated minimum time commitment set out in the terms of appointment is 35-40 days per annum including attendance at Committee meetings. For Committee Chairmen and the SID, this increases to a minimum of 45 to 50 days. In reality, the time devoted on the Group’s business by the Non-Executive Directors is considerably more than the minimum requirements.
Executive Directors are allowed to hold no more than one Non-Executive Director role in a FTSE 100 company and may not take on the Chairmanship of such a company.
Board Committees are also provided with sufficient resources to undertake their duties.
C2. Risk management and internal control systems See page 67 for more detail regarding internal control.
E. Relations with Shareholders E1. Shareholder engagement Details of engagements with shareholders during the year can be found on page 62.
Dear Shareholder The Nomination and Governance Committee (the ‘Committee’) continued to keep under review the structure, size and composition of the Board and its Committees. At the core of the process is an ongoing assessment led by me of the collective Board’s technical and governance skill set. These assessments provide an essential analysis of the skills and experience of the Non-Executive Directors relative to the required and desirable Board competencies to help ensure that the Board continues to have an appropriate range and depth of Non-Executive skills.
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/our-group/ corporate-governance
Details of Committee membership and meeting attendance can be found on page 58.
Simon Henry as Audit Committee Chairman – Simon had been a member of the Audit Committee since June 2014, and the Committee agreed that his background and experience enable him to fulfil the role of Audit Committee Chairman and for SEC purposes the role of Audit Committee financial expert.
New Non-Executive Director The external search firm JCA Group provided an extensive list of candidates. The Committee selected and shortlisted candidates, interviews were carried out with various members of the Board, and the process resulted in the appointment of Lord Lupton to the Board in June. Details of Lord Lupton’s induction are provided on page 61.
Performance of the annual effectiveness review of the Board and its Committees.
Received governance reports from the Company Secretary detailing updates and changes to regulation and best practice
Diversity The Board Diversity Policy was reviewed by the Committee during the year.
The Committee conducted a review of the role, including capabilities and time commitment of all the Directors of the Company. This review was undertaken with reference to the individual performance and conduct in reaching decisions. It also took account of any relationships that had been disclosed. Details of conflicts of interest can be found on page 81. Based on its assessment for 2017, the Committee is satisfied that, throughout the year, all Non-Executive Directors remained independent as to both character and judgement. All Directors were considered to have appropriate roles, including capabilities and time commitments.
Training A review of the Group’s approach to the training of Non-Executive Directors.
Individual development plans established for each internal candidate, and validated with individuals.
Assessment of candidates Each of the potential candidates for senior management positions was assessed by the Group Chief Executive and Chairman using the following criteria with input from Egon Zehnder by way of competency, psychometric and potential assessments and market benchmarking, and in the case of non-GEC members, also with further input from YSC Consulting1 (a premier leadership consultancy), who use a biographical assessment methodology. The results were then discussed and reviewed by the Nomination and Governance Committee and subsequently in a meeting with all Non-Executive Directors.
Candidates were scored from 1 to 5 for each of the above categories, being 5 (very strong versus requirements), 3 (average – not a distinctive strength) and 1 (weakness/development needed).
The Board also places high emphasis on ensuring the development of diversity in the senior management roles within the Group and supports and oversees the Group’s objective of achieving 40 per cent of senior roles held by female executives by 2020, along with other metrics which promote the engagement of other under-represented groups within the business. This is underpinned by a range of policies within the Group to help provide mentoring and development opportunities for female executives and to ensure unbiased career progression opportunities. Progress on this objective is monitored by the Board and built into its assessment of executive performance. You can read more on the Group’s diversity programmes on page 21 of the strategic report.
A copy of the Board Diversity Policy is available on our website at www.lloydsbankinggroup.com/responsible-business and information on Board diversity can be found on page 58.
Dear Shareholder It was both an honour and a pleasure to take on the role as Chairman of the Audit Committee (the ‘Committee’) in May 2017, and I would like to record my thanks and recognition to Nick Luff for his excellent performance in this role in the preceding four years, on behalf of the Board and the Company.
2017 was a year of significant change and challenge for the Committee. In addition to welcoming Lord Lupton to the Committee we saw the establishment and embedding of new leadership in the internal audit function, and the first full calendar year of the new senior partner for external audit. The Committee oversaw the preparation for various new accounting standards and regulatory requirements, including IFRS 9 ‘Accounting for financial instruments’, and the structural ring-fencing of relevant activities within the Bank.
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. A full list of responsibilities is detailed in the Committee’s terms of reference, which can be found at www.lloydsbankinggroup.com/ our-group/corporate-governance. In satisfying its purpose, the Committee undertakes the functions detailed within Disclosure and Transparency Rule 7.1.3R.
All members of the Committee are independent Non-Executive Directors with competence in the financial sector and their biographies can be found on pages 54–55. With effect from 1 July 2017 the Committee welcomed Lord Lupton, who brings extensive financial experience. Simon Henry is a Chartered Global Management Accountant and has extensive knowledge of financial markets, treasury, risk management and international accounting standards. He is a member having recent and relevant financial experience for the purposes of the UK Corporate Governance Code and is the Audit Committee financial expert for SEC purposes. The members of the Committee keep their skills up to date with Board deep dives and scheduled Audit Committee training. The focus of specific Audit Committee training this year has been on IFRS 9.
Annually the Committee undertakes an effectiveness review. The review forms part of the Board evaluation process with Directors being asked to complete parts of the questionnaire relating to the Committees of which they were members. The findings of the review were considered by the Committee at its January meeting followed up with telephone calls from the Audit Committee chairman with each of the Committee members. On the basis of the evaluation the feedback was that the performance of the Committee continues to be effective.
The Committee reviewed management’s assessment of the potential impact of the Financial Conduct Authority’s (‘FCA’) Policy Statement which confirmed a two month extension to the industry deadline (now August 2019) for consumers to make their PPI complaints, and on the potential impact of the Plevin case. In the second half of the year, consideration was given to the application for a Judicial Review in relation to the FCA’s policy statement that introduced both the August 2019 industry deadline and the concept that an undisclosed commission in excess of 50 per cent of the premium would give rise to an unfair relationship under the Consumer Credit Act. The Committee also reviewed management’s assessment of the start of the related FCA media campaign.
For packaged bank accounts, the Committee has continued to monitor the utilisation of the provision and management’s assessment of both the remaining exposure and the additional provisions required. This has included reviewing the expected level of complaints and the average redress payments.
The Committee was satisfied that the impairment provisions were appropriate. The disclosures relating to impairment provisions are set out in note 51: ‘Financial risk management’ on page 240 of the financial statements. The allowance for impairment losses on loans and advances to customers at 31 December 2017 was £2,201 million (31 December 2016: £2,412 million).
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 47: ‘Contingent liabilities and commitments’ on page 224 of the financial statements.
The Committee reviewed a summary of the key assumptions underlying the fair value adjustments made by management to the acquired MBNA assets and liabilities. The Committee was satisfied with the key assumptions made. The disclosures relating to the acquisition are set out in note 22: ‘Acquisition of MBNA Limited’ on page 197 of the financial statements.
The Committee has been briefed on the Group’s IFRS 9 implementation programme throughout 2017 and in prior years and held a session dedicated to IFRS 9 in October 2017. IFRS 9 has three critical elements: classification and measurement, impairment, and hedging. The Group has not adopted the hedging rules within IFRS 9 at 1 January 2018 (a permitted option) and, accordingly, the Committee’s focus has been on classification and measurement, and impairment.
The Committee discussed the Group’s approach to the new revenue standard (IFRS 15). The standard does not apply to transactions that are accounted for in accordance with IFRS 9 and, as a result, the impact on the Group is not significant.
The process was largely based on an assessment of responses received to a questionnaire from the Chairman of the Audit Committee and business areas as well as Finance, Risk, Legal and Group Internal Audit. The Committee considered also the FRC’s Audit Quality Inspection Report published in June 2017. Following review of the feedback from the process the Committee concluded that it was satisfied with the auditor’s performance and recommended to the Board a proposal for the reappointment of the auditor, to be approved at the Company’s AGM.
Dear Shareholder I am pleased to report on how the Board Risk Committee (the ‘Committee‘) has discharged its responsibilities throughout 2017.
More details on the Group’s wider approach to risk management can be found in the risk management section on pages 107–156. Full details of the Committee’s responsibilities are set out in its terms of reference, which can be found at www.lloydsbankinggroup.com/ourgroup /corporate-governance
During 2017, the Committee continued to utilise established sub-committees to provide additional focus on Financial Markets, IT Resilience & Cyber, and Stress Testing & Recovery Planning. These sub-committees enable members of the Committee to dedicate additional time and resource to achieving a more in-depth understanding of the topics covered, and enable further review and challenge of the associated risks.
A resilient IT environment is critical to providing reliable services to our customers and enabling sustainable growth. The dynamic cyber risk and the potential for external attacks threatens the confidentiality and integrity of electronic data or the availability of systems. These are key risks for the Group and a central area of focus for the Committee.
The Committee continues to focus on ensuring we have effective controls and oversight to comply with existing regulatory obligations. The Committee has also been focused on overseeing the successful execution of a number of significant, complex and interdependent regulatory change programmes including ring-fencing, EU General Data Protection Regulation, Payment Services Directive II (PSD2), Markets in Financial Instruments Directive II, and the Basel Committee on Banking Supervision (BCBS 239). Given the significance of ring-fencing, monthly programme reporting has been presented to Board and due consideration given to governance and compliance within the ring-fenced bank.
Conclusion: The Group has placed significant focus on ensuring compliance with these complex regulatory changes. Regulatory risk will remain a key area of focus for the Committee in 2018 given the importance of complying with our regulatory obligations.
Conclusion: The Group has made progress in enhancing its management of operational risk. The Group will continue to focus on enhancing the maturity of its operational risk framework to ensure it is proactive, forward looking and effective in managing the 21st century risks in a digital world, including execution, model, cyber/IT and third party risk.
Conclusion: Whilst good progress has been made in 2017, to continue embedding the Group’s conduct strategy initiatives into business as usual, ongoing improvement in the Group’s conduct risk profile will remain a priority for the Group in 2018 and will continue to be a subject of focus for the Committee.
Reviews were undertaken of the risks associated with the UK residential interest only portfolio and the Group’s participation in the buy-tolet segment.
Conclusion: The Committee continues to monitor closely trends in the residential interest only portfolio and the progress of management’s initiatives to further enhance customer treatment. The Committee was satisfied that additional underwriting controls within buy-to-let provided adequate safeguards to support continued participation in line with the Group’s risk appetite limits.
Residual value risk of motor finance businesses was monitored over the year.
To respond to a rapidly changing external environment, the RBC also reviewed emerging areas such as the impact of climate change on UK businesses, individuals and communities, and ways in which we can support enhanced UK productivity through the strengthening of digital skills, particularly for individuals, small businesses and charities.
Many of these activities are described in our 2018 Helping Britain Prosper Plan, which is developed annually with the RBC to reflect the ways in which Lloyds Banking Group, both directly (as the largest corporate tax payer and a substantial UK-wide employer) and indirectly, contributes to the wider economic and social health of Britain.
During the year, the Committee considered in detail the development of the Group’s responsible business approach, including a sustainability strategy. Detailed discussions took place with colleagues from relevant business areas and external advisers at which proposals were considered and challenged leading to a change of focus on some areas of the approach. The Committee contributed to the plans for strengthening the Group’s ongoing commitment to supporting basic, workplace and specialist digital skills in the UK during 2018 and provided perspectives on how this could best be achieved.
Corporate governance statement The Corporate Governance report found on pages 51–80 together with this Directors’ report of which it forms part, fulfils the requirements of the Corporate Governance Statement for the purpose of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR).
Profit and dividends The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2017 of £5,275 million (2016: £4,238 million). The Directors have recommended a final dividend, which is subject to approval by the shareholders at the AGM, of 2.05 pence per share (2016: 1.7 pence per share) totalling £1,475 million (2016: £1,212 million). The final dividend will be paid on 29 May 2018.
The Board continues to give due consideration at each year end to the return of any surplus capital and for 2017, the Board intends to implement a share buyback of up to £1 billion, equivalent to up to 1.4 pence per share. This represents the return of capital over and above the Board’s view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties. The share buyback programme will commence in March 2018 and is expected to be completed during the next 12 months. Given the total ordinary dividend of 3.05 pence per share and the intended share buyback, equivalent to up to 1.4 pence per ordinary share, the total capital return for 2017 will be up to 4.45 pence per share, an increase of up to 46 per cent on the prior year, equivalent to up to £3.2 billion.
The Company intends to use the authority for the repurchase of ordinary shares granted to it at the 2017 AGM to implement the proposed share buyback. Details of this existing authority are set out under ‘Power of Directors in relation to shares’.
Power of Directors in relation to shares The Board manages the business of the Company under the powers set out in the articles of association, which include the Directors’ ability to issue or buy back shares. The Directors were granted authorities to issue and allot shares and to buy back shares at the 2017 AGM. Shareholders will be asked to renew these authorities at the 2018 AGM. The authority in respect of purchase of the Company’s ordinary shares is limited to 7,154,088,636 ordinary shares, equivalent to 10 per cent of the issued ordinary share capital of the Company as at the latest practicable date prior to publication of the 2017 AGM circular.
2 The most recent notification provided by BlackRock Inc. under Rule 5 of the DTR identifies (i) an indirect holding of 3,599,451,380 shares in the Company representing 5.04 per cent of the voting rights in the Company, and (ii) a holding of 69,305,385 in other financial instruments in respect of the Company representing 0.09 per cent of the voting rights of the Company. BlackRock Inc.’s holding most recently notified to the Company under Rule 5 of the DTR varies from the holding disclosed in BlackRock Inc.’s Schedule 13-G filing with the US Securities and Exchange Commission dated 7 February 2018, which identifies beneficial ownership of 4,843,291,732 shares in the Company representing 6.7 per cent of the issued share capital in the Company. This variance is attributable to different notification and disclosure requirements between these regulatory regimes.
Viability statement The Directors have an obligation under the UK Corporate Governance Code to state whether they believe the Company and the Group will be able to continue in operation and meet their liabilities as they fall due over a specified period determined by the Directors, taking account of the current position and the principal risks of the Company and the Group.
The financial projections and the underlying assumptions in respect of expected market and business changes, and future expected legal, accounting and regulatory changes are subject to rigorous review and challenge from both divisional and Group executives.
The Group’s approach to stress testing and reverse stress testing, including both regulatory and internal stresses, is described on page 111.
The reporting period is 1 October 2016 to 30 September 2017, which is different to that of our Directors’ report (January 2017 – December 2017). This is in line with regulations in that the majority of the emissions reporting year falls within the period of the Directors’ report. Emissions are reported based on an operational boundary. The scope of reporting is in line with the GHG Protocol and covers Scope 1, Scope 2 and Scope 3 emissions. Reported Scope 1 emissions cover emissions generated from gas and oil used in buildings, emissions from UK company-owned vehicles used for business travel and emissions from the use of air conditioning and chiller/refrigerant plant. Reported Scope 2 emissions cover emissions generated from the use of electricity, calculated using the location based methodology. Reported Scope 3 emissions relate to business travel undertaken by colleagues and emissions associated with the extraction and distribution of each of our energy sources – electricity, gas and oil. A detailed definition of these emissions can be found in our 2017 Reporting Criteria online at www.lloydsbankinggroup.com/rbdownloads
Dear Shareholder On behalf of the Board and the Remuneration Committee (the ‘Committee’), I have the pleasure of presenting the Directors’ remuneration report for the year ended 31 December 2017. The Committee strongly believes that the Group’s remuneration approach, guided by four key reward principles, contributes significantly to the delivery of the Group’s strategic priorities.
From 2018, the Group no longer operates specific incentive arrangements for customerfacing colleagues. Instead, colleagues now participate only in the Group Performance
Our remuneration policy ensures fair reward for all colleagues, with a focus on building a culture where colleagues have a long-term interest in the success of the Group, in line with shareholders. Anita Frew Chairman, Remuneration Committee 1 Simplifying the Group’s remuneration policy and principles, with a focus on long-term share ownership 2 Ensuring remuneration outcomes are fair for all colleagues 3 Rewarding individual performance and collective success 4 Providing alignment to the Group’s future strategic priorities 5 Enhancing levels of disclosure and corporate governance
Rewarding all colleagues fairly The Group is committed to offering all colleagues a reward package that is competitive, performance-driven and fair.
The Committee considers that pay ratios provide a useful reference point. However, there remains uncertainty and potential confusion how these should be calculated and disclosed. The Committee has therefore chosen not to publish the CEO to colleague pay ratio data alongside this report and will instead comply with the government proposals when these are finalised.
We aim to achieve 100 per cent share ownership among our colleagues.
A single pay budget with higher awards for more junior colleagues
The detailed policy implementation table containing all elements of remuneration can be found on page 96.
The Group has applied a total pay budget of 2.7 per cent for the wider colleague population. Salary increases for the Group Chief Executive (GCE) and the Chief Financial Officer (CFO) are set below this budget, at 2 per cent. Juan Colombás took on a new role of Chief Operating Officer (COO) in September 2017 and accordingly it is proposed he receive a salary increase of 3.4 per cent to reflect the fact that the COO role is larger than his previous role as the Chief Risk Officer. Salaries will be as follows, effective dates shown below: Fixed share award
Malus/clawback provisions and holding period apply in line with regulatory requirements.
António Horta-Osório Group Chief Executive of max of max of max of max
George Culmer Chief Financial Officer of max of max of max of max
Annual report on remuneration Single total figure of remuneration (audited) The following table summarises the total remuneration delivered during 2017 in relation to service as an Executive Director.
The EFRBS was subject to performance conditions. It provides a percentage of the GCE’s base salary or reference salary in the 12 months before retirement or leaving. No additional benefit is due in the event of early retirement. The rate of pension accrued in each year depended on share price conditions being met and the total pension due is 6 per cent of the reference salary of £1,220,000 or £73,200.
The annual Group Performance Share (GPS) outcome is based on a percentage of the Group’s underlying profit, adjusted by a strategic modifier based on the Group’s Balanced Scorecard (BSC) metrics and collective and discretionary adjustments to reflect risk matters and other factors.
The Committee approved the final Group BSC performance outcome at Strong Plus (as detailed in table ‘Group Balanced Scorecard performance’ on page 90), with the view that while the mechanical BSC assessment was marginal in some areas, on balance there were other qualitative factors that provided the Committee with assurance that the recommendation was fair and justified. A full summary of the Group’s performance is provided in the Group Chief Executive’s statement on page 4, however the key factors were: the Group’s return to full private ownership; significant additional cost reductions; the completion of the successful acquisition of MBNA; and continued focus on commitments to the UK economy through the Helping Britain Prosper strategy.
The regulatory bodies (FCA and PRA) are comfortable with the Group’s approach to regulatory matters and recognise this as an area of strength.
Key mobilisation milestones are ahead of schedule and comfortably on track for the separation of the commercial and personal banking customers in line with the regulatory non ring-fenced Bank requirements.
Expansion of enhancement to key customer journeys leading to improved customer feedback and trust scores. Total complaints reduced by 18 per cent.
Significant progress made against Helping Britain Prosper targets with more than £47 billion of lending to first-time buyers since 2014, and 15 per cent increase in lending to SMEs since 2014 (versus market increasing by only 1 per cent). Over 700,000 individuals, businesses and charities trained in digital skills.
Directors’ remuneration report continued 2015 LTIP vesting (audited) Awards in the form of conditional rights to free shares in 2015 were made over shares with a value of 300 per cent of reference salary for the GCE and 275 per cent of salary for the CFO and CRO (now COO). These LTIP awards are vesting at 66.3 per cent, as detailed in the table below. This reflects the Group’s strong performance over the three financial years ended 31 December 2017, balanced against uncertainty in the economic and political environment. In particular, this has impacted negatively on absolute share price performance, resulting in no vesting for the Total Shareholder Return component. Executive Directors are required to retain any vested shares for a further two years after vesting.
E xp ec te d o ut co m e as %
Effective implementation of the supporting infrastructure required to drive the transformation activities across the Group to build Bank of the Future.
Deferral The 2017 GPS for all Executive Directors is awarded in a combination of cash and shares. 40 per cent of the GPS will be released in 2018 (£2,000 cash in March, the remainder in shares), 40 per cent will be released in 2019 and the remaining 20 per cent will be released in 2020, subject to remaining in the Group’s employment. Any shares released are subject to a further holding period in line with regulatory requirements.
2 Adjusted for movements in staff numbers and other impacts to ensure a like-for-like comparison. Salary increases effective 1 April 2018.
Comparison of returns to shareholders and GCE total remuneration The chart below shows the historical total shareholder return (TSR) of Lloyds Banking Group plc compared with the FTSE 100 as required by the regulations. The FTSE 100 index has been chosen as it is a widely recognised equity index of which Lloyds Banking Group plc has been a constituent throughout this period.
GCE Dec 2008 Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Dec 2017
2 Awards subject to performance under the LTIP had an expected value of 50 per cent of face value at grant (in line with the Remuneration Policy). Values are based on the 31 December 2017 closing price of 68.06 pence. Full face value of awards are £27,090,761 for António Horta-Osório, £14,988,060 for George Culmer and £11,718,714 for Juan Colombás.
6 The changes in beneficial interests for António Horta-Osório (574 shares), George Culmer (501 shares) and Juan Colombás (500 shares) relate to ‘partnership’ and ‘matching’ shares acquired under the Lloyds Banking Group Share Incentive Plan between 31 December 2017 and 20 February 2018. There have been no other changes up to 20 February 2018.
3 All LTIPs have performance periods ending 31 December at the end of the three-year period. Awards were made in the form of conditional rights to free shares.
Salaries will therefore be as follows: GCE: £1,244,400 (1 January 2018) CFO: £779,351 (1 April 2018) COO: £779,351 (1 January 2018)
The levels of the 2018 award are unchanged from 2017: GCE: £900,000 CFO: £504,000 COO: £497,000
For 2018, the benefits provided to Executive Directors include a car allowance, transportation, private medical insurance, life assurance and other benefits selected through the flexible benefits allowance which is currently capped at 4 per cent of base salary (unchanged from 2017).
For 2018, the Group Performance Share will be based on a percentage of the Group’s underlying profit, adjusted by a strategic modifier of up to 130 per cent based on the Group’s Balanced Scorecard (BSC) metrics and collective and discretionary adjustments to reflect risk matters and other factors. At least 75 per cent of performance is weighted towards a financial measure.
Individual awards will be adjusted to reflect a balanced scorecard approach with clearly identified performance metrics used to assess Group performance in key areas. Stretching objectives for the Group are approved around the start of the performance year. The objectives are aligned to the Group’s strategy and split across five categories: Customer, People, Control environment, Building the business and Finance. Each measure in the Group BSC is assigned targets aligned to a five-point rating scale. BSC ratings are based on a scale ranging from ‘Under’ (at the lowest level), through ‘Developing’, ‘Good’, ‘Strong’ and up to ‘Top’. Each of these ratings may be further differentiated by the addition of ‘minus’ or ‘plus’.
Economic profit1 Set relative to 2019 targets Threshold: £3,074m Maximum: £3,769m
None of the other Directors at 31 December 2017 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
Threshold: +5% vs UK Norm Maximum: +2% vs UK High Performing Norm
Awards made in 2018 will vest based on the Group’s performance against the financial and strategic measures, set out in the table below. In line with the Directors’ remuneration policy, the Committee has full discretion to amend payout levels should the award not reflect business and/or individual performance. Business performance includes, but is not limited to, consideration of returns to shareholders.
Nomination and Governance Committee membership2 £15,300 £15,000 1 New members only. 2 Including payments to Chairmen of other Committees who are members.
Total remuneration1 Number of employees 1 Total remuneration of UK-based colleagues. Includes base salary, bonus awards for the 2017 performance year, the estimated values of LTIP, pension and benefits.
How the Remuneration Committee spent its time in 2017 The Committee had eight scheduled meetings during 2017 to consider the following principal matters.
Juan Colombás (Chief Operating Officer from September 2017 and formerly the Chief Risk Officer) and George Culmer (Chief Financial Officer) also attended the Committee to advise as and when necessary on risk, financial and operational matters.
Statement of voting at Annual General Meeting The table below sets out the voting outcome at the Annual General Meeting in May 2017.
Directors’ remuneration policy The Group’s remuneration policy was approved at the AGM on 11 May 2017 and took effect from that date. It is intended that approval of the remuneration policy will be sought at three-year intervals, unless amendments to the policy are required, in which case further shareholder approval will be sought; no changes are proposed for 2018. The full policy is set out in the 2016 annual report and accounts (pages 90–98) which is available at: www.lloydsbankinggroup.com/globalassets/documents/investors/2016/2016_lbg_annual_report_v2.pdf
The tables in this section provide a summary of the Directors’ remuneration policy. There is no significant difference between the policy for Executive Directors and that for other colleagues. Further information about the remuneration policy for other colleagues is set out in section ‘Other remuneration disclosures’.
Purpose and link to strategy To provide cost effective and market competitive retirement benefits, supporting Executive Directors in building long-term retirement savings.
Additional benefits may be provided to individuals in certain circumstances such as relocation. This may include benefits such as accommodation, relocation, and travel. The Committee retains the right to provide additional benefits depending on individual circumstances.
This section discloses the remuneration awards made by the Group to Material Risk Takers (MRTs) in respect of the 2017 performance year. Additional information summarising the Group’s remuneration policies, structure and governance is also provided. These disclosures should be read in conjunction with the disclosures for Executive Directors contained in the Directors’ Remuneration Report (DRR) on pages 84–102, and together comply with the requirements of Article 450 of the Capital Requirements Regulation (EU) No. 575/2013 (CRR). The remuneration principles and practices detailed in the DRR apply to MRTs and nonMRTs in the same way as to Executive Directors (other than where stated in this disclosure).
Other highly remunerated individuals whose activities could have a material impact on the Group’s risk profile.
Decision making process for remuneration policy The Group has a strong belief in aligning the remuneration delivered to the Group’s executives with the successful performance of the business and, through this, the delivery of long-term, superior and sustainable returns to shareholders. It has continued to seek the views of shareholders and other key stakeholders with regard to remuneration policy and seeks to motivate, incentivise and retain talent while being mindful of the economic outlook. An essential component of the Group’s approach to remuneration is the governance process that underpins it. This ensures that the policy is robustly applied and risk is managed appropriately.
The Group has a robust governance framework, with the Remuneration Committee reviewing all compensation decisions for Executive Directors, senior management, senior risk and compliance officers, high earners and any other MRTs. This approach to governance is cascaded through the Group with the Executive Compensation Committee having oversight for all other colleagues and divisional Remuneration Committees providing oversight for specific business areas.
The use of a balanced scorecard approach to measure performance enables the Remuneration Committee to assess the performance of the Group and its senior executives in a consistent and performance-driven way. The Group’s remuneration policy supports the business values and strategy, based on building long-term relationships with customers and colleagues and managing the financial consequences of business decisions across the entire economic cycle.
The fixed share award, made annually, delivers Lloyds Banking Group shares over a period of five years. Its purpose is to ensure that total fixed remuneration is commensurate with the role, responsibilities and experience of the individual; provides a competitive reward package; and is appropriately balanced with variable remuneration, in line with regulatory requirements. The fixed share award can be amended or withdrawn in the following circumstances: – to reflect a change in role; – to reflect a Group leave policy (e.g. parental leave or sickness absence); – termination of employment with the Group; – if the award would be inconsistent with any applicable legal, regulatory or tax requirements or market practice.
Applies to: Senior Management, Executive Directors, members/attendees of the GEC and their respective direct reports Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function* Other MRTs* Non-MRTs*
For the 2017 performance year, approximately one third of colleagues are eligible to participate in variable pay arrangements other than GPS. These are used to incentivise customer-facing colleagues, primarily in the Community Banking division. In structure these are substantively similar to GPS and the majority of colleagues will move across to GPS for the 2018 performance year.
At least 40 per cent of MRTs’ variable remuneration above certain thresholds is deferred into Lloyds Banking Group Shares. For all MRTs, GPS is deferred in line with the regulatory requirements for three, five or seven years, (depending on MRT category) and subject to a six-month or 12-month retention period.
For all colleagues, any deferred variable remuneration amount is subject to performance adjustment (malus) in accordance with the Group’s Deferral and Performance Adjustment Policy.
3 Total number of Material Risk Takers earning more than €1m has increased from 53 in 2016 to 57 in 2017.
Remuneration £m Total outstanding deferred variable remuneration at 31 December 2017
This full risk management section provides a more in-depth picture of how risk is managed within the Group, detailing the Group’s emerging risks, approach to stress testing, risk governance, committee structure, appetite for risk (pages 108–115) and a full analysis of the primary risk categories (pages 115–156) – the framework by which risks are identified, managed, mitigated and monitored.
The Group’s approach to risk The Group operates a prudent approach to risk with rigorous management controls to support sustainable business growth and minimise losses. Through a strong and independent risk function (Risk division) a robust control framework is maintained to identify and escalate current and emerging risks to support sustainable business growth within Group risk appetite and through good risk reward decision making.
As a key component of the Risk Management Framework, Group risk appetite is embedded within principles, policies, authorities and limits across the Group and continues to evolve to reflect external market developments and composition of the Group.
The financial reporting process is actively monitored at business unit and Group levels. There are specific programmes of work undertaken across the Group to support: – annual assessments of (i) the effectiveness of internal controls over financial reporting; and (ii) the effectiveness of the Group’s disclosure controls and procedures, both in accordance with the requirements of the US Sarbanes Oxley Act; and – annual certifications by the Senior Accounting Officer with respect to the maintenance of appropriate tax accounting arrangements, in accordance with the requirements of the 2009 Finance Act.
Risk decision making and reporting Taking risks which are well understood, consistent with strategy and with appropriate return is a key driver of shareholder value.
Risk analysis and reporting supports the identification of opportunities as well as risks.
3 Exposures relating to the default fund of a central counterparty and credit valuation adjustment risk are included in counterparty credit risk.
– Internal contingency plans recalibrated and regularly reviewed for potential strategic, operational and reputational impacts, with a plan specifically for working through the potential impacts of the EU exit on the Group. – Engagement with politicians, officials, media, trade and other bodies to reassure our commitment to helping Britain prosper. – Wide array of risks considered in setting strategic plans. – Capital and liquidity is reviewed regularly through committees, ensuring compliance with risk appetite and regulatory requirements.
– Risk appetite criteria limits single counterparty bank and non-bank exposures complemented by a UK-focused strategy. – The Chief Security Office develops and maintains the Stability Response Plan with the Financial Stability Response Team acting as a rapid reaction group, should an external crisis occur. – The Chief Security Office also maintains the operational resilience framework to embed resilience activities across the Group and limit the impact of internal or external events.
Strategic and capital planning: – Allow senior management and the Board to adjust strategies if the plan does not meet risk appetite in a stressed scenario. – Support the Internal Capital Adequacy Assessment Process (ICAAP) by demonstrating capital adequacy, and meet the requirements of regulatory stress tests that are used to inform the setting of the Group’s Prudential Regulation Authority (PRA) and management buffers (see capital risk on pages 137–144).
Internal stress tests On at least an annual basis, the Group conducts macroeconomic stress tests of the operating plan, which are supplemented with higher-level refreshes if necessary. The exercise aims to highlight the key vulnerabilities of the Group’s business plan to adverse changes in the economic environment, and to ensure that there are adequate financial resources in the event of a downturn.
Other stress testing activity The Group’s stress testing programme also involves undertaking assessment of liquidity scenarios, market risk sensitivities and scenarios, and business specific scenarios (see the primary risk categories on pages 115–156 for further information on risk specific stress testing). If required, ad hoc stress testing exercises are also undertaken to assess emerging risks, as well as in response to regulatory requests. This wide ranging programme provides a comprehensive view of the potential impacts arising from the risks to which the Group is exposed and reflects the nature, scale and complexity of the Group.
Governance frameworks The policy framework is founded on Board-approved key principles for the overall management of risk in the organisation, which are aligned with Group strategy and risk appetite and based on a current and comprehensive risk profile that identifies all material risks to the organisation. The principles are underpinned by a hierarchy of policies which define mandatory requirements for risk management and control which are consistently implemented across the Group.
Business lines (first line) have primary responsibility for risk decisions, identifying, measuring, monitoring and controlling risks within their areas of accountability. They are required to establish effective governance and control frameworks for their business to be compliant with Group policy requirements, to maintain appropriate risk management skills, mechanisms and toolkits, and to act within Group risk appetite parameters set and approved by the Board.
Risk division (second line) is a centralised function headed by the Chief Risk Officer and consisting of eight Risk Directors and their specialist teams. The role of Chief Risk Officer was held by Juan Colombás until 4 September 2017 when he was succeeded by Stephen Shelley, previously Commercial Banking Risk Director. Within Risk division the Compliance function has been headed throughout 2017 by Letitia Smith, Group Director, Conduct, Compliance and Operational Risk.
The Risk Directors: – provide independent advice, oversight and challenge to the business; – design, develop and maintain policies, specific functional risk type frameworks and guidance to ensure alignment with business imperatives and regulatory requirements; – establish and maintain appropriate governance structures, culture, oversight and monitoring arrangements which ensure robust and efficient compliance with relevant risk type risk appetites and policies; – lead regulatory liaison on behalf of the Group including horizon scanning and regulatory development for their risk type; and – recommend risk appetite and oversight of the associated risk profile across the Group.
Group Internal Audit (third line) provides independent and objective assurance designed to add value and improve the organisation’s operations. Group Internal Audit has been headed throughout 2017 by Paul Day, Chief Internal Auditor, on an interim secondment basis from 1 January to 31 May, and on a permanent basis thereafter. It helps the Group accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control and governance processes. Group Internal Audit provides independent assurance to the Audit Committee and the Board that risks within the Group are recognised, monitored and managed within acceptable parameters. Group Internal Audit is fully independent of the business and the Risk division, and seeks to ensure objective challenge to the effectiveness of the risk governance framework.
Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the Corporate Governance section on pages 58–80, for further information on Board committees.
Group People Committee Oversees the Group’s colleague policy, remuneration policy and Group-wide remuneration matters, oversees compliance with Senior Manager and Certification Regime (SM&CR) and other regulatory requirements, monitors colleague engagement surveys and ensures that colleague-related issues are managed fairly, effectively and compliantly.
Full analysis of risk categories The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives. A detailed description of each category is provided on pages 116–156.
Following a review of the Group’s risk categories in 2017, model risk is now a primary risk category, and is described in detail on page 156. Financial reporting risk, previously a primary risk category, is now considered as a secondary risk category of operational risk (see pages 135–136; additionally the main features of the Group’s internal control system in relation to the financial reporting process are described on page 109).
Additional mitigation for Commercial customers Individual credit assessment and independent sanction of customer and bank limits: With the exception of small exposures to SME customers where relationship managers have limited delegated sanctioning authority, credit risk in commercial customer portfolios is subject to sanction by the independent Risk division, which considers the strengths and weaknesses of individual transactions, the balance of risk and reward, and how credit risk aligns to the Group’s risk appetite. Exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a tiered hierarchy of delegated sanctioning authorities and limit guidelines. Approval requirements for each decision are based on a number of factors including, but not limited to, the transaction amount, the customer’s aggregate facilities, credit policy, risk appetite, credit risk ratings and the nature and term of the risk. The Group’s credit risk appetite criteria for counterparty and customer underwriting is generally the same as that for assets intended to be held to maturity. All hard underwriting must be sanctioned via credit limits and a pre-approved credit matrix may be used for ‘best efforts’ underwriting.
Counterparty credit limits: Limits are set against all types of exposure in a counterparty name, in accordance with an agreed methodology for each exposure type. This includes credit risk exposure on individual derivatives and securities financing transactions, which incorporates potential future exposures from market movements against agreed confidence intervals. Aggregate facility levels by counterparty are set and limit breaches are subject to escalation procedures.
The Group maintains appetite guidelines on the acceptability of specific classes of collateral.
Commercial lending decisions must be based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. The requirement for collateral and the type to be taken at origination will be based upon the nature of the transaction and the credit quality, size and structure of the borrower. For non-retail exposures, the Group will often require the collateral to include a first charge over land and buildings owned and occupied by the business, a
Refer to note 51 on page 240 for further information on collateral.
Master netting agreements It is credit policy that a Group approved master netting agreement must be used for all derivative and traded property transactions and must be in place prior to trading. Any exceptions must be approved by the credit sanctioner. Although master netting agreements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis, within relevant jurisdictions and for appropriate counterparty types they do reduce the credit risk to the extent that, if an event of default occurs, all trades with the counterparty may be terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period, since this is the net position of all trades under the master netting agreement.
Those forborne loans which fall below individual assessment limits for impairment are grouped with other assets of similar characteristics and assessed collectively in accordance with the Group impairment policy
Customers receiving support from UK government sponsored programmes To assist customers in financial distress, the Group also participates in UK government sponsored programmes for households the most significant of which is the Income Support for Mortgage Interest (SMI) which provides certain defined categories of customers access to a benefit scheme, paid for by the government, which covers all or part of the interest on the mortgage. There are two primary categories: – Customers claiming Jobseeker's Allowance, Income Support, Universal Credit or Employment and Support Allowance benefits: Qualifying customers are able to claim for mortgage interest at 2.61 per cent on up to £200,000 of the mortgage. There is a two year time limit on Jobseeker's Allowance claims that started getting SMI benefit after 5 January 2009. There is no time limit for Income Support, Universal Credit or Employment and Support Allowance customer claims. – Pension Credit customers: Qualifying customers are able to claim for mortgage interest at 2.61 per cent on up to £100,000 of the mortgage and there is no time limit as to how long they can claim.
Whilst the material portfolios have been reviewed for forbearance, some non-retail loans and advances in the Commercial Banking and Run-off divisions have not been reviewed on the basis that the level of unimpaired forbearance is relatively immaterial, or because the concept of forbearance is not relevant. These include, but are not limited to, Lloyds Bank Commercial Finance Ltd and The Agricultural Mortgage Corporation Plc.
The main types of forbearance concessions to commercial customers in or facing financial difficulty are set out below: – Covenants: This includes temporary and permanent waivers, amendment or resetting of non-payment contractual covenants (including LTV and interest cover). The granting of this type of concession in itself would not result in the loan being classified as impaired and the customer is kept under review in the event that further forbearance is necessary; – Extensions and alterations: This includes extension and/or alteration of repayment terms to a level outside of market or the Group’s risk appetite due to the customer’s inability to make existing contractual repayment terms; amendments to an interest rate to a level considered outside of market or the Group’s risk appetite, or other amendments such as changes to capital and/or interest servicing arrangements including capital repayment holidays or conversion to interest only terms; and – Multiple type of forbearance (a combination of the above two).
The Group credit risk portfolio in 2017 Overview – Asset quality remains strong with portfolios continuing to benefit from the Group’s proactive approach to risk management, continued low interest rates and a resilient UK economic environment. – Gross impairment charges remain broadly flat, including the acquisition of MBNA. – Gross asset quality ratio (excluding releases and write-backs) was stable at 28 basis points.
– Impaired loans as a percentage of closing loans and advances reduced to 1.6 per cent (31 December 2016: 1.8 per cent) with impaired loans down £0.7 billion to £7.8 billion (31 December 2016: £8.5 billion), with reductions across Retail, Commercial Banking and Run-off divisions. As at 31 December Retail impaired loans were £104 million lower at £4,951 million, despite including £151 million relating to the acquisition of MBNA. Commercial Banking impaired loans reduced by £270 million to £1,927 million, driven by impaired loan repayments and reductions, partly offset by a large newly impaired loan.
Low risk culture and prudent risk appetite – The Group continues to take a prudent approach to credit risk, with robust credit quality and affordability controls at origination and a prudent through the cycle credit risk appetite. The Group’s portfolios are well positioned against an uncertain economic outlook and potential market volatility. – The Group continues to grow lending to key segments while maintaining prudent credit criteria. – The Group’s effective risk management ensures early identification and management of customers and counterparties who may be showing signs of distress.
Classified as impaired during the year 2,342 637 9 101 3,089 3,154
Secured – Total loans and advances reduced by 0.8 per cent to £292,187 million (31 December 2016: £294,503 million). The closed Specialist portfolio has continued to run-off, reducing by 10.9 per cent to £15,668 million. – New business quality remained stable and early arrears have continued to reduce. – The value of mortgages greater than three months in arrears (excluding repossessions) reduced to £5,437 million at 31 December 2017 (31 December 2016: £6,033 million). – Impaired loans decreased by £218 million to £3,886 million (31 December 2016: £4,104 million), and impaired loans as a percentage of closing advances reduced to 1.3 per cent (31 December 2016: 1.4 per cent). – UK house prices increased by 2.7 per cent over 2017 (on a quarterly non-seasonally adjusted basis).
Table 1.11: Mortgages greater than three months in arrears (excluding repossessions)
Average loan to value1: Stock of residential mortgages 41.8 53.7 49.2 44.0
Impairment provisions as a percentage of loans and advances that are forborne increased to 13.0 per cent (31 December 2016: 9.6 per cent).
Impairment provisions as a % of loans and advances which are forborne
Permanent term extensions and repair 1,179 1,668 61 116 4.0 4.7 1 Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last three months for Secured, and six months for other portfolios. Permanent changes, such as refinancing or recapitalisation which commenced during the last 24 months, are also included.
The movements in Retail forborne loans and advances during the year are as follows: Table 1.15: Movement in UK Retail forborne loans and advances (audited)
Asset quality ratio2 0.12% 0.02% 10bp 1 Restated. See page 181.
– Credit quality of the portfolio and new business remains generally good and the Group is not relaxing risk appetite despite a more competitive market. – Impaired loans reduced by 12 per cent to £1,927 million at 31 December 2017 compared with £2,197 million at 31 December 2016, driven by impaired loan repayments and reductions, partly offset by a large newly impaired loan. Impaired loans as a percentage of closing loans and advances reduced to 1.9 per cent from 2.1 per cent at 31 December 2016.
Portfolios – The SME Banking portfolio continues to grow within prudent credit risk appetite parameters. As a result of the Group’s customer driven relationship management, net lending has increased 2 per cent in 2017. Portfolio credit quality has remained stable or improved across the majority of key risk metrics. – The Mid Markets portfolio is domestically focused and reflects the underlying performance of the UK economy and our prudent credit risk appetite. Credit quality has been stable with levels of financial stress and impairment remaining low. – The Global Corporates business continues to have a predominance of investment grade clients, primarily UK based. The portfolio remains of good quality despite the current global economic uncertainty particularly relating to the EU Exit and a softer outlook in a number of sectors, including construction and retail.
3 December 2017 <£5m exposures include £9.2 billion within SME which has an LTV profile broadly similar to the >£5m exposures.
liquidity or general hedging requirements. The portfolio continues to be prudently managed within the Group’s conservative risk appetite and clearly defined sector strategies. – The Group continues to adopt a conservative stance across the Eurozone maintaining close portfolio scrutiny and oversight particularly given the current macro environment and horizon risks.
Exchange and other movements (38) 34 1 Restated. See page 181.
Unimpaired loans and advances Unimpaired forborne loans and advances were £447 million at 31 December 2017 (31 December 2016: £466 million).
For Insurance, the Group has reported shareholder exposures i.e. where the Group is directly exposed to risk of loss. These shareholder exposures relate to direct investments where the issuer is resident in the named Eurozone country and the credit rating is consistent with the tight credit criteria defined under the appropriate investment mandate. Insurance also has interests in funds domiciled in Ireland and Luxembourg where, in line with the investment mandates, cash is invested in short term financial instruments. The exposure is analysed on a look through basis to the country of risk of the obligors of the underlying assets rather than treating as exposure to country of domicile of the fund.
The Group has been a signatory to the Equator Principles since 2008 and has adopted and applied the expanded scope of Equator Principles III. The Equator Principles support the Group’s approach to assessing and managing environmental and social issues in Project Finance,
There is an ongoing high level of scrutiny regarding financial institutions’ treatment of customers, including those in vulnerable circumstances, from regulatory bodies, the media, politicians and consumer groups. There is also a significant regulatory focus on market misconduct, resulting from previous issues which include London Interbank Offered Rate (LIBOR) and Foreign Exchange (FX).
The Group actively engages with regulatory bodies and other stakeholders in developing its understanding of concerns related to customer treatment, effective competition and market integrity, to ensure that the Group’s strategic conduct focus continues to meet evolving stakeholder expectations.
Exposures The principal operational risks to the Group are: – A cyber-attack could result in customer detriment, financial loss, disruption and/or reputational damage; – Failure in IT systems, due to volume of change, and/or aged infrastructure, could result in unfair customer outcomes, financial loss and/or reputational damage; – Failure to protect and manage customers’ data could result in customer detriment, financial loss, disruption and/or reputational damage; – Internal and/or external fraud or financial crime could result in customer detriment, financial loss, disruption and/or reputational damage; – Failure to ensure compliance with increasingly complex and detailed anti-money laundering, anti-terrorism, sanctions and prohibitions laws and regulations, as such a failure would adversely impact the Group’s reputation and potentially incur fines and other legal enforcements; and – Terrorist acts, other acts of war or hostility, geopolitical, pandemic or other such events.
Measurement Operational risk is managed across the Group through an operational risk framework and operational risk policies. The operational risk framework includes a risk control self-assessment process, risk impact likelihood matrix, key risk and control indicators, risk appetite, a robust operational event management and escalation process, scenario analysis and operational losses process.
Operational risk losses and scenario analysis is used to inform the Internal Capital Adequacy Assessment Process (ICAAP). The Group calculates its minimum (Pillar I) operational risk capital requirements using The Standardised Approach (TSA). Pillar II is calculated using Internal and External loss data and extreme but plausible scenarios that may occur in the next 12 months.
Mitigation The Group’s strategic review considers the changing risk management requirements, adapting the change delivery model to be more agile and develop the people skills and capabilities needed to be the ‘Bank of the Future’. The Group continues to review and invest in its control environment to ensure it addresses the inherent risks faced. Risks are reported and discussed at local governance forums and escalated to executive management and Board as appropriate to ensure the correct level of visibility and engagement. The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (including insurance) and acceptance. Where there is a reliance on third party suppliers to provide services, the Group’s sourcing policy ensures that outsourcing initiatives follow a defined process including due diligence, risk evaluation and ongoing assurance.
Risk management continued colleagues. The Group also plays an active role with other financial institutions, industry bodies, and enforcement agencies in identifying and combatting fraud. – The Group has adopted policies and procedures designed to detect and prevent the use of its banking network for money laundering, terrorist financing, bribery, tax evasion, human trafficking, and modernday slavery, and activities prohibited by legal and regulatory sanctions. Against a background of increasingly complex and detailed laws and regulations, and of increased criminal and terrorist activity, the Group regularly reviews and assesses its policies, procedures and organisational arrangements to keep them current, effective and consistent across markets and jurisdictions. The Group requires mandatory training on these topics for all employees. Specifically, the anti-money laundering procedures include ‘know-your-customer’ requirements, transaction monitoring technologies, reporting of suspicions of money laundering or terrorist financing to the applicable regulatory authorities, and interaction between the Group’s Financial Intelligence Unit and external agencies and other financial institutions. The Anti-Bribery Policy prohibits the payment, offer, acceptance or request of a bribe, including ‘facilitation payments’ by any employee or agent and provides a confidential reporting service for anonymous reporting for suspected or actual bribery activity. The Sanctions and Related Prohibitions Policy sets out a framework of controls for compliance with legal and regulatory sanctions. – Operational resilience measures and recovery planning defined in the Group’s Resilience and Continuity (including Incident Management) Policy ensure an appropriate and consistent approach to the management of continuity risks, including potential interruptions from a range of internal and external incidents or threats including environmental and climatic issues, terrorism, cyber, economic instability, pandemic planning and operational incidents. The Group considers its operational resilience across five key pillars; cyber, third parties, IT, people and property.
Definition Insurance underwriting risk is defined as the risk of adverse developments in longevity, mortality, persistency, General Insurance underwriting and policyholder behaviour, leading to reductions in earnings and/or value.
Measurement The Group measures the amount of capital it requires and holds through applying the regulatory framework defined by the Capital Requirements Directive and Regulation (CRD IV) as implemented in the UK by the Prudential Regulation Authority (PRA) and supplemented through additional regulation under the PRA Rulebook. Full details of the Group’s regulatory capital and leverage frameworks, including the means by which its capital and leverage requirements and capital resources are calculated, will be provided in the Group’s Pillar 3 Report.
– Although the Group is not currently classified as a global systemically important institution (G-SII) under the Capital Requirements Directive, it has been classified as an ‘other’ systemically important institution (O-SII) by the PRA. The O-SII buffer is set to zero in the UK. – The Systemic Risk Buffer (SRB) will be applied to UK ring-fenced banks from early 2019. The size of buffer applied to the Group’s ring-fenced bank (RFB) sub-group in 2019 will be dependent upon the total assets of the sub-group. The FPC anticipates applying a buffer of 2.5 per cent to the largest ring-fenced institutions. Although the SRB will apply at a sub consolidated level within the Group’s structure, the PRA have indicated that they will include in the Group’s PRA Buffer an amount equivalent to the RFB’s Systemic Risk Buffer. The amount included in the PRA Buffer is expected to be lower as a percentage of Group risk-weighted assets reflecting the assets of the Group that will not be held in the RFB sub-group and for which the SRB will not apply to.
The capital conservation buffer (CCB) is a standard buffer of 2.5 per cent of risk-weighted assets designed to provide for losses in the event of stress and is being phased in over the period from 1 January 2016 to 1 January 2019. During 2017 it was 1.25 per cent and during 2018 it will increase to 1.875 per cent.
As part of the capital planning process, forecast capital positions are subjected to extensive stress analyses to determine the adequacy of the Group’s capital resources against the minimum requirements, including the ICG. The PRA uses the outputs from some of these stress analyses as one of the inputs that inform the setting of a bank-specific capital buffer for the Group, known as the PRA Buffer. The PRA Buffer also takes into account the CCB and CCyB. The PRA requires the PRA Buffer to remain confidential between the Group and the PRA.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At 31 December 2017 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £8.5 billion. Substantially all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009.
In addition, the Group utilised the 0.8 per cent of CET1 capital retained at 31 December 2016 to cover the acquisition of MBNA.
The transitional total capital ratio, after ordinary dividends reduced by 0.2 per cent to 21.2 per cent, largely reflecting amortisation on dated tier 2 instruments and foreign exchange movements on tier 1 and tier 2 instruments, offset by the increase in CET1 capital and the reduction in risk-weighted assets.
An analysis of the Group’s capital position as at 31 December 2017 is presented in the following section on both a CRD IV transitional arrangements basis and a CRD IV fully loaded basis.
Movements in subordinated debt: Repurchases, redemptions and other – (541) (1,201) (1,742)
CET1 capital resources have increased by £363 million in the year, primarily reflecting a combination of profit generation, dividends received from the Insurance business during the year, movements in the defined benefit pension schemes and a reduction in the deferred tax asset deducted from capital, partially offset by the payment of the 2017 interim dividend, the accrual of the full year ordinary dividend and an increase in the deduction for goodwill and other intangible assets, largely in relation to the acquisition of MBNA.
AT1 capital resources have reduced by £615 million in the year, primarily reflecting the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments and foreign exchange movements.
Contributions to the default fund of a central counterparty 428 340
Total risk-weighted assets as at 31 December 2017 210,919 1 Credit risk includes securitisation risk-weighted assets.
The concurrent UK stress test run by the Bank of England was also undertaken in 2017. As announced in November, despite the severity of the stress scenario, the Group exceeded the capital and leverage thresholds set out for the purpose of the stress test and was not required to take any capital action as a result.
The £4.7 billion increase in the SFT exposure measure during the year, representing SFT assets per the balance sheet net of deconsolidation and other SFT adjustments, reflected an increase in customer volumes, partially offset by reduced trading volumes and an increase in eligible netting adjustments.
Off-balance sheet items reduced by £0.3 billion during the year, primarily reflecting a net reduction in securitisation financing facility commitments together with corporate facility drawdowns, reductions and exits, largely offset by an increase in unconditionally cancellable credit card commitments following the acquisition of MBNA and new residential mortgage offers placed.
The average UK leverage ratio of 5.4 per cent over the quarter reflected a strengthening tier 1 capital position prior to the accrual for the announced full year ordinary dividend and further conduct provisions, and the reduction in underlying balance sheet assets during the quarter, net of qualifying central bank claims.
The Solvency II regime for insurers and insurance groups came into force from 1 January 2016. The insurance businesses are required to calculate solvency capital requirements and available capital on a risk-based approach. The Insurance business of the Group calculates regulatory capital on the basis of an internal model, which was approved by the PRA on 5 December 2015.
To assist in managing the balance sheet the Group operates a Liquidity Transfer Pricing (LTP) process which: allocates relevant interest expenses from the centre to the Group’s banking businesses within the internal management accounts; helps drive the correct inputs to customer pricing; and is consistent with regulatory requirements. LTP makes extensive use of behavioural maturity profiles, taking account of expected customer loan prepayments and stability of customer deposits, modelled on historic data.
As a result, wholesale funding has decreased by £9.7 billion to £101.1 billion as at 31 December 2017, with the amount maturing in less than one year falling to £28.5 billion as at 31 December 2017 (£35.1 billion as at 31 December 2016). In 2017, the Group issued term funding of £10.2 billion and following the full utilisation of the TFS, would expect term issuance volumes in 2018 to return to a steady-state requirement of between £15 billion and £20 billion per annum.
Cash and balances at central bank – non-LCR eligible4 4.8 4.8 –
Trading and fair value through profit and loss 1.7 1.8 (6)
Table 1.37: Analysis of 2017 total wholesale funding by residual maturity
Of which issued by Lloyds Banking Group plc2 1.0 5.2 1.6 1.0 8.8 1 Private placements include structured bonds and term repurchase agreements (repos).
Liquidity portfolio At 31 December 2017, the banking business had £120.9 billion of highly liquid unencumbered LCR eligible assets (31 December 2016: £120.8 billion), of which £120.2 billion is LCR level 1 eligible (31 December 2016: £120.3 billion) and £0.7 billion is LCR level 2 eligible (31 December 2016: £0.5 billion). These assets are available to meet cash and collateral outflows and PRA regulatory requirements. A separate liquidity portfolio to mitigate any insurance liquidity risk is managed within the Insurance business. LCR eligible liquid assets represent over eight times the Group’s money market funding less than one year to maturity (excluding derivative collateral margins and settlement accounts) and exceed total wholesale funding, and thus provide a substantial buffer in the event of market dislocation. As previously communicated, given the economic climate, the Group does not expect to hold gilts to maturity. The Group has therefore continued to reduce the size of its gilts portfolio owned outright.
Trading and other financial assets at fair value through profit or loss – – 4,642 4,642 – 7,378 – 150,858 158,236 162,878
Effective implementation of the RMF mutually reinforces and is reinforced by the Group’s risk culture, which is embedded in its approach to recruitment, selection, training, performance management and reward.
This includes a review of the Group’s current approach to governance and ongoing initiatives in light of the latest regulatory guidance, including in 2017 the continued enhancement of frameworks to address Senior Managers and Certification Regime (SM&CR) requirements and prepare for the requirement to ring-fence retail banking activities with effect from January 2019.
Cash and balances at central banks 58,521 – 58,521 – Interest rate
Available-for-sale financial assets 42,098 – 42,098 – Interest rate, foreign exchange, credit spread
Debt securities in issue 72,450 – 72,450 – Interest rate, credit spread
Liabilities arising from insurance and investment contracts 118,860 – – 118,860 Credit spread
The defined benefit pension schemes’ assets and liabilities are included under Other assets and Other liabilities in this table and note 35 on page 206 provides further information.
The Group’s trading book assets and liabilities are originated by Commercial Banking (CB) Markets within the Commercial Banking division. Within the Group’s balance sheet these fall under the trading assets and liabilities and derivative financial instruments. The assets and liabilities are classified as trading books if they have been acquired or incurred for the purpose of selling or repurchasing in the near future. These consist of government, corporate and financial institution bonds and loans/deposits and repos. Further information on these activities can be found under the Trading portfolios section on page 155.
Table 1.44 below shows the key material market risks for the Group’s banking, defined benefit pension schemes, insurance and trading activities.
Banking activities Exposures The Group’s banking activities expose it to the risk of adverse movements in market prices, predominantly interest rates, credit spreads, exchange rates and equity prices. The volatility of market values can be affected by both the transparency of prices and the amount of liquidity in the market for the relevant asset or liability.
The Group has an integrated Asset and Liability Management (ALM) system which supports non traded asset and liability management of the Group. This provides a single consolidated tool to measure and manage interest rate repricing profiles (including behavioural assumptions), perform stress testing and produce forecast outputs. The Group is aware that any assumptions based model is open to challenge. A full behavioural review is performed annually, or in response to changing market conditions, to ensure the assumptions remain appropriate and the model itself is subject to annual re-validation, as required under the Group Model Governance Policy. The key behavioural assumptions are: (i) embedded optionality within products; (ii) the duration of balances that are contractually repayable on demand, such as current accounts and overdrafts, together with net free reserves of the Group; and (iii) the re-pricing behaviour of managed rate liabilities namely variable rate savings.
Net investment foreign exchange exposures are managed centrally by GCT, by hedging non-sterling asset values with currency borrowing. In the first half of 2017, the Group unwound the economic hedges against these positions in order to create additional offset to common equity tier 1 (CET1) movements arising from revaluation of foreign currency risk-weighted assets (see note 51 on page 240). Economic foreign exchange exposures arising from non-functional currency flows are identified by divisions and transferred and managed centrally. The Group also has a policy of forward hedging its forecasted currency profit and loss to year end.
Mitigation Equity and credit spread risks are closely monitored and, where appropriate, asset liability matching is undertaken to mitigate risk. A hedging strategy is in place to reduce exposure from the with-profit funds.
All risk factors before diversification 1.1 1.3 2.9 0.9 1.2 2.1 14.3 1.1
Notes to the consolidated financial statements 173 1. Basis of preparation 2. Accounting policies 3. Critical accounting estimates 4. Segmental analysis 5. Net interest income 6. Net fee and commission income 7. Net trading income 8. Insurance premium income 9. Other operating income 10. Insurance claims 11. Operating expenses 13. Taxation 14. Earnings per share 15. Trading and other financial assets at fair value through profit or loss 16. Derivative financial instruments 17. Loans and advances to customers 18. Securitisations and covered bonds 19. Structured entities 20. Allowance for impairment losses on loans and receivables 21. Available-for-sale financial assets 22. Acquisition of MBNA Limited 23. Goodwill 24. Value of in-force business 25. Other intangible assets 26. Property, plant and equipment 27. Other assets 28 Customer deposits 29. Trading and other financial liabilities at fair value through profit or loss 30. Debt securities in issue 31. Liabilities arising from insurance contracts and participating investment contracts 32. Life insurance sensitivity analysis 33. Liabilities arising from non-participating investment contracts 34. Other liabilities 35. Retirement benefit obligations 36. Deferred tax 37. Other provisions 38. Subordinated liabilities 39. Share capital 40. Share premium account 41. Other reserves 42. Retained profits 43. Other equity instruments 44. Dividends on ordinary shares 45. Share-based payments 46. Related party transactions 47. Contingent liabilities and commitments 48. Financial instruments 49. Transfers of financial assets 50. Offsetting of financial assets and liabilities 51. Financial risk management 52. Consolidated cash flow statement 53. Events since the balance sheet date 54. Future accounting developments
Notes to the parent company financial statements 258 1. Basis of preparation and accounting policies 2. Amounts due from subsidiaries 3. Share capital, share premium and other equity instruments 4. Other reserves 5. Retained profits 6. Debt securities in issue 7. Subordinated liabilities 8. Related party transactions 9. Financial instruments 10. Other information
Our audit approach Overview – Overall Group materiality: £350 million (2016: £325 million), based on 5 per cent of the 3 year average of adjusted profit before tax. Statutory profits were adjusted to remove the effects of certain items which are exceptional and/or one-off in nature. – Overall parent company materiality: £350 million (2016: £325 million), based on 1 per cent of total assets. – The scope of our audit and the nature, timing and extent of audit procedures performed were determined by our risk assessment, the financial significance of components and other qualitative factors (including history of misstatement through fraud or error). – We performed audit procedures over components considered financially significant in the context of the Group (full scope audit) or in the context of individual primary statement account balances (audit of specific account balances). We performed other procedures including testing entity level controls, information technology general controls and analytical review procedures to mitigate the risk of material misstatement in the residual components.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditors’ report.
We gained an understanding of the legal and regulatory framework applicable to the Group and the industries in which it operates, and considered the risk of acts by the Group which were contrary to applicable laws and regulations, including fraud. We designed audit procedures at Group and significant component level to respond to the risk, recognising that the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion. We focused on laws and regulations that could give rise to a material misstatement in the Group and parent financial statements, including but not limited to, the Companies Act 2006, the Listing Rules, the Prudential Regulation Authority’s regulations, the Pensions Regulator legislation, the UK tax legislation. Our tests included, but were not limited to, review of the financial statement disclosures to underlying supporting documentation, review of correspondence with and reports to the regulators, enquiries of management, review of significant components auditors’ work and review of internal audit reports in so far as they related to the financial statements.
Overall materiality £350 million (2016: £325 million). £350 million (2016: £325 million).
Audit scope We tailored the scope of our audit to ensure that we performed sufficient work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group and the parent company, the accounting processes and controls, and the industry in which the Group operates.
Components within the scope of our audit contributed 99 per cent of Group total assets and 94 per cent of profit after tax.
We understood management’s process and tested key controls around the determination of impairment provision, including: – the identification of impairment events; – the governance over the impairment processes, including controls over unauthorised modifications to the models and the re-assessment by management that impairment models are still calibrated in a way which is appropriate for the impairment risks in the Group’s loan portfolios; – the transfer of data between underlying source systems and the impairment models that the Group operates; and
For a sample of individually impaired loans, we understood the latest developments in relation to each case and the basis of measuring the impairment provisions and considered whether key judgments were appropriate given the borrower’s circumstances. We also re-performed management’s impairment calculation, testing key inputs including the expected future cash flows, discount rates and the valuation of collateral held. Our testing of collateral valuation specifically considered whether valuations were up to date, consistent with the strategy being followed in respect of the particular borrower and assessed the appropriateness and sensitivities of key assumptions. We back-tested previous provisions by comparing them to the gains or losses crystallised when impaired loans were sold or exited.
We also considered whether certain recent events and macro-economic factors (e.g. continued volatility and uncertainty around commodity prices, sterling exchange rate movements and low interest rates) had been appropriately considered and captured.
The most significant provisions relate to past sales of payment protection insurance (PPI) policies, arrears handling activities, packaged bank accounts and insurance products of the German branch of Clerical Medical Investment Group Ltd (now Scottish Widows Ltd).
We engaged our actuarial specialists to assess the reasonableness of the actuarial assumptions, including the consideration and challenge of management’s rationale for the judgements applied and any reliance placed on industry information.
For maintenance expenses, we assessed the appropriateness of the judgements around costs deemed to be non-attributable to insurance business and the resulting per-policy costs assumptions. We have reviewed the adjustments required reflecting the impact of the Group’s outsourcing agreement in this area.
The retirement benefit schemes in the Group are calculated and valued with reference to a number of actuarial assumptions including discount rate, rate of inflation and mortality rates.
As a result of the size of these schemes, small changes in these assumptions can have a significant impact on the financial statements.
During the year, the Group has entered into significant one-off transactions that inherently have a high level of complexity and/or judgment in its determination of accounting treatment (e.g. acquisition of MBNA). This judgment increases the risk of management bias being introduced into the transactions.
Due to the nature of significant one-off transactions, the accounting often falls outside of the business as usual process level controls and requires manual calculations to be performed.
The Group’s financial reporting processes are reliant on automated processes and controls performed by IT systems. Further, the group-wide IT estate is complex in terms of the scale and nature of IT systems relied upon. The risks associated with IT are also impacted by the threat profile of IT within the banking environment, which is subject to a number of internal and external risks relating to cyber security and the resilience of IT systems.
As part of the audit, we validate the design and operating effectiveness of in-scope automated and IT dependent controls over financial reporting at a point in time as well as review the supporting IT General Computer Controls (ITGCs) that provide assurance over the continued integrity of these controls for the full financial reporting period.
We have obtained an understanding of management’s remediation programme and observed progress in terms of their remediation of a number of the control matters. However, several of the controls continued to be ineffective for the full financial reporting period.
On the basis of our additional audit testing, we were able to place reliance on the data and reports from in-scope applications.
Refer to page 73 (Audit Committee Report) and page 253 (Note 54).
We understood and critically assessed classification and measurement decisions and the ECL models developed by the Group. This included using our credit modelling experts in our assessment of judgements and assumptions supporting the ECL requirements of the standard. We re-performed certain model calculations to confirm the risk parameter outputs and the results were appropriate.
We considered post-model adjustments in the context of key model and data limitations identified by management, challenged their rationale and recalculated where necessary.
We have nothing material to add or to draw attention to. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and parent company’s ability to continue as a going concern.
With respect to the Strategic Report and Directors’ report, we considered whether the disclosures required by the UK Companies Act 2006 have been included.
Strategic report and Directors’ report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic Report and Directors’ report for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. (CA06)
Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of directors’ responsibilities set out on page 83, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Appointment Following the recommendation of the audit committee, we were appointed by the directors on 21 December 1995 to audit the financial statements for the year ended 31 December 1995 and subsequent financial periods. The period of total uninterrupted engagement is 23 years, covering the years ended 31 December 1995 to 31 December 2017. The audit was tendered in 2014 and we were re-appointed with effect from 1 January 2016. There will be a mandatory rotation for the 2021 audit.
Total comprehensive income attributable to other equity holders 415 412 394
Liabilities arising from insurance contracts and participating investment contracts 31 103,413 94,390
The directors approved the consolidated financial statements on 20 February 2018.
Profit for the year – – 860 860 – 96 956
Other employee award schemes – – 172 172 – – 172
Changes in non-controlling interests – – – – – (23) (23)
Net cash (used in) provided by operating activities (3,195) 2,074 16,372
Acquisition of businesses, net of cash acquired 52(E) (1,923) (20) (5)
Disposal of businesses, net of cash disposed 52(F) 129 5 (4,071)
Net cash provided by (used in) investing activities 6,808 (686) (3,310)
Cash and cash equivalents at beginning of year 62,388 71,953 65,147
Note 1: Basis of preparation The consolidated financial statements of Lloyds Banking Group plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the IFRS Interpretations Committee (IFRS IC) and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued by the IASB.
With effect from 1 January 2017 the Group has elected to early adopt the provision in IFRS 9 for gains and losses attributable to changes in own credit risk on financial liabilities designated at fair value through profit or loss to be presented in other comprehensive income. The impact has been to increase profit after tax and reduce other comprehensive income by £40 million in the year ended 31 December 2017; there is no impact on total liabilities or shareholders’ equity. Comparatives have not been restated.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2017 and which have not been applied in preparing these financial statements are given in note 54.
(A) Consolidation The assets, liabilities and results of Group undertakings (including structured entities) are included in the financial statements on the basis of accounts made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures. Details of the Group’s subsidiaries and related undertakings are given on pages 268–274.
Classified at fair value through profit and loss: Other financial assets and liabilities at fair value through profit or loss are designated as such by management upon initial recognition. Such assets and liabilities are carried in the balance sheet at their fair value and gains and losses arising from changes in fair value together with interest coupons and dividend income are recognised in the income statement within net trading income in the period in which they occur, except that gains and losses attributable to changes in own credit risk on financial liabilities held at fair value through profit or loss are taken directly to other comprehensive income (see note 1). Financial assets and liabilities are designated at fair value through profit or loss on acquisition in the following circumstances: – it eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising gains or losses on different bases. The main type of financial assets designated by the Group at fair value through profit or loss are assets backing insurance contracts and investment contracts issued by the Group’s life insurance businesses. Fair value designation allows changes in the fair value of these assets to be recorded in the income statement along with the changes in the value of the associated liabilities, thereby significantly reducing the measurement inconsistency had the assets been classified as available-for-sale financial assets. – the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, with management information also prepared on this basis.
(2) Available-for-sale financial assets Debt securities and equity shares that are not classified as trading securities, at fair value through profit or loss, held-to-maturity investments or as loans and receivables are classified as available-for-sale financial assets and are recognised in the balance sheet at their fair value, inclusive of transaction costs. Such assets are intended to be held for an indeterminate period of time and may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Gains and losses arising from changes in the fair value of investments classified as available-for-sale are recognised directly in other comprehensive income, until the financial asset is either sold, becomes impaired or matures, at which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement. Interest calculated using the effective interest method and foreign exchange gains and losses on debt securities denominated in foreign currencies are recognised in the income statement.
(5) Sale and repurchase agreements (including securities lending and borrowing) Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and rewards are retained. Funds received under these arrangements are included in deposits from banks, customer deposits, or trading liabilities. Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and receivables or trading securities. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.
(3) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income, the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is disposed of. The hedging instrument used in net investment hedges may include non-derivative liabilities as well as derivative financial instruments.
(G) Offset Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of set-off and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Cash collateral on exchange traded derivative transactions is presented gross unless the collateral cash flows are always settled net with the derivative cash flows. In certain situations, even though master netting agreements exist, the lack of management intention to settle on a net basis results in the financial assets and liabilities being reported gross on the balance sheet.
Subsequent to the recognition of an impairment loss on a financial asset or a group of financial assets, interest income continues to be recognised on an effective interest rate basis, on the asset’s carrying value net of impairment provisions. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the allowance is adjusted and the amount of the reversal is recognised in the income statement.
Note 2: Accounting policies continued value, less any impairment loss on that asset previously recognised, is reclassified from equity to the income statement. For impaired debt instruments, impairment losses are recognised in subsequent periods when it is determined that there has been a further negative impact on expected future cash flows; a reduction in fair value caused by general widening of credit spreads would not, of itself, result in additional impairment. If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, an amount not greater than the original impairment loss is credited to the income statement; any excess is taken to other comprehensive income. Impairment losses recognised in the income statement on equity instruments are not reversed through the income statement.
Note 2: Accounting policies continued – Insurance and participating investment contracts which are not unit-linked or in the Group’s with-profit funds
(N) Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net investment hedges. Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non-monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on available-for-sale nonmonetary financial assets, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge.
Note 3: Critical accounting estimates The preparation of the Group’s financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Group Executive Committee has been determined to be the chief operating decision maker for the Group. The Group’s operating segments reflect its organisational and management structures. The Group Executive Committee reviews the Group’s internal reporting based around these segments in order to assess performance and allocate resources. GEC considers interest income and expense on a net basis and consequently the total interest income and expense for all reportable segments is presented net. The segments are differentiated by the type of products provided, by whether the customers are individuals or corporate entities.
Other income, net of insurance claims 2,217 1,761 1,846 381 6,205
Segment underlying income, net of insurance claims 10,235 4,690 2,019 556 17,500
Other income, net of insurance claims 2,263 1,842 1,986 64 6,155
Segment underlying income, net of insurance claims 10,516 4,616 2,045 460 17,637
Other segment items: Investments in joint ventures and associates at end of year 5 – – 42 47 1 Restated – see page 181. 2 Net of profits on disposal of operating lease assets of £66 million.
Total income, net of insurance claims 17,267 384 (212) – 61 17,500
Loans and advances to banks 0.40 0.46 0.42 271 381 397
Debt securities held as loans and receivables 1.29 1.47 1.87 43 56 40
Interest receivable on loans and receivables 2.81 2.87 2.98 15,026 15,627 16,693
Total interest and similar income1 2.73 2.77 2.86 16,006 16,620 17,615
Liabilities under sale and repurchase agreements 0.58 0.46 0.57 (110) (38) (34)
Total interest and similar expense3 1.06 1.44 1.19 (5,094) (7,346) (6,297)
Net interest income 10,912 9,274 11,318 1 Includes £12 million (2016: £nil; 2015: £nil) of interest income on liabilities with negative interest rates.
Note 6: Net fee and commission income 2017 £m 2016 £m 2015 £m
Note 7: Net trading income 2017 £m 2016 £m 2015 £m
Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss and for trading as follows: 2017 £m 2016 £m 2015 £m
Net income arising on assets held at fair value through profit or loss: Debt securities, loans and advances 1,122 4,771 451
Net (expense) income arising on liabilities held at fair value through profit or loss – debt securities in issue (144) (154) 14
Note 8: Insurance premium income 2017 £m 2016 £m 2015 £m
Movement in value of in-force business (note 24) (165) 472 (162)
Change in insurance and participating investment contracts (note 31) (9,067) (14,160) 2,898
Pensions and other post-retirement benefit schemes (note 35) 625 555 548
Performance-based compensation expense deferred until later years comprises: Awards made in respect of the year ended 31 December 127 123 114
Average headcount The average number of persons on a headcount basis employed by the Group during the year was as follows: Fees payable to the auditors Fees payable to the Company’s auditors by the Group are as follows: 2017 £m 2016 £m 2015 £m
Other non-audit fees: Services relating to corporate finance transactions 1.2 0.1 0.2
Total fees payable to the Company’s auditors by the Group 27.9 24.3 24.3
During the year, the auditors also earned fees payable by entities outside the consolidated Lloyds Banking Group in respect of the following: 2017 £m 2016 £m 2015 £m
Reviews of the financial position of corporate and other borrowers – 1.2 3.1
Total impairment losses on loans and receivables (note 20) 691 592 441
Deferred tax: Adjustments in respect of prior years (48) (94) 96
Profit attributable to equity shareholders – basic and diluted 3,042 2,001 466
Note 15: Trading and other financial assets at fair value through profit or loss These assets are comprised as follows: Trading assets £m
Bank and building society certificates of deposit – 222 222 – 244 244
Asset-backed securities: Corporate and other debt securities 523 19,467 19,990 224 19,608 19,832
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 51.
Derivatives designated as fair value hedges: Derivatives designated as cash flow hedges: Total derivative assets/liabilities – hedging 741,357 1,881 1,613 641,288 2,712 1,964
The notional amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. Further details are provided in note 51 Credit risk.
Later than 1 year and not later than 5 years 887 1,282
Note 18: Securitisations and covered bonds Securitisation programmes Loans and advances to customers and debt securities classified as loans and receivables include loans securitised under the Group’s securitisation programmes, the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. As the structured entities are funded by the issue of debt on terms whereby the majority of the risks and rewards of the portfolio are retained by the subsidiary, the structured entities are consolidated fully and all of these loans are retained on the Group’s balance sheet, with the related notes in issue included within debt securities in issue.
The Group recognises the full liabilities associated with its securitisation and covered bond programmes within debt securities in issue, although the obligations of the Group are limited to the cash flows generated from the underlying assets. The Group could be required to provide additional support to a number of the securitisation programmes to support the credit ratings of the debt securities issued, in the form of increased cash reserves and the holding of subordinated notes. Further, certain programmes contain contractual obligations that require the Group to repurchase assets should they become credit impaired.
The Group earns fees from managing the investments of these funds. The investment management fees that the Group earned from these entities, including those in which the Group held no ownership interest at 31 December 2017, are reported in note 6.
Note 20: Allowance for impairment losses on loans and receivables continued
Of the total allowance in respect of loans and advances to customers, £1,772 million (2016: £1,876 million) related to lending that had been determined to be impaired (either individually or on a collective basis) at the reporting date.
Of the total allowance in respect of loans and advances to customers, £1,201 million (2016: £1,208 million) was assessed on a collective basis.
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,310 million (2016: £2,016 million), £1,836 million, or 79 per cent of the total (2016: £1,836 million, 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance and Wealth division; £302 million, or 13 per cent of the total (2016: £nil) relates to the acquisition of MBNA (note 22) and has been allocated to Cards in the Group’s Retail division; and £170 million, or 7 per cent of the total (2016: £170 million, 8 per cent of the total) to Motor Finance in the Group’s Retail division.
Note 24: Value of in-force business Critical accounting estimates and judgements The value of in-force business asset represents the present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts. The valuation of this asset requires assumptions to be made about future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to this asset. The methodology used to value this asset and the key assumptions that have been made in determining the carrying value of the value of in-force business asset at 31 December 2017 are set out below.
Risk-free rate (financial options and guarantees)1 0.00 to 4.20 0.00 to 4.20
Note 24: Value of in-force business continued The movement in the acquired value of in-force non-participating investment contracts over the year is as follows: 2017 £m 2016 £m
Balance sheet amount at 31 December 2016 425 13 4 39 1,200 1,681
The additional £702 million of purchased credit card relationships in the year ended 31 December 2017 have arisen from the acquisition of MBNA (see note 22) and represent the benefit of recurring income generated from the portfolio of credit cards purchased.
Accumulated depreciation and impairment: Exchange and other adjustments – (1) (8) 49 40
Expenditure on investment properties is comprised as follows: 2017 £m 2016 £m
Rental income of £213 million (2016: £229 million) and direct operating expenses arising from properties that generate rental income of £24 million (2016: £26 million) have been recognised in the income statement.
Assets arising from reinsurance contracts held (notes 31 and 33) 602 714
For amounts included above which are subject to repurchase agreements, see note 51.
Liabilities held at fair value through profit or loss 7,815 9,425
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements 41,378 42,067
Non-profit fund liabilities (i) Business description The Group principally writes the following types of life insurance contracts within its non-profit funds. Shareholder profits on these types of business arise from management fees and other policy charges.
Interest rates The rates of interest used are determined by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.
(iv) Options and guarantees outside the With-Profit Funds A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (e.g. term assurance) or guaranteed income for life (e.g. annuities). In addition, certain personal pension policyholders in Scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £35 million (2016: £82 million) in respect of those guarantees.
The movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows: 2017 £m 2016 £m
Change in provision for unearned premiums charged to income statement (46) (57)
Increase/(decrease) in liabilities charged to the income statement 1 337 366
Future maintenance and investment expenses4 10% reduction 289 240 318 264
Note 35: Retirement benefit obligations 2017 £m 2016 £m 2015 £m
Debt instruments1: Fixed interest government bonds 5,344 – 5,344 5,797 – 5,797
1 Of the total debt instruments, £27,732 million (31 December 2016: £25,219 million) were investment grade (credit ratings equal to or better than ‘BBB’).
Note 35: Retirement benefit obligations continued Assumptions The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows: Discount rate 2.59 2.76
Interest rate risk: The defined benefit obligation is determined using a discount rate derived from yields on AA-rated corporate bonds. A decrease in corporate bond yields will increase plan liabilities although this will be partially offset by an increase in the value of bond holdings.
The ultimate cost of the defined benefit obligations to the Group will depend upon actual future events rather than the assumptions made. The assumptions made are unlikely to be borne out in practice and as such the cost may be higher or lower than expected.
Benefits expected to be paid between 5 and 10 years 8,082 8,030
Benefits expected to be paid between 10 and 15 years 9,360 9,453
Benefits expected to be paid between 15 and 25 years 19,044 20,268
Benefits expected to be paid between 25 and 35 years 16,735 18,831
Benefits expected to be paid between 35 and 45 years 11,156 13,589
Benefits expected to be paid in more than 45 years 5,219 7,809
Note 35: Retirement benefit obligations continued Maturity analysis method and assumptions The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including allowance for expected future inflation. They are shown in their undiscounted form and therefore appear large relative to the discounted assessment of the defined benefit obligations recognised in the Group’s balance sheet. They are in respect of benefits that have been accrued prior to the respective year-end date only and make no allowance for any benefits that may have been accrued subsequently.
Movements in the other post-retirement benefits obligation: 2017 £m 2016 £m
Other (charge) credit to equity – – – – (13) – (13)
(Charge) credit to the income statement (273) 93 1,876 232 23 252 2,203
(Charge) credit to other comprehensive income – – (1,787) (466) (246) – (2,499)
Exchange and other adjustments – – – (14) – – (14)
The Group’s expectations as to the level of future taxable profits take into account the Group’s long-term financial and strategic plans, and anticipated future tax-adjusting items. In making this assessment, account is taken of business plans, the Board-approved operating plan and the expected future economic outlook as set out in the strategic report, as well as the risks associated with future regulatory change.
Deferred tax assets of approximately £76 million (2016: £92 million) have not been recognised in respect of £404 million of UK tax losses and other temporary differences which can only be used to offset future capital gains. UK capital losses can be carried forward indefinitely.
As a result of parent company exemptions on dividends from subsidiaries and on capital gains on disposal there are no significant taxable temporary differences associated with investments in subsidiaries, branches, associates and joint arrangements.
Note 37: Other provisions Critical accounting estimates and judgements At 31 December 2017, the Group carried provisions of £4,070 million (2016: £3,597 million) against the cost of making redress payments to customers and the related administration costs in connection with historical regulatory breaches, principally the mis-selling of payment protection insurance (2017: £2,778 million; 2016: £2,258 million).
Payment protection insurance (excluding MBNA) The Group increased the provision for PPI costs by a further £1,650 million in 2017, of which £600 million was in the fourth quarter, bringing the total amount provided to £18,675 million. The remaining provision is consistent with an average of 11,000 complaints per week (previously 9,000) through to the industry deadline of August 2019, in line with the average experience over the last nine months.
The higher volume of complaints received has been driven by increased claims management company (CMC) marketing activity and the Financial Conduct Authority (FCA) advertising campaign.
For every additional 1,000 reactive complaints per week above 11,000 on average through to the industry deadline of August 2019, the Group would expect an additional charge of £200 million.
Customer claims in relation to insurance branch business in Germany The Group continues to receive claims in Germany from customers relating to policies issued by Clerical Medical Investment Group Limited (subsequently renamed Scottish Widows Limited). The German industry-wide issue regarding notification of contractual ‘cooling off’ periods continued to lead to an increasing number of claims in 2016 and 2017. Up to 31 December 2016 the Group had provided a total of £639 million and no further amounts have been provided to 31 December 2017. The validity of the claims facing the Group depends upon the facts and circumstances in respect of each claim. As a result the ultimate financial effect, which could be significantly different from the current provision, will be known only once all relevant claims have been resolved.
Provisions are made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes irrevocably committed to the expenditure. At 31 December 2017 provisions of £104 million (31 December 2016: £239 million) were held.
Other repurchases and redemptions during the year2 (319) (182) (475) – (3,070) (4,046)
2 In total, the tender offers, repurchases and redemptions resulted from cash outflows of £7,885 million.
Redesignation to ordinary shares (see below) (80,921,051) – – (8) – –
Note 40: Share premium account 2017 £m 2016 £m 2015 £m
Movements in other reserves were as follows: 2017 £m 2016 £m 2015 £m
Foreign currency gains on net investment hedges (tax: £nil) (11) 106 17
Distributions on other equity instruments (net of tax) (313) (321) (314)
Executive and SAYE plans: Options granted in the year 17 16 12
During the year ended 31 December 2017 the Group operated the following share-based payment schemes, all of which are equity settled.
Other share option plans Lloyds Banking Group Executive Share Plan 2003 The Plan was adopted in December 2003 and under the Plan share options may be granted to senior employees. Options under this plan have been granted specifically to facilitate recruitment and in some instances, the grant may be subject to performance conditions. The Plan is used not only to compensate new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in some instances, the grant being made subject to individual performance conditions.
Share Incentive Plan Free Shares An award of shares may be made annually to employees up to a maximum of £3,000. The shares awarded are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition. If an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited.
On 10 May 2017, the Group made an award of £200 of shares to all eligible employees. The number of shares awarded was 21,566,047, with an average fair value of 0.69 based on the market price at the date of award.
Fixed share awards Fixed share awards were introduced in 2014 in order to ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for certain Lloyds Banking Group employees, with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements. The fixed share awards are delivered in Lloyds Banking Group shares, released over five years with 20 per cent being released each year following the year of award. The number of shares purchased in 2017 was 9,313,314 (2016: 10,031,272).
Note 46: Related party transactions Key management personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the Group’s key management personnel are the members of the Lloyds Banking Group plc Group Executive Committee together with its Non-Executive Directors.
Exercised/lapsed (includes entitlements of former key management personnel) (2) (9) (7)
Exercised/lapsed (includes entitlements of former key management personnel) (20) (46) (57)
Repayments (includes loans of former key management personnel) (3) (4) (2)
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 6.45 per cent and 23.95 per cent in 2017 (2016: 2.49 per cent and 23.95 per cent; 2015: 3.99 per cent and 23.95 per cent).
Deposits placed by key management personnel attracted interest rates of up to 4.0 per cent (2016: 4.0 per cent; 2015: 4.7 per cent).
At 31 December 2017, the Group did not provide any guarantees in respect of key management personnel (2016 and 2015: none).
Collective investment vehicles The Group manages 134 (2016: 139) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 83 (2016: 83) are consolidated. The Group invested £418 million (2016: £265 million) and redeemed £616 million (2016: £826 million) in the unconsolidated collective investment vehicles during the year and had investments, at fair value, of £2,328 million (2016: £2,405 million) at 31 December. The Group earned fees of £133 million from the unconsolidated collective investment vehicles during 2017 (2016: £192 million).
Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling LIBOR and the Australian BBSW Reference Rate. Certain of the plaintiffs’ claims, including those in connection with USD and JPY LIBOR, have been dismissed by the US Federal Court for Southern District of New York, and decisions are awaited on the Group’s motions to dismiss the Sterling LIBOR and BBSW claims. The decisions leading to the Group’s dismissal from the USD LIBOR claims are subject to two appeals; the first took place on 25 September 2017 and a decision is expected in the first quarter of 2018, and the second is expected to take place in the first half of 2018. The decisions leading to the Group’s dismissal from the JPY LIBOR claims are not presently subject to appeal.
Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year original maturity: Mortgage offers made 11,156 10,749
Other commitments 81,883 62,697 1 year or over original maturity 36,386 40,074
Note 48: Financial instruments (1) Measurement basis of financial assets and liabilities The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet heading.
Notes in circulation – – – – – 1,313 – 1,313
Debt securities in issue – – – – – 72,450 – 72,450
Unallocated surplus within insurance businesses – – – – – – 390 390
Derivative financial instruments 2,712 33,426 – – – – – 36,138
Loans and receivables: Loans and advances to banks – – – – 26,902 – – 26,902
Available-for-sale financial assets – – – 56,524 – – – 56,524
Derivative financial instruments 1,964 32,960 – – – – – 34,924
Unallocated surplus within insurance businesses – – – – – – 243 243
Bank and building society certificates of deposit – 244 – 244
Debt securities: Bank and building society certificates of deposit – 142 – 142
Total financial assets carried at fair value, excluding derivatives 140,326 62,672 4,700 207,698
(Losses) gains recognised in other comprehensive income within the revaluation reserve in respect of available-for-sale financial assets – (117) (117) – 312 312
Liabilities held at fair value through profit or loss – 9,423 2 9,425
Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 31 December – 1
Transfers out of the level 3 portfolio (216) – (37) –
Lead manager or broker quote n/a – – – 59 – –
Level 3 financial liabilities carried at fair value 804 962 1 Ranges are shown where appropriate and represent the highest and lowest inputs used in the level 3 valuations.
Loans and advances to customers: impaired 6,619 6,475 – – 6,475
Reverse repos included in above amounts: Loans and advances to customers 8,304 8,304 – – 8,304
(B) Financial liabilities Valuation hierarchy The table below analyses the fair values of the financial liabilities of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as described on page 228).
Repos included in above amounts: Deposits from banks 7,279 7,279 – 7,279 –
Loans and receivables: Loans and advances to customers – – 583 –
Related amounts where set off in the balance sheet not permitted3 Potential net amounts if offset of related amounts permitted £mAt 31 December 2017
Deposits from banks: Customer deposits: Trading and other financial liabilities at fair value through profit or loss: 1 After impairment allowance.
At 31 December 2017 the aggregate notional principal of interest rate swaps designated as fair value hedges was £109,670 million (2016: £194,416 million) with a net fair value asset of £738 million (2016: asset of £725 million) (note 16). The losses on the hedging instruments were £420 million (2016: losses of £1,946 million). The gains on the hedged items attributable to the hedged risk were £484 million (2016: gains of £2,017 million).
In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the commercial business. Note 16 shows when the hedged cash flows are expected to occur and when they will affect income for designated cash flow hedges. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2017 was £549,099 million (2016: £384,182 million) with a net fair value liability of £456 million (2016: liability of £352 million) (note 16). In 2017, ineffectiveness recognised in the income statement that arises from cash flow hedges was a loss of £21 million (2016: gain of £24 million).
Loans and advances to customers, net1 472,498 (7,030) 465,468 457,958 (6,331) 451,627
At 31 December 2017 the most significant concentrations of exposure were in mortgages (comprising 64 per cent of total loans and advances to customers) and to financial, business and other services (comprising 12 per cent of the total). For further information on concentrations of the Group’s loans, refer to note 17.
Neither past due nor impaired 6,577 295,765 48,897 116,396 461,058 31,590
Past due but not impaired 14 7,340 386 305 8,031 –
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 2(H). Included in loans and receivables are advances which are individually determined to be impaired with a gross amount before impairment allowances of £2,465 million (31 December 2016: £2,870 million).
The table below sets out the reconciliation of the allowance for impairment losses of £2,201 million (2016: £2,412 million) shown in note 20 to the allowance for impairment losses on an underlying basis of £3,442 million (2016: £3,532 million) shown above: 2017 £m
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and commercial are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Commercial lending has been classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating models. Further information about the Group’s internal probabilities of default rating models can be found on page 116.
Asset-backed securities: Corporate and other debt securities 27 16 43 29 65 94
Available-for-sale financial assets (excluding equity shares) An analysis of the Group’s available-for-sale financial assets is included in note 21. The credit quality of the Group’s available-for-sale financial assets (excluding equity shares) is set out below: Investment grade1 £m Other2 £m Total £m
Trading assets: Asset-backed securities: Other asset-backed securities 95 – 95 69 – 69
Corporate and other debt securities 469 54 523 221 3 224
Other assets held at fair value through profit or loss: Bank and building society certificates of deposit 222 – 222 244 – 244
Loans and receivables The disclosures below are produced under the underlying basis used for the Group’s segmental reporting. The Group believes that, for reporting periods following a significant acquisition, such as the acquisition of HBOS in 2009, this underlying basis, which includes the allowance for loan losses at the acquisition on a gross basis, more fairly reflects the underlying provisioning status of the loans.
Other The majority of non-mortgage retail lending is unsecured. At 31 December 2017, impaired non-mortgage lending amounted to £817 million, net of an impairment allowance of £542 million (2016: £972 million, net of an impairment allowance of £458 million). The fair value of the collateral held in respect of this lending was £154 million (2016: £139 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation and the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
Repurchase transactions Deposits from banks Included in deposits from banks are balances arising from repurchase transactions of £23,175 million (2016: £7,279 million); the fair value of the collateral provided under these agreements at 31 December 2017 was £23,082 million (2016: £8,395 million).
Available-for-sale financial assets 59 365 286 1,025 265 3,040 15,366 21,692 42,098
Derivative financial instruments, trading and other financial liabilities at fair value through profit or loss 19,215 16,932 4,933 3,419 948 1,961 4,298 25,295 77,001
Liabilities arising from insurance and investment contracts 1,898 2,003 2,484 2,466 2,425 8,532 21,842 77,210 118,860
Liabilities arising from non-participating investment contracts 15,447 – – – – 15,447
Further information on the Group’s liquidity exposures is provided on pages 144–148.
Note 52: Consolidated cash flow statement (A) Change in operating assets 2017 £m 2016 £m £m
Accretion of discounts and amortisation of premiums and issue costs 1,701 465 339
Included within cash and cash equivalents at 31 December 2017 is £2,322 million (2016: £14,475 million; 2015: £13,545 million) held within the Group’s long-term insurance and investments businesses, which is not immediately available for use in the business.
Impairment The IFRS 9 impairment model will be applicable to all financial assets at amortised cost, debt instruments measured at fair value through other comprehensive income, lease receivables, loan commitments and financial guarantees not measured at fair value through profit or loss.
IFRS 9 replaces the existing ‘incurred loss’ impairment approach with an expected credit loss (‘ECL’) model resulting in earlier recognition of credit losses compared with IAS 39. Expected credit losses are the unbiased probability weighted average credit losses determined by evaluating a range of possible outcomes and future economic conditions.
IFRS 17 Insurance Contracts IFRS 17 replaces IFRS 4 ‘Insurance Contracts’ and is effective for annual periods beginning on or after 1 January 2021.
Minor amendments to other accounting standards The IASB has issued a number of minor amendments to IFRSs effective 1 January 2018 (including IFRS 2 Share-based Payment and IAS 40 Investment Property) and effective 1 January 2019 (including IAS 19 Employee Benefits, IAS 12 Income Taxes and IFRIC 23 Uncertainty over Income Tax Treatments). These revised requirements are not expected to have a significant impact on the Group.
The directors approved the parent company financial statements on 20 February 2018.
Fair value and exchange adjustments and other non-cash items 495 1,986 (1,357)
Net cash provided by (used in) operating activities 8,221 (7,550) (1,718)
Cash and cash equivalents at end of year 272 42 24
Distributions on other equity instruments, net of tax (336) (330) (314)
Note 8: Related party transactions Key management personnel The key management personnel of the Group and the Company are the same. The relevant disclosures are given in note 46 to the consolidated financial statements.
Other related party transactions Related party information in respect of other related party transactions is given in note 46 to the consolidated financial statements.
Financial liabilities: Debt securities in issue – – – 2,455 2,455
As discussed in note 8, the Company has entered into interest rate and currency swaps with its subsidiary, Lloyds Bank plc, to manage these risks.
Derivative financial instruments 327 327 327 – – – – –
Profit (loss) after tax for the year 3,547 2,514 956 1,499 (802)
Net asset value per ordinary share 60.5p 60.2p 57.9p 60.7p 54.6p
Basic earnings (loss) per ordinary share 4.4p 2.9p 0.8p 1.7p (1.2) p
Diluted earnings (loss) per ordinary share 4.3p 2.9p 0.8p 1.6p (1.2) p
Post‑tax return on average shareholders’ equity 7.2 4.9 1.3 2.9 (2.0)
3 For 2016 and previous years, this figure excluded the limited voting ordinary shares owned by the Lloyds Bank Foundations. The limited voting ordinary shares were redesignated as ordinary shares on 1 July 2017 4 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
8 Capital ratios for 2014 and later years are in accordance with the CRD IV rules implemented by the PRA on 1 January 2014.
Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates, inflation, exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group's credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, instability as a result of the exit by the UK from the European Union (EU) and the potential for other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group's control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group's control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key legislation and regulation together with any resulting impact on the future structure of the Group; the ability to attract and retain senior management and other employees and meet its diversity objectives; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post‑retirement defined benefit scheme obligations; the extent of any future impairment charges or write‑downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non‑bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20‑F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements.
Gross asset quality ratio The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers before releases and write‑backs, expressed as a percentage of average gross loans and advances to customers for the period.
Underlying return on tangible equity Underlying profit after tax at the standard UK corporation tax rate adjusted to add back amortisation of intangible assets and to deduct profit attributable to non‑controlling interests and other equity holders, divided by average tangible net assets.
Birmingham Midshires Financial Services Ltd 4 Birmingham Midshires Land Development Ltd 4 Birmingham Midshires Mortgage Services Ltd 4 Black Horse (TRF) Ltd 1 Black Horse Executive Mortgages Ltd 1 Black Horse Finance Holdings Ltd 1 i ii Black Horse Finance Management Ltd 1 Black Horse Group Ltd 1 iv Black Horse Ltd 1 Black Horse Offshore Ltd 6 Black Horse Property Services Ltd 1 Boltro Nominees Ltd 1 BOS (Ireland) Property Services 2 Ltd 16 BOS (Ireland) Property Services Ltd 16 BOS (Shared Appreciation Mortgages
Lex Autolease (VC) Ltd 1 Lex Autolease Carselect Ltd 1 Lex Autolease Ltd 1 Lex Vehicle Finance 2 Ltd 2 Lex Vehicle Finance 3 Ltd 2 Lex Vehicle Finance Ltd (In liquidation) 13 Lex Vehicle Leasing (Holdings) Ltd 2 i ii x
Lloyds Bank Equipment Leasing (No. 7) Ltd 1 Lloyds Bank Equipment Leasing (No. 9) Ltd 1 Lloyds Bank Equipment Leasing (No. 10) Ltd
Lloyds Bank Hill Samuel Holding Company Ltd 1 Lloyds Bank Insurance Services (Direct) Ltd 1 Lloyds Bank Insurance Services Ltd 1 Lloyds Bank International Ltd 6 Lloyds Bank Leasing (No. 3) Ltd (In liquidation) 13 Lloyds Bank Leasing (No. 4) Ltd (In liquidation) 1 Lloyds Bank Leasing (No. 6) Ltd 1 Lloyds Bank Leasing (No. 7) Ltd (In liquidation) 13 Lloyds Bank Leasing (No. 8) Ltd 1 Lloyds Bank Leasing Ltd 1 Lloyds Bank Maritime Leasing (No. 2) Ltd
Lloyds Holdings (Jersey) Ltd 6 Lloyds Industrial Leasing Ltd 1 Lloyds International Pty Ltd 8 Lloyds Investment Bonds Ltd 1 Lloyds Investment Fund Managers Ltd 6 Lloyds Investment Securities No.5 Ltd 1 Lloyds Leasing (North Sea Transport) Ltd 1 Lloyds Leasing Developments Ltd 1 Lloyds Merchant Bank Asia Ltd 31 iv Lloyds Nominees (Guernsey) Ltd 37 Lloyds Offshore Global Services Private Ltd 48 Lloyds Plant Leasing Ltd 1 Lloyds Portfolio Leasing Ltd 1 Lloyds Premises Investments Ltd 1 Lloyds Project Leasing Ltd 1 Lloyds Property Investment Company No. 3 Ltd
Ocean Leasing (July) Ltd (In liquidation) 1 Ocean Leasing (No 1) Ltd (In liquidation) 13 Ocean Leasing (No 2) Ltd (In liquidation) 13 Oystercatcher LP 20 Oystercatcher Nominees Ltd 20 Oystercatcher Residential Ltd 20 Pacific Leasing Ltd Paneldeluxe Company Limited (In liquidation) 86 Pensions Management (S.W.F.) Ltd 54 * Peony Eastern Leasing Ltd 1 Peony Leasing Ltd 1 Peony Western Leasing Ltd 1 Perry Nominees Ltd 1 PIPS Asset Investments Ltd 1 i ii Portland Funding Ltd (In liquidation) 13 Prestonfield Investments Ltd 5 Prestonfield P1 Ltd (In liquidation) 88 Prestonfield P2 Ltd (In liquidation) 88 Prestonfield P3 Ltd (In liquidation) 88 Proton Finance Ltd 7 ii # Quion 6 BV 55 R.F. Spencer And Company Ltd 2 Ranelagh Nominees Ltd 1 Retail Revival (Burgess Hill) Investments Ltd 1 Saint Michel Holding Company No1 28 Saint Michel Investment Property 28 Saint Witz 2 Holding Company No1 28 Saint Witz 2 Investment Property 28 Saleslease Purchase Ltd (In liquidation) 88 Sapphire Cards Limited (In liquidation) 86 Savban Leasing Ltd 1 Scotland International Finance B.V. 21 Scotmar Commercial Equipment Finance Ltd