Helping Britain Prosper is our purpose. It means responding to the social and economic issues we believe we are best placed to address.
£39bn of gross new mortgage lending in 2016 with 60 per cent going to help homebuyers get on and move up the housing ladder
£1.8bn tax paid in 2015. We are a major contributor to UK tax revenues and were ranked as the highest payer of UK tax in the most recent PwC Total Tax Contribution Survey for the 100 Group. This payment increased to £2.3 billion in 2016
Reporting Just as we operate in an integrated way, we aim to report in an integrated way. We have taken further steps towards this goal this year. As well as reporting our financial results, we also report on our approach to operating responsibly and take into account relevant economic, political, social, regulatory and environmental factors.
OUR BUSINESS MODEL Simple, low risk, UK focused, retail and commercial bank
Operating responsibly A sustainable and responsible approach to doing business is integral to everything we do.
Multi-channel approach Operating in an integrated way through a range of distribution channels, including the largest branch network and digital bank in the UK, ensures our customers can interact with us when and how they want.
Our strengths and capabilities provide significant advantage and differentiation, driving value creation
We operate across four business areas to execute our strategy and drive value for all our stakeholders
£1,283m share of credit card balances growth in UK consumer finance assets
Over the last year the Group has made significant strides in removing past practices and organisational barriers that we believed were inconsistent with those values. We have also taken important steps in defining the culture and behaviours we believe we need to support our values and embedding those in the way we operate. While we still have further to go, I know that this approach is aligned with the commitment of our dedicated colleagues across the organisation who come to work every day wanting to deliver great customer service. Getting this culture right will be critical to our success in an increasingly competitive environment.
Communities As well as their commitment to customers, I am extremely proud of the way our colleagues support communities across the country − another aspect of helping Britain prosper. I am particularly pleased that so many have once again taken the time to volunteer and raise funds for charities and community groups. Over the course of this year 34,000 of our colleagues took part in volunteering activities, contributing 240,000 hours of their time by sharing their skills and experience to help make sustainable differences to local charities, schools, colleges and businesses.
Our charity partnership provides another part of our overall approach to addressing social disadvantage throughout the UK. Over the past two years our colleagues have raised more than £12.5 million for BBC Children in Need, over £4 million more than our original target. There is no doubt that this will make a significant impact across the UK, directly benefiting more than 40,000 disadvantaged children and young people.
Read more about our Plan on page 18 and online at www.lloydsbankinggroup.com/ProsperPlan
Creating the best customer experience We are committed to meeting our customers’ evolving needs and preferences through our multi-brand and multi-channel approach. We operate the UK’s largest branch network and the largest digital bank with over 12.5 million active online users. We have more than 8 million mobile banking users and for the second consecutive year, the Lloyds Bank app has been rated the best banking app of all the UK major banks for functionality.
This progress has been reflected in further reductions in the level of customer complaints and our net promoter score, which continued to improve in 2016 and is now nearly 50 per cent higher than at the end of 2011. Our latest ‘Building the Best Team’ survey results show that colleague engagement is at an all-time high and in line with top performing UK corporates. Our strong performance in 2016 reflects the hard work undertaken by colleagues across the Group and I would like to thank everyone for their significant efforts and commitment.
We have delivered strong financial performance in 2016 as we continue to make good progress against our strategic priorities. We are well positioned for future success.
Becoming simpler and more efficient Our cost leadership is a significant source of competitive advantage and cost management remains a strategic priority. In response to the lower rate environment we have accelerated the delivery of our cost initiatives, and announced at the half year an increase to the Simplification run-rate savings target and a reduction in our non-branch property portfolio. We remain on track to deliver both, having already achieved £0.9 billion of the increased £1.4 billion Simplification run-rate target. As a result of the continued focus on costs, our market-leading cost:income ratio has improved and we continue to target further reductions.
MAY Help to Grow scheme We were the first bank to take part in a scheme designed to boost lending to fast growing businesses, committing £30 million of growth loans
Cost guidance updated in half year results announcement Run-rate savings target increased from £1 billion to £1.4 billion per annum
Although post referendum most forecasters were predicting a reduction in growth, in practice growth has been resilient and the UK economy is estimated to have grown by 2 per cent in 2016, just shy of 2.2 per cent in 2015. Business and consumer confidence did fall immediately post referendum, but most of this has now been recovered and consumers’ retail spending growth actually accelerated in the months after the referendum.
REGULATORY ENVIRONMENT The regulatory landscape in which we operate continues to evolve, but the key themes of protecting consumers and small business customers, ensuring competitive markets and strengthening the prudential and capital framework remain.
Capital Although the Bank of England is comfortable with the capital level for the UK banking sector as a whole, a number of changes to capital requirements, particularly with regard to credit and operational risk, have been proposed by the Basel Committee for Banking Supervision and further discussions are scheduled for March 2017. We performed well in the recent Bank of England stress tests and remain comfortably in excess of minimum requirements on our key capital and leverage ratios. Given this and our strong capital generation, we are well positioned in the event of any changes.
Ring-fencing and resolution Good progress continues to be made towards implementation of ring-fencing in January 2019 in line with the EU Bank Recovery and Resolution Directive and additionally for UK banks, the Financial Services (Banking Reform) Act. Due to our UK retail and commercial focus the vast majority of our business will sit within the ring-fence, and we therefore expect ring-fencing to be less onerous for us than many of our UK peers.
In a very competitive market, we continue to differentiate ourselves (see panel below for more information).
BUSINESS AREAS Our business areas are structured according to the products and services we provide to best serve our customers' financial needs.
OUR COMPETITIVE STRENGTHS UK focus Operating primarily in the UK means we are focused on a single developed market that we truly understand while avoiding the complexities and costs of multi-jurisdictional operations.
Progress in 2016 continued reduction in cost:income ratio £0.9bn Simplification run-rate savings on track c.50% reduction in time taken to open a savings account of approved mortgage applications to offer in less than 14 days
BECOMING SIMPLER AND MORE EFFICIENT – Creating operational capability which is simpler and more efficient through further system enhancement and integration
SME lending growth, ahead of the market £2.8bn Consumer Finance UK customer asset growth new business start-ups supported first-time buyers supported
– Growth in targeted areas - SME lending growth of 3 per cent, ahead of the market - Consumer Finance UK customer asset growth of £2.8 billion - Black Horse motor finance growth of 20 per cent - Completion of four bulk annuity transactions, taking external deal size to more than £1.85 billion since our entry into the market in 2015 - Announced the acquisition of MBNA, a prime UK credit card business, in line with strategic goal to grow in consumer finance
Progress in 2016 71pts employee engagement at an all-time high of senior roles held by women
No.1 private sector employer for LGBT people 6 days formal training per colleague on average per year
Remuneration aligned with performance To ensure our employees act in the best interests of customers and shareholders, remuneration at all levels of the organisation is aligned to the strategic priorities and financial performance of the business and also takes into account specific risk management controls. Variable remuneration including bonuses for all colleagues, including our Executive Directors, is based on the performance of the individual, the business area and the Group as a whole.
Underlying profit decreased slightly in 2016, largely due to slightly lower income and higher impairments, partly offset by lower costs.
Helping Britain Prosper Plan performance 2016 This is the third year we have tracked and reported performance against all our Plan metrics and targets.
Apprenticeships: we created more than 1,000 new apprenticeship places, with a third of them being offered to candidates from the UK’s most disadvantaged areas
First-time buyers: we helped 75,000 first-time buyers, and remained one of the largest lenders to this market in the UK but fell short of our target to support 1 in 4 of all first-time buyers this year. We want to remain a leading provider in this market
Senior women: our 2016 progress was below our 33 per cent target. However we remain committed to our 2020 goal of 40 per cent women in senior roles. Our 2016 focus was on improving our internal female talent pipeline 1 The Plan target excludes net lending to the Social Housing and CRE sectors. Social Housing is included under a separate target in the 2016 Plan: we delivered £955 million of new funding support.
Our net promoter score is the measure of customer service at key touch points and the likelihood of customers recommending us. It has continued to improve in the year and is now nearly 50 per cent higher than at the end of 2011.
Colleague engagement remains high with our employee engagement index at 71, equalling our previous highest score. Our performance excellence and line management indices both reached their highest ever scores. These results indicate our colleagues have a sense of pride and are motivated to succeed while believing we are committed to delivering great products and services for customers.
A plan to help Britain We believe no other bank is better placed to help Britain prosper. We serve approximately 25 million customers and 1 million small businesses but we want to be more than just a bank. We want to go beyond business as usual and help address social and economic challenges such as Britain’s housing shortage, the skills gap in key industries, social mobility and social disadvantage.
Evolving the Plan We launched the Plan in 2014, drawing on advice from our senior leaders and many external stakeholders, including our Independent Stakeholder Panel and Foundations, to help us shape it. These stakeholders play a role in its continuing evolution.
Since the launch of the Plan we have achieved a lot, meeting 20 of our 25 targets in 2014, and 27 of our 28 targets in 2015. In 2016, we adjusted the Plan to make it more focused on what we can do best for Britain, more ambitious and more measurable in terms of the outcomes we want to achieve. In 2016 we achieved 20 out of our 24 targets.
Key actions We have made good progress against our People targets. Recognising the potential shortfall in many people’s pension provisions, we have exceeded our target and had over 280,000 visits to our retirement planning website.
HELPING PEOPLE PROSPER We are providing more support for individuals and families whether they are buying a home, planning for later life or looking for a rewarding job. We are making our Group more diverse and inclusive to reflect the Britain we serve.
Progress in 2016 new build mortgages provided in 2016 of senior roles now held by women
People, businesses and communities across Britain are facing significant challenges. We’re helping to address them through our Helping Britain Prosper Plan
We have helped more than 10,000 of our clients to start exporting for the first time, exceeding our Helping Britain Prosper Plan target of 5,000 businesses a year. This puts us on course to exceed our target of helping 25,000 businesses export for the first time, by 2020.
We also want to do more to support green business initiatives, so we’ve set a new environmental target to provide funding to help 10 million square feet of commercial real estate, equivalent to 10 London Shards, become more energy efficient by 2020.
HELPING COMMUNITIES PROSPER We are helping communities by addressing inequality, supporting disadvantaged people and championing Britain’s diversity.
We are committed to sustainable development and delivering a prosperous Britain for all. This includes working with others to deliver relevant areas of the United Nation’s agenda, such as the Sustainable Development Goals. As signatories to the UN Global Compact we have pledged to embed their 10 principles, including human rights, labour, environment and anti-corruption, into the way we operate. Our first annual Communication on Progress will be published online in April 2017.
Beyond regulatory compliance Operating responsibly requires running our business in ways that meet relevant legal and regulatory requirements. In addition, we have a number of internal policies and procedures related to doing business responsibly including our Ethics Policy. We support the UN’s wider development agenda, including the Guiding Principles on Business and Human Rights. We welcome the Modern Slavery Act and increased transparency and will publish our first Transparency Statement on or before 30 June 2017.
2. BUILDING TRUST Our Group strategy highlights our intention to build the best team in a responsible culture where colleagues put customers first. To embed this culture, we need to be clear about how we expect colleagues to behave at work.
Making our business more transparent We are committed to conducting our business responsibly and dealing transparently and fairly with any queries or concerns our stakeholders may have about our business.
We maintain regular dialogue with colleagues to assess their views. We measure our progress in building our culture along with colleagues’ pride in the Group through our colleague surveys. The ‘Best Bank for Customers’ and the ‘Building the Best Team’ surveys are conducted by an independent third party and provide a clear view of colleagues’ thoughts and feelings. We use the results to inform decisions about the Group’s future direction and to support improvement of each team’s performance. The 2016 results show that colleagues are engaged and they believe collaboration and working in an agile way are improving. We asked colleagues if they think Lloyds Banking Group is a responsible business. 87 per cent of them agreed that ‘The behaviour of the people I work with is consistent with Lloyds Banking Group’s Values and Codes of Responsibility’.
We regularly provide colleagues with information on the Group’s performance and matters that concern their role, such as changes in the economic and regulatory environment, organisational changes and reward and remuneration. Colleagues are offered share schemes as part of wider incentive arrangements, to encourage shared ownership of the business. Details of how rights relating to the control of the company attaching to such shares are exercised, which are incorporated by reference in the strategic report, are available on page 234.
Widening financial inclusion and supporting vulnerable customers We want to do more to help customers who are financially excluded or at risk of becoming so. Our financial inclusion strategy, launched in 2014, focuses on four themes: providing accessible products and services that meet customers’ needs; improving awareness and understanding of the impacts of financial exclusion across the bank; working in partnership with and signposting to other organisations that might be better suited to meet customer needs; and continuing to invest in financial education.
Supporting manufacturing and infrastructure In 2016 we exceeded our target to support £10 billion of infrastructure projects within the government's National Infrastructure Plan. Projects supported include finance provision for the Port of Dover, with the creation of its new cargo terminal, the Beatrice Offshore Windfarm, one of the largest private investments ever made in Scottish infrastructure, and the creation of a wood pellet power plant in Teesside which will generate enough electricity to power 600,000 homes.
We've provided £1.2 billion of new funding support to UK manufacturing businesses in 2016. We have also committed a £5 million sponsorship over five years to the Lloyds Bank Advanced Manufacturing Training Centre, where over 1,000 apprentices, graduates and engineers will acquire valuable specialist manufacturing skills by 2020, to help secure a pipeline of new talent into UK manufacturing.
Our approach to tax is governed by a Board-approved Tax Policy which we have discussed with HMRC. We comply with the HMRC Code of Practice on Taxation for Banks and the Confederation of British Industry’s Statement of tax principles. We do not interpret tax laws in a way that we believe is contrary to the intention of Parliament, and we do not promote tax avoidance products to our customers.
Helping businesses trade During 2016, we helped more than 10,000 of our clients to start exporting for the first time, exceeding our Helping Britain Prosper Plan target of 5,000 businesses a year. This puts us on course to exceed our target of helping 25,000 businesses export for the first time, by 2020.
The impact we‘re making of colleagues believe the Group is an inclusive place to work members of our five colleague diversity networks
We became the first UK company to include gender dysphoria in our Private Medical Benefit provision and were ranked number one private sector employer in the Stonewall Top 100. The Group was also named a Times Top 50 Employer for Women and Top 10 Employer for Working Families.
Occupational health, safety and wellbeing We provide access to comprehensive online tools to support common health topics, such as fitness, smoking, diet and mental health. We also issue monthly colleague newsletters on relevant issues and support national health and wellbeing campaigns such as National Worklife Balance Week. In November we held a Mental Health and Wellbeing week. We are now working with our new charity partner, Mental Health UK, to create an environment which is fully inclusive and supportive of colleagues living with mental health conditions.
launched a Personal Learning Calendar which focuses on a relevant topic each month such as delivering the best customer experience.
Support for disabled colleagues We are committed to being a more disability confident employer. More than 5,000 colleagues disclosed a disability in our most recent colleague survey. We also potentially serve around 6 million customers affected by disability or long-term health issues. We are recognised as a leading employer for disabled people with cutting edge practices for customers and colleagues; in 2016 we won a Business Disability SMART Award for the third year running for our workplace adjustments process and were highly commended for our colleague disability network. We have a range of programmes to support colleagues who become disabled or develop a long-term health condition. Our workplace adjustments process, which includes physical equipment, has supported over 18,000 colleagues to date.
Our emissions This year our overall carbon emissions, measured in CO2 equivalent tonnes (CO2e), have decreased by 12.95 per cent year-on-year and by 38.83 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) and our energy optimisation programme. Read more about our emissions in the Directors' report on page 81.
Emissions in tonnes CO2e in line with the GHG Protocol Corporate Standard (2004). We are in the process of transitioning to the revised Scope 2 guidance.
Indicator is subject to limited ISAE3000 (revised) assurance by Deloitte LLP for the 2016 Annual Responsible Business Reporting. Deloitte’s 2016 assurance statement and the 2016 Reporting Criteria are available online at www.lloydsbankinggroup.com/rbdownloads
Our charity of the year In 2016 we raised £6.1 million for our charity of the year, BBC Children in Need. This brings the total raised over our two year partnership to more than £12.5 million. The money we have raised will make a significant impact across the UK.
In 2017 we will begin a two year partnership with Mental Health UK, a collaboration of four national mental health charities. Our target is to raise £4 million to help develop and launch the first helpline dedicated to supporting people experiencing mental health and money management issues. We plan to use the partnership to further improve the awareness and management of mental health within the organisation, and to help our frontline colleagues to improve their service to customers.
Engaging with our stakeholders Working with our suppliers We are working together with our suppliers and others in our supply chain to ensure we source goods and services in ways that are responsible, sustainable and mutually beneficial. Our supply base comprises around 4,000 companies supplying us mainly with services, ranging from HR and recruitment through to marketing and legal advice. We also buy products to enable us to operate our banking services such as IT hardware and property-related goods. In 2016, we reduced our supplier expenditure to £5.3 billion from £5.8 billion in 2015. 94 per cent of this was spent with suppliers based in the UK.
Achievements in 2016 As a Group we have continued to deliver against our strategic priorities in 2016, simplifying and strengthening the business whilst growing in targeted areas. Risk has created a strong foundation to enable this progress, ensuring we react appropriately to the ever changing macro-economic and regulatory environment. Our prudent risk culture and appetite, along with close collaboration with the business, has enabled effective decision making and the achievement of a number of risk related deliverables in the year. These included: Conduct The Group's conduct strategy programme was fully implemented in 2016, embedding conduct into the everyday management of our business, ensuring that we retain a consistent and relentless focus on delivering improved customer outcomes through an open transparent culture.
Asset quality Effective risk management ensured asset quality remained strong with no deterioration in the underlying portfolio. The impairment charge increased to £645 million (2015: £568 million) with the asset quality ratio increasing slightly to 15 basis points, but this was largely due to lower provision releases and write-backs. The gross asset quality ratio remained unchanged at 28 basis points. Our prudent risk appetite and robust risk management framework were also reflected in impaired loans, which reduced by over £1 billion to £8.5 billion, and the impaired loans ratio, which continued to fall and is now below 2 per cent.
RISK AS A STRATEGIC DIFFERENTIATOR Group strategy and risk appetite are developed together to ensure one informs the other to deliver on our purpose to help Britain prosper whilst becoming the best bank for customers.
We believe effective risk management can be a strategic differentiator, in particular: Prudent approach to risk Implementing a prudent approach to risk appetite across the Group, aligned to the embedding of a strong risk culture, driven both from the top and across the wider business, ensures we operate within risk appetite.
Risk governance The Board approves the Group’s overall RMF and sets risk appetite, both of which are designed to ensure that we manage our risks in the right way to achieve our agreed strategic objectives. It has a dedicated Risk Committee of Non-Executive Directors who keep the design and performance of the Group’s RMF under close and regular scrutiny and interact closely with the executive risk management committee operating at Group Executive Committee level. The Board and senior management encourage a culture of transparency and openness to ensure that issues are escalated promptly to them where required.
Adverse changes in the economic and market environment we operate in or the credit quality and/or behaviour of our customers and counterparties could reduce the value of our assets and potentially increase our write downs and allowances for impairment losses, adversely impacting profitability.
– Conduct risk appetite metrics provide a granular view on how our products and services are performing for customers. – Product approval, review processes and outcome testing supported by conduct management information. – Learning from past mistakes through root cause analysis and clear customer accountabilities for colleagues, with rewards driven by customer-centric metrics. – The development of a refined framework for addressing thematic issues impacting customers in vulnerable circumstances.
Examples: – A resilient IT environment is critical to providing reliable services to customers and enabling sustainable growth. – The dynamic threat posed by cyber risk on the integrity of electronic data or the availability of systems.
Credit risk decisions are consistent, fair and responsible, taking account of customers’ circumstances. We support sustainable growth and meet our targets in the Helping Britain Prosper Plan while staying within prudent risk appetite.
We recognise that resilient and secure technology is critical to creating the best customer experience and maintaining trust across the wider industry.
We respond as appropriate to impending legislation and regulation and associated consultations and participate in industry bodies. We continue to be subject to significant ongoing and new legislation, regulation and court proceedings.
1 This key risk indicator is also a key performance indicator (KPI).
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.
Example: – Our funding and liquidity position is underpinned by a significant and stable customer deposit base and is supported by strong relationships with corporate customers and certain wholesale market segments. A deterioration in either the Group’s or the UK’s credit rating, or a sudden and significant withdrawal of customer deposits, would adversely impact our funding and liquidity position.
Governance risk Against a background of increased regulatory focus on governance and risk management, the most significant challenges arise from the requirement to improve the resolvability of the Group and to ring-fence core UK financial services and activities from January 2019 and further requirements under the SM&CR which come into force from March 2017.
– Leveraging our considerable change experience to meet ring-fencing and resolution planning requirements and the continuing evolution of SM&CR. – Programme in place to address ring-fencing and resolution planning. In close and regular contact with regulators to develop plans for our anticipated operating and legal structure. – Evolving risk and governance arrangements that continue to be appropriate to comply with regulatory objectives.
Ensuring we hold an appropriate level of capital to maintain financial resilience and market confidence, underpins our strategic objectives of supporting the UK economy and delivering sustainable growth.
Insurance (Life and Pensions) present value of new business premiums £1,108m £1,148m
Looking ahead, there are a number of regulatory capital framework changes which are yet to be finalised. These changes are being monitored closely as there is a risk that these could lead to higher capital requirements in the longer term.
Other income was £6,065 million in 2016 (2015: £6,155 million). Other income increased in the fourth quarter compared with the same period last year largely as a result of improved Insurance income and was higher than the third quarter of 2016, largely due to increased Commercial Banking fees and commissions and improved Insurance income. The year-on-year reduction of 1 per cent was largely due to continued pressure on fees and commissions, including the impact of the market-wide cap on card interchange fees introduced in late 2015, lower returns in the Insurance business and reduced income from the run-off portfolio.
The Simplification programme remains on track to deliver the increased target of £1.4 billion of annual run-rate savings by the end of 2017, with £0.9 billion of run-rate savings delivered to date. The total spent on the Simplification programme to date is £1.6 billion with an expected further spend of £0.6 billion by the end of 2017, of which around £0.2 billion will be included in restructuring costs.
Provisions as a % of impaired loans excluding run-off 41.2% 43.0% (1.8)pp
Impaired loans continued to fall and at 31 December 2016 were £8.5 billion, 1.8 per cent of total loans and advances compared with £9.6 billion, and 2.1 per cent at 31 December 2015.
The charge of £790 million for Enhanced Capital Notes in 2016 represented the write-off of the embedded derivative and the premium paid on the redemption of the remaining notes in the first quarter.
Going forward, the Group remains confident in its future prospects and now expects to deliver a return on required equity of between 12.0 and 13.5 per cent and a return on tangible equity of between 13.5 and 15.0 per cent in 2019.
Loans and advances to customers were £450 billion compared with £455 billion at 31 December 2015. The reduction reflects continued strong growth in Consumer Finance, up 11 per cent, and SME lending, up 3 per cent, with both segments outperforming the market. This was offset by further reductions in ‘closed’ portfolios, reduced lending to financial institutions and lower ‘open book’ mortgage balances, reflecting the Group’s prudent stance on risk and its focus on protecting margin in the current competitive low growth market. Mortgage open book balances fell by £4.5 billion to £266 billion during the year, of which £3.4 billion was in the first half and £1.1 billion was in the second half. Mortgage open book balances are expected to be broadly stable in 2017.
Tangible net assets per share 54.8p 52.3p 2.5p 1 The CET1 and leverage ratios at 31 December 2016 and 31 December 2015 are reported on a pro forma basis, including dividends paid by the Insurance business in February 2017 and February 2016 respectively, in relation to prior year earnings.
The amount of capital we believe is appropriate to hold is likely to vary from time to time depending on circumstances and the Board will continue to give due consideration, subject to the situation at the time, to the distribution of any surplus capital through the use of special dividends or share buy backs.
The Group’s total capital ratio remains strong at 21.4 per cent, significantly in excess of regulatory requirements.
Risk-weighted assets fell by 3 per cent to £216 billion with the reduction mainly arising in the fourth quarter primarily as a result of active balance sheet management including securitisations.
Customer deposits £273.7bn £131.9bn £11.1bn £1.6bn £418.3bn 1 Excludes reverse repos of £8.3 billion (31 December 2015: £nil).
Profit (loss) after tax for the year 2,514 956 1,499 (802) (1,387)
Common equity tier 1 capital/Core tier 1 capital 13.6 12.8 12.8 14.0 12.0 1 Restated in 2013 for IAS 19 (Revised) and IFRS 10.
2 Annual dividends comprise both interim and final dividend payments. Under IFRS, the total dividend for the year represents the interim dividend paid during the year and the final dividend which will be paid and accounted for during the following year.
5 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
9 Capital ratios for 2012 were not restated to reflect the adoption of IAS 19 (Revised).
It is also a distributor of insurance, and a range of long-term savings and investment products. Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value to customers, and by providing them with greater choice and flexibility. It will maintain its multi-brand and multi-channel strategy, and continue to simplify the business and provide more transparent products, helping to improve service levels and reduce conduct risks.
Progress against strategic initiatives The division has made good progress against its strategic objectives; improving the customer experience and realigning branch and other capabilities in line with changing customer needs.
Creating the best customer experience – Largest UK digital bank with over 12.5 million active online users including over 8 million mobile users. – 55 per cent of approved mortgage applications proceed to offer within 14 days compared to 37 per cent in 2015. – Instant mortgage lending decisions through the online Agreement in Principle.
Becoming simpler and more efficient – Continued the branch network optimisation programme in response to changing customer behaviour. - Investing in new distribution technology and rolling out WIFI
Delivering sustainable growth – Continued to attract new customers through positive switching activity, accounting for more than 1 in 5 switchers in 2016. – Since the launch of the Group’s Helping Britain Prosper Plan in 2014 the Group has continued to be the leading supporter of first-time house buyers, with £11.7 billion lent in 2016. – Exceeded Helping Britain Prosper target by supporting over 121,000 start-up businesses whilst also launching a range of new products and services to improve the customer experience for small businesses.
Financial performance – Underlying profit decreased 3 per cent to £3,003 million reflecting the challenging interest rate environment, continued pressure on other operating income and increased investment in the business. – Net interest income decreased 3 per cent driven largely by a reduction in mortgage balances reflecting the focus on protecting margins. Banking margin fell by just 2 basis points despite the continuing low interest rate environment. – Other income was 6 per cent lower than 2015 driven by changing customer behaviour and improvements to the customer proposition. – Operating costs decreased 4 per cent to £4,174 million as efficiency savings more than covered an increase in investment. Staff numbers have reduced by 11 per cent in the year. – Impairment charge increased 7 per cent to £373 million, however underlying credit quality remains stable. – Loans and advances to customers fell 3 per cent to £297.7 billion, with the open mortgage book (excluding specialist mortgage books and Intelligent Finance) reducing by £4.5 billion to £266 billion during the year, of which £3.4 billion was in the first half and £1.1 billion in the second half. The fall reflects the decision to protect net interest margin in the current competitive low growth market. – Customer deposits decreased 1 per cent to £271.0 billion, driven by the decision to reduce tactical balances. – Risk-weighted assets increased £0.6 billion to £55.2 billion reflecting the Group’s focus on balancing margin and risk considerations offset by a more prudent approach to secured risk-weighted asset modelling.
Retail offers a broad range of financial service products, including current accounts, savings and mortgages, to UK personal customers, including Wealth and small business customers market share of current account switchers £11.7bn of lending to first-time buyers
Through its four customer facing divisions − SME, Mid Markets, Global Corporates and Financial Institutions – it provides clients with a range of products and services such as lending, transactional banking, working capital management, risk management, debt capital markets services, as well as access to private equity through Lloyds Development Capital.
Progress against strategic initiatives The division has made significant progress against its strategic objectives; delivering a return on risk-weighted assets of 2.44 per cent, exceeding the investor commitment of returns greater than 2.40 per cent by the end of 2017 while continuing to grow lending in key client segments.
Financial performance – Underlying profit in line with prior year at £2,468 million. – Return on risk-weighted assets of 2.44 per cent with a 7 per cent reduction in risk-weighted assets, total income growth and disciplined cost management. – Total income up 2 per cent with growth across SME, Mid Markets and Financial Institutions. – Net interest income up 6 per cent with a 28 basis points improvement in net interest margin, supported by high quality deposit growth, disciplined deposit pricing and reduced funding costs. Other income down 4 per cent due to non-recurring income recognised in 2015 relating to refinancing support of Global Corporates clients. This has been partially offset by growth in CB Markets of 8 per cent and increased momentum in the second half of the year with other income up 9 per cent against the first half of 2016. – Operating lease depreciation increased due to additional charges relating to certain leasing assets. – Operating costs down 1 per cent with performance reflecting disciplined cost management and headcount rationalisation, supported by efficiency initiatives resulting in positive jaws.
Commercial Banking has a client-led, low risk, capital efficient strategy, helping UK-based clients and international clients with a link to the UK
Its aim is to deliver sustainable growth, within a prudent risk appetite, in these markets through its multi-brand, multi-channel distribution model.
Progress against strategic initiatives The division continues to make significant progress against its strategic objectives, and has delivered its original target of increasing UK customer assets by £6 billion a year ahead of target, whilst maintaining a prudent approach to new business and managing residual value risk conservatively. In line with its strategy to grow in consumer finance the Group has entered into an agreement to acquire MBNA’s prime UK credit card business with £7.0 billion of assets and c.2.8 million customers, which will give us the opportunity to create a best-in-class credit card operation.
Financial performance – Underlying profit at £1,283 million was down 7 per cent, driven by slightly lower income and increased impairment, but return on risk-weighted assets remained strong at 4.09 per cent. – Net interest income at £1,941 million was down 1 per cent with strong asset growth offset by the 73 basis point reduction in net interest margin. This was largely due to the focus on high quality, lower margin motor finance business, with the margin also impacted by lower Euribor and planned reductions in deposits, in line with the Group’s funding strategy. – Other income was down 2 per cent at £1,338 million due to the market-wide reduction in card interchange fees. Excluding this, other income was 3 per cent higher driven by continued fleet growth in Lex Autolease. – Operating costs fell 4 per cent to £939 million with continued investment in the business more than offset by underlying efficiency savings. The division maintained a strong cost:income ratio, in line with 2015 at 37.4 per cent. – The impairment charge of £282 million increased by £47 million, primarily due to overall growth and the non-recurrence of a favourable one-off release in 2015. Credit quality remains good with new business written within the Group’s prudent credit and conduct appetite. – UK customer assets were up 9 per cent year-on-year, driven primarily by growth in Black Horse. – Customer deposits were down 29 per cent to £7.9 billion driven by re-pricing activity and the Group’s deposit strategy.
Creating the best customer experience – Regained ‘5 star’ Service Awards in both Life & Pensions and Investment categories at the 2016 Financial Adviser Service Awards together with ‘Most Improved Provider’ award. These accolades are voted on by 5,000 UK financial advisers and reflect improved customer service alongside simplified and streamlined processes. – Strengthened the general insurance business with the launch of a flexible online home insurance offering, delivering increased direct sales, significant new functionality and more choice for customers. – A founder member of the UK government’s Flood Re initiative and played a lead role in setting up the scheme, which has enabled customers in high flood risk areas to secure affordable home insurance.
The Insurance division is committed to providing a range of trusted and value-for-money protection, pension and investment products to meet the needs of its customers 6m life, pensions and investments customers share of the home insurance market
1 Present value of new business premiums. With-Profit fund bulk annuity transfer sales were £2,386 million in 2015 and £243 million in 2016. Excluding these transfers, LP&I sales have improved 23 per cent in 2016.
The lower income and costs reflect further reductions in the run-off portfolios.
Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions.
The table below shows the reconciliation between loans and advances and average interest-earning banking assets. Quarter ended 31 Dec 2016 £bn
Return measures The Group’s underlying return on required equity for 2016 was 13.2 per cent (2015: 15.0 per cent) and the underlying return on tangible equity was 14.1 per cent (2015: 16.0 per cent). The reduction in both return measures was as a result of lower underlying profit and higher tax.
Building stakeholder relationships Understanding our stakeholders’ concerns supports us in the delivery of our strategy to become the best bank for customers as it helps us to focus on what is important.
We have had an independent Stakeholder Panel for a number of years who represent the views of a range of stakeholders.
Diversity and succession planning The Board has always placed great emphasis on seeking membership that reflects diversity in its broadest sense while maintaining the necessary levels of skills and experience required to oversee a major financial institution. During the year, we reviewed our Board Diversity Policy and agreed a specific target to maintain at least three female Board members and, recognising the emerging target for FTSE companies to move towards 33 per cent female representation, to take opportunities to increase the number of female Board members over time where that is consistent with other skills and diversity requirements.
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 underrepresented groups within the business. The role of succession planning in promoting diversity is recognised and the Group has a range of policies to help provide mentoring and development opportunities.
Board effectiveness review The Board carries out an annual evaluation of its effectiveness. Having undertaken an external review in 2015, in 2016 this was conducted internally and was overseen by the Nomination and Governance Committee. The results of the review are set out on page 66, together with information about our progress against the 2015 review actions.
Remuneration Our approach to reward aims to provide a clear link between remuneration and delivery of the Group's key strategic objectives, supporting the aim of becoming the best bank for customers, whilst delivering long-term, superior and sustainable returns to shareholders. This year, we will be seeking shareholder support for a new remuneration policy, which will formally apply, subject to shareholder approval, from the date of the AGM in 2017.
Strategy As well as reviewing progress in implementing the Group’s 2015-2017 strategic review, the Board spent considerable time in 2016 exploring the challenges arising from the rapidly emerging digital environment. There were several meetings which focused on Group strategy, including a two day offsite which debated the transformation required to be 'Bank of the Future' in order to underpin continued competitive success. This will provide the backdrop to the next phase of our strategic development, on which we will report later this year.
The Group Executive Committee, the Responsible Business Committee and the Board receive regular updates on progress. The culture dashboard is also shared with the Board to ensure further opportunity for oversight. During the June Board strategy offsite, the Group Chief Executive led the presentation of a 'deep dive' session on culture, providing the Board with an opportunity to offer feedback on our culture plans.
Skills and experience: Simon has deep international experience in board level strategy and execution. His extensive knowledge of financial markets, treasury and risk management and his qualification as an Audit Committee Financial Expert is of particular value in our Board Risk and Audit Committees. Simon has a BA in Mathematics, an MA from the University of Cambridge and is a fellow of the Chartered Institute of Management Accountants.
External appointments: Senior Independent Director of Witan Investment Trust, Chairman of the Lincoln’s Inn Investment Committee and a member of the Norges Bank Investment Management Corporate Governance Advisory Board.
The depth of diverse experience and complementary skills in our management team strengthens our ability to adjust to changing market environments and deliver our strategy to become the best bank for customers.
05 Karin Cook Group Director, Operations Karin joined the Group in 2013 as Chief Operating Officer, Commercial Banking and became Group Director, Operations in 2015. Karin joined from HSBC where she was Global Chief Operating Officer for Private Banking and previously, Global Head of OTC Derivative Operations. Prior to HSBC, Karin spent nine years at Morgan Stanley in London and five years at Goldman Sachs in Paris, in a variety of Operations and Finance roles. She holds a degree in Modern Languages from Cambridge University. Karin is a Non-Executive Director of Scottish Widows Ltd and is also the Group’s Executive Sponsor for Sexual Orientation and Gender Identity.
The Board ensures that the Group manages risk effectively, monitors financial performance and reporting and ensures that appropriate and effective succession planning arrangements and remuneration policies are in place. It provides and encourages entrepreneurial leadership across the Group within this framework.
Deputy Chairman Anita Frew Anita Frew as Deputy Chairman ensures 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.
This enables the Board to spend a greater proportion of its time on strategic, forward looking agenda items. Each Committee comprises Non-Executive Directors only and is chaired by an experienced Chairman. The Committee Chairmen report to the Board on the activities of the Committee at each Board meeting.
Prior to the AGM in Scotland the Board held a joint discussion with the Board of Scottish Widows Group Limited allowing in-depth focus on insurance matters.
Senior Managers and Certification Regime Last year, the Corporate Governance Framework was reviewed in preparation for the introduction in March 2016 of the Senior Managers and Certification Regime (SM&CR) and, as relevant to the Scottish Widows Group, the Senior Insurance Managers Regime.
The review, which was part of a wider range of initiatives undertaken to prepare the Group for the introduction of SM&CR, found that the framework was generally aligned with the requirements of the SM&CR but a number of changes were recommended.
Board oversight: MBNA acquisition In December 2016 the Group announced that it had agreed to acquire MBNA, a UK consumer credit card business, from Bank of America. This is a significant strategic step which reinforces the Group's ability to deliver sustainable growth whilst helping Britain prosper and will enhance the Group's position and offering in the UK prime credit card market. The transaction is expected to complete by the end of the first half of 2017, subject to the receipt of competition and regulatory approval.
– Group operating plan – Draft results and presentation to analysts – Approval of dividends – Funding and Liquidity plan – Capital plan
The deep dive sessions, strategy offsite meeting and site visit to Halifax are described on page 64
EFFECTIVENESS Board induction The Chairman personally ensures that on appointment each Director receives a full, formal and tailored induction. The emphasis is on ensuring the induction brings the business and its issues alive for the new Director, taking account of the specific role they have been appointed to fulfil and the skills/experience of the Director to date.
Stuart Sinclair is Senior Independent Director at both QBE Insurance (Europe) Limited, a general insurance and reinsurance company, and Swinton Group Limited, an insurance broker for home and motor insurance. The Board has recognised that potential conflicts may arise in relation to his position at QBE Insurance and in relation to Swinton Group. The Board has authorised the potential conflicts and requires Mr Sinclair to recuse himself from discussions, should the need arise.
Access to advice The Group provides access, at its expense, to the services of independent professional advisers in order to assist Directors in their role. Board Committees are also provided with sufficient resources to undertake their duties. All Directors, including Non-Executive Directors, have access to the services of the Company Secretary in relation to the discharge of their duties.
Recommendations from the 2016 Board effectiveness review (internal) The review identified a number of actions to maintain and improve the Board’s effectiveness.
Links to strategy Several Directors said they would welcome more frequent linkage to strategy in the regular business of the Board.
– Non-Executive Director discussion on Executive succession carried out – Non-Executive Directors are informed about and able to input on Group Chief Executive succession planning – Chairman and Nomination and Governance Committee continued to review Non-Executive Director profile and succession
Control effectiveness review An annual control effectiveness review (CER) is undertaken to evaluate the effectiveness of the Group’s control framework with regard to its material risks, and to ensure management actions are
An annual certification process, at individual entity level, of compliance with the minimum governance standards set out in the Corporate Governance Framework enhances management of any legal, regulatory and reputational risks associated with the Group’s subsidiary entities. The process provides GEC members with additional oversight of subsidiary entities within their respective business area, including an escalation process for any matters of non-compliance. In addition, the process provides continued focus on simplification of the Group’s legal entity structure through consideration of the lifecycle of each entity.
The Group has a diverse range of shareholders and investors with different communication and engagement needs which are addressed by specialist teams.
Relationships with retail shareholders The Company Secretary has a team dedicated to engage with retail shareholders who, with support from the Company's registrar Equiniti Limited, deliver the Group’s shareholder service strategy, including the AGM. Group Secretariat provides feedback to the Board and appropriate Committees to ensure the views of retail shareholders are received and considered. Important shareholder information, including details on the arrangements for the 2017 AGM, can be found on pages 286 and 287.
Annual General Meeting 2016 at a glance The AGM is an opportunity for shareholders to hear directly from the Board on the Group’s performance and strategic direction, and importantly, to ask questions.
A summary of the reports and communications to be issued in 2017 can be found on page 286.
We are committed to the highest standards of corporate governance, designed to ensure rigour in the Board’s discussions and decision making
Dear Shareholder A key priority for the Committee, under my leadership, is to keep the composition of the Board and its Committees under review and to make appropriate recommendations to the Board. There were two changes to the Board in 2016. Stuart Sinclair joined the Board in January 2016 and Dyfrig John retired from the Board in May 2016. Stuart’s appointment followed that of Deborah McWhinney, who joined the Board in December 2015.
Committee composition, skills and experience To ensure a broad representation of experienced and independent Directors, membership of the Committee comprises the Chairman, the Deputy Chairman, who is also the Chairman of the Remuneration Committee, the Senior Independent Director, the Chairman of the Audit Committee and the Chairman of the Risk Committee. The Group Chief Executive attends meetings as appropriate.
The Board should be of sufficient size to reflect a broad range of views and perspectives whilst allowing all Directors to participate effectively in meetings. The Board currently comprises three Executive Directors, nine independent Non-Executive Directors and the Chairman who was independent on appointment.
The Committee reviewed the role, including capabilities and time commitment, of the Chairman, Deputy Chairman, Senior Independent Director, Non-Executive Directors, the Group Chief Executive and Executive Directors and found them to be appropriate.
New appointments are made on merit, taking account of the specific skills and experience needed to ensure a rounded Board and the diversity benefits each candidate can bring to the overall Board composition. On gender diversity the Board has a specific target to maintain at least three female Board members and, recognising the emerging target for FTSE companies to move towards 33 per cent female representation, to take opportunities to increase the number of female Board members over time where that is consistent with other skills and diversity requirements.
Our approach to succession planning Good succession planning contributes to the delivery of the Group’s strategy by ensuring the desired mix of skills and experience of Board members now and in the future. The Board is also committed to recognising and nurturing talent within executive and management levels across the Group to ensure the Group creates opportunities to develop current and future leaders. The role of succession planning in promoting diversity is recognised and the Group has a range of policies which promote the engagement of underrepresented groups within the business in order to build a diverse talent pipeline.
I found the programme very well structured and comprehensive. There was a good mix of formal presentations and more informal sessions. It really brought the business and its issues alive for me and, having spent my career in the United States, the tailored and in-depth overview of the UK regulatory landscape was especially instructive.
I have really enjoyed my first year on the Board because the Group to me was a mixture of relatively familiar topics such as retail network analysis, product testing, capital models and conduct requirements and newer topics such as ring-fencing.
2 Mr Prettejohn was unable to attend the June Audit Committee meeting due to a prior commitment.
Dear Shareholder Throughout 2016, the Audit Committee has continued to focus on its key objectives, overseeing financial reporting, internal controls, whistleblowing, and internal and external audit.
The Audit 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
All members of the Committee are independent Non-Executive Directors with competence in the financial sector with the Committee as a whole having competence relevant to the financial sector. Nick Luff is a Chartered Accountant and has significant financial experience in the UK listed environment enabling him to fulfil the role of Audit Committee Chairman, for the purposes of the UK Corporate Governance Code (the ‘Code’) as a member having recent and relevant financial experience, and for SEC purposes, the role of Audit Committee financial expert. In addition, Simon Henry is a Chartered Global Management Accountant and has extensive knowledge of financial markets, treasury and risk management, and also qualifies as a member having recent and relevant financial experience under the Code and an Audit Committee financial expert under SEC rules.
In determining the adequacy of the provision for redress payments and administration costs in connection with the mis-selling of PPI the Group makes a number of assumptions based on management judgement. Such assumptions include the number of future complaints that will be received and the extent to which they will be upheld; average redress payments; and related administrative costs.
– The disclosures relating to PPI are set out in note 38: ‘Other provisions’ on page 230 of the financial statements.
– The Committee considered the financial and demographic assumptions used to determine the defined benefit liabilities, in particular mortality assumptions and the discount rate, which have been updated to reflect recent experience. – The Committee was also satisfied that the Group’s quantitative and qualitative disclosures made in respect of retirement benefit obligations are appropriate. The relevant disclosures are set out in note 36: ‘Retirement benefit obligations’ on page 222 of the financial statements.
Other significant issues The following matters were also considered by the Committee: Risk management and internal control systems Full details of the internal control and risk management systems in relation to the financial reporting process are given within the risk management section on pages 116 to 169. Specific matters that the Committee considered during the year included: – the effectiveness of systems for internal control, financial reporting and risk management; – the extent of the work undertaken by the Finance teams across the Group and consideration of the resources to ensure that the control environment continued to operate effectively; and – the major findings of internal investigations into control weaknesses, fraud or misconduct and management’s response along with any control deficiencies identified through the assessment of the effectiveness of the internal controls over financial reporting under the US Sarbanes-Oxley Act.
In accordance with regulations there was a change of lead audit partner.
These assessments considered data and information from a number of sources including: – the results of an internal effectiveness survey; and – the FRC’s Audit Quality Inspection Report (AQIR) on PwC published in May 2016.
Statutory Audit Services compliance The Company and the Group confirm compliance with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the year to 31 December 2016.
The Committee has concluded, through its detailed work, that the Group continues to have strong discipline in the management of both emerging and existing risks, and the Committee’s work continues to help support the Group in achieving its core aim of operating as a safe, low risk bank.
Since January 2016, all Non-Executive Directors have been members of the Board Risk Committee. The Chief Risk Officer has full access to the Committee and attends all meetings. The Interim Group Audit Director and members of the Executive also attend meetings as appropriate.
2 Mr Luff was unable to attend the July Risk Committee meeting due to prior executive commitments.
As the most senior risk forum in the Group, the Committee interacts with other related risk forums, including the Executive Group Risk Committee. Such interaction assists with the agenda planning process, where in addition to annual agenda planning, matters considered by the Group Risk Committee are reviewed to ensure escalation of all relevant matters to the Board Risk Committee.
In addition, during 2016, two further sub-committees of the Board Risk Committee were established to focus on Financial Markets and IT Resilience & Cyber, in addition to an existing Stress Testing & Recovery Planning sub-committee. The sub-committees were constituted to enable members of the Board Risk Committee to dedicate additional time and resource to better understand and to enable fuller review and challenge of the risks associated with the topic of the sub-committee.
EU referendum The Committee regularly reviewed a range of lead economic and Key Performance Indicators across the portfolios, to help identify any early signs of deterioration in the economy and the Group’s credit risk profile.
Conclusion: The combination of pricing that reflects the future value of vehicles, and prudent provisioning, appropriately reflects potential risk. The Committee introduced a new risk appetite limit to reflect planned business growth and manage the concentration of residual value risk. The Committee will continue to monitor this throughout 2017.
The Committee reviewed a diverse set of stress testing scenarios in 2016, including internally defined moderate and severe economic downturns, reverse stress test events including a large scale cyberattack and external scenarios set by the Bank of England and the European Banking Authority.
Conclusion: The Group’s capital and liquidity positions remained above required minimums and the relevant risk appetite metric, with outcomes reflecting the ongoing de-risking by the Group. The implementation and assessment of robust and well managed stress testing arrangements will remain a key area of focus for the Committee in the coming year.
Model risk The approach to model risk management, including the Group’s model governance framework, material models and regulatory requirements were reviewed.
Commercial Banking portfolios The Committee considered a range of regular and ad-hoc papers covering key risks associated with the Commercial Banking portfolios.
Additional topics covered in 2016 included country risk, the potential impact of the EU referendum, a review of the exposure to European Banks and deep dives in to the oil and gas sector. There was also increased focus on the Financial Markets business and the associated traded market risk through a newly created sub-committee.
Conclusion: Regular and cyclical assessments of key portfolios has assisted the Committee in its oversight of risk management within Commercial Banking and any impact arising from both existing and emerging risks. Management continues to take satisfactory action to mitigate and address risks and the Committee will continue to review core aspects of the Commercial Banking business during 2017.
The Committee is supported in its work by two business‑wide committees which report to the Group Chief Executive: the Group Customer First Committee and the Responsible Business Management Committee. Information on the work of these committees can be found on page 122.
I welcomed the opportunity during the year to get involved in responsible business activities in different parts of the country, including taking part in a panel for the School for Social Entrepreneurs (more detail on page 80). And I very much enjoyed meeting the profoundly deaf founder of the Yumma Café, a catering business aimed specifically at supporting deaf people. This was a great example of how the personal experience which drives many social entrepreneurs is making a significant difference. I would like to thank all those who attended our meetings this year for their support.
How the Committee spent its time in 2016 The Committee has reviewed and discussed the following topics: – the development of the Group’s responsible business strategy, with input from the Group Chief Executive – the Group’s approach to measuring stakeholder and customer trust against its peers in financial services and acknowledged leaders in generating trust – the continuing development of the Group’s culture programme, in conjunction with the Board – the results of colleague surveys as they relate to the Group’s responsible business activities – the steps taken to identify vulnerable customers and to ensure the Group’s products and customer service approach take account of their varying needs – the initiatives in place to tackle financial disadvantage amongst customers and to promote financial and digital inclusion – the work of the School for Social Entrepreneurs and the Schools Activity Programme – a report on the Group’s charitable Foundations, and their planned future activities, from the Chief Executive of the Lloyds Bank Foundation for England and Wales – the Group’s responsible and sustainable finance approach, including the creation of the Green Loan Initiative and the work being done to develop innovative solutions to meet the increasing demand of customers for responsible lending products
Responsible Business Committee and external stakeholders The members of the Committee have an ongoing dialogue with key stakeholders with an interest in the Committee’s activities. Committee members look forward to engaging with key stakeholders, including the independent Stakeholder Panel, in 2017.
DECEMBER Detailed consideration of an agreement on the metrics to include in the 2016/17 Plan to be presented to the Board
Responsible business in action: School for Social Entrepreneurs The Lloyds Bank and Bank of Scotland Social Entrepreneurs programme is delivered through a partnership with the School for Social Entrepreneurs and the Big Lottery. The programme aims to support 2,000 social entrepreneurs by 2020.
In July 2016, Sara Weller was asked to join a panel to select the next cohort of 21 Social Entrepreneurs to secure a place on the programme. This was an opportunity to understand how each of the social entrepreneurs is supported through a 12 month package comprising a series of interactive learning sessions, a senior colleague from within Lloyds Bank to support them as they develop their social business, and a small grant.
The Directors have recommended a final dividend, which is subject to approval by the shareholders at the AGM, of 1.7 pence per share (2015: 1.5 pence per share) totalling £1,212 million (2015: £1,070 million). The Directors have also recommended a special dividend of 0.5 pence per share (2015: 0.5 pence per share) totalling £356 million (2015: £357 million). The final and special dividend will be paid on 16 May 2017.
Biographies of current Directors are set out on pages 54 to 57. Details of the Directors seeking re-election at the AGM are set out in the Notice of Meeting.
Directors’ indemnities The Directors of the Company, including the former Director who retired during the year, have entered into individual deeds of indemnity with the Company which constituted ‘qualifying third party indemnity provisions’ for the purposes of the Companies Act 2006. The deeds indemnify the Directors to the maximum extent permitted by law and remain in force for the duration of a Director’s period of office. The deeds were in force during the whole of the financial year or from the date of appointment in respect of the Director appointed in 2016. In addition, the Group had appropriate Directors' and Officers' liability insurance cover in place throughout 2016.
Power of Directors in relation to shares The Board manages the business of the Company under the powers set out in the articles of association, these powers include the Directors’ ability to issue or buy back shares. The Directors were granted authorities to issue and allot shares and to buy back shares at the 2016 AGM. Shareholders will be asked to renew these authorities at the 2017 AGM. The authority in respect of purchase of the Company’s ordinary shares is limited to 7,145,465,640 ordinary shares, equivalent to 10 per cent of the issued ordinary share capital of the Company.
Group results Summary of Group results 33 to 36 Ordinary dividends Dividends on ordinary shares 238 Directors’ biographies Board of Directors 54 to 57 Directors in 2016 Board of Directors 54 to 57 Directors’ emoluments Directors’ remuneration report 84 to 114
The Directors have specifically assessed the prospects of the Company and the Group over the first three years of the current plan. The uncertain economic and political environment caused by the UK's plans to leave the EU and the pace of regulatory change mean that the assumptions supporting the fourth and fifth years of the operating plan are likely to be less reliable. As a result, the Board considers that a three year period continues to present a reasonable degree of confidence over expected events and macroeconomic assumptions, whilst still providing an appropriate longer-term outlook, although the remaining period of the operating plan contains no information which would cause different conclusions
Intensity ratio An intensity ratio of GHG gases (CO2e) per £m of underlying income has been selected.
Dear Shareholder On behalf of the Board and as Chair of the Group’s Remuneration Committee, I have pleasure in presenting the Directors’ remuneration report for the year ended 31 December 2016. I am very grateful for the continued support and engagement we have had with shareholders and their representative bodies, especially during consultations on the outcomes of the remuneration review which I outlined in last year’s statement and which was a key priority for 2016.
There are no significant changes to the remuneration policy for Executive Directors that is being put to a binding vote at the 2017 AGM, and the maximum opportunity for both the short-term and long-term elements of variable remuneration will remain the same.
Remuneration outcomes for 2016 The Group has delivered strong financial performance in 2016 following further strategic progress. Underlying profit was £7.9 billion and statutory profit has more than doubled to £4.2 billion. The Group’s balance sheet remains strong and capital generation of approximately 190 basis points has enabled the Group to increase the ordinary dividend, pay a special dividend and fully cover the expected capital impact of the MBNA acquisition.
A formulaic approach has been used to set the Executive Directors’ bonus awards, consistent with other colleagues across the Group. The Committee determined that bonus awards of between 77 per cent and 78 per cent of maximum should be made to Executive Directors. Each of these awards, as well as the proposed Group Ownership Share awards detailed in the report, reflect the Group’s strong underlying performance against both financial and Balanced Scorecard metrics.
Overall, the total remuneration for the Executive Directors is down by around 35 per cent compared to 2015. Further details on the reward outcomes for Executive Directors are outlined in the annual report on remuneration.
2017 Executive Director salaries It was the Committee’s intent that Executive Director salary increases remain aligned with the 2 per cent budget for all colleagues. With that principle in mind, the Committee proposes to increase the base salaries of the Chief Financial Officer and the Chief Risk Officer by 2 per cent.
As disclosed in the 2015 Directors’ remuneration report, for the first time since 2011, a salary increase was applied in 2016 for the Group Chief Executive to begin to adjust his base salary to the previously disclosed Reference Salary of £1.22 million, which was set relative to the market when he joined in 2011, and for the adjustment to be staged over two years. As a result the second stage of the adjustment to £1.22 million is to be implemented with effect from January 2017, with 2 per cent of the increase delivered in cash and the remainder in shares.
SUMMARY OF THE REMUNERATION REVIEW Enhancing the link between remuneration and strategy As part of the review of the Group’s variable remuneration arrangements in 2016, the existing reward principles were simplified and updated to ensure they support the Group’s strategic priorities. The table below shows the link between strategic priorities, the reward principles and performance measures for the Group Ownership Share and Group Performance Share plans. Further detail can be found in the strategic report.
Customer alignment – Rewards action and behaviour which puts customers first – Builds a responsible business plan that helps Britain prosper – Supports the Culture Plan
Competitive, performance-driven and fair – Drives successful change towards Bank of the Future – Encourages working together as one team – Delivers fair outcomes, based on performance, not personal characteristics
The Group’s remuneration arrangements support its purpose of helping Britain prosper and align to the Group’s aim of becoming the best bank for customers, whilst delivering long-term, superior and sustainable returns for shareholders.
The Group believes in offering fair reward. It fosters a performance-driven and meritocratic culture where colleagues share in the collective success of the Group and are rewarded for performance aligned to the long-term sustainable success of the business and the commitment to changing the culture of the Group.
2017 deferral of variable remuneration Under new PRA remuneration requirements, 60 per cent of variable remuneration awarded to PRA Senior Managers must be deferred for seven years with pro rata vesting between the third and seventh year. The Group’s approach ensures that both short-term and long-term variable remuneration is subject to deferral and is more onerous than the minimum PRA requirements, as over 60 per cent of variable remuneration awarded to Executive Directors is deferred under the Group Ownership Share plan and vests over a period of seven years from the date of grant.
2017 Group Ownership Share Individual performance determines 2017 Group Ownership Share award
For Executive Directors, awards of between 77 per cent and 78 per cent of maximum opportunity were determined reflecting Group and individual performance.
Executive Director remuneration outcomes The charts below summarise the Executive Directors’ remuneration for the years ended 31 December 2015 and 2016.
2 2014 LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 15 February 2017. The average share price between 1 October 2016 and 31 December 2016 (58.30 pence) has been used to calculate the value. The shares were awarded in 2014 based on a share price of 78.878 pence.
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. Information on how the Policy will be implemented in 2017 is included in the annual report on remuneration.
Formal consultation on the remuneration of Executive Directors is not undertaken with employees and no formal remuneration comparison measurements were used. However, surveys are undertaken semi-annually on employee engagement and discussion on the Group’s remuneration approach takes place with union representatives during the annual pay review cycle and on relevant employee reward matters, on which the Remuneration Committee receives and considers relevant feedback. In addition, the Remuneration Committee has reviewed equal pay analysis undertaken by an independent third party and will continue to monitor this on an ongoing basis.
Colleague opinion is also sought through regular engagement surveys. This includes questions relating to remuneration, the results of which in 2016 positioned colleague satisfaction with the Group’s reward arrangements, including the link to performance, above the high performing norm of UK companies.
The exercise of the Committee’s discretion will be disclosed in accordance with regulatory requirements.
3. The minimum that may be paid, where only the fixed element is paid (salary, benefits, pension and the fixed share award).
This may, for example, include the following circumstances: – An interim recruit, appointed to fill an Executive Director role on a short-term basis.
– Exceptional circumstances requiring the Chairman to take on an executive function on a short-term basis. – An Executive Director recruited at a time in the year when it would be inappropriate to provide a Group Performance Share or Group Ownership Share award for that year, for example, where there may be insufficient time to assess performance. In this situation the Committee may feel it appropriate to transfer the quantum in respect of the months employed during the year to the subsequent year so that reward is provided on a fair basis. – An Executive Director recruited from a business or location where benefits are provided that do not fall into the definition of ‘variable remuneration forfeited’ but where the Committee considers it reasonable to buy-out these benefits. – Transitional arrangements for overseas hires, which might include relocation expenses and accommodation.
The service contracts and letters of appointment are available for inspection at the Company’s registered office.
– At any time, at its absolute discretion, the Group may elect to terminate the individual’s employment by paying to the Executive Director, in lieu of the notice period, an amount equivalent to base salary, subject to mitigation as described more fully in the termination payments section of this report, below.
Termination payments It is the Group’s policy that where compensation on termination is due, it should be paid on a phased basis, mitigated in the event that alternative employment is secured. Where it is appropriate to make a bonus payment (now known as Group Performance Share) to the individual, this should relate to the period of actual service, rather than the full notice period. Any Group Performance Share payment will be determined on the basis of performance as for all continuing employees and will remain subject to performance adjustment (malus and clawback) and deferral. Generally, on termination of employment, Group Performance Share awards, long-term incentive awards (now known as Group Ownership Share) and other rights to payments will lapse except where termination falls within one of the reasons set out below. In the event of redundancy, the individual may receive a payment in line with statutory entitlements at that time. If an Executive Director is dismissed for gross misconduct, the Executive Director will receive normal contractual entitlements until the date of termination and all deferred Group Performance Share and Group Ownership Share awards will lapse.
Awards lapse on date of leaving (or on notice of leaving) unless the Committee determines otherwise in exceptional circumstances that they will vest on the original vesting date (or exceptionally on the date of leaving). Where award is to vest it will be subject to the performance conditions and time pro-rating (for months worked in performance period). Malus and clawback will apply.
Awards vest on the original vesting date (or exceptionally on the date of leaving). Vesting is subject to the performance conditions and time pro-rating (for months worked in performance period). Malus and clawback will apply.
Awards vest on death subject to the performance conditions and time pro-rating (for months worked in performance period unless determined otherwise). Malus and clawback will apply.
2 Reference to change of control or merger includes a compromise or arrangement under section 899 of the Companies Act 2006 or equivalent. Fixed share awards may also be released/ exchanged in the event of a resolution for the voluntary winding up of the Company; a demerger, delisting, distribution (other than an ordinary dividend) or other transaction, which, in the opinion of the Committee, might affect the current or future value of any award; or a reverse takeover, merger by way of a dual listed company or other significant corporate event, as determined by the Committee. In the event of a demerger, special dividend or other transaction which would in the Committee’s opinion affect the value of awards, the Committee may allow a long-term incentive award to vest to the extent relevant performance conditions are met to that date and if the Committee so determined, on a time pro-rated basis (unless determined otherwise) to reflect the number of months of the performance period worked.
Purpose and link to strategy To provide an appropriate reward to attract and retain a high-calibre individual with the relevant skills, knowledge and experience.
NEDs are reimbursed for expenses incurred in the course of their duties, such as travel and accommodation expenses, on a grossed-up basis (where applicable).
For 2017, the Group Performance Share will be based on a percentage of the Group’s underlying profit, adjusted by a strategic multiplier of up to 130 per cent based on the Group’s Balanced Scorecard (BSC) metrics and risk matters.
Individual awards are adjusted to reflect a balanced scorecard approach with clearly identified performance metrics used to assess Group performance in key areas. Stretching objectives for each division and function 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.
Awards in 2017 are being made as follows: GCE: 300 per cent of reference salary CFO: 275 per cent of base salary CRO: 275 per cent of base salary
1 The FCA changed the approach to complaint classification and reporting from 30 June 2016. Updated complaint data is not yet available on the new basis, but will be available by the end of the first quarter at which point, or shortly thereafter, the metric will be disclosed.
2 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
Under terms agreed when joining the Group, the CRO is entitled to a conditional lump sum benefit of £718,996 either (i) on reaching normal retirement age unless the CRO voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death.
Annual bonus (audited) The individual bonus awards for Executive Directors are determined in the same way as for colleagues across the Group, with outcomes based on the individual on-target award adjusted for the Group annual bonus outcome and for individual performance outcomes.
(2) Balanced Scorecard performance Under (0%) Developing (55%) Good (100%) Strong (125%) Top (145%)
BSC ratings are based on a scale ranging from ‘Under’ (at the lowest level), through ‘Developing’, ‘Good’, ‘Strong’ and up to ‘Top’, which is the highest rating. Each of these ratings may be further differentiated by the addition of ‘minus’ or ‘plus’. The Committee reviewed performance in depth to determine ratings for the Group and each division and function, including consideration of risk matters arising in 2016. Risk adjustments were approved by the Board Risk Committee.
The resilience of the Group’s capital position was demonstrated again in 2016 when it comfortably exceeded the threshold for the latest PRA stress test and performed well compared to peers.
Lead Board and executive team in highly impactful exercise to review the impact of digital technology and market change on the ‘Bank of the Future’, enabling the Group to develop critically important plans for the evolution of its business model and technology base.
Expected outcomes are based on individual performance before taking into account a modifier based on underlying profit and the Group BSC, as follows: Rating Under Developing Good Strong Top
Cost leadership Continued improvement in the Group’s market-leading cost:income ratio to 48.7 per cent (2015: 49.3 per cent) – efficiency programme successfully accelerated in response to customers’ changing preferences.
Well-managed relationships with key external stakeholders, e.g. debt and equity investors, regulators, and credit rating agencies.
Based on a full assessment of performance, the Committee agreed an individual rating for 2016 of Strong plus for the CFO. Expected outcomes are based on individual performance before taking into account a modifier based on underlying profit and the Finance division’s BSC, as follows: Rating Under Developing Good Strong Top
Group’s low risk model recognised by the market; tight credit default swap (CDS) spreads and resilient credit ratings confer tangible funding cost benefits to the Group.
Based on a full assessment of performance, the Committee agreed an individual rating for 2016 of Strong plus for the CRO.
Deferral The 2016 annual bonus for all Executive Directors is awarded in a combination of cash and shares. 40 per cent of the annual bonus will be released in 2017 (£2,000 cash in March, the remainder in shares), 40 per cent will be released in 2018 and the remaining 20 per cent will be released in 2019, subject to remaining in the Group’s employment. Any shares released are subject to a further holding period in line with regulatory requirements.
The Group has delivered a good financial performance over the performance period of the 2014 Long-Term Incentive Plan (LTIP) awards, continuing to transform the business for the benefit of our shareholders. Performance was measured over three financial years ended 31 December 2016. The performance conditions attached to these awards and actual performance are set out in the table below. At the end of the performance period, it has been assessed that awards will vest at 55 per cent of maximum. Executive Directors are required to retain any shares vesting for a further two years post vesting.
1 2016: Ordinary and special dividend in respect of the financial year ended 31 December 2016, partly paid in 2016 and partly to be paid in 2017. 2015: Ordinary and special dividend in respect of the financial year ended 31 December 2015, partly paid in 2015 and partly paid in 2016.
Other Committees 2016 Total 1 Scottish Widows Group Limited. 2 Due to their role as Chairmen of other Board Committees, Alan Dickinson, Anita Frew and Nick Luff do not receive any fees for their membership of the Nomination and Governance
Old requirement met % of base salary Number of shares1 % of base salary1
António Horta-Osório 2,025 200% 6,560,829 545% 17,891,894 Yes 350% 6,917,220 905% Yes 1 Number of shares required and current shareholding percentage of base salary plus fixed share award figures are calculated using the average share price for the period 1 January 2016 to 31 December 2016 (61.73 pence).
2 2013 LTIP award was eligible to receive an amount equal in value to any dividends paid during the performance period. Dividend equivalents have been paid based on the number of shares vested and have been paid in shares. The dividend equivalent shares were paid on 7 March 2016. The closing market price of the Group’s ordinary shares on that date was 72.75 pence. The dividend equivalent shares are not subject to any holding period.
None of the other Directors at 31 December 2016 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
Juan Colombás 3,145,458 08/03/2016 44,355 Release of 2012 Deferred Bonus 08/03/2016 277,981 Release of 2013 Deferred Bonus 08/03/2016 1,785,116 Vesting of 2013 LTIP
Total remuneration1 Number of employees 1 Total remuneration of UK-based colleagues. Includes base salary, bonus awards for the 2016 performance year, the estimated values of LTIP and Commercial Banking Transformation Plan awards for the performance period ended 31 December 2016 (including dividend equivalents where applicable), pension and benefits.
How Committee meetings are run The management of the Committee is in keeping with the basis on which meetings of the Board are managed, as detailed on page 62, with a structure which facilitates open discussion and debate, with steps taken to ensure adequate time for members of the Committee to consider proposals which are put forward.
During 2016, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review.
In addition to the scheduled meetings, the Committee met on a number of other occasions to allow the Directors greater time to discuss their views and for an in-depth review of key areas including this year the review of the Directors’ Remuneration Policy.
António Horta-Osório (Group Chief Executive), Simon Davies (Chief People, Legal and Strategy Officer), Paul Hucknall (People Director, Centres of Excellence), Chris Evans (Director, Reward Policy and Partnering), Stuart Woodward (Head of Reward Regulation and Governance) and Matthew Elderfield (Group Director, Conduct, Compliance and Operational Risk) (until September 2016) and Letitia Smith thereafter provided guidance to the Committee (other than for their own remuneration).
All narrative and quantitative tables are unaudited unless otherwise stated. The audited information is required to comply with the requirements of relevant International Financial Reporting Standards.
Risk appetite is documented in a Board Risk Appetite Statement which is reviewed by the Board Risk Committee and approved annually by the Board.
The Board Risk Committee is responsible for overseeing the development, implementation and maintenance of the Group’s overall risk management framework and its risk appetite, to ensure they are in line with emerging regulatory, corporate governance and industry best practice.
Board Risk Appetite includes the following areas: – Credit – the Group has a conservative and well balanced credit portfolio through the economic cycle.
Governance and control – The Group’s approach to risk is founded on a robust control framework and a strong risk management culture which are the foundation for the delivery of effective risk management and guide the way all employees approach their work, behave and make decisions. – Governance is maintained through delegation of authority from the Board down to individuals through the management hierarchy. Senior executives are supported by a committee based structure which is designed to ensure open challenge and support effective decision making. – The Group’s risk appetite, principles, policies, procedures, controls and reporting are regularly reviewed and updated where needed to ensure they remain fully in line with regulations, law, corporate governance and industry good-practice. – The interaction of the executive and non-executive governance structures relies upon a culture of transparency and openness that is encouraged by both the Board and senior management. – Board-level engagement, coupled with the direct involvement of senior management in Group-wide risk issues at Group Executive Committee level, ensures that escalated issues are promptly addressed and remediation plans are initiated where required. – Line management is directly accountable for identifying and managing risks in their individual businesses, ensuring that business decisions strike an appropriate balance between risk and reward consistent with the Group’s risk appetite. – Clear responsibilities and accountabilities for risk are defined across the Group through a Three Lines of Defence model which ensures effective independent oversight and assurance in respect of key decisions.
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. – An aggregate view of the Group’s overall risk profile, key risks and management actions, and performance against risk appetite, is reported to and discussed monthly at the Group Risk Committee (and a subset at the Group Asset and Liability Committee), with regular reporting to the Board Risk Committee and the Board. – Rigorous stress testing exercises are carried out to assess the impact of a range of adverse scenarios with different probabilities and severities to inform strategic planning. – The Chief Risk Officer regularly informs the Board Risk Committee (BRC) of the aggregate risk profile and as a member of the Board, has direct access to the Chairman and members of BRC.
The table below provides a high level guide to how the Group’s business activities are reflected in its risk measures and balance sheet. Details of the business activities for each division are provided in the Divisional Results on pages 40 to 48.
– Internal contingency plans recalibrated and regularly reviewed for potential strategic, operational and reputational impacts. – 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/regulatory requirements.
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 PRA and management buffers (see Capital Risk on pages 159 to 166).
Risk mitigation: – Drive the development of potential actions and contingency plans to mitigate the impact of adverse scenarios. Stress testing also links directly to the Group’s Recovery Planning process.
Internal stress tests At least on an annual basis, the Group conducts macroeconomic stress tests of the operating plan, which is 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.
The RMF provides the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also seeks to facilitate effective communication on these matters across the Group.
The Chief Risk Officer is accountable for developing and leading an industry-wide recognised Risk function that adds value to the Group by: – providing a regular comprehensive view of the Group’s risk profile, both current and emerging key risks, and management actions; – (with input from the business areas and Risk Division) proposing Group risk appetite to the Board for approval, and overseeing performance of the Group against risk appetite; – developing an effective RMF which meets regulatory requirements for approval by the Board, and overseeing execution and compliance; and
All business areas complete a Control Effectiveness Review (CER) annually, reviewing the effectiveness of their internal controls and putting in place a programme of enhancements where appropriate. The CER reports are approved at Divisional Risk Committees or directly by the relevant member of the Group Executive Committee to confirm the accuracy of the assessment. This key process is overseen and independently challenged by Risk Division, reviewed by Group Audit against the findings of its assurance activities, and reported to the Board.
Page 124 Page 145 Page 146 Page 152 Page 154 Page 159 Page 166 Page 167 Page 168 Page 168 Page 169
Credit risk exposures in the Insurance Division largely result from holding bond and loan assets in the shareholder funds (including the annuity portfolio) and from exposure to reinsurers.
In commercial portfolios the PD models also segment counterparties into a number of rating grades, with each grade representing a defined range of default probabilities. Counterparties migrate between rating grades if the assessment of the PD changes. The Corporate (non-retail) Master Scale comprises of 19 non-default ratings and 4 default rating grades, and forms the basis on which internal reporting is completed.
In addition, the Group has in place quantitative limits such as product maximum limits, the level of borrowing to income and the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are policy limits above which the Group will reject borrowing applications. The Group also applies certain criteria that are applicable to specific products such as for applications for a mortgage on a property that is to be let by the applicant.
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 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: – Unemployed customers claiming Jobseekers Allowance: Qualifying customers are able to claim for mortgage interest at 3.12 per cent on up to £200,000 of the mortgage. There is a two year time limit on claims.
Commercial customers Early identification, control and monitoring are key to supporting the customer and protecting the Group. With the exception of small exposures in SME all non-retail exposures in the Commercial Banking and Run-off Divisions are reviewed at least annually (and more frequently where required) by the independent Risk Division. As part of the Group’s established Credit Risk Classification system, every exposure in the good book is categorised as either ‘good’ or ‘watchlist’. The term watchlist refers to cases which require closer monitoring on the good book and are split between Special Mention and Special Review (the latter being the more serious of the two). This complements the Group’s risk rating tools and is designed to identify and highlight portfolio levels of asset quality as well as individual problem credits. All watchlist names are reviewed by the Business and Risk Division regularly, and the classification is updated if required. This process seeks to ensure that relationship managers act promptly to identify, and highlight to senior management those customers who have greater potential to become higher risk in the future.
All of a customer’s impaired loans are treated as forborne as they are considered as having been (or will be) granted some form of forbearance. Most impaired loans and advances exist only in the BSU within Commercial Banking Division and Run-off Division.
Upon exit from forbearance the customer may be returned to the mainstream good classification. It is important to note that such a decision can be made only by the independent Risk Division.
New residential lending 65.2 63.0 n/a 64.7 1 Average loan to value is calculated as total loans and advances as a percentage of the total indexed collateral of these loans and advances.
New owner occupier interest only mortgages are subject to conservative underwriting criteria with rigorous controls on customers' ability to repay the principal at the end of term. New interest only mortgages, including those with any element of capital repayments represented 1.9 per cent of new residential mortgages in 2016 (2.8 per cent in 20152).
Forborne loans UK Secured forborne loans and advances reduced by £1,006 million in 2016 to £2,096 million, primarily due to a reduction in recapitalisations with higher levels of historic cases exiting the two year probation period, and a tightening of eligibility criteria during the year. At 31 December 2016, UK Secured loans and advances currently or recently subject to forbearance improved to 0.7 per cent (31 December 2015: 1.0 per cent) of total UK Secured loans and advances.
3 Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last six months.
The table below sets out the largest unimpaired forborne loans and advances to Commercial Banking customers (exposures over £5 million) as at 31 December 2016 by type of forbearance: Table 1.21: Commercial Banking unimpaired forborne loans and advances1 (audited)
– Asset quality remains strong, and the quality of new business continues to be good. – Credit risk appetite has been maintained, and the Group has robust indebtedness and affordability controls to ensure new lending is sustainable for our customers. – The impairment charge increased by £47 million to £282 million largely due to the UK Motor Finance portfolio, in which there was overall growth as well as the non-recurrence of a favourable one-off in 2015. – Credit Cards balances grew broadly in line with the market, and underlying credit quality remained strong. Impaired loans fell by £59 million due to continued reductions in recoveries, and impairment provisions as a percentage of impaired loans remained stable. – Loans balances contracted marginally and underlying credit quality remained strong. Impaired loans fell by £90 million largely due to reductions in recoveries, and impairment provisions as a percentage of impaired loans remained broadly stable. – Growth in UK Motor Finance loans and advances was ahead of the market, in part due to strategic relationships with business partners such as Jaguar Land Rover, which also contributed to the strong underlying credit quality in the portfolio. Impaired loans fell by £14 million largely due to a reclassification of impaired balances for some finance leases, and on an underlying basis grew broadly in line with the portfolio. Impairment provisions as a percentage of impaired loans increased, reflecting the reclassification of impaired balances, and portfolio growth coupled with a prudent approach to residual value.
Classified as forborne during the year 110 34 82 108 16 61
Impaired loans and advances The movements in Run-off corporate real estate, other corporate and Specialist Finance impaired forborne loans and advances were as follows: Table 1.29: Movement in Run-off corporate real estate, other corporate and Specialist Finance impaired forborne loans and advances (audited)
The Group manages its exposures to individual countries through authorised country limits which take into account economic, financial, political and social factors. In addition, the Group manages its direct risks to the selected countries by establishing and monitoring risk limits for individual banks, financial institutions, corporates and individuals.
The Group has been a signatory to the Equator Principles since 2006 and has adopted and applied the expanded scope of Equator Principles III. The Equator Principles support the Group’s approach to assessing and managing environmental and social issues in Project Finance, Project-Related Corporate loans and Bridge loans.
Exposures The Group faces significant conduct risks, which affect all aspects of the Group’s operations, all types of customers and other stakeholders. These can be considered across two main categories; customer conduct risks and market conduct risks. Customer conduct risks are those that have a direct impact on a customer – or group of customers – and can materialise through products or services not meeting the needs of its customers; sales processes resulting in poor customer outcomes; or the failure to deal with a customer’s complaint effectively which in turn may lead to a referral to the Financial Ombudsman Service. Market conduct risks can exist where activity taken can disrupt the fair and effective operation of a market in which the Group is active. Market conduct risks can arise from the mismanagement of market sensitive information, the failure to identify and report suspicious transactions or orders, or through inaccurate benchmark submissions.
Measurement To articulate its conduct risk appetite, the Group has sought more granularity through the use of suitable conduct risk metrics and tolerances that indicate where it may potentially be operating outside its conduct appetite. Conduct Risk Appetite Metrics (CRAMs) have been designed for all product families offered by the Group; a set of common metrics have been agreed for all products to support a consistent approach. These contain a range of product design, sales and post-sales metrics to provide a more holistic view of conduct risks; each product also has additional bespoke metrics. The common metrics are sales volume, product governance adherence, target market, outcome testing: meets customer needs, outcome testing: information disclosure, outcome testing: regulatory compliance, retention, usage, claims (decline rates), complaints, Financial Ombudsman Service uphold rate and complaints outcome testing. Each of the tolerances for the metrics are agreed for the individual product and are tracked monthly. At a consolidated level these metrics are part of the Board approved risk appetite. The Group also continues to measure the effectiveness of the overall strategic focus on conduct within the divisions and functions and its impact on customer outcomes and the effective implementation of the Customer Vulnerability agenda through the Group Customer First Committee (GCFC).
In relation to market conduct, relevant metrics are being established, and will continue to evolve in line with external developments. These cover a range of topics including the management of confidential and market sensitive information; and the way in which conflicts of interest are managed.
Monitoring Monitoring and reporting is undertaken at Board, Group and business area committees. As part of the reporting of CRAMs, a robust outcomes testing regime, for both sales and complaints processes, is in place to test performance of customer critical activities. The GCFC has responsibility for monitoring and reviewing integrated measurement of enhanced outcomes, customer views and cultural transformation, including challenging Divisions to make changes based on key learnings to support the delivery of the Group’s vision and foster a customer centric culture. Monitoring activity has also increased in scope to cover trading and communication surveillance, and the monitoring and testing of controls relevant to our market conduct agenda.
MARKET RISK Definition Market risk is defined as the risk that unfavourable market moves (including changes in and increased volatility of interest rates, market-implied inflation rates, credit spreads and prices for bonds, foreign exchange rates, equity, property and commodity prices and other instruments) lead to reductions in earnings and/or value.
Trading book only £m Non-trading £m Insurance £m Primary market risk factor
Debt securities in issue 76,314 – 76,314 – Interest rate, credit spread
The Group ensures that it has adequate cash and balances at central banks and stocks of high quality liquid assets (e.g. Gilts or US Treasury Securities) that can be converted easily into cash to meet liquidity requirements. The majority of these assets are held as available-for-sale with the remainder held as financial assets at fair value through profit and loss. Further information on these balances can be found under the Funding and Liquidity Risk on page 155. Interest rate risk in the asset portfolios is swapped into a floating rate.
Table 1.34: Key material market risks for the Group by individual business activity (profit before tax impact measured against Group single stress scenarios)
Risk type 2016 Interest Rate Basis Risk FX Credit Spread Equity Inflation
1 Banking Activities: Insurance and Pensions stresses; Interest rate -100 bps, Basis 3 month Libor +100bps/Bank Base Rate -25bps, FX -15 per cent GBP. Credit Spread +100 per cent, Equity -30 per cent, Inflation +50 bps.
Measurement In addition to measuring single factors, board risk appetite is calibrated primarily to five economic multirisk scenarios, and is supplemented with sensitivity based measures. The scenarios assess the impact of unlikely, but plausible adverse stresses on income, with the worst case for banking activities, defined benefit pensions, insurance and trading portfolios reported against independently, and across the Group as a whole.
How market risks arise and are managed across the Group’s activities is considered in more detail below.
Foreign exchange risk Economic foreign exchange exposure arises from the Group’s investment in its overseas operations (net investment exposures are disclosed in note 52 on page 261). In addition, the Group incurs foreign exchange risk through non-functional currency flows from services provided by customer facing divisions and the Group’s debt and capital management programmes.
(iii) Market Value limit: this caps the amount of conventional and inflation-linked government bonds held by the Group for liquidity purposes.
Table 1.35 below shows, split by material currency, the Group’s market value sensitivities to an instantaneous parallel up and down 25 and 100 basis points change to all interest rates.
Client facing activity and associated hedges 176.8 (286.1) 724.9 (408.0) 152.4 (140.1) 604.7 (464.2)
The surplus or deficit in the schemes is tracked on a monthly basis along with various single factor and scenario stresses which consider the assets and liabilities holistically. The impact on Group capital resources of the schemes is monitored monthly. Performance against risk appetite triggers is also monitored monthly. Hedges are in place and asset/liability matching positions are also actively monitored.
– Equity risk arises indirectly through the value of future management charges on policyholder funds. These management charges form part of the value of in-force business (see note 24 on page 213). Equity risk also arises in the with-profits funds but is less material. – Credit spread risk mainly arises from annuities where policyholders’ future cashflows are guaranteed at retirement. Exposure arises if the market value of the assets which are held to back these liabilities, mainly corporate bonds and loans, do not perform in line with expectations. Within the Group accounts a large amount of the exposure to market value movements, but not actual default losses, is removed as accounting rules require that assets Insurance have acquired from Group are maintained at the original amortised book value. – Interest rate risk arises through holding credit and interest assets mainly in the annuity book and also to cover general insurance liabilities, capital requirements and risk appetite. – Inflation exposure arises from a combination of inflation linked policyholder benefits and inflation assumptions used to project future expenses.
All trading activities are performed within the Commercial Banking division. While the trading positions taken are generally small, any extreme moves in the main risk factors and other related risk factors could cause significant losses in the trading book depending on the positions at the time. The average 95 per cent 1-day trading VaR (diversified across risk factors) was £1.3 million for year end 2016 compared to £1.4 million for year end 2015. This decrease was due to the significant de-risking activities that took place at the portfolio level.
Table 1.39 shows some relevant statistics for the Group’s 1-day 95 per cent confidence level VaR that are based on 300 historical consecutive business days to year end 2016 and year end 2015.
Table 1.39: Trading portfolios: VaR (1-day 95 per cent confidence level) (audited)
The aim of operational risk management is to manage operational risks, protecting customers and the Group, whilst delivering sustainable growth. Operational risks are managed in line with defined appetites through the Group Operational Risk Management Framework, evaluating key exposures, measuring risks, mitigating risks, and monitoring risks on an ongoing basis, as set out below.
Mitigation 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. This ensures the correct level of visibility and engagement. The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (which would also include 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 sourcing process including due diligence and risk evaluation. Contingency plans are maintained for a range of potential scenarios, with regular disaster recovery and scenario testing scheduled to test and challenge the readiness of the Group to respond in the event of an incident.
Monitoring Monitoring and reporting is undertaken at Board, Group and business area committees, in accordance with delegated limits of authority which are regularly reviewed and refreshed. Business unit risk exposure is aggregated and discussed at oversight committees, and matters are escalated to the Chief Risk Officer, or higher committees, if appropriate. A combination of: regular management information and reporting from business areas, oversight and challenge from Risk Division, Group Audit and other assurance activities ensures that key risks are regularly presented and debated by executive management.
Mitigation The Group manages the liquidity profile of the balance sheet through short term liquidity management and over the life of the funding plan, combining business as usual and stressed conditions. Longer term funding, defined as having an original maturity of more than one year, is used to manage the Group’s strategic liquidity profile, determined by the Group’s balance sheet structure.
Liquidity risk within the Insurance business may result from: the inability to sell financial assets quickly at their fair values; an insurance liability falling due for payment earlier than expected; the inability to generate cash inflows as anticipated; an unexpected large operational event; or from a general insurance catastrophe e.g. a significant weather event. Following the implementation of Solvency II, the annuity portfolio is ring-fenced and assets held to match annuity liability cashflows are excluded from shareholder liquidity. In the event a liquidity shortfall arises on the annuity portfolio, shareholder liquidity will be required to support this. As a result, the shareholder’s exposure to liquidity risk is through Insurance’s non-annuity and surplus assets, any shortfall arising in the annuity portfolio and the investment portfolios within the general insurance business. Liquidity risk is actively managed and monitored within the Insurance business to ensure that, even under stress conditions, there is sufficient liquidity to meet obligations and remain within approved risk appetite.
3 Non-LCR eligible liquid assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance).
6 The Group reclassified gilts held within the liquidity portfolio as ‘available-for-sale’ (previously been classified as ‘held-to-maturity’) during the third quarter of 2016 as the Group has decided it is no longer appropriate to commit to holding any gilts to maturity.
2 Consists of medium-term notes (£2.5 billion) and subordinated liabilities (£3.0 billion).
Stress testing results Internal stress testing results at 31 December 2016 showed that the Banking business had liquidity resources representing 167.0 per cent of modelled outflows from all wholesale funding sources, retail and corporate deposits, intraday requirements and rating dependent contracts under the Group’s most severe liquidity stress scenario.
A hypothetical idiosyncratic two notch downgrade of the Group’s current long-term debt rating and accompanying short-term downgrade implemented instantaneously by all major rating agencies, could result in a contractual outflow of £3.1 billion of cash over a period of up to one year, £1.8 billion of collateral posting related to customer financial contracts and £9.0 billion of collateral posting associated with secured funding.
The Group’s analysis separately identifies those assets held at central banks; assets not held at central banks are classified as either encumbered or unencumbered.
Additional minimum requirements are set by the PRA by the issuance of bank specific Individual Capital Guidance (ICG). This reflects a point in time estimate by the PRA, which may change over time, of the minimum amount of capital that is needed by the bank. It includes the assessment of risks that are not fully covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered at all by Pillar 1, such as pensions and interest rate risk in the banking book (IRRBB).
The countercyclical capital buffer (CCYB) is time-varying and is designed to require banks to hold additional capital to remove or reduce the build-up of systemic risk in times of credit boom, providing additional loss absorbing capacity and acting as an incentive for banks to constrain further credit growth. The amount of the buffer is determined by reference to buffer rates set by the FPC for the individual countries where the Group has relevant credit risk exposures. The buffer is currently set at zero for the UK, however non-zero rates for Norway, Sweden and Hong Kong were in place at 31 December 2016. Given that the Group has minimal exposures to these jurisdictions, the overall requirement is negligible. The UK CCYB rate was set to increase from 0 per cent to 0.5 per cent of risk-weighted assets on 29 March 2017, at which time the overlapping aspects of Pillar 2 supervisory capital buffers would be removed or reduced. However, following the EU referendum, on 5 July 2016 the FPC announced in their Financial Stability Report that the planned 0.5 per cent UK CCYB would not be implemented in March 2017 and the zero per cent rate was expected to remain until at least June 2017. The FPC also recommended that where existing Pillar 2 supervisory buffers reflect risks that would be captured by a UK CCYB rate, the PRA should reduce those buffers by an amount of capital which is equivalent to the effect of a UK CCYB rate of 0.5 per cent. The FPC has also indicated that it expects to review the UK CCYB and to set a rate in the region of 1 per cent of risk-weighted assets when risks are judged to be neither subdued nor elevated, but the rate can be set in excess of this level. Any increase in CCYB would take effect 1 year after it is set.
The minimum leverage ratio in the UK is 3 per cent, in line with current Basel requirements. In addition the UK framework requires two buffers to be maintained: an Additional Leverage Ratio Buffer (ALRB), which is calculated as 35 per cent of the Systemic Risk Buffer (applicable from 2019) and a time-varying Countercyclical Leverage Buffer (CCLB) which is calculated as 35 per cent of the countercyclical capital buffer rate (currently set at 0 per cent). At least 75 per cent of the minimum 3 per cent requirement and the entirety of any buffers that may apply must be met by CET1 capital.
The regulatory framework within which the Group operates continues to evolve and further detail on this will be provided in the Group’s Pillar 3 report. The Group continues to monitor these developments very closely, analysing the potential capital impacts to ensure that, through organic capital generation, the Group continues to maintain a strong capital position that exceeds the minimum regulatory requirements and the Group’s risk appetite and is consistent with market expectations.
Dividend policy The Group has established a dividend policy that is both progressive and sustainable. We expect ordinary dividends to increase over the medium term to a dividend payout ratio of at least 50 per cent of sustainable earnings. The Board interprets progressive to indicate a dividend per share that is expected to increase over the medium term. Sustainable earnings represents the long term earnings generation of the business. Sustainable earnings are defined as earnings after tax attributable to ordinary shareholders adjusted to remove the effects of market volatility, exceptional conduct or litigation events, major liability management or restructuring and other one off items such as the sale of businesses, and exceptional underlying business performance.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At 31 December 2016 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £8,500 million. Substantially all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009.
Pension movements: Removal of defined benefit pension surplus 454 – – 454
Excess of expected losses over impairment provisions and value adjustments (332) – – (332)
Movements in subordinated debt: Repurchases, redemptions and other – (551) (3,211) (3,762)
Tier 2 capital resources have reduced by £1,910 million in the year largely reflecting calls and redemptions, including the redemption of all remaining series of Enhanced Capital Notes (ECNs) under the Regulatory Call Right, and the amortisation of dated tier 2 instruments, partly offset by the issuance of a new dated tier 2 instrument, foreign exchange movements on subordinated debt, the transitioning of grandfathered AT1 instruments to tier 2 and a reduction in the significant investments deduction.
The redemption of the remaining series of ECNs followed the decision of the Court of Appeal in December 2015 that a Capital Disqualification Event (CDE) in relation to the ECNs had occurred. The Group subsequently exercised its option to redeem them in the first quarter of 2016. In June 2016 the Supreme Court confirmed the decision of the Court of Appeal.
2 Differences may arise between transitional and fully loaded threshold risk-weighted assets where deferred tax assets reliant on future profitability and arising from temporary timing differences and significant investments exceed the fully loaded threshold limit, resulting in an increase in amounts deducted from CET1 capital rather than being risk-weighted.
Market risk-weighted assets reduced by £0.6 billion due to a reduction in the Value-at-Risk multiplier, improvements to the VaR model and active portfolio management.
Average leverage ratio exposure measure4 718,926 1 Deconsolidation adjustments predominantly reflect the deconsolidation of assets related to Group subsidiaries that fall outside the scope of the Group’s regulatory capital consolidation (primarily the Group’s Insurance entities).
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.
Exposures The major sources of insurance risk within the Group are the Insurance business and the Group’s defined benefit pension schemes.
Longevity and persistency are key risks within the life and pensions business. Longevity risk arises from the annuity portfolios where policyholders’ future cashflows are guaranteed at retirement and increases in life expectancy, beyond current assumptions, will increase the cost of annuities. Longevity risk exposures are expected to increase with the Insurance business growth in the bulk annuity market. Persistency assumptions are set to give a best estimate however, customer behaviour may result in increased cancellations or cessation of contributions.
Mitigation Insurance risk in the Insurance business is mitigated in a number of ways: – General insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements broadly spread over different reinsurers. Detailed modelling, including that of the potential losses under various catastrophe scenarios, supports the choice of reinsurance arrangements. – Insurance processes on underwriting, claims management, pricing and product design. – Longevity risk transfer and hedging solutions are considered on a regular basis. A team of longevity and bulk pricing experts has been built to support the new bulk annuity proposition. – Exposure limits by risk type are assessed through the business planning process and used as a control mechanism to ensure risks are taken within risk appetite.
Measurement People risk is measured through a series of quantitative and qualitative indicators, aligned to key sources of people risk for the Group such as succession, retention, colleague engagement and performance management. In addition to risk appetite measures and limits, people risks and controls are monitored on a monthly basis via the Group’s risk governance framework and reporting structures.
Mitigation The Group maintains a system of internal controls, which is designed to: – ensure that accounting policies are consistently applied, transactions are recorded and undertaken in accordance with delegated authorities, that assets are safeguarded and liabilities are properly recorded; – enable the calculation, preparation and reporting of financial, prudential regulatory and tax outcomes in accordance with applicable International Financial Reporting Standards, statutory and regulatory requirements; and – ensure that disclosures are made on a timely basis in accordance with statutory and regulatory requirements and as far as possible are consistent with best practice and in compliance with the British Bankers’ Association Code for Financial Reporting Disclosure.
Monitoring Financial reporting risk 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.
Notes to the consolidated financial statements 186 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 banks 18. Loans and advances to customers 19. Securitisations and covered bonds 20. Structured entities 21. Allowance for impairment losses on loans and receivables 22. Available-for-sale financial assets 23. Goodwill 24. Value of in-force business 25. Other intangible assets 26. Property, plant and equipment 27. Other assets 28. Deposits from banks 29 Customer deposits 30. Trading and other financial liabilities at fair value through profit or loss 31. Debt securities in issue 32. Liabilities arising from insurance contracts and participating investment contracts 33. Life insurance sensitivity analysis 34. Liabilities arising from non-participating investment contracts 35. Other liabilities 36. Retirement benefit obligations 37. Deferred tax 38. Other provisions 39. Subordinated liabilities 40. Share capital 41. Share premium account 42. Other reserves 43. Retained profits 44. Other equity instruments 45. Dividends on ordinary shares 46. Share-based payments 47. Related party transactions 48. Contingent liabilities and commitments 49. Financial instruments 50. Transfers of financial assets 51. Offsetting of financial assets and liabilities 52. Financial risk management 53. Consolidated cash flow statement 54. Acquisition of MBNA Limited 55. Future accounting developments
Notes to the parent company financial statements 280 1. 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
The areas of focus for our audit which involved the greatest allocation of our resources and effort were: – Loan loss impairment provisions – Deferred tax asset – Conduct risk and provisions – Uncertain tax positions – Insurance actuarial assumptions – Significant transactions – Defined benefit obligations – Privileged access to IT systems – Hedge accounting
Change of Senior Statutory Auditor Following the mandatory rotation of the previous Engagement Partner, this is my first year as Senior Statutory Auditor to the Group. In order to better understand the Group, its operations, its financial reporting processes and the judgements exercised by the directors I observed a number of Audit Committee meetings, auditor meetings with executive management and auditor process meetings from April 2015 to February 2016. I commenced planning the 2016 audit in March 2016 and presented the audit plan to the Audit Committee in April 2016. This included an assessment of materiality, an identification of the areas of focus of the audit, an overview of planned audit testing strategies, audit team structure and proposed communications with the Audit Committee throughout the audit.
Audit scope We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates.
The Group is structured into four divisions being Retail, Commercial Banking, Insurance and Consumer Finance. Within the Group’s main consolidation and financial reporting system, each of the divisions comprises a number of reporting units. The consolidated financial statements are an aggregation of the reporting units.
Reporting units within the scope of our audit contributed 99 per cent of Group total assets. Audit coverage on account balances in the consolidated income statement ranged between 56 per cent and 99 per cent.
We designed our audit by applying materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors or management that represented a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as ‘areas of focus’ in the table below. We have also set out how we tailored our audit to address these specific areas in order to provide an opinion on the financial statements as a whole, and any comments we make on the results of our procedures should be read in this context. This is not a complete list of all risks identified by our audit.
Our work covered impairment of loans and advances to customers within Retail, Consumer Finance and Commercial Banking.
We tested the completeness and accuracy of relevant data from underlying systems and data warehouses that is used in those models.
For a sample of individually impaired loans we understood the latest developments at the borrower and the basis of measuring the impairment provisions and considered whether key judgements were appropriate given the borrowers’ 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 the gains or losses crystallised when impaired loans were sold or exited.
Based on the procedures performed and evidence obtained, we found management’s assumptions to be reasonable and therefore consider provisions to be appropriate.
In addition we have performed the following substantive procedures: We met with Divisional and Group management to understand the emerging and potential issues that they had identified. We independently assessed emerging and potential areas where exposures might have arisen based upon our knowledge and experience of emerging industry issues and the regulatory environment. We used this to challenge the completeness of the issues identified by management and whether a provision was required.
The majority of our detailed audit work was on the significant conduct provisions in relation to past sales of payment protection insurance policies, arrears handling activities, packaged bank accounts and insurance products in the German branch of Clerical Medical Investment Group Ltd (now Scottish Widows Ltd). We also examined other areas of compensation payments made to customers.
The Group’s accounting policy is that the discount rate applied to cash flows is consistent with that applied to such cash flows in the capital markets. Management currently use the actual asset mix as a proxy for deriving a market consistent view of the illiquidity adjustment to the discount rate.
We understood and tested key controls over the completeness and accuracy of data extracted and supplied to the Group’s actuary, which is used in the valuation of the Group’s defined benefit obligations. We also tested the controls for determining the actuarial assumptions and the approval of those assumptions by senior management. We found the key controls were designed, implemented and operated effectively, and therefore we determined that we could place reliance on these controls for the purposes of our audit.
Refer to page 72 (Audit Committee Report), page 186 (Accounting Policies), and page 228 (Note 37 and Critical Accounting Estimates and Judgements).
We also reviewed management’s basis for allocating forecast profits between legal entities, challenging significant assumptions and using our experience of the Group’s activities.
The Group has a number of open tax matters, for which management is required to make certain judgements as to the likely outturn for the purposes of calculating the Group’s tax liabilities.
Due to the nature of these transactions, the accounting falls outside of the business as usual process level controls and requires manual calculations to be performed.
We understood and tested key controls surrounding Group IT's central process for the periodic recertification of user access entitlements across in-scope systems as well as reviewed the processes for managing privileged access to IT systems.
In addition, in light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ Report. We have nothing to report in this respect.
– the directors’ explanation on page 82 of the Annual Report, in accordance with provision C.2.2 of the Code, as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and the directors’ statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing our audit. We have nothing to report having performed our review.
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT Our responsibilities and those of the directors As explained more fully in the Statement of directors' responsibilities set out on page 83, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view.
Mark Hannam (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 21 February 2017
Diluted earnings per share 14 2.9p 0.8p 1.6p 1 The profit after tax attributable to other equity holders of £412 million (2015: £394 million; 2014: £287 million) is partly offset in reserves by a tax credit attributable to ordinary shareholders of £91 million (2015: £80 million; 2014: £62 million).
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: Remeasurements before taxation (1,348) (274) 674
Liabilities arising from insurance contracts and participating investment contracts 32 94,390 80,294
Currency translation differences (tax: £nil) – (4) – (4) – – (4)
Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax – (371) – (371) – – (371)
Adjustment on sale of interest in TSB Banking Group plc – – – – – (825) (825)
Other changes in non-controlling interests – – – – – (41) (41)
(B) Goodwill Goodwill arises on business combinations and represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities acquired. Where the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired entity is greater than the cost of acquisition, the excess is recognised immediately in the income statement.
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. 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. – where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and would otherwise need to be separately accounted for.
(3) Loans and receivables Loans and receivables include loans and advances to banks and customers and eligible assets including those transferred into this category out of the fair value through profit or loss or available-for-sale financial assets categories. Loans and receivables are initially recognised when cash is advanced to the borrowers at fair value inclusive of transaction costs or, for eligible assets transferred into this category, their fair value at the date of transfer. Financial assets classified as loans and receivables are accounted for at amortised cost using the effective interest method (see (D) above) less provision for impairment (see (H) below).
When a financial liability is exchanged for an equity instrument, the new equity instrument is recognised at fair value and any difference between the original carrying value of the liability and the fair value of the new equity is recognised in the profit or loss.
(1) Life insurance business (i) Accounting for insurance and participating investment contracts
(ii) Accounting for non-participating investment contracts The Group’s non-participating investment contracts are primarily unit-linked. These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit-linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable. Investment returns (including movements in fair value and investment income) allocated to those contracts are recognised in the income statement through insurance claims.
NOTE 4: SEGMENTAL ANALYSIS Lloyds Banking Group provides a wide range of banking and financial services in the UK and in certain locations overseas.
The Group’s activities are organised into four financial reporting segments: Retail; Commercial Banking; Consumer Finance and Insurance. The Group’s unsecured personal lending portfolio, previously part of Retail, is now managed by Consumer Finance and elements of the Group’s business in the Channel Islands and Isle of Man were transferred from Retail to Commercial Banking; comparatives have been restated accordingly.
Other segment items reflected in income statement above: Increase in value of in-force business – – – 472 – 472
Other income, net of insurance claims 1,115 2,072 1,359 1,827 (218) 6,155
Other income, net of insurance claims 1,202 1,962 1,368 1,725 210 6,467
2 The Group’s insurance businesses’ income statements include income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These items have no impact in total upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the business, these items are shown net within the underlying results.
4 Comprises market movements on the ECN embedded derivative (loss of £101 million); the effects of asset sales (gain of £54 million); volatile items (loss of £107 million ); liability management (loss of £28 million); the amortisation of purchased intangibles (£342 million); restructuring costs (£170 million); TSB costs (£745 million); and the fair value unwind and other items (loss of £192 million).
Geographical areas Following the reduction in the Group’s non-UK activities, an analysis between UK and non-UK activities is no longer provided.
Net interest income 9,274 11,318 10,660 1 Includes £51 million (2015: £nil; 2014: £nil) of interest expense on assets with negative interest rates.
Total net income arising on assets held at fair value through profit or loss 17,305 2,835 8,621
Net (losses) gains on financial instruments held for trading (428) 194 851
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows: Total life insurance gross claims and surrenders (8,617) (7,983) (7,506)
2 In addition, regulatory provisions of £61 million (2015: £nil; 2014: £nil) have been charged against income.
NOTE 11: OPERATING EXPENSES continued Performance-based compensation The table below analyses the Group’s performance-based compensation costs between those relating to the current performance year and those relating to earlier years.
Performance-based compensation expense deferred until later years comprises: Awards made in respect of the year ended 31 December 123 114 152
Other non-audit fees: Services relating to corporate finance transactions 0.1 0.2 0.3
It is the Group’s policy to use the auditors on assignments in cases where their knowledge of the Group means that it is neither efficient nor cost effective to employ another firm of accountants. Such assignments typically relate to the provision of advice on tax issues, assistance in transactions involving the acquisition and disposal of businesses and accounting advice.
Acquisition due diligence and other work performed in respect of potential venture capital investments 1.0 1.2 1.0
Total impairment losses on loans and receivables (note 21) 592 441 737
Tax charge thereon at UK corporation tax rate of 20 per cent (2015: 20.25 per cent; 2014: 21.5 per cent) (848) (333) (379)
2 In 2016 this includes a £231 million write down of the deferred tax asset held within the life business, reflecting the Group’s utilisation estimate which has been restricted by the current economic environment.
Debt securities: Other public sector securities – 1,325 1,325 – 2,039 2,039
Other financial assets at fair value through profit or loss include the following assets designated into that category: (i) financial assets backing insurance contracts and investment contracts of £101,888 million (2015: £90,492 million) which are so designated because the related liabilities either have cash flows that are contractually based on the performance of the assets or are contracts whose measurement takes account of current market conditions and where significant measurement inconsistencies would otherwise arise. Included within these assets are investments in unconsolidated structured entities of £15,611 million (2015: £13,282 million), see note 20; and
Derivatives designated as cash flow hedges: Total derivative assets/liabilities – hedging 641,288 2,712 1,964 745,854 2,686 2,437
Later than 1 year and not later than 5 years 1,282 859
Covered bond programmes Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of covered bonds by the Group. The Group retains all of the risks and rewards associated with these loans and the partnerships are consolidated fully with the loans retained on the Group’s balance sheet and the related covered bonds in issue included within debt securities in issue.
Total securitisation and covered bond programmes 37,774 34,963 1 Includes securitisations utilising a combination of external funding and credit default swaps.
The Group has not voluntarily offered to repurchase assets from any of its public securitisation programmes during 2016 (2015: none). Such repurchases are made in order to ensure that the expected maturity dates of the notes issued from these programmes are met.
(A) Asset-backed conduits In addition to the structured entities discussed in note 19, which are used for securitisation and covered bond programmes, the Group sponsors an active asset‑backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated exposure of Cancara at 31 December 2016 was £6,840 million (2015: £7,295 million), comprising £6,684 million of loans and advances (2015: £6,440 million) and £156 million of debt securities (2015: £855 million).
All lending assets and debt securities held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary for standard lending activities in the normal course of the Group’s banking activities. During 2016 there has been a planned drawdown on certain liquidity facilities for balance sheet management purposes, supporting the programme to provide funding alongside the proceeds of the asset‑backed commercial paper issuance. The Group could be asked to provide further support under the contractual terms of these arrangements including, for example, if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption. As at 31 December 2015 there had been no drawdowns on these liquidity facilities.
The external assets in Cancara are consolidated in the Group’s financial statements.
(B) Consolidated collective investment vehicles and limited partnerships The assets and liabilities of the Insurance business held in consolidated collective investment vehicles, such as Open‑Ended Investment Companies and limited partnerships, are not directly available for use by the Group. However, the Group’s investment in the majority of these collective investment vehicles is readily realisable. As at 31 December 2016, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the Group was £75,669 million (2015: £67,122 million).
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 2016, are reported in note 6.
For unsecured personal lending portfolios, the impairment trigger is generally when the balance is two or more instalments in arrears or where the customer has exhibited one or more of the impairment characteristics set out above. While the trigger is based on the payment performance or circumstances of each individual asset, the assessment of future cash flows uses historical experience of cohorts of similar portfolios such that the assessment is considered to be collective. Future cash flows are estimated on the basis of the contractual cash flows of the assets in the cohort and historical loss experience for similar assets. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. The collective impairment allowance is also subject to estimation uncertainty and in particular is sensitive to changes in economic and credit conditions, including the interdependency of house prices, unemployment rates, interest rates, borrowers’ behaviour, and consumer bankruptcy trends. It is, however, inherently difficult to estimate how changes in one or more of these factors might impact the collective impairment allowance.
Of the total allowance in respect of loans and advances to customers, £1,208 million (2015: £1,170 million) was assessed on a collective basis.
During 2016 government securities with a fair value at the point of transfer of £22,830 million were reclassified from held-to-maturity investments, (see note 1).
Expense inflation 3.73 3.65 1 All risk-free rates are quoted as the range of rates implied by the relevant swap curve.
Non-economic assumptions Future mortality, morbidity, expenses, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience. Further information on these assumptions is given in note 32 and the effect of changes in key assumptions is given in note 33.
Cost or valuation: Exchange and other adjustments (5) – – 23 18
Balance sheet amount at 31 December 2016 3,764 1,217 3,294 4,697 12,972
Assets arising from reinsurance contracts held (notes 32 and 34) 714 675
Life insurance (see (1) below): Non-life insurance contracts (see (2) below): 1 Reinsurance balances are reported within other assets (note 27).
(iii) Assumptions Key assumptions used in the calculation of with-profit liabilities, and the processes for determining these, are: Investment returns and discount rates With-profit fund liabilities are valued on a market-consistent basis, achieved by the use of a valuation model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant swap curve, adjusted for credit risk. Further information on significant options and guarantees is given below.
Lapse rates (persistency) Lapse rates are allowed for on some non-profit fund contracts. The process for setting these rates is as described for with-profit liabilities, however a prudent scenario is assumed by the inclusion of a margin for adverse deviation within the non-profit fund liabilities.
Key changes in assumptions A detailed review of the Group’s assumptions in 2016 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£48 million decrease).
NOTE 33: LIFE INSURANCE SENSITIVITY ANALYSIS Critical accounting estimates and judgements Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require assumptions to be made about future investment returns, future mortality rates and future policyholder behaviour and are subject to significant management judgement and estimation uncertainty. The methodology used to value these liabilities and the key assumptions that have been made in determining their carrying value are set out in note 32.
NOTE 34: LIABILITIES ARISING FROM NON-PARTICIPATING INVESTMENT CONTRACTS The movement in liabilities arising from non-participating investment contracts may be analysed as follows: 2016 £m 2015 £m
Total charge (credit) to the income statement (note 11) 555 548 (226)
During 2009, the Group made one-off contributions to the Lloyds Bank Pension Scheme No 1 and Lloyds Bank Pension Scheme No 2 in the form of interests in limited liability partnerships for each of the two schemes which hold assets to provide security for the Group’s obligations to the two schemes. At 31 December 2016, the limited liability partnerships held assets of approximately £5.4 billion. The limited liability partnerships are consolidated fully in the Group’s balance sheet.
The Group currently expects to pay contributions of approximately £575 million to its defined benefit schemes in 2017.
The expense (credit) recognised in the income statement for the year ended 31 December comprises: £m £m £m
Duration of the defined benefit obligation 20 19 2016 £m 2015 £m
Benefits expected to be paid between 2 and 5 years 3,971 3,759
Benefits expected to be paid between 15 and 25 years 20,268 19,882
Benefits expected to be paid between 25 and 35 years 18,831 18,631
Benefits expected to be paid between 35 and 45 years 13,589 13,878
NOTE 36: 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.
Payment protection insurance The Group increased the provision for PPI costs by a further £1,000 million in 2016, bringing the total amount provided to £17,025 million.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward at 31 December 2016 of £46 million (2015: £76 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be utilised. These tax credits can be carried forward indefinitely.
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 2016 provisions of £239 million (31 December 2015: £201 million) were held.
Other provisions also include those arising out of the insolvency of a third party insurer, which remains exposed to asbestos and pollution claims in the US. The ultimate cost and timing of payments are uncertain. The provision held of £35 million at 31 December 2016 represents management’s current best estimate of the cost after having regard to actuarial estimates of future losses.
Other repurchases and redemptions during the year: 7.5% Undated Subordinated Step-up Notes – – (5) – – (5)
Callable Floating Rate Subordinated Notes 2016 – – – – (186) (186)
Floating Rate Undated Subordinated Step-up Notes – – (29) – – (29)
NOTE 40: SHARE CAPITAL (1) Authorised share capital As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual general meeting on 5 June 2009. This change took effect from 1 October 2009.
Limited voting ordinary shares The limited voting ordinary shares are held by the Lloyds Bank Foundations (the Foundations). The holders of the limited voting ordinary shares, who held 0.1 per cent of the total ordinary share capital at 31 December 2016, are entitled to receive copies of every circular or other document sent out by the Company to the holders of other ordinary shares. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. In the event of an offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting ordinary share will convert into an ordinary share and shall rank equally with the ordinary shares in all respects from the date of conversion.
Foreign currency gains on net investment hedges (tax: £nil) 106 17 22
The trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but have chosen to waive their entitlement to the dividends on those shares as indicated: the Lloyds Banking Group Share Incentive Plan (holding at 31 December 2016: 27,898,019 shares, 31 December 2015: 24,275,824 shares, waived rights to all dividends), the HBOS Share Incentive Plan Trust (holding at 31 December 2016: 445,625 shares, 31 December 2015: 446,169 shares, waived rights to all dividends), the Lloyds Banking Group Employee Share Ownership Trust (holding at 31 December 2016: 10,699,978 shares, 31 December 2015: 164,141,179 shares, on which it waived rights to all dividends), Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2016: 42,846 shares, 31 December 2015: 42,846 shares, waived rights to all but a nominal amount of one penny in total) and the Lloyds Banking Group Qualifying Employee Share Ownership Trust (holding at 31 December 2016: nil shares, 31 December 2015: 1,398 shares, waived rights to all but a nominal amount of one penny in total).
For the HBOS sharesave plan, no options were exercised during 2015 or 2016 and the outstanding options lapsed on 31 December 2016. The options outstanding at 31 December 2015 had an exercise price of £1.8066 and a weighted average remaining contractual life of 0.4 years.
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 2.49 per cent and 23.95 per cent in 2016 (2015: 3.99 per cent and 23.95 per cent; 2014: 0.5 per cent and 23.95 per cent).
Deposits placed by key management personnel attracted interest rates of up to 4.0 per cent (2015: 4.7 per cent; 2014: 4.7 per cent).
Subsidiaries Details of the Group’s subsidiaries and related undertakings are provided on pages 293 to 300. In accordance with IFRS 10 Consolidated financial statements, transactions and balances with subsidiaries have been eliminated on consolidation.
Joint ventures and associates At 31 December 2016 there were loans and advances to customers of £173 million (2015: £225 million) outstanding and balances within customer deposits of £15 million (2015: £8 million) relating to joint ventures and associates.
Visa Inc completed its acquisition of Visa Europe on 21 June 2016. The Group’s share of the sale proceeds comprised cash consideration of approximately £330 million (of which approximately £300 million was received on completion of the sale and £30 million is deferred for three years) and preferred stock, which the Group measures at fair value. The preferred stock is convertible into Class A Common Stock of Visa Inc or its equivalent upon the occurrence of certain events. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement (LSA) with Visa Inc, which clarifies the allocation of liabilities between the parties should the litigation referred to above result in Visa Inc being liable for damages payable by Visa Europe. The maximum amount of liability to which the Group may be subject under the LSA is capped at the cash consideration which was received by the Group at completion. Visa Inc may also have recourse to a general indemnity, currently in place under Visa Europe’s Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.
Certain Group companies, 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. The lawsuits, which contain broadly similar allegations, allege violations of the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act and the Commodity Exchange Act, as well as various state statutes and common law doctrines. Certain of the plaintiffs’ claims, including those asserted under US anti-trust laws, were dismissed by the US Federal Court for Southern District of New York (the District Court). In November 2015 OTC and exchange-based plaintiffs’ claims against the Group were dismissed for lack of personal jurisdiction. On 20 December 2016, the Federal Court for Southern District of New York dismissed all antitrust class action claims against LBG and its affiliates in the Multi District Litigation arising from the alleged manipulation of USD LIBOR. Further appeals in relation to the anti-trust claims remain possible.
Tax authorities The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities including open matters where Her Majesty’s Revenue and Customs (HMRC) adopt a different interpretation and application of tax law. The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013 HMRC informed the Group that their interpretation of the UK rules, permitting the offset of such losses, denies the claim; if HMRC’s position is found to be correct management estimate that this would result in an increase in current tax liabilities of approximately £600 million and a reduction in the Group’s deferred tax asset of approximately £400 million. The Group does not agree with HMRC’s position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due. There are a number of other open matters on which the Group is in discussion with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc); none of these is expected to have a material impact on the financial position of the Group.
Update to the Financial Conduct Authority’s announcement in November 2015 on a deadline for PPI complaints and Plevin v Paragon Personal Finance Limited On 2 August 2016, the Financial Conduct Authority (FCA) published a further consultation paper (CP16/20: Rules and guidance on payment protection insurance complaints: feedback on CP15/39 and further consultation), following on from the original consultation published in November 2015.
The FCA continues to propose the introduction of a two year deadline by which consumers would need to make their PPI complaints and indicates the deadline period will start in June 2017 and end in June 2019, later than originally indicated by the FCA. The FCA has also consulted further on changes to the proposed rules and guidance that should apply when firms handle PPI complaints in light of the Supreme Court’s decision in Plevin v Paragon Personal Finance Limited [2014] UKSC 61. The Group awaits the FCA’s final decision. A further announcement by the FCA is expected in 2017.
HBOS Reading – customer review The Group is commencing a review into a number of customer cases from the former HBOS Impaired Assets Office based in Reading. This review follows the conclusion of a criminal trial in which a number of individuals, including two former HBOS employees, were convicted of conspiracy to corrupt, fraudulent trading and associated money laundering offences which occurred prior to the acquisition of HBOS by the Group in 2009. The review is at an early stage and it is currently not possible to determine the ultimate financial impact on the Group.
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £63,203 million (2015: £63,086 million) was irrevocable.
NOTE 49: 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.
Debt securities in issue – – – – – 76,314 – 76,314
Liabilities arising from insurance contracts and participating investment contracts – – – – – – 94,390 94,390
Trading and other financial liabilities at fair value through profit or loss – 43,984 7,879 – – – – 51,863
Level 3 Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that require significant management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group’s asset‑backed securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3.
(A) Financial assets, excluding derivatives Valuation hierarchy At 31 December 2016, the Group’s financial assets carried at fair value, excluding derivatives, totalled £207,698 million (31 December 2015: £173,568 million). The table below analyses these financial assets by balance sheet classification, asset type and valuation methodology (level 1, 2 or 3, as described on page 247). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
Transfers into the level 3 portfolio 186 155 341 71 55 126
Trading and other financial liabilities at fair value through profit or loss
At 31 December 2016, the own credit adjustment arising from the fair valuation of £9,423 million (2015: £7,878 million) of the Group’s debt securities in issue designated at fair value through profit or loss resulted in a loss of £28 million (2015: gain of £114 million).
(C) Derivatives All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2016, such assets totalled £36,138 million (31 December 2015: £29,467 million) and liabilities totalled £34,924 million (31 December 2015: £26,301 million). The table below analyses these derivative balances by valuation methodology (level 1, 2 or 3, as described on page 247). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and level 2 during the year.
Derecognised pursuant to tender offers and redemptions in respect of Enhanced Capital Notes (476) – – –
(i) Uncollateralised derivative valuation adjustments, excluding monoline counterparties The following table summarises the movement on this valuation adjustment account during 2015 and 2016: £m 2015 £m
The CVA is sensitive to: – the current size of the mark-to-market position on the uncollateralised asset; – expectations of future market volatility of the underlying asset; and – expectations of counterparty creditworthiness.
A one per cent rise in the CDS spread would lead to an increase in the DVA of £152 million to £275 million.
At 31 December 2016, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £96 million (2015: £76 million).
Trading and other financial liabilities at fair value through profit or loss 2 – – 1 – –
Derivatives Reasonably possible alternative assumptions have been determined in respect of swaptions in the Group’s derivative portfolios which are priced using industry standard option pricing models. Such models require interest rate volatilities which may be unobservable at longer maturities. To derive reasonably possible alternative valuations these volatilities have been flexed within a range of nil per cent to 115 per cent (2015: 1 per cent and 63 per cent).
Reverse repos included in above amounts: Loans and advances to customers – – – – –
Reverse repurchase agreements The carrying amount is deemed a reasonable approximation of fair value given the short-term nature of these instruments.
Repurchase agreements The carrying amount is deemed a reasonable approximation of fair value given the short term nature of these instruments.
Trading and other financial assets at fair value through profit or loss 10,256 3,380 13,711 7,460
Loans and receivables: Loans and advances to customers 583 – 1,491 –
Related amounts where set off in the balance sheet not permitted3 Potential net amounts if offset of related amounts permitted £mAt 31 December 2016
Deposits from banks: Customer deposits: Trading and other financial liabilities at fair value through profit or loss:
Trading and other financial assets at fair value through profit or loss: Loans and advances to banks: Loans and advances to customers: Reverse repos – – – – – –
NOTE 52: FINANCIAL RISK MANAGEMENT As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and capital can be found on pages 115 to 169. The following additional disclosures, which provide quantitative information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.
Loans and advances to customers, net1 457,958 (6,331) 451,627 455,175 (7,250) 447,925
Trading and other financial assets at fair value through profit or loss:3,4
Off-balance sheet items: Other items serving as direct credit substitutes 779 – 779 458 – 458
Performance bonds and other transaction-related contingencies 2,237 – 2,237 2,123 – 2,123 1 Amounts shown net of related impairment allowances.
4 Includes assets within the Group’s unit-linked funds for which credit risk is borne by the policyholders and assets within the Group’s With-Profits funds for which credit risk is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.
Loans and advances to customers Loans and advances designated at fair value through profit or loss £m
2 This represents the element of the charge on loans and advances to customers in HBOS’s results that was included within the Group’s fair value adjustments in respect of the acquisition of HBOS on 16 January 2009.
Total loans and advances which are past due but not impaired 14 7,340 386 305 8,031 –
Total held as available-for-sale financial assets 55,306 5 55,311 31,835 4 31,839 1 Credit ratings equal to or better than ‘BBB’.
D. Collateral held as security for financial assets A general description of collateral held as security in respect of financial instruments is provided on page 126. The Group holds collateral against loans and receivables and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for trading and other financial assets at fair value through profit or loss and for derivative assets is also shown below.
Trading and other financial assets at fair value through profit or loss (excluding equity shares) Included in trading and other financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with a carrying value of £33,079 million (2015: £33,174 million). Collateral is held with a fair value of £30,850 million (2015: £36,493 million), all of which the Group is able to repledge. At 31 December 2016, £27,303 million had been repledged (2015: £15,438 million).
In addition, securities held as collateral in the form of stock borrowed amounted to £47,816 million (2015: £58,621 million). Of this amount, £16,204 million (2015: £29,859 million) had been resold or repledged as collateral for the Group’s own transactions.
E. Collateral pledged as security The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts.
Customer deposits Customer deposits included deposits held as collateral for facilities granted with a carrying value of £2,462 million (2015: £nil) and a fair value of £2,277 million (2015: £nil). No collateral balances in the form of cash were provided in respect of repurchase agreements (2015: £5 million).
Securities lending transactions The following on balance sheet financial assets have been lent to counterparties under securities lending transactions: 2016 £m 2015 £m
Available-for-sale financial assets 127 259 73 637 222 1,887 16,080 37,239 56,524
Liabilities arising from insurance and investment contracts 1,583 2,190 2,737 2,463 2,377 8,588 19,971 74,593 114,502
Trading and other financial liabilities at fair value through profit or loss 14,390 19,718 11,845 1,938 13,513 61,404
The following tables set out the amounts and residual maturities of the Group’s off balance sheet contingent liabilities and commitments. Up to 1 month £m £m £m £m £m years £m years £m
Write-off of allowance for loan losses, net of recoveries (1,272) (3,467) (5,761)
Share of post-tax results of associates and joint ventures 1 3 (32)
(E) Disposal and closure of group undertakings and businesses £m £m £m
Liabilities arising from insurance contracts and participating investment contracts – (3,828) –
IFRS 9 Financial Instruments IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement and is effective for annual periods beginning on or after 1 January 2018.
Impairment Overview 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.
The requirement to recognise lifetime ECL for loans which have experienced a significant increase in credit risk since origination, but which are not credit impaired, does not exist under IAS 39. The assessment of whether an asset is in stage 1 or 2 considers the relative change in the probability of default occurring over the expected life of the instrument, not the change in the amount of expected credit losses. This will involve setting quantitative tests combined with supplementary indicators such as credit risk classification. Reasonable and supportable forward looking information will also be used in determining the stage allocation. In general, assets more than 30 days past due, but not credit impaired, will be classed as stage 2.
– Maximum exposure is the contractual amount except for certain revolving facilities (as defined by the standard)
Credit risk methodologies have been defined and model build and approval is underway for core portfolios. The Retail secured model has been approved by the Model Governance Committee. Models and credit risk processes will be tested during the parallel run period to embed the changes and help improve the understanding of the new impairment models.
Finance systems and reporting requirements are being developed and tested. Existing controls and governance structures have been reviewed and changes identified as a result of IFRS 9. The governance framework includes the review, challenge and sign-off of forward looking information for a range of economic scenarios. Communication and training plans are in place and the impact on resources within Finance and Risk functions is being assessed to ensure the business is ready to implement the new standard.
Issue of other equity instruments – – – (21) (21) 5,355 5,334
Fair value and exchange adjustments and other non-cash items 2,482 (594) 1,118
NOTE 6: DEBT SECURITIES IN ISSUE These comprise the following issues by the Company: US$1 billion 3.1% notes due 2021 (issued July 2016); €639 million 0.75% notes due 2021 and €772 million 1% notes due 2023 (issued November 2016); and ¥41.9 billion 0.615% notes due 2021 and ¥19.1 billion 1.047% notes due 2026 (issued December 2016).
Issued during the year: 5.3% Subordinated Fixed Rate Notes 2045 (US$824 million) – – 543 543 4.582% Subordinated Fixed Rate Notes 2025 (US$1,353 million) – – 893 893
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2016, the Company held deposits of £42 million with Lloyds Bank plc (2015: £24 million). Given the volume of transactions flowing through the account, it is not meaningful to provide gross inflow and outflow information. Included within other liabilities is £2,690 million (2015: £11,101 million) due to subsidiary undertakings. In addition, at 31 December 2016 the Company had interest rate and currency swaps with Lloyds Bank plc with an aggregate notional principal amount of £2,905 million and a net positive fair value of £461 million (2015: notional principal amount of £734 million and a net positive fair value of £45 million). Of this amount an aggregate notional principal amount of £1,529 million and a net positive fair value of £307 million (2015: notional principal amount of £325 million and a net positive fair value of £26 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities.
Total financial liabilities – – – 3,065 3,065 1 See note 1.
The carrying amount of cash and cash equivalents (2016: £42 million; 2015: £24 million) is a reasonable approximation of fair value.
Reports and communications The Group issues regulatory announcements through the Regulatory News Service (RNS); shareholders can subscribe for free via the ‘Investors & Performance’ section of our website at www.lloydsbankinggroup.com, where our statutory reports and shareholder communications are available. A summary of the reports and communications to be issued in 2017 are listed below: Available format
Registrar Equiniti Limited Aspect House, Spencer Road, Lancing West Sussex BN99 6DA
The company registrar is Equiniti Limited. They provide a shareholder service, including a telephone helpline and shareview which is a free secure portfolio service.
Analysis of shareholders At 31 December 2016 Shareholders Number of ordinary shares
Asset quality ratio The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers after releases and write-backs expressed as a percentage of average loans and advances to customers.
Return on assets Underlying profit before tax divided by average total assets.
Underlying return on tangible equity Underlying profit after tax at the standard UK corporation tax rate adjusted to add back amortisation of intangible assets, after tax, profit attributable to non-controlling interests and other equity holders, divided by average tangible net assets.
Glossary Arrears A customer is in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Such a customer is also said to be in a state of delinquency and the entire outstanding balance is delinquent.
Credit valuation adjustments These are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. Further details are given in note 49.
Impairment allowances Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against profit for the incurred loss inherent in the lending book. An impairment allowance may either be individual or collective.
Individually/collectively assessed Impairment is measured individually for assets that are individually significant, and collectively where a portfolio comprises homogenous assets and where appropriate statistical techniques are available.
Impairment loss provisions for individually significant impaired loans are assessed on a case-by-case basis, taking into account the financial condition of the counterparty, any guarantor and the realisable value of any collateral held.
A methodology of estimating the credit risk within a portfolio by utilising internal risk parameters to calculate credit risk regulatory capital requirements. There are two approaches to IRB: Foundation IRB and Advanced IRB.
Medium Term Notes Medium term notes are a form of corporate borrowing covering maturity periods ranging from nine months to 30 years. Details of the notes issued under the Group’s medium term notes programmes are given in note 31.
Negative equity mortgages Negative equity occurs when the value of the property purchased using the mortgage is below the balance outstanding on the loan. Negative equity is the value of the asset less the outstanding balance on the loan.
Subordinated liabilities Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of depositors and other creditors of the issuer. Details of the Group’s subordinated liabilities are set out in note 39.
Disclosures arising from Enhanced Disclosure Task Force (EDTF) recommendations The 32 recommendations listed below are made in the report ‘Enhancing the Risk Disclosures of Banks’ issued by the Enhanced Disclosure Task Force of the Financial Stability Board on 29 October 2012.
General commentary 1 Present all related risk information together or provide an index or an aid to navigation. 115 2 Define the bank’s risk terminology and risk measures and present key parameter values used. 116-169 3 Describe and discuss top and emerging risks. 28-31, 118 4 Outline plans to meet each new key regulatory ratio. 155, 160
29 Provide analysis of the bank’s counterparty credit risk that arises from its derivatives transactions. 131, 267 30 Discuss credit risk mitigation, including collateral held for all sources of credit risk. 124-126
BOS (USA) Inc. 100% 14 BOS Edinburgh No 1 Ltd 100% 17 BOS Mistral Ltd 100% 2 BOSIC Inc. 100% 18 BOSSAF Rail Ltd 100% 1 Britannia Personal Lending Ltd 100% 4 i # British Linen Leasing (London) Ltd 100% 5 British Linen Leasing Ltd 100% 5 British Linen Shipping Ltd 100% 5 Brooklyn Properties Ltd (in liquidation) 100% 32 i # 100% ii C&G Financial Services Ltd (in strike off) 100% 12 C&G Homes Ltd 100% 12 C&G Estate Agents Ltd 100% 12 C.T.S.B. Leasing Ltd 100% 1
Carlease Ltd 100% 1 Cartwright Finance Ltd 100% 2 viii 0.08% vii # Cashfriday Ltd 100% 9 Cashpoint Ltd 100% 1 Castle Baynard Funding Ltd (in liquidation) 100% 13 Caveminster Ltd 100% 1
ICC Holdings Unlimited Company 99.09% (100%) 16 ICC Software Partners Ltd (in liquidation) 100% 33 IF Covered Bonds Limited Liability Partnership n/a 4 * Inchcape Financial Services Ltd 100% 2 i # Industrial Real Estate (General Partner) Ltd 100% 34 Industrial Real Estate (Nominee) Ltd 100% 34 Intelligent Finance Financial Services Ltd 100% 4 Intelligent Finance Software Ltd 100% 4 International Motors Finance Ltd 100% 2 i # IWEB (UK) Ltd (in liquidation) 100% 13 Kanaalstraat Funding C.V. n/a 35 * Kanto Leasing Ltd 100% 1 Katrine Leasing Ltd 100% 36 Langbourn Holdings Ltd 99.99% (100%) 37 LB Comhold Ltd 100% 1 LB Healthcare Trustee Ltd 100% 1 LB Leasing L.P n/a 38 * LB Mortgages Ltd 100% 1 LB Motorent Ltd 100% 1 LB Quest Ltd 100% 1 LB Share Schemes Trustees Ltd 100% 1 LBCF Ltd 100% 9 LBG Capital Holdings Ltd 100% 1 LBG Capital No. 2 plc 100% 1 LBG Capital No. 1 plc 100% 1 LBI Leasing Ltd 100% 1 LDC (Asia) Ltd (in liquidation) 100% 39 LDC (General Partner) Ltd 100% 40 LDC (Managers) Ltd 100% 40 LDC (Nominees) Ltd 100% 40 LDC Carry VI LP n/a 41 * LDC Equity VI LP n/a 41 * LDC GP LLP n/a 41 * LDC I LP n/a 41 * LDC II LP n/a 41 * LDC III LP n/a 41 * LDC IV LP n/a 41 * LDC Parallel (Nominees) Ltd 100% 40 LDC Parallel VI LP n/a 41 * LDC Ventures Carry Ltd 100% 40 LDC Ventures Trustees Ltd 100% 40 LDC V LP n/a 41 * LDC VI LP n/a 41 * Leasing (No. 2) Ltd 100% 1 Legacy Renewal Company Ltd 99.99% (100%) 5 Lex Autolease (CH) Ltd 100% 1 Lex Autolease (FMS) Ltd (in liquidation) 100% 1 Lex Autolease (Shrewsbury) Ltd (in liquidation) 100% 13 100% iv 100% v Lex Autolease (VC) Ltd 100% 1 Lex Autolease (VL) Ltd (in liquidation) 100% 13 Lex Autolease Carselect Ltd 100% 1 Lex Autolease Ltd 100% 1 Lex Vehicle Finance 2 Ltd 100% 2 Lex Vehicle Finance 3 Ltd 100% 2 Lex Vehicle Finance Ltd 100% 2 Lex Vehicle Leasing (Holdings) Ltd 100% 2 i 100% ii 100% x Lex Vehicle Leasing Ltd 100% 2 Lex Vehicle Partners (1) Ltd 100% 2 Lex Vehicle Partners (2) Ltd 100% 2 Lex Vehicle Partners (3) Ltd 100% 2 Lex Vehicle Partners (4) Ltd 100% 2 Lex Vehicle Partners Ltd 100% 2 Lime Street (Funding) Ltd 100% 1 Lloyds (FDC) Company 99% (100%) 1 Lloyds (General Partner) Ltd 100% 6 Lloyds (Gresham) Ltd 100% 1 100% x Lloyds (Gresham) No. 1 Ltd 100% 1 Lloyds (Nimrod) Leasing Industries Ltd (in liquidation) 100% 1 Lloyds (Nimrod) Specialist Finance Ltd 100% 1 Lloyds America Securities Corporation 100% 14 Lloyds Asset Leasing Ltd 100% 1 Lloyds Bank (BLSA) 50% (100%) 1 Lloyds Bank (Branches) Nominees Ltd 100% 1 Lloyds Bank (Colonial & Foreign) Nominees Ltd 100% 1 Lloyds Bank (Fountainbridge 1) Ltd 100% 5 Lloyds Bank (Fountainbridge 2) Ltd 100% 5 Lloyds Bank (Gibraltar) Ltd 100% 42 Lloyds Bank (I.D.) Nominees Ltd 100% 1 Lloyds Bank (PEP Nominees) Ltd 100% 1 Lloyds Bank (Stock Exchange Branch) Nominees Ltd 100% 1 Lloyds Bank Asset Finance Ltd 100% 1 Lloyds Bank Commercial Finance Ltd 100% 9 Lloyds Bank Commercial Finance Scotland Ltd 100% 43 Lloyds Bank Corporate Asset Finance (HP) Ltd 100% 1 Lloyds Bank Corporate Asset Finance (No.1) Ltd 100% 1 Lloyds Bank Corporate Asset Finance (No. 2) Ltd 100% 1 Lloyds Bank Corporate Asset Finance (No.3) Ltd 100% 1
Lloyds Bank Corporate Asset Finance (No.4) Ltd 100% 1 Lloyds Bank Covered Bonds LLP n/a 44 * Lloyds Bank Equipment Leasing (No. 1) Ltd 100% 1 Lloyds Bank Equipment Leasing (No. 2) Ltd (in liquidation) 100% 13 Lloyds Bank Equipment Leasing (No. 5) Ltd 100% 1 Lloyds Bank Equipment Leasing (No. 7) Ltd 100% 1 Lloyds Bank Equipment Leasing (No. 9) Ltd 100% 1 Lloyds Bank Equipment Leasing (No. 10) Ltd 100% 1 Lloyds Bank Equipment Leasing (No. 11) Ltd 100% 1 Lloyds Bank Financial Advisers Ltd 100% 1 i 100% ii Lloyds Bank Financial Services (Holdings) Ltd 99.99% (100%) 1
Portland Funding Ltd 100% 1 Prestonfield Investments Ltd 100% 5 Prestonfield P1 Ltd 100% 5 Prestonfield P2 Ltd 100% 5 Prestonfield P3 Ltd 100% 5 Proton Finance Ltd 99.99% (100%) 7 ii #
R.F. Spencer And Company Ltd 100% 2 Ranelagh Nominees Ltd 100% 1 Retail Revival (Burgess Hill) Investments Ltd 100% 1 Saint Michel Holding Company No1 100% 28 Saint Michel Investment Property 99% (100%) 28 Saint Witz 2 Holding Company No1 100% 28 Saint Witz 2 Investment Property 99% (100%) 28 Saleslease Purchase Ltd 100% 17 Savban Leasing Ltd 100% 1 Scotland International Finance B.V. 100% 21 Scotland International Finance No. 2 B.V. (in liquidation) 100% 21 Scotmar Commercial Equipment Finance Ltd 100% 2 i # Scottish Widows (Port Hamilton) Ltd 100% 54 Scottish Widows Active Management Fund n/a 3 * Scottish Widows Administration Services Ltd 100% 1 Scottish Widows Annuities Ltd 100% 3 Scottish Widows Bank plc 100% 3 Scottish Widows Financial Services Holdings 100% 54
Hemel Hempstead, England, HP2 7SJ Aspire Oil Services Ltd 28.4% Union Plaza, 6th Floor, 1 Union Wynd, Aberdeen, AB10 1DQ Atcore Technology Group Ltd 71.2% 353 Buckinghamshire Avenue, Slough, Berkshire, SL1 4PF & Australand Apartments No.6 Pty Ltd 50% Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia Australand Residential Investments Pty Ltd 50% Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia Australand Residential Trust 50% Level 3, 1 Chomebush Bay Drive, Rhodes, NSW 2138, Australia AVJBOS Nominees Proprietary Ltd 50% Ground Floor, 1 Lakeside Drive, Burwood East, VIC 3151, Australia Bacchus Newco Ltd 52.7% The Grange, Harnett Drive, Wolverton Mill, Milton Keynes, Buckinghamshire, MK12 5NE & Bergamot Ventures Ltd 45% 6th Floor 25 Farringdon Street, London, EC4A 4AB ii Bluestone Consolidated Holdings Ltd 88.4% Newnham Mill, Newnham Road, Cambridge, CB3 9EY & BoS Mezzanine Partners Fund LP n/a 7 Melville Crescent, Edinburgh, EH3 7JA * Brington North Holdco Ltd 50% 25 Gresham Street, London, EC2V 7HN & Business Growth Fund plc 24.3% 13-15 York Buildings, London, England, WC2N 6JU Bybox Group Holdings Ltd 47.3% 1-2 Cherry Barn, High Street, Harwell, Oxford, OX11 0EY Capital Economics Research Ltd 31.2% 100 Victoria Street, London, England, SW1E 5JL Cary Towne Parke Holdings LLC 98% Jeffrey Cohen, 1066 Woodward Avenue, Detroit, MI 48226, United States Cary Towne Parke LLC 100% National Registered Agents Inc., 150 Fayetteville Street, Raleigh, NC 2782, United States Caspian Media Holdings 88.4% Unit G4, Harbour Yard, Chelsea Harbour, London, SW10 0DX & CIPHR Group Ltd 40.2% Abbey House, Chapel Street, Marlow, SL7 1DD City & General Securities Ltd 100% 10 Upper Berkeley Street, London, W1H 7PE ii Citysprint (UK) Holdings Ltd 30.8% Ground Floor, Redcentral, 60 High Street, Redhill, RH1 1SH Clifford Thames (Topco) Ltd 50.3% Springfield Lyons House, Chelmsford Business Park, Chelmsford, CM2 5TH & CMS Acquisitions Company Ltd 36.7% Caisteal Road, Castlecary, Cumbernauld, Glasgow, G88 0FS Cobaco Holdings Ltd 50.3% Cobaco House, North Florida Road, Haydock Industrial Estate, Merseyside, WA11 9TP & Connect Managed Holdings Ltd 58.8% Abbey Place, 24-28 Easton Street., High Wycombe, HP11 1NT & Connery Ltd 20% 44 Esplanade St Helier Jersey JE4 9WG Continental Shelf 225 Ltd (in liquidation) 100% 4 Mount Ephraim Road, Tunbridge Wells, Kent, TN1 1EE i Continental Shelf 291 Ltd (in liquidation) 100% 4 Mount Ephraim Road, Tunbridge Wells, Kent, TN1 1EE i Craig Finance Ltd 20% 35 Great St. Helen’s, London, EC3A 6AP CTI Holdings Ltd 53.6% 47 Esplanade St Helier Jersey JE1 0BD & Cuts Ice Holdings Ltd 32.1% Level 1, Devonshire House, Mayfair Place, London, W1J 8AJ D.U.K.E Real Estate Ltd 100% 1st Floor, Exchange Place, 3 Semple Street, Edinburgh, EH3 8BL i Dale Erskine Power Solutions Ltd 74.3% Eastfield Industrial Estate, Salter Road, Scarborough, North Yorkshire, YO11 3DU & Delancey Arnold UK Ltd (in liquidation) 50% 105 St Peters Street, St Albans, AL1 3EJ Devonshire Homes (Cullompton) Ltd 25% Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA i Devonshire Homes (Landkey) Limited 25% Devonshire House, Lowman Green, Tiverton, Devon, EX16 4LA Dino Newco Ltd 34.5% Unit 2, Orchard Place, Nottingham Business Park, Nottingham, NG8 6PX Duchy Homes (Penistone) Ltd 21.5% Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH Duchy Homes (Scawthorpe) Ltd 21.5% Middleton House, Westland Road, Leeds, West Yorkshire, LS11 5UH EDM Business Services Holdings Ltd 65.3% Queens House, 8-9 Queen Street, London, EC4N 1SP & Eley Group Ltd 70.8% Selco Way, Off First Avenue, Minworth Industrial Estate, Minworth, Sutton Coldfield, B76 1BA & Ellis Whittam (Holdings) Ltd 40.2% Woodhouse, Aldford, Chester, CH3 6JD EPI-V Equity LP n/a 1st Floor 67 Leigh Road, Eastleigh, SO50 9DF * EPI-V Equity Investments LP n/a 1st Floor 67 Leigh Road, Eastleigh, SO50 9DF * Equiom Holdings Ltd 51.1% Jubilee Buildings, Victoria Street, Douglas, Isle of Man, IM 1 2SH &