The 2019 Annual Report and Accounts incorporates the strategic report and the consolidated financial statements, both of which have been approved by the Board of Directors.
Risk management The Group’s approach to risk 130 Emerging risks 133 Risk governance 135 Capital stress testing 137 Full analysis of risk categories 138
Total shareholder return increased in the year reflecting the increased ordinary dividend and higher share price
All the above key performance indicators directly impact remuneration outcomes and support the delivery of our reward principles.
The Group is driven by our powerful purpose of Helping Britain Prosper. As I have mentioned in previous years, despite the external challenges, the Board are determined to continue building value for shareholders by maintaining our focus on results delivery whilst simultaneously investing in the major transformation required to serve our customers and operate effectively in a digital world. This transformation not only requires adopting new technologies, but also adapting to the new skills, culture and ways of working that the digital revolution requires. Delivering this effectively while remaining true to our traditional values and focusing on customer service is a tremendous challenge, but we are committed to building a successful and sustainable Group of which we can all be proud.
We remain on track to deliver our commitment of more than £3 billion of strategic investment over the three year plan period, having invested around £2 billion to date. This investment, which in 2019 continued to focus on further enhancing our leading customer experience, digitising the Group, maximising Group capabilities and transforming ways of working, is essential to sustain our long-term competitive advantage.
Our weak spot continued to be the ongoing legacy from past misconduct, with another significant provision for PPI mis-selling as we approached the deadline for customer compensation claims last August. In addition, despite the organisation’s best intentions to provide rapid and generous compensation to victims of the historic HBOS Reading Fraud, we also had to acknowledge that the independent review of this process by Sir Ross Cranston highlighted shortcomings which now require us to ensure customers can opt into a further review if they are not satisfied with their outcome. We have learned a number of lessons from this, on how to improve our handling of small business customers, which we will build into our ongoing operations. The Board and Executive team remain committed to doing whatever is necessary to ensure all victims impacted by past failures receive fair recompense that reflects the importance we attach to earning and retaining the trust of our customers.
Performance and capital return We delivered a solid financial performance in 2019 despite the challenging external environment. I am naturally disappointed that our statutory result was significantly impacted by the additional PPI charge in the year as noted above. Despite this, our performance continues to demonstrate the resilience of our customer franchise and business model, the appropriateness of our strategy and the strength of our balance sheet.
Supporting the UK economy through uncertain times We have and will continue to play an active part in supporting the UK economy, to which our success is inextricably linked. As part of our purpose of Helping Britain Prosper, we believe we have a responsibility to help address the social, economic and environmental challenges that the UK faces, whether we're helping people buy a house, supporting businesses to start up and grow, building digital skills, being a leader in diversity or helping the transition to a low carbon economy.
Significant strategic progress positioning us well to respond to the changing environment
Given our unique position at the heart of the UK economy, the successful transition to a more sustainable, lower-carbon economy is of strategic importance to us. Lord Blackwell Chairman
Customers £15.5 trillion of payments processed in 2019 = 7x UK GDP
Communities and Environment £50.8 million donated to help communities in 2019
Last October I also announced that I plan to retire from my role as Chairman of Lloyds Banking Group once my successor is appointed, at or before the AGM in 2021, which would mark nine years on the Board. I will be sad to leave, but know I will do so with great pride in what has been accomplished to rebuild the Group’s strength and shape its development so it can continue to play its important role in supporting the UK’s prosperity.
As we look ahead, we recognise that the external environment is changing at an extraordinary rate and the UK is being confronted by a range of evolving social, economic and environmental challenges that are unprecedented in nature and require a bold response. At the same time, stakeholder expectations of how major UK institutions should respond are changing, raising fundamental questions regarding how companies can retain their implicit licence to operate while also remaining both relevant and attractive to a diverse range of stakeholders, including customers, colleagues, shareholders and the broader society.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 05
Loans and advances decreased by £4 billion to £440 billion. The acquisition of Tesco Bank’s prime UK residential mortgage portfolio, as well as organic growth in targeted segments including SME and UK Motor Finance, was more than offset by continued reductions in the closed mortgage book and lower balances in Mid Markets and Global Corporates. The reduction in Commercial balances is due to continued optimisation of the portfolio as we actively address low riskadjusted return relationships.
The Group is strongly capital generative, although this has been impacted by PPI in 2019. Given our strong capital position at the year end, the Board has recommended a final ordinary dividend of 2.25 pence per share, bringing the total ordinary dividend for the year to 3.37 pence per share. This represents an increase of 5 per cent on 2018 and is in line with our progressive and sustainable ordinary dividend policy. The Group’s capital position remains strong with a pro forma CET1 ratio of 13.8 per cent after allowing for ordinary dividends.
We are committed to maintaining the UK’s number one branch network and customerfacing colleagues in branch now spend around 50 per cent of their time addressing customers’ complex needs
We are trialling new branch formats, including a new flagship Bank of Scotland branch and Home by Halifax
We have continued to develop our digital proposition and our digitally-active customer base has increased again to 16.4 million, of which 10.7 million are active on their mobile banking app; 75 per cent of products are now originated digitally
Open Banking is now available to all digital customers and our unique Single Customer View capability is available to over 5 million customers
We have exceeded our goal of attracting over 1 million new pension customers, a year ahead of target and we have continued to make progress towards the target of growing open book assets under administration by £50 billion by the end of 2020, with cumulative net growth of £37 billion since 2017
We launched Schroders Personal Wealth, with the ambition of becoming a top three financial planning business by end of 2023
We have also helped over 700,000 individuals, small businesses and charities to develop digital skills in 2019, and we are on track for our target of 1.8 million by 2020. Our Digital Knowhow workshops have also helped thousands of organisations learn how to avoid fraud and take advantage of digital marketing techniques.
Net asset quality ratio expected to be less than 30 basis points
>50% by 2030 We aim to help reduce the emissions we finance by more than 50 per cent by 2030
The next decade will be crucial for protecting the planet for future generations, and financial services has a critical role to play. We are fully committed to supporting our customers, clients and colleagues to transition to a low carbon economy, working closely with other organisations and government to create the solutions that will accelerate progress and ultimately Help Britain Prosper.
We previously reported statutory profit before tax but changed to statutory profit after tax at full year 2019 to further align our key performance indicators to remuneration. 1 Restated to reflect amendments to IAS12.
Pay for performance across the Group Key performance indicators are regularly reviewed by the Board, with an aim to provide a fair, balanced and comprehensive view of the Group's performance. The measures outlined on these pages identify the most effective output measures for assessing financial and non-financial performance including progress towards becoming the best bank for customers, colleagues and shareholders.
The remuneration awarded to Executive Directors is heavily weighted towards the delivery of long-term, sustainable performance. As part of our 2020 Remuneration Policy, our proposed move to long-term share awards continues to support the Group’s strategic aims and the long-term sustainable success of the business, page 117.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 09
From a strategic perspective this indicates the progress we are making in digitising the Group from the customer usage standpoint.
Total shareholder return reflects share price performance and dividends received. Our share price increased by 21 per cent in 2019.
Employee engagement index % favourable 2019 20/22 20/22 21/22 20/24 27/28
On the assumption that the global economy remains broadly stable, we would expect the UK economy to grow in 2020 to 2022 at a pace slightly above that achieved in the past two years
The UK housing market remained subdued through much of 2019, although falling mortgage rates and the election of a government with a strong Parliamentary majority appeared to be beginning to stimulate the market towards the end of the year. The level of housing transactions was broadly flat at around 20 per cent lower than the norm prior to 2008, with muted price growth.
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As technological capabilities across the banking sector continue to become more sophisticated, customers also increasingly want and expect to be in control of their finances, with the ability both to see their accounts and monitor transactions across multiple providers. Against this, human interaction for more complex or emotive needs continues to be valued as part of a multi-channel servicing approach.
We remain committed to our multi-channel model, comprising the UK’s largest digital bank and branch network, and are focused on ensuring that this remains relevant to evolving customer preferences. As part of this, we are continuing to strengthen our digital capabilities, with a number of recent enhancements putting our customers more in control of their finances and resulting in strong digital customer satisfaction scores.
Capital regulation The Group continues to prepare for further regulatory capital developments in particular implementation of the final Basel III reforms.
Market dynamics Digital adoption trends continue to surpass expectations, with the significant uptake driven by changes in demographics and an increasing similarity in customer behaviour across multiple geographies. As a result, we are seeing a significant change in how customers interact with financial services providers, while expectations of service are often being influenced by technology-led experiences outside of financial services.
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Market dynamics We continue to operate in an highly competitive environment, driven by regulatory changes, shifting customer behaviours and increasing levels of innovation across the sector.
Across our traditional business lines, ringfencing regulation has seen a number of our competitors deploy excess liquidity to support asset growth within the UK, specifically within mortgages where customer rates have in the last few years hit record lows. While this is beneficial for our customers, this has depressed margins across the UK banking sector and more recently has resulted in some smaller participants stepping back from the market.
Elsewhere, we have also started to see the first signs of large technology companies participating in financial services, often partnering with local incumbent banks across different geographies. While the scale of their future ambitions is uncertain at this stage, the power of their brand and large customer bases pose future disruption threats.
Maximising Group capabilities with 75 per cent of products now originated digitally and we operate the largest digital bank in the UK with 16.4 million customers and 10.7 million mobile app customers, while our customer satisfaction scores remain strong.
Helping Britain Prosper Given our focus on the UK, our success is interwoven with the UK’s prosperity. We aim to Help Britain Prosper through creating a responsible business that focuses on customers’ needs, and delivering long-term sustainable success for shareholders.
Creating competitive advantages We believe that these capabilities provide competitive advantage and enable us to continue to deliver for customers whilst also delivering sustainable and superior returns over the longer term, as outlined below.
We recognise these challenges and continue to evolve our business model and strategy, to enhance their sustainability over the longer term.
Best bank for customers, colleagues and shareholders Doing the right thing for our customers, colleagues and shareholders by meeting their financial needs, helping them succeed, improving our service proposition and creating value for them, is fundamental to our business model and the long-term sustainability of the business.
#1 branch network, serving complex needs As a core element of our multi-channel model, we remain committed to maintaining the largest branch network in the UK and our market share of around 21 per cent by 2020. In the year we have continued to make a number of changes to ensure that our network reflects our customers’ evolving needs. As part of this, we have expanded the reach of our remote advice service to around 580 branches, which alongside the ability to access the service from the comfort of their own homes, is providing our customers with increased choice and convenience in how they can discuss their financial needs with us. In addition, our branch colleagues have also been able to increase their focus on addressing customers more complex financial needs, with this now accounting for around 50 per cent of their time.
Focus for 2020 In 2020, we will continue to focus on improving our customers’ digital banking experience, with new features providing them with greater insights into their transactional activity and ability to achieve their financial goals. We will also continue to deepen our customer insights to develop more personalised products and services, while also ensuring our branch network remains relevant to our customers’ needs.
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Top quartile technology spend Consistent with the scale of our transformation, we continue to invest significantly in technology. In 2019, our technology spend, which increased by 14 per cent year on year, equated to 19 per cent of operating costs and remains among the top quartile of global peers. Importantly this was achieved while reducing operating costs, with our modular approach to transformation and IT modernisation delivering business efficiencies and creating capacity for greater levels of investment. The mix of our technology spend also continues to evolve, with greater emphasis on the development of new capabilities, with the combination of this and enhancing existing capabilities accounting for over 75 per cent of spend in 2019.
Focus for 2020 Our technology investment will continue to focus on areas that deliver meaningful benefits for our customers and colleagues. We will further embrace new technologies and increase data capabilities to develop insight-driven propositions, while ensuring that these reflect customer expectations. This will be delivered alongside a rigorous focus on ensuring the safety and security of our customers’ data.
Focus for 2020 In 2020, we will extend the reach and functionality of Single Customer View to around 9 million customers, introducing new features that will enable customers to engage with their long-term savings and investments more proactively. In addition, we will continue to support the development of Schroders Personal Wealth in line with its ambitious targets, while also making further improvements to our business clients’ digital banking experience.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 19
50 per cent increase in training and development to 4.4 million hours
In addition to up-skilling our colleagues, we are also using targeted recruitment to introduce new skills into the organisation across areas that will support the new strategic competencies of the Group going forward. We have also hired over 1,200 colleagues across critical areas such as engineering, data science and cyber security. The integration of skills such as these into our colleague base positions us well to continue transforming the Group for success in a digital world, with other benefits including a reduced reliance on thirdparty providers.
I think it’s great that the bank is investing so heavily in my development. It has allowed me to develop new skills and gives me the confidence to put them into practice Lloyds Banking Group colleague
The Board has a comprehensive stakeholder engagement programme and always aims to act in the best interest of the Group and to be fair and balanced in its approach. The needs of different stakeholders are always considered as well as the consequences of any decision in the long-term and the importance of our reputation for high standards of business conduct. It may not always be possible to provide a positive outcome for all stakeholders and the Board frequently has to make difficult decisions based on competing priorities. However, comprehensive engagement enables informed decision making taking into account the consequences for different stakeholders.
Customer feedback is crucial to Board discussions and achieving a leading customer experience
Direct engagement The Board takes advantage of all available opportunities to engage with customers. In 2019, these included a series of branch/office visits and customer events for retail, commercial and insurance customers. Client contact enables direct feedback and informs strategic decision making.
The Chairman and a number of Non-Executive Directors also attended customer insights sessions monthly across the UK to hear directly from customers about their lives and what is important to them.
The Chairman, Chief Executive and other Board members regularly review customer complaints to understand areas where we can improve and review how we respond to complaints.
Shareholder priorities Superior returns and lower cost of equity Strong capital generation and attractive distribution policy
The first three quarterly payments, payable in June, September and December will each be 20 per cent of the previous year’s total ordinary dividend per share with the fourth quarter payment payable in May, following approval at the AGM.
The Group has around 2.4 million shareholders, the vast majority of whom are retail shareholders, and this approach will provide a more regular flow of dividend income to all shareholders whilst accelerating the receipt of payments.
Our decision process The decision to introduce quarterly dividends was made following shareholder feedback and extensive discussion at both management and Board level
This approach both supports our purpose to Help Britain Prosper whilst aligning to the Group’s progressive and sustainable ordinary dividend policy
The Board considers that the above arrangements are invaluable in giving them an understanding of the views of the workforce and encouraging meaningful dialogue between the Board and the workforce.
The Group has around 65,000 colleagues, who take pride in working for an inclusive and diverse Group and, with their support, we are building a culture in which everyone feels included, empowered and inspired to do the right thing for customers. Through our strategy we have made our biggest ever investment in colleagues to ensure that we continue to attract, develop and retain these skills and capabilities.
Direct engagement We work to maintain an open dialogue with our colleagues. During the year the Board communicated directly with colleagues through videos, webcasts, and our Group intranet, detailing the Group’s performance, changes in the economic and regulatory environment and updates on our key strategic initiatives. We also hosted regular Ask Me Anything sessions providing the opportunity for colleagues and contingent workers to ask questions and receive real time responses directly from members of the Board.
The Board participated in the transforming ways of working labs, providing them with the opportunity to see first-hand the activity underway in support of improving the customer and colleague experience.
The proposed policy comprises: A significant reduction in executive pension contributions
Our decision process The engagement that has taken place in 2019 has heavily influenced the decisions made by the Remuneration Committee. Further details of the feedback we received can be found on page 99.
Our engagement process In developing our proposals, various stakeholder groups have been engaged including customers, colleagues, shareholders, suppliers, government and regulators
The annual responsible business materiality study specifically identified environmental sustainability and climate change as a critical issue and as a result further detailed analysis was undertaken by the Group sustainability teams
Direct engagement The Board continued to support the Group's four charitable Foundations and during Small Charities Week, the Group ran campaigns with each Foundation showcasing the work they do for small but vital charities including those tackling domestic abuse and mental health. This demonstrated the alignment between the Group supporting vulnerable customers and the work done by charities to support these social issues. Sara Weller, Chair of the Group's Responsible Business Committee, is a Bank Trustee of the Lloyds Bank Foundation, England and Wales.
Members of the Board visited several charities in 2019, including the Manchester Digital Academy, Angel Eyes in Northern Ireland and the Cathedral Archer project in Sheffield.
We define key Board decisions as those that are significant to any of our stakeholders Lord Blackwell Chairman
Adapting to market changes and horizon scanning (including climate change and developments in data and technology)
Indirect Engagement The Board Risk Committee receives monthly updates on Group regulatory interaction providing a view of key areas of focus, alongside progress made addressing regulatory actions, and current enforcement activity.
The Board continue to closely monitor the status of our regulatory relationships, enhancing proactive engagement across key regulatory changes and areas of focus. Read more on regulatory change on page 11.
Our engagement process The Chairman was an active member of CityUK’s EU exit Steering Group, working with other major financial institutions to inform government decision making
When reviewing the possible impacts of the EU exit, the Board have given particular consideration to the Group’s strong UK focus and UK-centric strategy, with specific focus on the trading, financial, operational and reputational impacts for the Group, as well as the cyber, physical security and fraud risks, and the continued support of our customers.
Given the vast majority of our business is in the UK, the direct impact on the Group from leaving the EU is relatively modest.
The Board recognise that tax is one of the ways in which the Group contributes to society, therefore appropriate, prudent and transparent tax behaviour is a key component of Board responsibility.
We have a clear tax policy which is part of our Board-approved Group risk management framework. This policy sets out clear actions for colleagues to manage tax risks. Like any business, our success rests on maintaining a good reputation. We understand that the way we approach our tax obligations has a powerful impact on this reputation, so finding the most responsible balance is vital. We comply with the HMRC Code of Practice on Taxation for Banks and Confederation of British Industry’s Statement of tax principles.
It is important that we have the right framework to operate responsibly. The Sourcing and Supply Chain Management Policy applies to all businesses, divisions, Group functions and legal entities across the Group, whether based in the UK or overseas,
Engaging in ways that ensure we achieve the best value for customers in terms of price, quality and social impact
Building strong, collaborative relationships and understanding the environment in which we operate so that they can meet our needs and our customers’ needs
Suppliers are encouraged to express their satisfaction or dissatisfaction to their points of contact within the Group e.g. the supplier manager, the sourcing manager, the finance contacts. Suppliers also have access to the Speak Up line.
Indirect engagement We work with around 3,100 active suppliers of varying sizes, most in professional services sectors such as IT, cyber, operations, management consultancy, legal, HR, marketing and communication.
All material contracts are subject to rigorous cost management governance and updates on key supplier risks are provided to the Board.
We require suppliers to adhere to relevant Group policies and UK suppliers are additionally required to comply with our Code of Supplier Responsibility. This outlines our expectations for responsible business behaviour, underpinning our efforts to share and extend good practice. This can be found on our Group website www.lloydsbankinggroup.com/our-group/ working-with-suppliers/
The Group announced in September 2019 that we had entered into an agreement with Tesco Bank to acquire its prime UK residential mortgage portfolio.
Our decision process The Group has a clear strategy as outlined on pages 16 to 19, and the Board regularly reviews this strategy in light of the changing external environment to ensure that our focus remains the right one
The Board agreed the acquisition criteria and discussed the key risks that needed to be assessed
The transaction is in line with this approach and demonstrates the Group’s strong commitment to the strategically core prime mortgage market
In 2019, we were the first bank to sign up to the Mental Health Accessibility Standards, supporting customers with mental health problems. For customers at risk of gambling related harm, we have enabled controls on all of our credit and debit cards, and built on our own internal controls to run a pilot in partnership with Gamban, that helps restrict access to gambling websites and applications worldwide to provide further assistance.
Responsible governance and accountability Creating and sustaining a values-based culture with good governance is crucial to ensuring our colleagues remain engaged, well informed and can effectively deliver our strategy. Our rigorous internal governance and controls, comprising numerous policies and standards ensure that we treat all stakeholders fairly, while minimising risk.
If our colleagues witness something inappropriate, they can report the matter to the colleague conduct management team, or make use of our independent and confidential whistleblowing service, Speak Up. In 2019 colleagues reported 451 concerns, of which 216 were formally investigated following triage, with 39 per cent of those investigations substantiated, resulting in remedial action.
Building capability and digital skills Number of individuals, SMEs and charities trained in digital skills, including internet banking
Identify and manage material sustainability and climate related risks across the Group, disclosing these, their impacts on the Group and its financial planning processes, in line with the TCFD framework
Our exposure to high carbon sectors is low (less than 0.5 per cent of total loans and advances to customers). In addition, data for these loans and advances is presented at an overall sector level and not all customers in these sectors will have high emissions or be exposed to significant transition risks.
3 Total loan and advances to customers were £488,088 million at 31 December 2018 and £498,247 million at 31 December 2019, see page 293.
UK motor finance includes loans and advances for low emission vehicles
– The TCFD working group, co-chaired by senior executives in risk and sustainability, coordinates the implementation of the TCFD recommendations and supports adherence to key regulatory requirements on climate risk
Our Group sustainability team is supported by divisional sustainability governance forums led by Divisional Managing Directors, ensuring a coordinated approach to oversight, delivery and reporting of the Group’s sustainability strategy.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 31
How we are delivering against our ambitions In 2019, we have focused on developing new products, services and processes to achieve our ambitions, and our progress has been recognised.
Initiatives and collaboration Climate change is a global challenge that requires collaboration across companies and industries to ensure the risks and opportunities can be adequately identified and managed. To support this, we participate in several industry initiatives and have signed up to key principles that drive action on climate change and sustainability, including: United Nations Environment Programme Finance Initiative (UNEP FI) We became a member of UNEP FI in 2019 and joined its Phase 2 Banking TCFD Pilot. We also became a signatory to the Principles for Responsible Banking and Principles for Sustainable Insurance.
EP100 – a commitment to set ambitious energy productivity targets by 2030
This year we lent £13.8 billion to first-time buyers, and introduced the Lend a Hand and Family Boost mortgage propositions, which make it easier for those with little or no savings to buy their first home.
Supporting businesses of all types and sizes is fundamental to Helping Britain Prosper. In 2019 small businesses and SMEs represent over 99 per cent of the business population, three fifths of employment and half of all turnover in the private sector. Since 2018 we have helped over 233,000 businesses start up, increased net lending to start up, SME and Mid Market businesses to £3.4 billion, and re-affirmed our commitment to the UK’s manufacturing sector providing £2.6 billion of dedicated investment.
We want to make saving as easy as possible for our customers, as it helps to build financial resilience, and can play a meaningful role in tackling disadvantage. Accordingly, we continue to improve choice, flexibility and control for those who are investing, saving or planning for retirement.
In 2019, we launched Schroders Personal Wealth. This market leading proposition aims to tackle a growing need for professional advice as the number of people taking responsibility for their financial future increases. In September Scottish Widows launched its standard annuity into the open Market, enabling us to deliver a secure income for life to customers in a market that many providers have left.
As a Group we remain committed to responsible investment, as signatory to both the Equator Principles and the UN Principles for Responsible Investment.
Lloyds Bank plays a key role in helping us to expand and increase our positive commercial, social and environmental impact as we aim to handle more stock, open more stores and attract more members.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 33
Building capability and digital skills The UK’s skills and productivity gap requires significant enhancements in capability including digital skills. To help make that happen, we are facilitating digital training for 1.8 million people by 2020, at the same time as investing in a range of apprenticeship schemes.
Nearly one third of charities recognise they can save around a day a week due to increased digital capability. Not everyone, however, is enjoying the benefits that digital can bring. 11.9 million people do not have the essential digital skills for life, increasing to 17.3 million people lacking digital skills in the workplace. While the number of people who are digitally disengaged is dropping, it is forecast that 4.5 million people will remain disengaged by 2030.
Supporting apprenticeships Supporting diverse talent development is essential if we are to genuinely become the best bank for customers, colleagues and shareholders. Internally, we are delivering over 25 different apprenticeship programmes, available to all colleagues regardless of location, career stage or working pattern. The Group has partnered with a range of institutions including Manchester Metropolitan University who offered colleagues and new recruits the chance to join the degree-level Digital and Technology Solutions Degree Apprenticeship. This structured programme provided opportunities to benefit from applying the skills and knowledge developed at university.
Sexual orientation Percentage of colleagues who disclose they are lesbian, gay, bisexual or transgender 2.2% 2.0% All data as at 31/12/2019. Group Executive Committee (GEC) assists the Group Chief Exec. in strategic, cross-business or Groupwide matters and inputs to Board. GEC and Direct Reports includes the Group Chief Exec., GEC and colleagues who report to a member or attendee of GEC, excluding administrative or executive support roles (personal assistant, executive assistant). Reporting: A colleague is an individual who is paid via the Group's payroll and employed on a permanent or fixed term contract (employed for a limited period). Includes parental leavers, and internationals (UK includes Guernsey, IOM, Jersey and Gibraltar). Excludes leavers, Group Non-Executive Directors, contractors, temps, and agency staff Diversity: Calculation is based on headcount, not FTE (full-time employee value). Data source is HR system (Workday) containing all permanent colleague details. Gender: includes international, those on parental/maternity leave, absent without leave (AWOL) and long-term sick. Excludes contractors, Group Non-Executive Directors, temps and agency staff. All other diversity information is UK Payroll only. All diversity information is based on voluntary self-declaration, apart from gender, so is not 100 per cent representative; our systems do not record diversity data of colleagues who have not declared this information. BAME: comprising of mixed/multiple, Asia, Black, Middle Eastern, North African and other (non-white) ethnicities. Colleague grades: from A through to J, Senior Executive (SE), Executive (EX) and Executive Director (ED) A being the lowest. Senior Managers: Grades F, G, H, J, SE, E and ED (F being the lowest). Managers: Grade D-E (D being the lowest).
Supporting disability We are moving the debate on from accommodating disabilities, to developing talent and careers. In 2019, 2.8 per cent of colleagues disclosed a disability and we support them in a range of ways. We ensure full and fair consideration to applications from people with disabilities. We offer bespoke training, career development, promotions and adjustments for colleagues and applicants
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 35
Supplier management – Engaging and responding to our stakeholders www.lloydsbankinggroup.com/our-group/responsiblebusiness /reporting-centre/
– Helping the transition to a sustainable low carbon economy, page 28
– Reflecting the needs of our stakeholders: Communities and Environment, page 23
– Risk overview 2019 themes, page 40 – Our principal risks, page 42
Trading surplus was resilient at £8,822 million (2018: £9,003 million) with lower net income partly offset by the Group's continued progress in delivering cost reductions. Underlying profit was £7,531 million compared to £8,066 million in 2018, reflecting lower net income and higher impairment charges, partly offset by the Group’s strong cost performance. The Group’s market-leading underlying return on tangible equity was 14.8 per cent.
Retail offers a broad range of financial service products to personal and business banking customers, including current accounts, savings, mortgages, credit cards, unsecured loans, motor finance and leasing solutions.
UK’s largest digital bank with 16.4 million active digital customers and 10.7 million mobile banking app customers, with average customer logons at 23 times per month and 75 per cent of new products now originated digitally
Digitising the Group Recognised for innovations by being first in the Business Insider mobile banking study, with recent updates including
Remote mortgage applications up 30 per cent, with re-mortgage applications starting digitally up 50 per cent in value
Other income reduced 4 per cent reflecting a lower Lex fleet size. Operating lease depreciation includes an associated benefit, more than offset by some weakening in used car prices through the first three quarters of 2019
Customer lending increased by 1 per cent with the acquisition of Tesco Bank's mortgage portfolio and growth in UK Motor Finance, partly offset by closed book mortgages. Organic open mortgage balances remained flat year on year
Progress in 2019 Leading customer experience 95 per cent of SME and Mid Market clients migrated onto Commercial Banking Online platform with customers now having 24/7 access to their accounts, and 5 years of transaction history. The platform sees around 130,000 payments processed every day and around 1.2 million log ons per month
Launched Asset Finance Broker API, linking new business proposals directly from broker to Group, reducing manual intervention by 87 per cent, enabling quicker and more accurate credit decisions with realtime updates
Maximising Group capabilities Achieved the committed £18 billion gross new lending to UK businesses; a further £18 billion committed for 2020
Other income of £1,422 million was 15 per cent lower than in 2018, driven by lower levels of client activity in challenging market conditions in Global Corporates and Financial Institutions
Return on risk-weighted assets of 2.14 per cent was 36 basis points lower, despite the acceleration of risk-weighted asset optimisation in the second half, driven by two material corporate impairment charges
New ‘Plan and Protect’ life and critical illness cover launched in 2019 helps create financially resilient families by understanding their needs and protecting what matters most, providing a safety net if the worst happens
Scottish Widows won 5 star service awards at the Financial Adviser Service Awards for the fourth consecutive year
Digitising the Group Significant progress on Single Customer View, with home insurance and individual pension customers added in 2019. Over 5 million customers now able to access their insurance products alongside their bank account
Addressing an underserved customer need for home contents insurance for renters through a partnership with the fintech firm Trov. New online low cost product offers a flexible on-demand monthly subscription policy
Continued progress towards target of growing open book assets under administration by £50 billion by the end of 2020, with strong customer net inflows of £18 billion (including Zurich transfer) in 2019. Cumulative net inflows of £30 billion and market movements give overall growth of £37 billion since the start of the current strategic plan in 2018
Through significant investment in technology we are able to support customers looking to secure income for life with their pension savings.
Articulate individual and collective accountabilities for risk appetite, oversight and assurance
Our approach to risk Risk management is at the heart of our strategy to become the best bank for customers.
This risk overview provides a summary of risk management within the Group, with a prudent approach and rigorous controls to support sustainable business growth and minimise losses. Through a strong and independent risk function, a robust control framework is maintained to identify and escalate current and emerging risks, support sustainable growth within Group risk appetite, and to drive and inform good risk reward decisions.
The risk management section from pages 129 to 187 provides a more in-depth picture of how risk is managed within the Group, detailing the Group’s emerging risks from pages 133 to 134, approach to stress testing, risk governance, committee structure, appetite for risk and a full analysis of the principal risk categories, the framework by which risks are identified, managed, mitigated and monitored.
The Board is responsible for approving the Group’s risk appetite statement annually. Board-level metrics are cascaded into more detailed business appetite metrics and limits
Incentives Remuneration, performance management and succession planning that support our core values and put the customer at the heart of everything we do.
We continue to invest in supporting this activity as part of the wider sustainability strategy (see Responsible business section on pages 26 to 34), and are also active participants in a number of external initiatives to help drive consistency across the industry.
Our customer focused strategy remains the right one. Guided by the overriding principle of Helping Britain Prosper, we continue to focus on customer needs and support our personal and business customers. We have delivered on our commitment to lend £18 billion to UK businesses in 2019, reaffirming our support for the UK economy.
Change / execution risk Delivering change is a key part of how the Group continues to serve our customers, fulfil our strategic objectives, and deliver our aim of Helping Britain Prosper.
During 2019 key change initiatives included continued digitisation of the Group and transforming ways of working. There has also been significant delivery of regulatory change in order to adapt to the changing regulatory landscape.
Our principal risks Principal risks and uncertainties are reported regularly to the Board Risk Committee. Change/execution, data and operational resilience have been elevated from existing risks to principal risks during 2019, and strategic added as a new principal risk
Risk Appetite We have limited appetite for material events or losses that occur due to the inappropriate use of data.
Internal programmes ensure that data is used correctly, and the control environment is regularly assessed through both internal and third-party testing
We recognise the importance of the Group’s operational resilience to our customers, markets and the wider financial sector
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 43
Greater competition for specialist skill sets (such as data science and engineering), alongside demographic challenges in the working population, may result in a skills shortage impacting delivery of key strategic initiatives
Risk Appetite We have business plans that are responsive to internal and external factors including changes to the regulatory, macroeconomic and competitive environments.
The Group’s forward looking approach to managing strategic risk will help the Group identify new risks and opportunities, and allow the Group to be better prepared to respond to changes in the regulatory and competitive environments
Example Observed or anticipated changes in the economic environment could impact profitability due to an increase in delinquency, defaults, write-downs and/or expected credit losses.
Risk Appetite We have a conservative and well balanced credit portfolio through the economic cycle, generating an appropriate return on equity, in line with our target return on equity in aggregate.
Mitigation Prudent, through the cycle credit principles, risk policies and appetite statements
Example Failure to deliver key regulatory changes or to comply with ongoing requirements.
We are committed to operating sustainably and responsibly, and commit significant resource and expense to ensure we meet our legal and regulatory obligations
Example Ineffective risk management could lead to adverse customer impact, reputational damage and financial loss, across all of our principal risks.
Mitigation The Group continues to review and invest in its control environment to ensure it addresses the inherent risks faced
We have senior committees that ensure our focus on embedding a customer-centric culture and delivering fair outcomes across the Group. Our conduct risk framework continues to support this through robust and effective management. This supports our vision of being the best bank for customers, enabling the delivery of a leading customer experience through effective root cause analysis and learning from customer feedback
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 45
Strategic growth initiatives within Insurance are developed and managed in line with a defined risk appetite, aligned to the Group risk appetite and strategy
The Group’s funding and liquidity position is underpinned by its significant customer deposit base, and is supported by strong relationships across customer segments
Our funding position allows us to grow targeted business segments, and better address our customers’ needs
Alternatively a shortage of capital could arise from an increase in the amount of capital that needs to be held
Mitigation The Group has a capital management framework that includes the setting of capital risk appetite
Risk Appetite We have governance arrangements that support the effective long-term operation of the business, maximise shareholder value and meet regulatory and societal expectations.
The Group’s Viability statement can be found on pages 95 to 96.
Lloyds Banking Group Annual Report and Accounts 2019 47 Strateg ic rep ort
The Group’s balance sheet remains strong with lending growth in the open mortgage book as well as targeted segments, including SME and UK Motor Finance. This was more than offset by lower balances in Mid Markets and Global Corporates, primarily as a result of the continued optimisation of the Commercial portfolio, as well as continued reductions in the closed mortgage book. The Group’s capital position remains strong with a pro forma CET1 ratio of 15.0 per cent pre dividend accrual and 13.8 per cent post dividend.
Credit quality remains strong with a net asset quality ratio of 29 basis points and a gross asset quality ratio of 37 basis points compared with 21 basis points and 28 basis points respectively in 2018. The impairment charge increased to £1,291 million with the increase primarily driven by two material corporate cases in Commercial Banking, along with some weakening in used car prices in Black Horse.
Stage 2 loans and advances to customers as a proportion of total lending reduced by 0.1 percentage points to 7.7 per cent, whilst Stage 3 loans and advances fell by the same amount to 1.8 per cent. The Group’s coverage of Stage 2 assets reduced by 0.4 percentage points to 3.7 per cent, reflecting a number of model refinements, including an enhanced approach to loan amortisation in the Commercial Banking portfolio. Coverage of Stage 3 assets reduced by 1.8 percentage points to 22.5 per cent largely as a result of the improved performance of mortgage cases in long-term default, and a change in the mix of Commercial assets due to a combination of write-offs and the transfer in of cases with lower likelihood of net loss. The Group’s total underlying ECL at 31 December 2019 was £4.2 billion and broadly stable compared to prior year (31 December 2018: £4.4 billion). Total ECL allowances as a percentage of drawn balances fell slightly to 0.8 per cent. The Group expects the 2020 net asset quality ratio to be less than 30 basis points.
Taxation The tax expense was £1,387 million (2018: £1,454 million) representing an effective tax rate of 32 per cent (2018: 24 per cent). This reflected the increase in non-deductible conduct provision charges in relation to PPI, partially offset by the release of a deferred tax liability.
Return on tangible equity The underlying return on tangible equity was 14.8 per cent, primarily reflecting resilient underlying profit and slightly lower average tangible equity. The statutory return on tangible equity was 7.8 per cent and was impacted by PPI.
Of which money-market funding <1 year maturity 3 £22bn £21bn 5
Liquidity coverage ratio5 137% 128% 9pp 1 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion).
2 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion).
4 Eligible assets are calculated as a simple average of month end observations over the previous 12 months.
5 The Liquidity coverage ratio is calculated as a simple average of month end observations over the previous 12 months.
The Group continues to optimise funding and target current account balance growth, with Retail current accounts up 4 per cent at £76.9 billion (31 December 2018: £73.7 billion). The loan to deposit ratio was flat at 107 per cent.
The Group’s capital position remains strong with the CET1 capital ratio increasing to 15.0 per cent pre dividend accrual. After accruing 123 basis points for the ordinary dividend, the CET1 ratio stands at 13.8 per cent.
Impact from the implementation of IFRS 16 on risk-weighted assets (bps) (11)
The Group has announced that it will move to the payment of quarterly dividends in 2020, with the first quarterly dividend in respect of the first quarter of 2020 payable in June 2020. The new approach will be to adopt three equal interim ordinary dividend payments for the first three quarters of the year followed by, subject to performance, a larger final dividend for the fourth quarter of the year. The first three quarterly payments, payable in June, September and December will be 20 per cent of the previous year’s total ordinary dividend per share. The fourth quarter payment will be announced with the full year results, with the amount continuing to deliver a full year dividend payment that reflects the Group’s financial performance and its objective of a progressive and sustainable ordinary dividend. The final dividend will continue to be paid in May, following approval at the AGM. The Group believes that this approach will provide a more regular flow of dividend income to all shareholders whilst accelerating the receipt of payments.
Final date for joining or leaving the dividend reinvestment plan 19 June 2020
Final date for joining or leaving the dividend reinvestment plan 21 August 2020
Tangible net assets per share 50.8p 53.0p (2.2)pp 1 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206.
Average interest-earning banking assets £437bn £435bn £433bn £433bn £436bn £435bn £436bn £437bn
Loans and advances to customers2 £440bn £447bn £441bn £441bn £444bn £445bn £442bn £445bn
Global Corporates and Financial Institutions 30.8 33.7 (9) 34.7 (11) 34.4 (10)
3 Includes Mid Corporates (31 December 2019: £5.3 billion; 30 September 2019: £5.2 billion; 30 June 2019: £5.4 billion; 31 December 2018: £5.8 billion).
Net income 2,133 1,988 1 Present value of new business premiums. Further information on page 331.
2019 £m 20181 £m 1 Prior periods segmental comparatives restated to reflect the transfer of certain equities business from Commercial Banking into Central items.
Central items includes income and expenditure not attributed to divisions, including the costs of certain central and head office functions, and the Group’s private equity business, Lloyds Development Capital.
Reconciliation between statutory and underlying basis results The table below sets out the reconciliation from the statutory results to the underlying basis results.
1 In the year ended 31 December 2019 this comprises the effects of market volatility and asset sales (gains of £126 million); the amortisation of purchased intangibles (£68 million); restructuring (£471 million, comprising severance related costs, the integration of Zurich’s UK workplace pensions and savings business and costs associated with the establishment of the Schroders Personal Wealth Joint venture); and the fair value unwind and other items (losses of £275 million).
2 In the year ended 31 December 2018 this comprises the effects of market volatility and asset sales (losses of £50 million); the amortisation of purchased intangibles (£108 million); restructuring (£879 million, comprising severance related costs, the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA and Zurich’s UK workplace pensions and savings business); and the fair value unwind and other items (losses of £319 million).
The Group actively manages its exposures to interest rate, foreign currency exchange rate, inflation and market movements within the banking book through a comprehensive hedging strategy. This helps to mitigate earnings volatility and reduces the impact of market movements on the capital position.
Less profit attributable to non-controlling interests and other equity holders (£m)1 (547) (531)
Governance A letter from our Chairman 65 Board of Directors 66 Group Executive Committee 68 Corporate governance report 70 Directors' report 94 Directors' remuneration report 98 Other remuneration disclosure 124 64 Lloyds Banking Group Annual Report and Accounts 2019
Melissa Chigubu aged 19, has been given the accolade by the Women's Engineering Society at a ceremony at the Royal Academy of Engineering. The award was founded by the Women's Engineering Society in 2016.
It aims to address the skills shortage in engineering and highlight the discrepancy between men and women entering engineering and manufacturing.
Following a recruitment process led by the Nomination and Governance Committee, Sarah Legg was appointed to the Board in December 2019 as a new independent Non-Executive Director and Catherine Woods will join the Board on 1 March 2020 as a new independent Non-Executive Director. While selected on merit, these appointments help meet our commitments to both gender and BAME diversity. Sarah became a member of the Audit and Board Risk Committees and Catherine will join the Board Risk and Remuneration Committees.
Anita Frew stepped down as Senior Independent Director on 1 December 2019 and will retire as Deputy Chairman and Non-Executive Director at the AGM in May 2020. Anita has been an extremely valuable Board member, and will be much missed. Alan Dickinson succeeded Anita as Senior Independent Director on 1 December 2019 and will also take on the role of Deputy Chairman following Anita’s retirement from the Board. Alan’s significant board, financial and regulatory experience, including as a chairman, make him ideally suited to this role.
Board effectiveness The Board carried out an annual evaluation of its effectiveness during the year. This was an internal evaluation, which ran between October 2019 and January 2020 and was overseen by the Nomination and Governance Committee. The process which was undertaken and the findings of the review can be found on pages 77 to 78, together with information about our progress against the 2018 review actions.
Corporate Governance Code The year under review was the first year that the Code has applied to the Group. Our statement of compliance with the Code and a summary of the requirements of the Code can be found on pages 80 to 81. The Group also implemented our approach to workforce engagement and further information on this can be found on page 22.
Strong board governance experience, including investor relations and remuneration Anita was previously Chairman of Victrex plc, the Senior Independent Director of Aberdeen Asset Management and IMI plc, an Executive Director of Abbott Mead Vickers, a Non-Executive Director of Northumbrian Water and has held various investment and marketing roles at Scottish Provident and the Royal Bank of Scotland. External appointments: Chairman of Croda International Plc and a Non-Executive Director of BHP Billiton.
Ri 1 Lord Blackwell has announced his plan to retire as Group Chairman at or before the AGM in 2021.
António Horta-Osório Executive Director and Group Chief Executive António joined the Board as an Executive Director in January 2011 and became Group Chief Executive in March 2011. Read his full biography on page 67
6. Vim Maru Group Director, Retail Appointed: September 2013 (GEC) Skills and experience: Vim joined the Group in June 2011 and is currently responsible for the Group’s Retail products and distribution, as well as Customer Services and brands and marketing activity for the Group. He is also Executive Co-Sponsor for Ethnicity and holds a position on the UK Finance Board. Vim has extensive experience in Retail banking having worked in financial services for nearly 20 years. Prior to joining the Group, Vim spent 12 years at Santander in a range of roles in corporate strategy, mergers and acquisitions, the Life Division and most recently held the position of Director, Retail Products.
Agenda set The Chairman holds monthly meetings to review the draft agenda and planner with the Company Secretary and Chief of Staff, as well as quarterly meetings with a wider group of central functions, to identify emerging issues
Matters may be added to agendas in response to external events, Non-Executive Director requests, regulatory initiatives and the quarterly Board topic review meetings
Non-Executive discussions and informal dinners are held prior to most Board meetings, some of which also include the Group Chief Executive
Board meeting Board meetings have certain standing items, such as a report from the Group Chief Executive and Chief Financial Officer on Group performance, reports from the Chairmen of Committees and principal subsidiaries and updates from certain GEC members
Link to strategic priorities: Link to stakeholder groups: Customers; Community and Environment; Suppliers
Link to strategic priorities: Link to stakeholder groups: Customers; Colleagues; Community and Environment; Shareholders; Suppliers; Regulatory and Government
Discussed how the Group supports vulnerable customers and customers in financial difficulty
Discussed processes and outcomes for the fair treatment of customer complaints and remediation
Approved the payment of quarterly dividends Link to stakeholder groups: Shareholders
Approved AGM documentation and received update on voting Link to stakeholder groups: Shareholders
Discussed the FCA firm evaluation letter Link to stakeholder groups: Regulatory and Government
Approved Group risk appetite Link to stakeholder groups: Customers; Shareholders; Colleagues; Community and Environment; Regulatory and Government; Suppliers
Reviewed and approved the risk management framework Link to stakeholder groups: Customers; Shareholders; Colleagues; Regulatory and Government; Suppliers
Link to strategic priorities: Link to stakeholder groups: Customers; Regulatory and Government
The Group’s culture plan is driven by our three core values; putting customers first, keeping it simple and making a difference together and these are underpinned by our six drivers of culture: Vision and Values, Leaders and Line Managers, Communication and Colleague Voice, Enabling and Developing Colleagues, Reward and Recognition and Accountability and Empowerment. These are also reflected in divisional plans and align to the FCA’s four key drivers of culture. Culture initiatives are designed and delivered collaboratively, with input from colleagues and various teams across the Group, including divisional culture leads, Inclusion and Diversity, Responsible Business and Group Corporate Affairs.
The Board provides oversight and direction of culture activities and believes that establishing the right culture is important to ensure we are building an environment where all colleagues feel included, empowered and inspired to do the right things for customers. During 2019, the Board assessed and monitored the Group’s progress on culture through regular updates at Board meetings, which included: Regular updates on our Group strategic review, which incorporates our biggest ever investment in colleagues, with a significant focus on transforming the way we work and our culture
Culture highlights from 2019 include: Continued roll out and embedding of Your Best, our transformational approach to performance management and career development. As part of the roll out we undertook the biggest capability uplift for line managers ever seen across the Group
How does the Board oversee the Group’s sustainability strategy? Given the strategic importance of our sustainability ambitions, our governance structure provides clear oversight and ownership of the sustainability strategy. The Board of Directors as a whole is responsible for sustainability and has oversight via the Responsible Business Committee, a subcommittee of the Board, chaired by me and which includes the Chairman, Lord Blackwell, and Deputy Chairman, Anita Frew, as members. The Responsible Business Committee regularly reports to the Board to enable the Board to discuss pertinent issues as whole. Day to day accountability for sustainability rests with executive management, in particular the Group Chief Executive. Further information in relation to the sustainability governance structure can be found on page 30. Can you tell us about your personal highlights in 2019? There are so many matters on which great progress has been made in 2019. However, if I had to pick a couple of areas, I would choose highlights where colleagues have gone the extra mile and more to support individuals at the risk of disadvantage. Firstly our Digital Skills Academy, piloted in Manchester and now rolling out to other cities, starting with Bristol. Secondly, our work to provide support to Mental Health UK to allow them to set up the UK’s first Money and Mental Health Advice line.
Board oversight: transformation The Board is responsible for the overall strategic direction of the Group and has been engaged with the Group’s strategy to transform its business for success in a digital world through multiple touchpoints throughout the year. These have included: The annual cycle of two strategy away days to debate priorities and agree implementation plans
Group Structure and Ring-Fencing Governance Arrangements From 1 January 2019 UK legislation requires large UK banks to separate personal banking services such as current and savings accounts from riskier activities, such as investment banking, in other parts of their business. This is called ring-fencing. The Group has established a Group structure and governance arrangements which are appropriate for the Group and meet the regulatory requirements. Lloyds Bank plc and Bank of Scotland plc are the banks, within the Group, which have been included within the ring-fence (together, the Ring-Fenced Banks). The governance structure focuses on ensuring: Independent decision making by the Ring-Fenced Bank Boards – on any matters where there might be a conflict between the interests of the Ring-Fenced Banks and the interests of another part of the Group
Group Structure The subsidiaries of the Group are structured into the following sub-groups under Lloyds Banking Group plc providing effective governance for the business undertaken in each sub group: Ring-Fenced Banks sub-group containing Lloyds Bank plc and Bank of Scotland plc (including the Halifax and MBNA businesses), serving both their UK personal and commercial customers
Board Structures Since the Ring-Fenced Banks represent the core banking activity of the Group, all of the Directors of Lloyds Banking Group plc also sit on the Boards of the Ring-Fenced Banks, which are chaired by the Group Chairman. The ring-fencing governance structures have been operating since 1 January 2019. The Group Chief Executive is also Chief Executive of the Ring Fenced Banks. In addition, the RingFenced Bank Boards have three additional independent Non-Executive Directors. These Ring-Fenced Bank only directors are independent of the management and the rest of the Group and play a critical role in the governance structure, with an enhanced role in managing any potential conflicts between the Ring-Fenced Banks and the Group. One of the Directors, Nigel Hinshelwood, acts as Senior Independent Director of the RingFenced Banks and also chairs the cross-Group Information Technology and Cyber Security Advisory Forum.
Whilst meeting the Connect and Resolve teams in our Atlantic Quay building, António listened in to customer calls with the teams who support Schroders Personal Wealth and handle credit disputes. He also watched mobile messaging interactions with customers, seeing and hearing first-hand how we are meeting our customers’ needs through a range of channels and products. This experience was part of the Reconnecting with Customers pilot programme, launched in July 2019 to bring senior leaders across the Group closer to our customers and customerfacing teams.
Ring-fencing governance requirements, with an increased number of participants at the Board, require individual Directors and the Chairman and Committee Chairmen to manage meetings, to ensure all Directors are able to contribute fully and effectively
Final report discussed at a meeting of the Board, following its consideration by the Nomination and Governance Committee.
Continued use of informal sessions to air issues that need more discussion
Continued to streamline length and time spent on ‘taken as read’ reports
As part of his programme of regional visits, Lord Blackwell spent time in Birmingham in September. He met colleagues from Lloyds Bank and Halifax branches, as well as spending time with colleagues from Brindley Place.
In establishing and reviewing the risk management and internal control systems, the Directors carried out a robust assessment of the emerging and principal risks facing the company, including those that would threaten its business model, future performance, solvency or liquidity and reputation, the likelihood of a risk event occurring and the costs of control. The process for identification, evaluation and management of the emerging and principal risks faced by the Group is integrated into the Group’s overall framework for risk governance. The risk identification, evaluation and management process also identifies whether the controls in place result in an acceptable level of risk. At Group level, a consolidated risk report and risk appetite dashboard are reviewed and regularly debated by the Executive Group Risk Committee, Board Risk Committee and the
The Chairman and Non-Executive Directors were impressed by customers’ openness and willingness to share their views. The sessions they attended gave a deep insight into customers’ lives and needs and their ideas on how a bank can provide a leading customer experience.
Lord Blackwell leads the Board and promotes the highest standards of corporate governance. He leads in building an effective and complementary Board, and sets the Board’s agenda. The Chairman also leads Board succession planning and ensures effective communication with shareholders.
1 William Chalmers joined the Board with effect from 1 August 2019.
A. The Group is led by an effective, committed Board, which is collectively responsible for the long-term, sustainable success of the Group, ensuring due regard is paid to the interests of the Group’s stakeholders, with its effectiveness assessed with an annual Board effectiveness review, discussed further on page 77 to 78. The Group’s Corporate Governance Framework, which is reviewed annually by the Board, sets out the key decisions and matters reserved for the Board’s approval, which includes matters relating to the Group’s long-term strategy and priorities. Further details of the Corporate Governance Framework can be found online at www.lloydsbankinggroup.com/our-group/corporate-governance, and on page 71.
D. The Board recognises that engaging with and acting on the needs of the Group’s stakeholders is key to achieving the strategy and long-term objectives of the Company. Engagement with stakeholders, across the organisation and including that of the Board, is discussed further on pages 20 to 27, and in the Directors’ statement of compliance with their duties under section 172 of the Companies Act 2006, also on pages 20 to 27.
H. Non-Executive Directors are advised of time commitments prior to their appointment and are required to devote such time as is necessary to discharge their duties effectively. The time commitments of the Directors are considered by the Board on appointment and annually thereafter, and, following the most recent review, the Board is satisfied there are no directors whose time commitments are considered to be a matter for concern. External appointments, which may affect existing time commitments relevant to the Board, must be agreed with the Chairman, and prior Board approval must be obtained before taking on any new external appointments. The Board has not approved any significant external commitments during 2019. No Executive Director has taken up more than one Non-Executive Director role at a FTSE100 company or taken up the chairmanship of such a company. More information on Directors’ attendance at meetings can be found on page 70.
L. An internally facilitated Board evaluation was completed in 2019, with an externally facilitated evaluation having taken place in 2018. Individual evaluation is carried out by the Chairman on behalf of the Board. Performance evaluation of the Chairman is carried out by the NonExecutive Directors, led by the Senior Independent Director, taking into account the views of the Executive Directors. More information on the Board effectiveness review can be found on pages 77 to 78, along with the findings, actions, and progress made during the year.
M. The Board has delegated a number of responsibilities to the Audit Committee, including oversight of financial reporting processes, the effectiveness of internal controls and the risk management framework, whistleblowing arrangements and the work undertaken by the external and internal auditors. The Audit Committee reports regularly to the Board on its activities, and its report for 2019, confirming how it has discharged its duties can be found on pages 85 to 88.
P. The Group is committed to offering all colleagues a reward package that is competitive, performance-driven and fair and its Remuneration Policy is designed to promote the long-term and sustainable success of the Company. The Directors’ Remuneration Report on pages 98 to 128 provides further details regarding the remuneration of Directors. The current Remuneration Policy can be found in the 2016 Annual Report and Accounts and remains unchanged since last approved by shareholders at the 2017 AGM. A new Remuneration Policy will be proposed for approval by shareholders at the 2020 AGM.
Board and GEC changes As set out in my introduction to the Governance Report on page 65 there have been a number of changes to the Board and its Committees during the year, all of which have been overseen by the Committee.
During the year, the Committee undertook a thorough process to identify and assess candidates which resulted in the appointment of two new Group Non-Executive Directors: Sarah Legg was appointed to the Board on 1 December 2019 and Catherine Woods will join the Board on 1 March 2020. While selected on the basis of their strong banking experience and skills, these two appointments help meet our continuing commitment to gender diversity. Sarah’s appointment also supports our objective of BAME diversity. Details of the selection process can be found on page 84.
The Committee continues to keep under review, on an ongoing basis, the structure, size and composition of the Board and its Committees, making recommendations to the Board as appropriate. Consideration was given to anticipated retirements from the Group Board over the next two years, together with the need to ensure the appropriate mix of knowledge, skills and experience, and diversity.
Good succession planning and recognition of diversity is integral to maintaining a strong Board and supporting the development of the Executive population. Lord Blackwell Chairman, Nomination and Governance Committee 1 The Chairman was independent on appointment in accordance with the Code. Following the Financial Reporting Council’s Guidance on Board Effectiveness, the Chairman is not subject to the Code’s independence test, other than on appointment.
The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year. The Committee’s terms of reference can be found at www.lloydsbankinggroup.com/our-group/ corporate-governance.
The Group Chief Executive attends meetings as appropriate. Details of Committee memberships and meeting attendance can be found on page 70.
The Group also set a target of 8 per cent of senior roles to be held by BAME executives by 2020. At Board level, the Group aims to meet the objectives of the Parker review for at least one BAME Board member by, or as soon as possible after, the target date of 2021. The appointment of Sarah Legg in 2019 supports this objective.
Central to this is an ongoing assessment, led by the Chairman, of the collective Board’s technical and governance skill set. From this the Chairman creates a Board skills matrix which is used to track the Board’s strengths and identify any gaps in the desired collective skills profile of Board. Various factors are taken into consideration such as the Group’s future strategic direction, and helping ensure due weight is given to diversity in its broadest sense. The skills matrix was considered in the appointment of Sarah Legg and Catherine Woods and the appointment of Alan Dickinson as Senior Independent Director and, in due course, also as Deputy Chairman.
Outcomes of the annual Board evaluation process are also taken into consideration.
During the year the Committee led the search process for, and appointment of, new Non-Executive Directors which culminated in the appointment of Sarah Legg, who joined the Board on 1 December, and Catherine Woods who will join the Board on 1 March 2020.
1 Aside from assisting with senior recruitment Heidrick & Struggles have no other connection to the Company, or individual Directors.
The Committee has continued to focus on the issues relevant to the Group’s financial reporting, including consideration of key accounting judgements, and ensuring the integrity of financial reporting and related disclosures. The Committee has also spent a significant proportion of its time considering other related areas, including monitoring of the Group’s internal control framework, to ensure it remains effective and fit for purpose. The key sources of information here remain the company’s Financial Controllership, the Risk function, Internal Audit and External Audit. The Committee is hence receiving multiple, independent and objective reports, in support of assurance provided.
The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year. A full list of responsibilities is detailed in the Committee’s terms of reference, which can be found at www.lloydsbankinggroup.com/ our-group/corporate-governance. In satisfying its purpose, the Committee undertakes the functions detailed within Disclosure Guidance and Transparency Rule 7.1.3R.
All members of the Committee are independent Non-Executive Directors with competence in the financial sector and their biographies can be found on pages 66 to 67.
Annually the Committee undertakes an effectiveness review. The review forms part of the Board evaluation process with Directors being asked to complete parts of the questionnaire relating to the Committees of which they were members. The findings of the review were considered by the Committee at its January 2020 meeting. On the basis of the evaluation the feedback was that the performance of the Committee continues to be effective.
During 2019, the Group made provisions totalling £2,450 million in respect of PPI.
The allowance for impairment losses on loans and advances to customers at 31 December 2019 was £3,259 million (2018: £3,150 million).
The Committee considered updates from management and from the Group’s Insurance Audit Committee summarising its activities, which included a review of the economic and non-economic assumptions made by management to determine the Group’s VIF asset and insurance liabilities. The most significant assumptions were in respect of annuitant mortality, workplace pension persistency and expenses.
The Committee was satisfied that the viability statement could be provided and advised the Board that three years was a suitable period of review. The viability statement is disclosed within the Directors’ report on pages 95 to 96.
The overall cost associated with PPI remains uncertain and the Committee has considered management’s use of sensitivities used to evaluate this uncertainty. At 31 December 2019, for every one per cent increase in the PIR conversion rate on the stock at the Industry Deadline, the Group would expect an additional charge of approximately £100 million.
Prior to engagement of the auditor for a permitted service, the policy requires that senior management confirms whether the Committee has pre-approved the service or specific approval is required. The total amount of fees paid to the auditor for both audit and non-audit related services in 2019 is disclosed in note 12 to the financial statements.
The Group’s resilience, through strategic change and continually emerging risks, has been a core consideration. Alan Dickinson Chairman, Board Risk Committee
Dear Shareholder I am pleased to report on how the Board Risk Committee (the ‘Committee‘) has discharged its responsibilities throughout 2019.
The Committee was concerned to oversee the successful delivery of significant regulatory change such as the embedding of ringfenced banking, data risk and operational resilience. Operational resilience has been elevated to a primary risk category along with change and execution risk, recognising the extensive Group strategic change agenda. The Committee was pleased to see that good progress was made with the management of customer rectifications. The Committee also focused very closely on conduct risks and, in particular, the Group’s management of customers in financial difficulty, including implementation of a revised operating model to improve customer outcomes. Each of these areas will be subject to ongoing focus in 2020.
Other areas of focus for the year ahead will include continued improvements in the Group’s treatment of vulnerable customers, fraud and financial crime, consumer indebtedness, and continually evolving risks within IT and cyber – as part of the broader operational resilience agenda. The Committee will again consider impacts on the Group’s broader risk profiles arising from delivery of the strategic change agenda. Inevitably, the external environment continues to provide challenges and potential impacts for the Group’s risk profile which the Committee continues to closely monitor.
In seeking to achieve this, the Committee assumes responsibility for monitoring the Group’s risk management framework, which embraces risk principles, policies, methodologies, systems, processes, procedures and people. It also includes the review of new, or material amendments to risk principles and policies, and overseeing any action resulting from material breaches of such policy.
More details on the Group’s wider approach to risk management can be found in the risk management section on pages 129 to 187. Full details of the Committee’s responsibilities are set out in its terms of reference, which can be found at www.lloydsbankinggroup.com/ our-group/corporate-governance
The Committee held a deep dive into financial difficulty cases to provide deeper insight into root cause analysis and the actions being taken to improve customer outcomes. Other key focus areas included the initiatives being delivered and progressed through the Financial Wellbeing lab and implementation of a revised operating model to improve outcomes.
Complaints The Committee continues to focus on ensuring the Group is resolving customer complaints in a timely and fair manner and eradicating the causes for complaints.
The Committee recognises the importance of the Group’s vulnerability strategy in delivering customer outcomes, against a backdrop of increasing regulatory focus and noted the Group’s response to the FCA’s consultation on Vulnerable Customers, considering the potential impact on the Group’s strategy going forward.
The Committee considered the progress that continues to be made to implement the Group’s vulnerability strategy, and the enhancements made to support the embedding of regulatory Framework and Guidance.
During the year the Committee has increased focus on climate change, sustainability and the potential impact to the Group and impact on our customers.
Consideration was given to the Group’s lending controls, risk appetite monitoring and new lending indebtedness risk for the consumer unsecured, motor, retail secured and buy-to-let portfolios.
The Committee continues to focus on the risks associated with the extensive Group strategic change agenda, recognising the challenges faced in ensuring both successful delivery and embedding of change.
The Committee continues to consider key economic and political risks. Consideration is focused on risks that may impact the Group’s central economics forecast that is incorporated into the Group’s four year operating plan. Continuation of the current global trade tensions, deterioration in the UK property market or UK productivity, or a global economic slowdown and low (or negative) interest rates could have an adverse impact on profitability, capital generation and the Group’s credit risk profile.
The prolonged uncertainty regarding the options, timing and the process itself could affect the outlook for the UK and global economy.
When reviewing the possible impacts of the EU Exit, the Committee has given particular consideration to the Group’s strong UK focus and UK-centric strategy. The Committee continues to closely monitor developments, with specific focus on the trading, financial, operational impacts for the Group, as well as the cyber, physical security and fraud risks, and the continued support of our customers.
The Committee considered the challenging and evolving nature of the fraud risk environment influenced by factors such as an increasing sophistication of fraud typologies and an uplift in industry reported gross fraud losses. The Committee noted the correlated impact on the Group’s gross authorised fraud losses albeit our market share remains below our market share of transactions. Gross unauthorised fraud losses at both Industry and Group level rose during 2019. However, they remain within Group appetite and the Group’s net losses remain stable year on year on a like-for-like basis.
In addition, a key area of focus for the Committee has been ensuring ring-fencing requirements have been fully embedded and the Committee has operated in line with its commitments to the PRA and continued to demonstrate independent decision making for the ring-fenced bank. Key topics have included reviews of the ring-fenced bank perimeter, management of legal entity conflicts and governance.
Dear Shareholder I am pleased to report on the activity of the Responsible Business Committee (the ‘Committee’), during a busy 2019.
The Group was recognised by Fortune magazine as a leading business worldwide for its work on both sustainability and mental health.
How the Committee spent its time in 2019 The Committee continued to focus on the three material areas aligned to the Bank of the Future, with the aim of enabling people, businesses and communities to be ready for the future: Digital Skills The programme was reviewed regularly, with updates on the direction of and progress with the Lloyds Bank Academy which successfully launched a second location in Bristol. The Committee also considered ‘future.now’ launched by the Lord Mayor of London, bringing together organisations to boost digital skills in the UK
The relationship between the Group and the Charitable Foundations is a key area of focus and the Group worked closely with the Foundations to showcase the work they do. The Committee continues to review the work done to support the Charitable Foundations work in the charitable sector through strengthening skills-based volunteering across their-supported charities
The Committee will continue to discuss and monitor the effectiveness of the portal.
Details of committee membership and meeting attendance can be found on page 70.
Profit and dividends The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2019 of £4,393 million (2018: £5,960 million). The Directors have recommended a final dividend for 2019, which is subject to approval by the shareholders at the AGM, of 2.25 pence per share totalling £1,586 million. The final dividend will be paid on 27 May 2020.
Capital Requirements (Country-by-Country Reporting) As required under the Capital Requirements (Country-by-Country Reporting) Regulations 2013, the Group’s related disclosures may be found online, at www.lloydsbankinggroup.com/globalassets/ documents/investors/2018/2018_lbg_crdiv_country_by_country_ disclosures.pdf
Lloyds Banking Group Annual Report and Accounts 2019 95 Lloyds Banking Group Annual Report and Accounts 2019 95 Strateg ic rep ort
The 2017 Group Strategic Review, which sets out the Group’s customer and business strategy for the three year period from 2018 to 2020 inclusive
The financial projections and the underlying assumptions in respect of expected market and business changes, and future expected legal, accounting and regulatory changes are subject to rigorous review and challenge from both divisional and Group executives
The Directors have specifically assessed the prospects of the Company and the Group over the first three years of the current plan. The uncertain global economic and political environment, including the longer-term impact of the UK leaving the EU, together with the pace of regulatory change mean that the assumptions supporting the fourth year 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 to be reached over the longer-term viability of the Company and Group. Information relevant to the assessment can be found in the following sections of the annual report and accounts: The Group’s principal activities, business and operating models and strategic direction are described in the strategic report on pages 2 to 46
The Group’s approach to stress testing and reverse stress testing, including both regulatory and internal stresses, is described on page 137 to 138
Based upon this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years to 31 December 2022.
Going concern The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the Directors have considered a number of key dependencies which are set out in the risk management section under principal risks and uncertainties: funding and liquidity on page 45 and pages 175 to 180 and capital position on pages 166 to 175. Additionally, the Directors have considered the capital and funding projections of the Company and Group. Accordingly, the Directors conclude that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months from the date of the approval of the financial statements and therefore it is appropriate to continue to adopt the going concern basis in preparing the accounts.
GHG emissions (CO2e) per £m of underlying income (Location Based)1 11.5 13.0 15.5
This year, our overall location based carbon emissions were 207,768 tCO2e; a 14.6 per cent decrease since 2018 and 63.1 per cent decrease against our 2009 baseline (legacy scope). Reductions achieved are attributable to an extensive energy optimisation programme and reductions in business travel, alongside decarbonisation of the UK electricity grid. In addition, there has been a reduction in property footprint and headcount.
Total CO2e (location based) 207,768 243,293 286,892 1 Restated 2018/2017 and 2017/2016 emissions data to improve the accuracy of reporting, using actual data to replace estimates.
2 Scope 3 emissions have been expanded to include additional elements within the Group’s own operations including emissions from waste, colleague commuting and additional elements of business travel (including taxis, tube, well to tank emissions of business travel and hotels). We have also disclosed legacy scope numbers to allow fairer comparison to numbers previously disclosed and to demonstrate performance versus our previous targets.
We are also making improvements to pensions for all the 50,000 colleagues who participate in Defined Contribution (DC) arrangements (the majority of our workforce) to make all members eligible for a maximum employer contribution of 15 per cent, and to increase the employer contribution for our lower paid colleagues by one per cent.
We have listened to feedback and the external sentiment around executive remuneration. Some of the sentiments that resonated with me and my Committee were that executive remuneration should be re-evaluated in the context of colleagues as a whole; be truly variable, and not managed within a ‘corridor’ without being closely aligned with outcomes. We have tackled these sentiments head on with our proposals in the new Policy by reducing the new maximum opportunity for Executive Directors and by demonstrating with this year’s outcomes that performance and conduct do have material consequences, resulting in lower total remuneration.
Simplicity Remuneration should be designed in a manner that is clear for all stakeholders and reflects their expectations
It was with these objectives in mind that we designed the new Policy detailed on page 115 and summarised on page 100. The key headlines are as follows: The maximum pension allowance for Executive Directors is reduced to 15 per cent of salary
We are introducing a new long-term variable reward plan to align pay more closely to our business model of producing sustainable long-term returns
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 99
We are very focused on addressing the pay gap from the bottom up and not just from the top down, in other words, by taking action to increase pay and pensions for more junior colleagues
We’ve focused on simplifying the allocation to our overall Group Performance Share pool by agreeing to use a fixed 5 per cent of underlying profit as the starting position. The Committee will retain discretion to ensure that 5 per cent remains appropriate
William Chalmers Chief Financial Officer 1 Aug 2019 – £5.14m –
Group performance and variable remuneration For 2019, the performance of the Group was resilient in a challenging and uncertain economic environment. Despite a softening of margins and income, continued discipline in operating costs enabled the Group to maintain its significant investment in digitising and transforming the way we support customers, as well as to pay an increased dividend to shareholders. Financial results were however heavily impacted by the PPI provision of £2.45 billion; therefore a significant downward adjustment was made to the Group Performance Share pool to reflect this along with other conduct-related costs. The final 2019 Group Performance Share pool is £310.1 million, which is a reduction of 33 per cent compared to 2018. The vesting of the 2017 Executive Group Ownership Share was similarly affected by financial performance and shareholder returns, with a formulaic vesting outcome of 49.7 per cent. No discretion was used to change the vesting outcome.
The performance and strategic progress of the Group was however overshadowed by significant non-financial conduct issues during the latter part of the year, not least the findings of Sir Ross Cranston’s review into how the Group has treated customers who were the victims of the HBOS Reading fraud. These issues are reflected in the variable reward outcomes for Executive Directors.
Executive Director variable rewards decisions As a result of the overall performance of the Group and the issues faced during 2019, the Group Chief Executive and Chief Operating Officer independently requested that they be withdrawn from consideration for Group Performance Share awards for 2019. The Committee exercised its discretion to accept this request and welcomed the judgement shown in volunteering it as a consequence of the non-financial conduct issues mentioned above. No downward adjustment has been made to the overall Group Performance Share pool as a result of these individual decisions, which was therefore distributed to other colleagues outside the executive team.
For the newly appointed Chief Financial Officer, overall performance for 2019 was assessed at 3.12 out of 5 with a corresponding Group Performance Share award of £195,528. An award of 250 per cent of salary will be awarded under the final Executive Group Ownership Share to the Group Chief Executive and 237.5 per cent for Chief Financial Officer. No Group Ownership Share award is being made to the Chief Operating Officer who has announced his retirement. Further details of awards are provided on pages 105 and 111.
Together with my Committee members, I look forward to hearing your views on the remuneration arrangements outlined in the report and we hope the new Policy alongside the resolutions relating to remuneration will receive your support at the upcoming AGM.
All other aspects remain the same, including quantum. Why: – Provides alignment to the release schedule for other colleagues eligible for a Fixed Share Award in the Group meeting our alignment principle.
– Contributions set as a percentage of base salary (cash salary only).
– Maximum allowance of 46 per cent for Group Chief Executive (GCE) and 25 per cent for other EDs and all future appointments.
What: – We are reducing the maximum employer pension contribution available to all EDs to 15 per cent of base salary with no compensation for the reduction. Why: – We agree comparable pension contributions should be available to all colleagues, including EDs.
Group Ownership Share (GOS) – Maximum opportunity of 400 per cent for the
GCE and a maximum of 300 per cent of salary for other EDs.
– The Committee retains full discretion to amend the payout levels should the award not reflect business and/or individual performance.
– Award levels set at the time of grant under the rules of the 2016 Long-Term Incentive Plan approved at the AGM on 12 May 2016 and made in the form of conditional shares.
– Remuneration Committee will grant awards based on a discretionary pre-grant test using the Balanced Scorecard to inform decision making.
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Q Why did you decide the new Long Term Share Plan is more appropriate for your business compared to the traditional LTIP?
We believe this Policy cycle is the most opportune time to restructure our reward package and introduce the LTSP for the following core reasons.
Amending the existing LTIP by reducing the number of measures was considered. However, we felt that this would not match the wider objectives of alignment to the Group’s strategy and the experience of colleagues.
The use of a single Balanced Scorecard to inform both variable reward components provides clear line of sight to important annual and strategic measures, which can be tracked year on year through our disclosure.
Balanced Scorecard Strategic decisions will, as now, be measured through the inclusion of both financial and non-financial performance metrics within the Balanced Scorecard
Underpin assessment The Committee will make an assessment against the three financial underpins. In addition, the Committee will consider applying a downward discretionary adjustment by asking itself whether there are any non-financial factors that should be considered at vesting
Q What factors will the Committee take into account when exercising discretion?
Has the Group suffered a serious conduct event or has severe reputational damage arisen from the Group not living its values?
Q How did you determine the new maximum opportunity for the Long Term Share Plan and did you consider shareholder guidelines that there should be at least a 50 per cent discount when moving to a restricted share model?
We are reducing the maximum opportunity for the Group Chief Executive’s long-term awards by 50 per cent from 400 per cent to 200 per cent of base salary, and the normal ‘target’ level of award to 150 per cent of base salary. Unlike a number of restricted share schemes, our Long Term Share Plan will have a pre-grant test to determine the value of awards. As outlined, this will be based on the Balanced Scorecard (consistent with the short term variable award) with the expectation that the achievement of an overall outcome in line with target will lead to an award of 150 per cent of base salary.
The pre-vest test against defined underpins after three years is an important feature to guard against the potential of ‘rewards for failure.’ After considerable debate, we are confident that focusing on capital strength, relative returns and a progressive and sustainable ordinary dividend aligns with our commitments to shareholders. Underpins will be measured over a three year period year period from grant and each underpin element will determine the vesting of 33 per cent of the original award.
The Committee will have discretion to consider any other events before confirming the vesting of awards using the questions outlined above.
Finance measures (33%) Our financial measures assess the Group’s ability to deliver a capital efficient, low cost and profitable bank 1 The measure in relation to external reputation has been expanded to now also include relationship with the Group’s regulators.
Removing complex standalone LTIP metrics and instead using a simplified Balanced Scorecard will give management clearer line of sight and greater alignment of interest to long-term share price performance whilst the underpin and pre-vest test, combined with the long-term delivery of shares over up to eight years, ensure that long-term and multi-year performance assessment is not compromised.
As a result of the proposed changes in policy, total variable opportunities will reduce from 540 per cent of salary to 340 per cent for the Group Chief Executive. This is a reduction of 29 per cent in maximum total compensation when reductions in fixed pay through the pension changes are taken into account. Other Executive Directors' total variable opportunities will reduce from 400 per cent to 300 per cent of salary resulting in a 19 per cent reduction in maximum total compensation.
Directors’ remuneration report continued 1 Indicative underpin definitions; final details to be confirmed in 2020 DRR Implementation Report.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 103 2019 Annual report on remuneration
Buy out award5 – – – – 4,378 – – – 4,378 –
5 William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer. He was granted deferred cash of £2,046,097 and deferred share awards over 4,086,632 Shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group. The deferred cash and the number of Shares over which the deferred share awards were granted was calculated using the USD:GBP exchange rate and the respective mid-market closing prices of Mr Chalmers’ previous employer and the Group on 3 June 2019.
Deliver Helping Britain Prosper Plan targets 20/22 metrics were rated green (90.9%) 4<50% of Helping Britain Prosper Plan metrics are Green ≥90% of Helping Britain Prosper Plan metrics are Green and none are Red
Application of Group performance modifier The modifier determined by Group Balanced Scorecard performance is applied to the proportion of UP allocated under Step 1.
Strong progress in executing the Group’s strategic transformation programme, with significant investment in technology, people and improved customer propositions Further progress on the strategy for growing our Financial Planning & Retirement business with the successful launch of our Schroders Personal Wealth joint venture But acknowledged organisational failures in the Group’s handling of some customers, including the victims of the historic HBOS Reading fraud
Successful acquisition of the Tesco mortgage book finalised under William’s stewardship
Key considerations factored into assessing performance and overall rating include, but are not limited to, the following: STEP 1 STEP 2 STEP 3
Committee determine final award outcome Judgement is applied by the Remuneration Committee to determine award levels within the formulaic pay-out ranges.
The Remuneration Committee exercised its overall discretion to accept the voluntary withdrawal of the Group Chief Executive and Chief Operating Officer from consideration for a 2019 GPS award. Accordingly, no award value was determined.
2 Award pro-rated to reflect working days of employment. 3 GPS award reflects full year in line with hiring commitment.
2017 Executive Group Ownership Share (audited) Group Ownership Share (GOS) Awards in the form of conditional rights to free shares in 2017 were made over shares with a value of 300 per cent of reference salary for the GCE and 275 per cent of salary for the former CFO and COO. These awards are vesting at 49.7 per cent, as detailed in the table below. The formulaic outcome reflects the Group’s solid financial and strong strategic performance over the three years ended 31 December 2019, balanced against a challenging economic and political environment impacting negatively on share price performance. This has resulted in no vesting for the Total Shareholder Return component and lower than expected Economic Profit.
Weighting Measure Threshold Maximum Actual Vesting 10% Customer Complaint Handling FCA reportable complaints
In accordance with retirement provisions, George has maintained outstanding deferred Group Performance Share awards under the 2016 GPS Plan (83,466 Shares), 2017 GPS Plan (176,108 Shares) and under the 2018 GPS Plan (501,341 Shares) which continue to be released on their scheduled release dates, subject to the relevant terms (including post-vesting holding periods, malus and, where applicable, clawback and deductions for national insurance and income tax). 2016 GPS shares released in September 2019.
No other payment for loss of office were made in 2019.
António Horta-Osório – 1,765 3,398 7,475 11,540 8,704 5,791 6,434 6,544 4,727
António Horta-Osório – 0% 0% 25.30% 30% 30% 0% 0% 0% 0%
2 Awards subject to performance under the GOS had an expected value of 50 per cent of face value at grant (in line with the Remuneration Policy). Values are based on the 31 December 2019 closing price of 62.535 pence.
6 In addition, Nick Prettejohn held 400 (6.475 per cent) preference shares at 1 January 2019 and 31 December 2019.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 109
George Culmer 1. The shares awarded in March 2016 vested on 7 March 2019. The closing market price of the Group’s ordinary shares on that date was 62.15 pence. Shares vested are subject to a further two-year holding period.
7. William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer. He was granted deferred cash of £2,046,097 and deferred share awards over 4,086,632 Shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group. The deferred cash and the number of Shares over which the deferred share awards were granted was calculated using the USD:GBP exchange rate of 1.2664 and the respective mid-market closing prices of Mr Chalmers’ previous employer and the Group on 3 June 2019 (57.05 pence) resulting in a face value of the awards of £4,377,521. The award is subject to vesting terms in line with those forfeited as set out above, and is on materially the same terms as the Executive Group Ownership Share (ExGOS), including the discretions as summarised on page 93 of the 2017 Annual Report, but as the award is a buy-out it is not subject to performance conditions and is not subject to time pro-rating in a good leaver circumstances. The award is subject to malus and clawback on the same terms as ExGOS awards, and in addition is subject to clawback in the event of resignation within one year of grant. The value of the award is not pensionable.
8. Options vested on 18 July 2019 and William Chalmers exercised on 1 August 2019. The closing market price of the Group’s ordinary shares on that date was 52.84 pence. Mr Chalmers retained all the shares apart from 384,733 shares which were sold to meet income tax and National Insurance contributions. Shares are subject to a six month holding period from the date of vesting on 18 July 2019.
FCA total reportable1 complaints and Financial Ombudsman Service (FOS) change rate2
The Group has applied a total pay budget of 2.4 per cent including a minimum pay award of £500 for eligible colleagues. Focussing on lower paid colleagues and colleagues paid lower in their pay range, the Group’s pay approach ensures over 63 per cent of colleague will receive a pay award of 2.5 per cent or more. The pay budget for senior executives is set below the budget for the wider colleague at 2 per cent.
Awards remain unchanged from 2019 as follows: GCE: £1,050,000 COO: £497,000 CFO: £504,000
With effect from 1 January 2020, pension allowances will be reduced for all Executive Directors to 15 per cent of base salary. Any new Executive Director appointments in 2020 will also attract a maximum allowance of 15 per cent of base salary.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 111
A Group Ownership Share award will be granted in relation to 2019 performance under the terms of the current Remuneration Policy. On the basis of the new Long Term Share Plan being approved by shareholders at the 2020 AGM, no further Group Ownership Share awards would then be made.
There are no changes to proposed financial and strategic measures to provide consistency with the 2019 plan and continued alignment to the key strategic priorities as set out in the third Group Strategic Review.
Digital net promoter score Set relative to 2022 targets Threshold: 65.3 Maximum: 68.3
Performance adjustment is determined by the Remuneration Committee and/or Board Risk Committee and may result in a reduction of up to 100 per cent of the GPS and/or GOS opportunity for the relevant period. It can be applied on a collective or individual basis. When considering collective adjustment, the Senior Independent Performance Adjustment and Conduct Committee (SIPACC) submits a report to the Remuneration Committee and Board Risk Committee regarding any adjustments required to balanced scorecards or the overall GPS and/or GOS outcome to reflect in-year or prior year risk matters.
GCE (salary increase effective 1 January 2020) 2.0% (100%) 1 2.0%
Colleague total remuneration has been calculated in line with the single total figure of remuneration. The single total figure of remuneration calculated for each of the 62,364 UK colleagues includes full time equivalent base pay, Group Performance Share awards for the 2019 performance year, vesting Group Ownership Share awards (for eligible colleagues), core benefits, pension, overtime and shift payments, travel/relocation payments (for eligible colleagues) and private medical benefit
Each of the three individuals identified was a full-time employee during the year
Due to operational constraints, inflationary adjustments to defined benefit pensions are excluded
We believe our approach to pay progression has contributed to the reduction of the 2019 median pay ratio and supports reducing the gap between executive and wider colleague pay over time. For example, the colleague who is now at P25 for 2019 received a 2.69 per cent pay increase which brought them up from P24 to that level.
Constructive engagement with the Group’s recognised Unions, particularly on the deployment of the Group Performance Share model with the introduction of ‘Your Best’, the improvements to the DC pension scheme for all colleagues, the broader reward package the Group offers and 2019 discussions on pay budgets. Together the Unions are recognised across a bargaining unit of circa. 95 per cent of colleagues and continue to play a valuable role in representing colleagues across the Group
Oversight and engagement Regular updates on corporate governance and institutional remuneration principles changes
The regulators were invited to attend committee meetings in 2019 and gain greater understanding of Committee debates in relation to performance and reward outcomes
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 115 2020 Remuneration Policy Approval for this Remuneration Policy will be sought at the AGM on 21 May 2020 and, if approved, will take effect from that date.
Fixed share award Purpose and link to strategy To ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for Executive Directors with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements.
Operation The fixed share award will be delivered entirely in Lloyds Banking Group shares, released over three years with 33 per cent being released each year following the year of award. The Committee can, however, decide to deliver some or all of it in the form of cash.
Pension Purpose and link to strategy To provide cost effective and market competitive retirement benefits, supporting Executive Directors in building long-term retirement savings.
Maximum potential The maximum allowance for all Executive Directors is 15 per cent of base salary. All future appointments as Executive Directors will also attract a maximum allowance of 15 per cent of base salary in line with the majority of the workforce. Maximum allowance may be increased or decreased in order to remain aligned.
Maximum potential Participation levels may be increased up to HMRC limits as amended from time to time. The monthly savings limits for Save As You Earn (SAYE) is currently £500. The maximum value of shares that may be purchased under the Share Incentive Plan (SIP) in any year is currently £1,800 with a two-for-one match. Currently a three-for-two match is operated up to a maximum colleague investment of £30 per month. The maximum value of free shares that may be awarded in any year is £3,600.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 117
The Committee is committed to providing transparency in its decision making in respect of Group Performance Share awards and will disclose historic measures and target information together with information relating to how the Group has performed against those targets in the annual report on remuneration for the relevant year except to the extent that this information is deemed to be commercially sensitive, in which case it will be disclosed once it is deemed not to be sensitive.
Long Term Share plan Purpose and link to strategy Long term variable reward opportunity to align executive management incentives and behaviours to the Group’s objectives of delivering long-term superior and sustainable returns. The Long Term Share Plan will incentive stewardship over a long time horizon and promote good governance through a simple alignment with the interest of shareholders.
Changes The Long Term Share Plan replaces the Executive Group Ownership Share Plan.
Deferral of variable remuneration and holding periods Operation The Group Performance Share and Long Term Share plans are both considered variable remuneration for the purpose of regulatory payment and deferral requirements. The payment of variable remuneration and deferral levels are determined at the time of award and in compliance with regulatory requirements (which currently require that at least 60 per cent of total variable remuneration is deferred for seven years with pro rata vesting between the third and seventh year, and at least 50 per cent of total variable remuneration is paid in shares or other equity linked instruments subject to a holding period in line with current regulatory requirements).
Where qualitative underpin thresholds are used and performance against those underpins is not commensurate with the Group's overall financial performance over the underpin period
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 119
3. The minimum that may be paid, where only the fixed element is paid (base salary, benefits, pension and the fixed share award).
Salary Fixed share award Pension and Benefits Group Performance Share Long Term Share Plan Share price appreciation (50%)
An Executive Director recruited at a time in the year when it would be inappropriate to provide a Group Performance Share or Long Term 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
The maximum level of variable remuneration (excluding buy-out awards) that may be awarded to new Executive Directors is equal to 200 per cent of fixed remuneration, including any discount permitted by the European Banking Authority. In making any such remuneration decisions, the Committee will apply any appropriate performance measures in line with those applied to other Executive Directors.
At any time after notice to terminate is given by either the Group or the Executive Director, the Group may require the Executive Director to take leave for some or all of the notice period
Paid until date of retirement/death. For ill health, injury or permanent disability which results in the loss of employment, paid for the applicable notice period (including any period of leave required by the Group).
Awards vest in full on the date of death unless in exceptional circumstances the Remuneration Committee determines that the underpins or prevest test do not support full vesting.
– An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective sizing methodologies.
– Fees and benefits for comparable roles in comparable publicly listed financial services groups of a similar size.
The Chairman receives an all-inclusive fee, which is reviewed periodically plus benefits including life insurance, car allowance, medical insurance and transportation. The Committee retains the right to provide additional benefits depending on individual circumstances.
Non-Executive Directors Approved persons performing significant influence functions (SIFs) and/ or all colleagues performing a senior management function
In addition to setting the overall remuneration policy and philosophy for the Group, the Remuneration Committee ensures that colleagues who could have a material impact on the Group’s risk profile are provided with appropriate incentives and reward to encourage them to enhance the performance of the Group and that they are recognised for their individual contribution to the success of the organisation, whilst ensuring that there is no reward for excessive risk taking. The Remuneration Committee works closely with the Risk Committee in ensuring the Group Performance Share (GPS) plan outcome is moderated. The two Committees determine whether the proposed GPS outcome and performance assessments adequately reflect the risk appetite and framework of the Group; whether it took account of current and future risks; and whether any further adjustment is required or merited. The Group and the Remuneration Committee are determined to ensure that the aggregate of the variable remuneration for all colleagues is appropriate and balanced with the interests of shareholders and all other stakeholders.
Remuneration for control functions is set in relation to benchmark market data to ensure that it is possible to attract and retain staff with the appropriate knowledge, experience and skills. An appropriate balance between fixed and variable compensation supports this approach. Generally, control function staff receive a higher proportion of fixed remuneration than other colleagues and the aggregate ratio of fixed to variable remuneration for all control function staff does not exceed 100 per cent. Particular attention is paid to ensure remuneration for control function staff is linked to the performance of their function and independent from the business areas they control.
Non-Executive Director fees are reviewed periodically by the Board. Further information on fees can be found on page 112 of the DRR and page 123 of the DRP.
Details of NEDs’ benefits are set out on page 123 of the DRP.
Applies to: – Non-Executive Directors (NEDs) – Senior Management, Executive Directors, members/
– Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function1
MRTs’ vested variable remuneration (including variable remuneration subject to a holding period) can be recovered from colleagues up to seven years after the date of award in the case of a material or severe risk event (clawback). This period may be extended to ten years where there is an ongoing internal or regulatory investigation. Clawback is used alongside other performance adjustment processes.
– Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function
– Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function2
All other termination payments comply with the Group’s contractual, legal and regulatory requirements and are made in such a way as to ensure they do not reward failure or misconduct and reflect performance over time.
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Number of Material Risk Takers paid €1 million1,2 or more 2019 Material Risk
3 Total number of Material Risk Takers earning more than €1m has decreased from 53 in 2018 to 43 in 2019.
Table 4 Total outstanding deferred variable remuneration Remuneration £m Total outstanding deferred variable remuneration at 31 December 2019
Table 6 Deferred remuneration Analysis of deferred remuneration at 31 December 2019
Risk management is at the heart of our strategy to become the best bank for customers. Our mission is to protect our customers, shareholders, colleagues and the Group, whilst enabling sustainable growth in targeted segments. This is achieved through informed risk decisions and robust risk management, supported by a consistent risk-focused culture. The risk overview (pages 40 to 46) provides a summary of risk management within the Group. It highlights the important role of risk as a strategic differentiator, key areas of focus for risk during 2019, and the role of risk management in enhancing the customer experience, along with an overview of the Group’s enterprise risk management framework, and the principal risks faced by the Group.
The Group’s enterprise risk management framework (ERMF) (see risk overview, page 40) is structured to align with the industry-accepted internal control framework standards.
The Group’s risk appetite statement details the risk parameters within which the Group operates. The statement forms part of our control framework and is embedded into our policies, authorities and limits, to guide decision-making and risk management. The Board is responsible for approving the Group’s risk appetite statement at least annually. Group Board-level metrics are cascaded into more detailed business appetite metrics and limits.
Three lines of defence model The ERMF is implemented through a ‘three lines of defence’ model which defines clear responsibilities and accountabilities and ensures effective independent oversight and assurance activities take place covering key decisions.
Lloyds Banking Group Annual Report and Accounts 2019 131 to the effectiveness of risk decisions taken by business management, providing proactive advice and guidance, reviewing, challenging and reporting on the risk profile of the Group and ensuring that mitigating actions are appropriate.
Emerging risks The Group considers the following to be risks that have the potential to increase in significance and affect the performance of the Group. These risks are considered alongside the Group’s operating plan.
– We actively implement programmes to deliver legal, regulatory and mandatory change requirements.
Climate: The key risks are financial, derived from both physical risks (climate and weather-related events) and transition risks resulting from the process of adjustment towards a low carbon economy. Climate change extends across multiple risk types e.g. credit, market, conduct and operational. For example, physical and transition risks could result in the impairment of asset values, may impact the creditworthiness of our clients, and the products and services our customers require.
– Embedding of Group Cyber control framework aligned to industry recognised cyber security framework (National Institute of Standards and Technology, NIST).
– Three year cyber strategy to deliver an industry-leading approach across the Group and to embed innovation in our approach to cyber.
– Increased business and colleague engagement through education and awareness, phishing testing and cultural MI. Cyber risk is governed through all key risk committees and there are quarterly reviews of all cyber risks.
– Engagement with politicians, regulators, officials, media, trade and other bodies to monitor external developments and reassure our commitment to Helping Britain Prosper.
Data: Advancements in new technologies and new services, an increasing external threat landscape, and changing regulatory requirements increase the need for the Group to effectively govern, manage, and protect its data (or the data shared with third-party suppliers). Failure to manage data risk effectively can result in unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.
– The Group is making a significant investment to improve data privacy, including the security of data and oversight of third-parties.
Geopolitical: Current geopolitical uncertainties or political upheavals could further impede the global economic recovery, heighten instability and impact markets. Terrorist activity including cyber-attacks also has the potential to trigger changes in the economic outlook, market risk pricing and funding conditions. Additionally, the more recent coronavirus outbreak and related global health issues could potentially impact economies and markets.
– Emerging customer risks, including those pertaining to vulnerable customers, are managed through customer segmentation strategy governance throughout the change lifecycle.
Uncertainty as to the nature of such potential changes may adversely affect the value of a broad array of financial products, including any LIBOR-based securities, loans and derivatives. This may impact the availability and cost of hedging instruments and borrowings.
– Developed a communication strategy for our customers to ensure they understand the risks or outcomes they might face from transition.
– Developing an implementation plan for new products and a transition plan for legacy products, taking into account market developments and lead times for product, process and system changes
Responsible for the development, implementation and effectiveness of the Group’s enterprise risk management framework, the clear articulation of the Group’s risk appetite and monitoring and reviewing of the Group’s aggregate risk exposures and concentrations of risk.
Provides senior management oversight, challenge and accountability in connection with the Group’s engagement with conduct review matters as agreed with the Group Chief Executive.
The Group Risk Committee is supported through escalation and ongoing reporting by business area risk committees, cross-divisional committees addressing specific matters of Group-wide significance and the following second line of defence Risk committees which ensure effective oversight of risk management: Credit Risk Committees Review material credit risk, both current and emerging, and adherence to agreed risk appetite; provide insight into the performance of material credit portfolios against expectation, forecast, metrics, portfolio controls to ensure they remain within agreed credit risk appetite; provide assurance that new business is being written within agreed credit risk appetite; ensure credit risk exposures causing concerns and any risks or issues are identified as early as possible so that remedial action may be taken; review information on credit impairment levels and allowance for expected credit losses; review information on the performance of credit risk models; and the reporting of monitoring activities relating to residual value risk.
Responsible for reviewing and proposing changes to the market risk management framework, and for reviewing adequacy of data quality for managing market risks.
The Fraud and Financial Crime Prevention Committee brings together accountable stakeholders and subject matter experts to ensure that the development and application of fraud and financial crime risk management complies with the Group’s Strategic Aims, Group Corporate Responsibility, Group risk appetite and Group Fraud and Financial Crime (Anti-Money Laundering, Anti-bribery and Sanctions) policies. It provides direction and appropriate focus on priorities to enhance the Group’s fraud and financial crime risk management capabilities in line with business and customer objectives whilst aligning to the Group’s target operating model.
Ring Fenced Bank Perimeter Oversight Committee The Committee escalates perimeter control breaches to the Ring-Fenced Banks’ Board and the Ring-Fenced Banks’ Board Risk Committee.
Scenario stress testing is used for: Risk Identification: Understand key vulnerabilities of the Group and its key legal entities under adverse economic conditions
Regulatory stress tests In 2019, the Group participated in both the Annual Cyclical Scenario (ACS) UK stress test and the Biennial Exploratory Scenario (BES) run by the Bank of England (BoE). Despite the severity of the ACS stress, the Group exceeded the capital and leverage hurdles on a transitional basis, after the application of management actions and as a consequence was not required to take any capital actions. The BoE continues to review the outputs of the BES exercise.
Reverse stress testing Reverse stress testing is used to explore the vulnerabilities of the Group’s and its key legal entities’ strategies and plans to extreme adverse events that would cause the businesses to fail. Where this identifies plausible scenarios with an unacceptably high risk, the Group or its entities will adopt measures to prevent or mitigate that and reflect these in strategic plans.
Other stress testing activity The Group’s stress testing programme also involves undertaking assessments of liquidity scenarios, market risk sensitivities and scenarios, and business specific scenarios (see the principal risk categories on pages 138 to 187 for further information on risk-specific stress testing). If required, ad hoc stress testing exercises are also undertaken to assess emerging risks, as well as in response to regulatory requests. This wide ranging programme provides a comprehensive view of the potential impacts arising from the risks to which the Group is exposed and reflects the nature, scale and complexity of the Group. From 2020 onwards, climate change risk stress testing will be considered as part of the implementation of the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).
Mitigation The Group takes a range of mitigating actions with respect to change and execution risk. These include the following: The Board establishes a Group-wide risk appetite and metric for change and execution risk
Definition Data risk is defined as the risk of the Group failing to effectively govern, manage and control its data (including data processed by third party suppliers), leading to unethical decisions, poor customer outcomes, loss of value to the Group and mistrust.
Exposures Data risk is present in all aspects of the business where data is processed, both within the Group and by third parties including colleague and contractor, prospective and existing customer, client lifecycle and insight processes. Data risk manifests
When data governance fails to provide robust oversight of data decision-making and the control mechanisms to ensure strategies and management instructions are implemented effectively
When data standards are not maintained across core data, data management risks are not managed and data related issues are not remediated as a result of poor data management resulting in inaccurate, incomplete data that is not available at the right time, to the right people, to enable business decisions to be made, and regulatory reporting requirements to be fulfilled
The Group being overly reliant on a supplier which fails to provide a service
Failure to manage operational resilience effectively could impact the following other risk categories: Regulatory compliance – non-compliance with new/existing operational resilience regulations, for example, through failure to identify emerging regulation or not embedding regulatory requirements within the Group’s policies, processes and procedures
Operational risk – being unable to safely provide customers with business services
Market risk – the Group being unable to provide key services could have ramifications for the wider market and could impact share price
Measurement Operational resilience risk is managed across the Group through the Group’s enterprise risk management framework and Operational risk policies. The Group’s enterprise risk management framework includes a risk and control self-assessment process, risk impact likelihood matrix, key risk and control indicators, risk appetite, a robust incident management and escalation process, scenario analysis and an operational losses process. Board risk appetite metrics are in place and are well understood. These specific measures are subject to ongoing monitoring and reporting, including a mandatory review of thresholds on at least an annual basis. To strengthen the management of operational resilience risk, the Group mobilised an operational resilience enhancement programme which is designed to focus on end to end resilience and the management of key risks to critical processes.
Property: the Group's property portfolio remains a key focus in ensuring resilience requirements are appropriately maintained. Processes are in place to identify key buildings where a critical business process is performed. Depending on criticality, a number of mitigating controls are in place to manage the risk of severe critical business process disruption. The Group remains committed to investment in the upkeep of the property portfolio, primarily through the Group Property upkeep investment programme
Definition The risks which result from strategic plans which do not adequately reflect trends in external factors, ineffective business strategy execution, or failure to respond in a timely manner to external environments or changes in stakeholder behaviours and expectations.
Loans and advances, contingent liabilities, commitments, debt securities and derivatives also expose the Group to refinance risk. Refinance risk is the possibility that an outstanding exposure cannot be repaid at its contractual maturity date. If the Group does not wish to refinance the exposure then there is refinance risk if the obligor is unable to repay by securing alternative finance. This may occur for a number of reasons which may include: the borrower is in financial difficulty, because the terms required to refinance are outside acceptable appetite at the time or the customer is unable to refinance externally due to a lack of market liquidity. Refinance risk exposures are managed in accordance with the Group’s existing credit risk policies, processes and controls, and are not considered to be material given the Group’s prudent and through the cycle credit risk appetite. Where heightened refinance risk exists exposures are minimised through intensive account management and, where appropriate, are classed as impaired and/or forborne.
In addition, stress testing and scenario analysis are used to estimate impairment losses and capital demand forecasts for both regulatory and internal purposes and to assist in the formulation of credit risk appetite.
Collateral The principal types of acceptable collateral include: residential and commercial properties charges over business assets such as premises, inventory and accounts receivable financial instruments such as debt securities vehicles cash guarantees received from third-parties
The Group maintains appetite parameters on the acceptability of specific classes of collateral.
The Group considers risk concentrations by collateral providers and collateral type with a view to ensuring that any potential undue concentrations of risk are identified and suitably managed by changes to strategy, policy and/or business plans.
Lloyds Banking Group Annual Report and Accounts 2019 143 stressed interest rate scenario. Affordability assessments for all lending are compliant with relevant regulatory and conduct guidelines. The Group takes reasonable steps to validate information used in the assessment of a customer’s income and expenditure.
Any exceptions must be approved by the appropriate credit sanctioner. Master netting agreements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis. However, within relevant jurisdictions and for appropriate counterparty types, master nettings agreements do reduce the credit risk to the extent that, if an event of default occurs, all trades with the counterparty may be terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period, since this is the net position of all trades under the master netting agreement.
Intensive care of customers in financial difficulty The Group operates a number of solutions to assist borrowers who are experiencing financial stress. The material elements of these solutions through which the Group has granted a concession, whether temporarily or permanently, are set out below.
The net asset quality ratio increased to 29 basis points (2018: 21 basis points) as did the impairment charge to £1,291 million (2018: £937 million). This was primarily driven by material charges against two corporate cases in Commercial Banking, along with some weakening in used car prices in Retail
Low risk culture and prudent risk appetite The Group continues to take a prudent approach to credit risk, with robust credit quality and affordability controls at origination and a prudent through the cycle credit risk appetite
1 Prior period segmental comparatives restated. See note 4 on page 217.
Group loans and advances to customers The following pages contain analysis of the Group’s loans and advances to customers by sub-portfolio. Loans and advances to customers are categorised into the following stages: Stage 1 assets comprise of newly originated assets (unless purchased or originated credit impaired), as well as those which have not experienced a significant increase in credit risk. These assets carry an expected credit loss allowance equivalent to the expected credit losses that result from those default events that are possible within 12 months of the reporting date (12 month expected credit losses).
Expected credit loss allowance on drawn balances (3,150) (525) (994) (1,553) (78)
Expected credit loss allowances (drawn and undrawn) as a percentage of gross lending (%)1 0.7 0.1 4.2 28.4 0.5 1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
Expected credit loss allowance on drawn balances (3,965) (702) (1,346) (1,917)
2 Prior period segmental comparatives restated. See note 4 on page 217.
Table 1.13: Group Stage 2 loans and advances to customers (statutory basis)
Table 1.14: Group Stage 2 loans and advances to customers (underlying basis)
Portfolios Secured credit quality remains strong, with flow to arrears stable at low levels. Total secured loans and advances are broadly flat at £289.8 billion (31 December 2018: £289.2 billion), with an improved asset risk mix
The impairment release of £167 million in 2019 compared to a charge of £38 million in 2018. This reflects provision releases due to improved credit quality of the portfolio and a reassessment of Secured cases in long-term default. Total expected credit loss allowance as a percentage of loans and advances (coverage) reduced slightly to 0.4 per cent (31 December 2018: 0.5 per cent)
Other loans and advances increased by £0.2 billon to £10.6 billion. The impairment charge was £54 million for 2019 (2018: £27 million). This increase is partly due to the non-repeat of prior year IFRS 9 methodology refinements in Business Banking. Total coverage remained flat at 1.2 per cent (31 December 2018: 1.2 per cent)
3 Prior period segmental comparatives restated. See note 4 on page 217.
Expected credit loss allowance on drawn balances (1,613) (389) (662) (484) (78)
Expected credit loss allowances (drawn and undrawn) as a percentage of gross lending (%)3 1 Unsecured includes Credit cards, Loans and Overdrafts.
4 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million (31 December 2018: £17 million) for Business Banking in Other.
Table 1.20: Retail expected credit loss allowances (drawn and undrawn) as a percentage of loans and advances to customers (statutory basis)
4 UK Motor Finance for Stages 1 and 2 include £201 million (31 December 2018: £99 million) relating to provisions against residual values of vehicles subject to finance leasing agreements. These provisions are included within the calculation of coverage ratios.
Table 1.22: Retail Stage 2 loans and advances to customers (statutory basis)
Table 1.23: Retail Stage 2 loans and advances to customers (underlying basis)
2 Balances exclude the impact of the HBOS and MBNA acquisition related adjustments.
The increase is due to the resumption of business as usual litigation activity which had been partially suspended whilst changes were made to the Group’s handling of mortgages arrears.
Table 1.26: Period end and average LTVs across the Retail mortgage portfolios (underlying basis)
Average loan to value2: Stock of residential mortgages 43.6 52.3 44.0 44.9
Average loan to value2: Stock of residential mortgages 42.6 52.6 45.3 44.3
The main customer treatments included are: repair, where arrears are written on to the loan balance and the arrears position cancelled; instances where there are suspensions of interest and/or capital repayments; past term interest only mortgages; and refinance personal loans.
As at 31 December 2019, 98.8 per cent of forbearance loans are captured in Stage 2 or Stage 3 for IFRS 9 and hold provision on a lifetime basis (31 December 2018: 98.0 per cent).
2 2019 balances include MBNA, 2018 balances have been restated on the same basis.
2 Balances exclude the impact of HBOS and MBNA acquisition related adjustments.
There are headwinds in a number of sectors including agriculture, construction, manufacturing and consumer related sectors such as retail. Performance and monitoring of vulnerable sectors remains a key focus at this stage of the credit cycle
Stage 2 loans as a proportion of total loans and advances to customers remained broadly stable at 6.2 per cent (31 December 2018: 6.5 per cent). Stage 2 ECL allowances as a percentage of Stage 2 drawn balances were lower at 4.2 per cent (31 December 2018: 5.1 per cent) with the reduction weighted toward SME mainly due to enhanced approach to loan amortisation within the IFRS 9 model and a number of other model refinements
The Global Corporates business continues to have a predominance of UK based, and to a lesser extent, US and European-based multi-national investment grade clients. The portfolio remains of good quality and is well positioned for the current economic outlook
Asset quality ratio 0.30% 0.06% 24bp 1 Prior period segmental comparatives restated. See note 4 on page 217.
Total Up to date 1-30 days past due Over 30 days past due
Focus remains on the UK market, on good quality customers, with a proven track record in real estate and where cash flows are robust
Both investment and development lending is subject to specific credit risk appetite criteria. Development lending criteria includes maximum loan to gross development value and maximum loan to cost, with funding typically only released against completed work as confirmed by the Group’s monitoring quantity surveyor
The Group’s business areas and sub-groups are each exposed to different types and levels of climate-related risk in their operations. For example, the general insurance function regularly uses weather, climate and environmental models and data to assess its insurance risk from covered perils such as windstorm and flood. A team of specialist scientists are employed within underwriting to do this work and they also regularly monitor the state of climate science to assess the need to include its potential impacts within pricing and solvency.
The Group has been a signatory to the Equator Principles since 2008 and has adopted and applied the expanded scope of Equator Principles III and committed itself to adoption of Equator Principles 4 during 2020. The Equator Principles support the Group’s approach to assessing and managing environmental and social issues in project finance, projectrelated corporate loans and bridge loans. The Group has also been a signatory to the UN Principles for Responsible Investment (UNPRI) since 2012, which incorporate ESG (environmental, social and governance) risk considerations in asset management. Scottish Widows is responsible for the annual UNPRI reporting process.
Business units identify, assess and implement policy and regulatory requirements and establish local controls, processes, procedures and resources to ensure appropriate governance and compliance
Business units regularly produce management information to assist in the identification of issues and test management controls are working effectively
Ineffective management and monitoring of products and their distribution (including the sales process)
Outsourcing of customer service and product delivery to third-parties that do not have the same level of control, oversight and culture as the Group
Measurement To articulate its conduct risk appetite, the Group has sought more granularity through the use of suitable Conduct Risk Appetite Metrics (CRAMs) and tolerances that indicate where it may be operating outside its conduct risk appetite. These include Board-level conduct risk metrics covering an assessment of overall CRAMs performance, out of appetite CRAMs, Financial Ombudsman Service (FoS) change rates and complaints.
Mitigation The Group takes a range of mitigating actions with respect to conduct risk and remains focused on delivering a leading customer experience. The Group’s ongoing commitment to good customer outcomes sets the tone from the top and supports the development of the right customer-centric culture – strengthening links between actions to support conduct, culture and customer and enabling more effective control management. Actions to encourage good conduct include: Conduct risk appetite established at Group and business area level, with metrics included in the Group risk appetite to ensure ongoing focus
Customer needs considered through divisional customer plans, with integral conduct lens, reviewed and challenged by Group Customer First Committee (GCFC)
Cultural transformation: achieving our values-led culture through a focus on our behaviours to ensure we are transforming our Group culture for success in a digital world. This is supported by strong direction and tone from senior executives and the Board
Active engagement with regulatory bodies and other stakeholders to develop understanding of concerns related to customer treatment, effective competition and market integrity, to ensure that the Group’s strategic conduct focus continues to meet evolving stakeholder expectations
Monitoring Monitoring and reporting is undertaken at Board, Group, entity and divisional committees. As part of the reporting of CRAMs, a robust outcomes testing regime is in place to determine whether the Group is delivering fair outcomes for customers.
GCFC acts as the guardian of customer experience and has responsibility for monitoring and reviewing plans and actions to improve it, providing oversight of customer outcomes and customer experience and providing challenge to divisions to make changes to support the delivery of the Group’s vision and foster a customer-centric culture.
Failure to ensure compliance with increasingly complex and detailed regulation including anti-money laundering, anti-bribery, counterterrorist financing, and financial sanctions and prohibitions laws and regulations
A number of these risks could increase where there is a reliance on thirdparty suppliers to provide services to the Group or its customers.
Table 1.38 below shows high level loss and event trends for the Group using Basel II categories. Based on data captured on the Group’s Risk and Control Self-Assessment, in 2019 the highest frequency of events occurred in external fraud (67.89 per cent) and execution, delivery and process management (18.04 per cent). Clients, products and business practices accounted for 72.70 per cent of losses by value, driven by legacy issues where impacts materialised in 2019 (excluding PPI).
The increasing digitisation of the business is changing the capability mix required and may impact our ability to attract and retain talent
Failure to manage capacity, colleagues having excessive demands placed on them resulting in wellbeing issues and business objectives not being met
Mitigation The Group takes many mitigating actions with respect to people risk. Key areas of focus include: Focusing on leadership and colleague engagement, through delivery of strategies to attract, retain and develop high calibre people together with implementation of rigorous succession planning
Managing organisational capability and capacity through divisional people strategies to ensure there are the right skills and resources to meet our customers’ needs and deliver our strategic plan
Definition Insurance underwriting risk is defined as the risk of adverse developments in the timing, frequency and severity of claims for insured/underwritten events and in customer behaviour, leading to reductions in earnings and/ or value.
The FPC regularly considers the adequacy of the UK CCYB rate in light of the evolution of the overall risk environment. As at 31 December 2019 non-zero buffer rates also currently apply for Bulgaria, the Czech Republic, Denmark, France, Hong Kong, Iceland, Ireland, Lithuania, Norway, Slovakia and Sweden. During 2020 Belgium, Germany, and Luxembourg will implement non-zero buffer rates. The Group’s overall countercyclical capital buffer at 31 December 2019 was 0.9 per cent of risk-weighted assets which reflects the concentration of exposures of the Group to the UK.
The minimum leverage ratio requirement under the UK Leverage Ratio Framework is 3.25 per cent. This is supplemented by a time-varying countercyclical leverage buffer (CCLB) which is determined by multiplying the leverage exposure measure by 35 per cent of the countercyclical capital buffer (CCYB) rate. As at 31 December 2019 the CCLB for the Group was 0.3 per cent. This is set to increase in proportion to the increase in the countercyclical capital buffer following the FPC’s decision to increase the UK CCYB rate to 2.0 per cent with effect from December 2020. An additional leverage ratio buffer (ALRB) of 0.7 per cent applies to the RingFenced Bank sub-group and is determined by multiplying the Ring-Fenced Bank sub-group leverage exposure measure by 35 per cent of the SRB. This equates to 0.6 per cent of the total leverage exposure measure at Group level.
At least 75 per cent of the 3.25 per cent minimum leverage ratio requirement as well as 100 per cent of regulatory leverage buffers must be met by CET1 capital.
Mitigation The Group has a capital management framework that includes the setting of capital risk appetite. Close monitoring of capital and leverage ratios is undertaken to ensure the Group meets regulatory requirements and risk appetite levels and deploys its capital resources efficiently. Comprehensive stress testing analyses take place to evidence capital adequacy.
Monitoring The Group’s capital is actively managed and monitoring capital ratios is a key factor in the Group’s planning processes and stress testing, which separately cover the Ring-Fenced Bank sub-group and key individual banking entities. Multi-year base case forecasts of the Group’s capital position, based upon the Group’s operating plan, are produced at least annually to inform the Group’s capital plan whilst shorter term forecasts are more frequently undertaken to understand and respond to variations of the Group’s actual performance against the plan. The Group’s capital plan is tested for capital adequacy using a range of stress scenarios and sensitivities covering adverse economic conditions as well as other adverse factors that could impact the Group.
For the Bank of England Annual Cyclical Scenario stress test, the Bank of England has taken action to avoid an unwarranted de facto increase in capital requirements that could result from the interaction of IFRS 9. The stress hurdle rates for banks participating in the exercise are adjusted to recognise the additional resilience provided by the earlier provisions taken under IFRS 9. The Bank of England is considering options for a more enduring treatment of IFRS9 provisions in the capital framework and alternative options will be explored further during the 2020 Bank of England ACS stress test.
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 and management actions, the Group continues to maintain a strong capital position that exceeds both minimum regulatory requirements and the Group’s risk appetite and is consistent with market expectations.
This takes into account, amongst other things: the minimum Pillar 1 CET1 capital requirement of 4.5 per cent of risk-weighted assets the Group’s Pillar 2A set by the PRA. During the year the PRA reduced the Group’s Pillar 2A requirement from 4.7 per cent to 4.6 per cent of risk-weighted assets at 31 December 2019, of which 2.6 per cent must be met by CET1 capital the capital conservation buffer (CCB) requirement of 2.5 per cent of risk-weighted assets the Group’s current countercyclical capital buffer (CCYB) requirement of 0.9 per cent of risk-weighted assets, which is set to increase following the FPC’s decision to increase the UK CCYB rate from 1.0 per cent to 2.0 per cent, effective from December 2020. In conjunction the PRA will consult during 2020 on a proposed reduction in Pillar 2A capital requirements by 50 per cent of this increase in the CCYB, equivalent to reducing the Pillar 2A CET1 requirement by 28 per cent of the increase.
Dividend policy The Group has established a policy to pay a progressive and sustainable ordinary dividend. Any growth in the ordinary dividend will be decided by the Board in light of the circumstances at the time.
The Board also gives due consideration to the return of capital through the use of special dividends or share buybacks. Surplus capital represents capital over and above the amount management wish to retain to grow the business, meet regulatory requirements and cover uncertainties. The amount of required capital may vary from time to time depending on circumstances and by its nature there can be no guarantee that any return of surplus capital will be appropriate.
Distributable reserves are determined as required by the Companies Act 2006 by reference to a company’s individual financial statements. At 31 December 2019 Lloyds Banking Group plc (‘the Company’) had accumulated distributable reserves of approximately £10 billion. Substantially all of the Company’s merger reserve is available for distribution under UK company law as a result of transactions undertaken to recapitalise the Company in 2009.
In May 2019 the Group announced that it will move to the payment of quarterly dividends in 2020, with the first quarterly dividend in respect of the period to 31 March 2020 payable in June 2020. The new approach will result in three equal interim ordinary dividend payments for the first three quarters of the year followed by, subject to performance, a larger final dividend for the fourth quarter of the year. The first three quarterly payments, payable in June, September and December will be equal to 20 per cent of the previous year’s total ordinary dividend per share. The fourth quarter payment will be announced with the full year results, with the amount continuing to deliver a full year dividend payment that reflects the Group’s financial performance and objective of a progressive and sustainable ordinary dividend.
Minimum requirement for own funds and eligible liabilities (MREL) In 2015, the Financial Stability Board established an international standard for the total loss absorbing capacity (TLAC) of global systemically important banks (G-SIBs). The standard, which applies from 1 January 2019, is designed to enhance the resilience of the global financial system by ensuring that failing G-SIBs have sufficient capital to absorb losses and recapitalise under resolution, whilst continuing to provide critical banking services.
Applying the Bank of England’s MREL SoP to current minimum capital requirements, the Group’s indicative MREL requirement, excluding regulatory capital and leverage buffers, is as follows: From 1 January 2020, the higher of 2 times Pillar 1 plus Pillar 2A, equivalent to 20.6 per cent of risk-weighted assets, or 6.5 per cent of the UK leverage ratio exposure measure
The Bank of England will review the calibration of MREL in 2020 before setting final end-state requirements to be met from 2022. This review will take into consideration any changes to the capital framework, including the finalisation of the Basel III reforms.
Analysis of capital position The Group’s pro forma CET1 capital build amounted to 207 basis points before PPI, and to 86 basis points after the in-year PPI charge, reflecting: Underlying capital build (198 basis points), including the dividend paid up by the Insurance business in February 2020 in relation to its 2019 earnings (18 basis points)
The transitional total capital ratio, after ordinary dividends, reduced to 21.3 per cent (21.5 per cent on a pro forma basis), largely reflecting the reduction in CET1 capital and the net reduction in AT1 capital instruments, partially offset by the reduction in risk-weighted assets.
Table 1.39: Capital resources (audited) The table below summarises the consolidated capital position of the Group. The Group’s Pillar 3 Report will provide a comprehensive analysis of the own funds of the Group.
Movements in capital resources The key difference between the transitional capital calculation as at 31 December 2019 and the fully loaded equivalent is primarily related to capital securities that previously qualified as tier 1 or tier 2 capital, but that do not fully qualify under the regulation, which can be included in additional tier 1 (AT1) or tier 2 capital (as applicable) up to specified limits which reduce by 10 per cent per annum until 2022. In addition, following revisions to eligibility criteria for capital instruments under CRR II, certain tier 1 capital instruments of the Group that will transition to tier 2 capital by 2022 will cease to qualify as regulatory capital in June 2025. The key movements on a transitional basis are set out in the table below.
Movement in treasury shares and employee share schemes 233 – – 233
Pension movements: Removal of defined benefit pension surplus 463 – – 463
2 Reflects the accrual for the 2019 full year ordinary dividend and the reversal of the accrual for the 2018 full year ordinary dividend which was paid during the year.
Table 1.41: Minimum requirement for own funds and eligible liabilities (MREL) An analysis of the Group’s current transitional MREL position is provided below.
Total MREL resources reduced by £714 million, largely as a result of the reduction in total capital resources, offset in part by the increase in senior unsecured securities following the issuances made during the year.
Total risk-weighted assets 203,431 206,366 1 Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of being deducted from CET1 capital.
Movements in risk levels (market risk only) – – – – (79) – (79)
Credit risk, risk-weighted assets: Asset size reduction of £3.9 billion, largely driven by commercial portfolio management, includes changes in book size (both drawn and undrawn balances) and composition, excluding acquisitions and disposals
Model updates increase in risk-weighted assets of £2.3 billion which relates to changes to the Retail mortgage models
The average UK leverage ratio of 5.0 per cent over the quarter largely reflected a higher average exposure measure compared to the position at 31 December 2019, with the reductions in the derivative exposure measure and off-balance sheet items described above largely occurring towards the end of the quarter.
3 The average UK leverage ratio is based on the average of the month end tier 1 capital position and average exposure measure over the quarter (1 October 2019 to 31 December 2019). The average of 5.0 per cent compares to 4.9 per cent at the start and 5.1 per cent at the end of the quarter.
5 Calculated in accordance with CRD IV rules which include central bank claims within the leverage exposure measure.
The Group has opted to apply paragraph 4 of CRR Article 473a (the ‘transitional rules’) which allows for additional capital relief in respect of any post 1 January 2018 increase in Stage 1 and Stage 2 IFRS 9 expected credit loss provisions (net of regulatory expected losses) during the transition period. As at 31 December 2019 no additional capital relief has been recognised.
Stress testing The Group undertakes a wide-ranging programme of stress testing providing a comprehensive view of the potential impacts arising from the risks to which the Group and its key legal entities are exposed. One of the most important uses of stress testing is to assess the resilience of the operational and strategic plans of the Group and its legal entities to adverse economic conditions and other key vulnerabilities. As part of this programme the Group conducted a macroeconomic stress test of the four year operating plan in the first quarter of 2019.
G-SIB indicators Although the Group is not currently classified as a Global Systemically Important Bank (G-SIB), by virtue of the Group’s leverage exposure measure exceeding €200 billion the Group is required to report G-SIB indicator metrics to the PRA. The Group’s indicator metrics used within the 2019 Basel G-SIBs annual exercise will be disclosed from April 2020 and the results are expected to be made available by the Basel Committee later this year.
The Group’s funding and liquidity position is underpinned by its significant customer deposit base, and is supported by strong relationships across customer segments. The Group has consistently observed that in aggregate the retail deposit base provides a stable source of funding. Funding concentration by counterparty, currency and tenor is monitored on an ongoing basis and where concentrations do exist, these are managed as part of the planning process and limited by internal funding and liquidity risk monitoring framework, with analysis regularly provided to senior management.
Monitoring Daily monitoring and control processes are in place to address internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a daily basis for early signs of liquidity risk in the market or specific to the Group. This captures regulatory metrics as well as metrics the Group considers relevant for its liquidity profile. These are a mixture of quantitative and qualitative measures, including: daily variation of customer balances; changes in maturity profiles; funding concentrations; changes in LCR outflows; credit default swap (CDS) spreads; and basis risks.
Financial assets at fair value through other comprehensive income 25.0 24.0 4
6 Excludes repos of £9.5 billion (31 December 2018: £1.8 billion).
Other currencies £bn Total £bn 1 Private placements include structured bonds.
High quality covered bonds 2.4 1.0 1.9 0.8 1 Designated multilateral development bank (MDB).
Financial assets at amortised cost: Loans and advances to banks – – 1 1 – 1,858 3,851 4,065 9,774 9,775
Financial assets at fair value through other comprehensive income: – – 7,278 7,278 – 17,114 – 423 17,537 24,815 1 Assets regarded by the Group to be readily realisable in the normal course of business, to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.
Definition Governance risk is defined as the risk that the Group’s organisational infrastructure fails to provide robust oversight of decision-making and the control mechanisms to ensure strategies and management instructions are implemented effectively.
Mitigation The Group’s enterprise risk management framework (ERMF) establishes robust arrangements for risk governance, in particular by: Defining individual and collective accountabilities for risk management, risk oversight and risk assurance through a three lines of defence model which supports the discharge of responsibilities to customers, shareholders and regulators
Supporting a consistent approach to Group-wide behaviour and risk decision-making through a Group policy framework which helps everyone understand their responsibilities by clearly articulating and communicating rules, standards, boundaries and risk appetite measures which can be controlled, enforced and monitored
The Group’s Code of Responsibility embodies its values and reflect its commitment to operating responsibly and ethically both at a business and an individual level. All colleagues are required to adhere to the code in all aspects of their roles.
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.
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 asset swapped and held at fair value through other comprehensive income with the remainder held as financial assets at fair value through profit and loss. Further information on these balances can be found under funding and liquidity risk on page 175.
Measurement In addition to measuring single factors, Group risk appetite is calibrated primarily to five multi-risk Group economic 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.
The Group risk appetite is cascaded first to the Group Asset and Liability Committee (GALCO), chaired by the Chief Financial Officer, where risk appetite is approved and monitored by risk type, and then to Group Market Risk Committee (GMRC) where risk appetite is sub-allocated by division. These metrics are reviewed regularly by senior management to inform effective decision-making.
Optionality risk arises predominantly from embedded optionality within assets, liabilities or off-balance sheet items where either the Group or the customer can affect the size or timing of cash flows. One example of this is mortgage prepayment risk where the customer owns an option allowing them to prepay when it is economical to do so. This can result in customer balances amortising more quickly or slowly than anticipated due to customers’ response to changes in economic conditions.
Table 1.56 below shows supplementary value sensitivity to a steepening and flattening (c.100 basis points around the 3 year point) in the yield curve. This ensures there are no unintended consequences to managing risk to parallel shifts in rates.
Mitigation The Group’s policy is to optimise reward whilst managing its market risk exposures within the risk appetite defined by the Board. The Group Market Risk Policy and procedures outlines the hedging process, and the centralisation of risk from divisions into GCT, e.g. via the transfer pricing framework. GCT is responsible for managing the centralised risk and does this through natural offsets of matching assets and liabilities, and appropriate hedging activity of the residual exposures, subject to the authorisation and mandate of GALCO within the Board risk appetite. The hedges are externalised to the market by derivative desks within GCT and Commercial Banking Markets. The Group mitigates income statement volatility through hedge accounting. This reduces the accounting volatility arising from the Group’s economic hedging activities by utilising both LIBOR and bank base rate assets. Any hedge accounting ineffectiveness that leads to accounting volatility is continuously monitored.
Table 1.58 demonstrates the impact of the Group’s UK Recession scenario on the Insurance business’ portfolio (with no diversification benefit, but after the impact of Group consolidation on interest rate and credit spreads). The amounts include movements in assets, liabilities and the value of in-force business in respect of insurance contracts and participating investment contracts.
Monitoring Market risks in the Insurance business are monitored by Insurance senior executive committees and ultimately the Insurance Board. Monitoring includes the progression of market risk capital against risk appetite limits, as well as the sensitivity of profit before tax to combined market risk stress scenarios and in year market movements. Asset and liability matching positions and hedges in place are actively monitored and if necessary rebalanced to be within agreed tolerances. In addition market risk is controlled via approved investment policies and mandates.
Table 1.59: Trading portfolios: VaR (1-day 95 per cent confidence level) (audited)
Notes to the parent company financial statements 321 1. Basis of preparation and accounting policies 2. Amounts due from subsidiaries 3. Share capital, share premium and other equity instruments 4. Other reserves 5. Retained profits 6. Debt securities in issue 7. Subordinated liabilities 8. Related party transactions 9. Financial instruments 10. Other information 188 Lloyds Banking Group Annual Report and Accounts 2019
We have audited the financial statements, included within the Annual Report and Accounts (the “Annual Report”), which comprise: consolidated and parent company balance sheets as at 31 December 2019; the consolidated income statement and the consolidated statement of comprehensive income for the year then ended; the consolidated and parent company cash flow statements for the year then ended; and the consolidated and parent company statements of changes in equity for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
Other than those disclosed in note 12 to the financial statements, we have provided no non-audit services to the Group or the parent company in the period from 1 January 2019 to 31 December 2019.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
We found the key controls were designed, implemented and operated effectively, and therefore determined that we could place reliance on these key controls for the purposes of our audit.
We found these key controls were designed, implemented and operated effectively, and therefore determined that we could place reliance on these key controls for the purposes of our audit.
For the Stage 1 and 2 allowance, we focused on: – The identification and assessment of the completeness and accuracy of critical data applied in the ECL calculation. – The governance over the ECL determination, including the validation of the ECL methodology, assumptions and inputs, and the annual model performance validation; and – The review, challenge and approval processes in place to assess the overall reasonableness of the allowance for ECL.
For a sample of Stage 3 credit impaired loans, we: – Evaluated the basis on which the allowance was determined, and the evidence supporting the analysis performed by management; – We independently challenged whether the key assumptions used, such as the recovery strategies, collateral rights and ranges of potential outcomes, were appropriate, given the borrower’s circumstances; – Re-performed management’s allowance calculation, assessing supporting evidence in relation to key inputs on a case by case basis, that included expected future cash flows, discount rates, valuations of collateral held, and the weightings applied to scenario outcomes; and – Where relevant, specifically considered whether valuations were up to date, and consistent with the strategy being followed in respect of the particular borrower and assessed the sensitivity to key assumptions used.
We considered regulatory developments and reviewed the Group’s correspondence with the FCA and PRA, discussing the content of any correspondence considered to be pertinent to our audit with management. We also met with each regulator.
Some of the economic and non-economic actuarial assumptions used in valuing the insurance contract liabilities and the value of in-force business asset are highly judgemental in nature, in particular persistency (the retention of policies over time), longevity (the expectation of how long an annuity policyholder will live and how that might change over time), maintenance expenses (future expenses incurred to maintain existing policies to maturity), credit default and illiquidity premium (adjustments made to the discount rate).
Refer to page 206 (Note 2: Accounting policies), page 214 (Note 3: Critical accounting judgements and estimates) and pages 275 and 289 (Notes 50 and 53).
The Group enters into derivative contracts in order to manage and economically hedge risks such as interest and foreign exchange rate risk. These arrangements create accounting mismatches which are addressed through designating instruments into fair value or cash flow hedge accounting relationships.
Our testing included the following: – Examining selected hedge documentation to assess whether it complies with the requirements of IFRS; – Testing the key year-end reconciliations between underlying source systems and the models used to manage hedging relationships; – Independently assessing whether management have captured and are monitoring all material sources of ineffectiveness, including any impact of reference rate reform; – Re-performing a sample of hedge effectiveness calculations; and – Testing a sample of manual adjustments posted to record ineffectiveness.
We tested the design and operating effectiveness of those key controls identified that manage IT privileged access across the in-scope IT platforms. Specifically, we tested controls over: – The completeness and accuracy of the Access Controls Lists from IT platforms that are used by downstream IT security processes; – The onboarding and management of IT privileged accounts through the privileged access break-glass tool (including static IT privileged accounts); – The monitoring of security events on IT platforms by the Security Operations Centre; and – Approval, recertification and timely removal of access from IT systems.
The Group is structured into three segments being Retail, Commercial Banking, and Insurance and Wealth. Each of the segments comprises a number of components. The consolidated financial statements are a consolidation of the components.
Components within the scope of our audit contributed 98 per cent of Group total assets and 86 per cent of Group total income.
Overall materiality £360 million (2018: £360 million). £360 million (2018: £360 million).
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £18 million (Group and parent company audit) (2018: £15 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and 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 UK Corporate Governance Code (the “Code”); and considering whether the statements are consistent with the knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit. (Listing Rules)
Other Code Provisions We have nothing to report in respect of our responsibility to report when: – The statement given by the directors, on page 97, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and parent company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and parent company obtained in the course of performing our audit; – The section of the Annual Report on page 85 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; and – The directors’ statement relating to the parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Use of this report This report, including the opinions, has been prepared for and only for the parent company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: Remeasurements before tax (1,433) 167 628
Movements in revaluation reserve in respect of equity shares held at fair value through other comprehensive income: Change in fair value – (97)
Movement in cash flow hedging reserve: Effective portion of changes in fair value taken to other comprehensive income 1,209 234 (363)
Other comprehensive income for the year, net of tax (1,126) (113) (395)
Liabilities arising from insurance contracts and participating investment contracts 32 111,449 98,874
Distributions on other equity instruments – – (466) (466) – – (466)
Redemptions of other equity instruments (note 44) – – – – (1,481) – (1,481)
Issue of other equity instruments – – (5) (5) 1,136 – 1,131
Realised gains and losses on equity shares held at fair value through other comprehensive income – 129 (129) – – – –
Consolidated statement of changes in equity for the year ended 31 December 204 Lloyds Banking Group Annual Report and Accounts 2019
Cash and cash equivalents at end of year 54(D) 57,811 55,224 60,982
Note 1: Basis of preparation The consolidated financial statements of Lloyds Banking Group plc and its subsidiary undertakings (the Group) have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) . IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the IFRS Interpretations Committee (IFRS IC) and its predecessor body. On adoption of IFRS 9 in 2018, the Group elected to continue applying hedge accounting under IAS 39. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued by the IASB.
The Group adopted IFRS 16 Leases from 1 January 2019. IFRS 16 replaces IAS 17 Leases and addresses the classification and measurement of all leases. The Group’s accounting as a lessor under IFRS 16 is substantially unchanged from its approach under IAS 17; however for lessee accounting there is no longer a distinction between the accounting for finance and operating leases. For all assets the lessee recognises a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the lessee’s incremental borrowing rate. Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. Payments associated with leases with a lease term of 12 months or less and leases of low-value assets are recognised as an expense in profit or loss on a straight-line basis.
The Group has also implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on other equity instruments, previously taken directly to retained profits, is reported within tax expense in the income statement. Comparatives have been restated. Adoption of these amendments to IAS 12 has resulted in a reduction in tax expense and an increase in profit for the year in 2019 of £115 million (2018: £106 million; 2017: £102 million) for the Group and £89 million (2018: £82 million; 2017: £79 million) for the Company. There is no impact on shareholders' equity or on earnings per share.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating to the issuance of debt instruments (see (E) (5) below) or share capital (see (P) below) . Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair value at the acquisition date.
(C) Other intangible assets Intangible assets which have been determined to have a finite useful life are amortised on a straight line basis over their estimated useful life as follows: up to 7 years for capitalised software; 10 to 15 years for brands and other intangibles.
(D) Revenue recognition (1) Net interest income Interest income and expense are recognised in the income statement for all interest-bearing financial instruments using the effective interest method, except for those classified at fair value through profit or loss. The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument to the gross carrying amount of the financial asset (before adjusting for expected credit losses) or to the amortised cost of the financial liability, including early redemption fees, and related penalties, and premiums and discounts that are an integral part of the overall return. Direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument are also taken into account. Interest income from non-credit impaired financial assets is recognised by applying the effective interest rate to the gross carrying amount of the asset; for credit impaired financial assets, the effective interest rate is applied to the net carrying amount after deducting the allowance for expected credit losses. Impairment policies are set out in (H) below.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. The fair values of derivative financial instruments are adjusted where appropriate to reflect credit risk (via credit valuation adjustments (CVAs) , debit valuation adjustments (DVAs) and funding valuation adjustments (FVAs) ) , market liquidity and other risks.
Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be designated as a hedge of another financial instrument such as a loan or deposit or a portfolio of such instruments. At the inception of the hedge relationship, formal documentation is drawn up specifying the hedging strategy, the hedged item, the hedging instrument and the methodology that will be used to measure the effectiveness of the hedge relationship in offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness of the hedging relationship is tested both at inception and throughout its life and if at any point it is concluded that it is no longer highly effective in achieving its documented objective, hedge accounting is discontinued. Note 17 provides details of the types of derivatives held by the Group and presents separately those designated in hedge relationships. In respect of interest rate benchmark reform, the Group assumes that the interest rate benchmark on which the hedged cash flows and/or the hedged risk are based, or the interest rate benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of interest rate benchmark reform. The Group does not discontinue a hedging relationship during the period of uncertainty arising from the interest rate benchmark reform solely because the actual results of the hedge are not highly effective.
At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses) . In the event of a significant increase in credit risk since origination, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses) . Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk since initial recognition are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are allocated to Stage 3. Some Stage 3 assets, mainly in Commercial Banking, are subject to individual rather than collective assessment. Such cases are subject to a risk-based impairment sanctioning process, and these are reviewed and updated at least quarterly, or more frequently if there is a significant change in the credit profile.
In certain circumstances, the Group will renegotiate the original terms of a customer’s loan, either as part of an ongoing customer relationship or in response to adverse changes in the circumstances of the borrower. In the latter circumstances, the loan will remain classified as either Stage 2 or Stage 3 until the credit risk has improved such that it no longer represents a significant increase since origination (for a return to Stage 1) , or the loan is no longer credit impaired (for a return to Stage 2) . Renegotiation may also lead to the loan and associated allowance being derecognised and a new loan being recognised initially at fair value.
Lease payments are allocated between the liability and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset is depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis.
Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of twelve months or less. Low-value assets comprise IT equipment and small items of office furniture.
Note 2: Accounting policies continued (2) General insurance business The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the balance sheet within liabilities arising from insurance contracts and participating investment contracts on a basis that reflects the length of time for which contracts have been in force and the projected incidence of risk over the term of the contract and only credited to the income statement when earned. Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future policy terminations based upon past experience.
(P) Share capital Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds. Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the period in which they are paid.
The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty in these financial statements, which together are deemed critical to the Group’s results and financial position, are as follows: Allowance for expected credit losses The Group recognises an allowance for expected credit losses for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income and certain loan commitment and financial guarantee contracts. At 31 December 2019 the Group’s expected credit loss allowance was £3,455 million (31 December 2018: £3,362 million) , of which £3,278 million (31 December 2018: £3,169 million) was in respect of drawn balances.
The calculation of the Group’s expected credit loss (ECL) allowances and provisions against loan commitments and guarantees under IFRS 9 requires the Group to make a number of judgements, assumptions and estimates. The most significant are set out below.
The setting of precise trigger points combined with risk indicators requires judgement. The use of different trigger points may have a material impact upon the size of the ECL allowance. The Group monitors the effectiveness of SICR criteria on an ongoing basis.
The accounting valuation of the Group’s defined benefit pension schemes’ liabilities requires management to make a number of assumptions. The key areas of estimation uncertainty are the discount rate applied to future cash flows and the expected lifetime of the schemes’ members. The discount rate is required to be set with reference to market yields at the end of the reporting period on high quality corporate bonds in the currency and with a term consistent with the defined benefit pension schemes’ obligations. The average duration of the schemes’ obligations is approximately 18 years. The market for bonds with a similar duration is illiquid and, as a result, significant management judgement is required to determine an appropriate yield curve on which to base the discount rate. The cost of the benefits payable by the schemes will also depend upon the life expectancy of the members. The Group considers latest market practice and actual experience in determining the appropriate assumptions for both current mortality expectations and the rate of future mortality improvement. It is uncertain whether this rate of improvement will be sustained going forward and, as a result, actual experience may differ from current expectations. The effect on the net accounting surplus or deficit and on the pension charge in the Group’s income statement of changes to the principal actuarial assumptions is set out in part (v) of note 36.
More detail on the nature of the assumptions that have been made and key sensitivities is set out in note 38.
In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the balance sheet at fair value using a three level hierarchy. Financial instruments categorised as level 1 are valued using quoted market prices and therefore minimal estimates are made in determining fair value. The fair value of financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation techniques including discounted cash flow analysis and valuation models.
The Group’s activities are organised into three financial reporting segments: Retail; Commercial Banking; and Insurance and Wealth.
Total underlying income, net of insurance claims 10,821 4,340 2,133 815 18,109
Insurance and other, net of insurance claims 247 356 2,146 (1,087) 1,662
Other external income, net of insurance claims 1,623 1,112 2,343 (530) 4,548
Segment other income, net of insurance claims 2,097 1,670 1,865 378 6,010
Total underlying income, net of insurance claims 10,845 4,843 1,979 858 18,525
Segment underlying income, net of insurance claims 10,845 4,843 1,979 858 18,525
Analysis of segment underlying other income, net of insurance claims: Credit and debit card fees 640 312 1 – 953
Gains less losses on disposal of available-for-sale financial assets – 5 (3) 444 446
Insurance and other, net of insurance claims 6 (6) 2,223 (96) 2,127
Other external income, net of insurance claims 1,313 618 2,432 259 4,622
Other segment items: Investments in joint ventures and associates at end of year 12 – – 53 65 1 Restated see page 217.
3 Net of profits on disposal of operating lease assets of £41 million (2018: £60 million; 2017: £32 million) .
Debt securities held at amortised cost 2.23 1.60 1.29 122 66 43
Net interest income 10,180 13,396 10,912 1 Includes £26 million (2018: £31 million; 2017: £12 million) of interest income on liabilities with negative interest rates and £45 million (2018: £46 million; 2017: £49 million) in respect of interest income on finance leases.
The most significant performance obligations undertaken by the Group are in respect of current accounts, the provision of other banking services for commercial customers, credit and debit card services and investment management services.
Investment management services principally comprise the management and administration of policyholders’ funds in accordance with investment mandates. Fees are generally based on the value of the assets under management.
Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss as follows: 2019 £m 2018 £m 2017 £m
Other financial instruments mandatorily held at fair value through profit or loss: Debt securities, loans and advances 3,509 (26) 1,122
Gains less losses on disposal of financial assets at fair value through other comprehensive income (2017: available-for-sale financial assets) (note 42) 196 275 446
Amortisation of acquired value of in-force non-participating investment contracts (note 25) 30 40 34
Methodology, model and assumption changes Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; either as changes to the model inputs or to the underlying assumptions, as well as the impact of changing the models used.
Tax effect of share of results of joint ventures – – (1)
Profit attributable to equity shareholders – basic and diluted 2,459 3,975 3,144 1 Restated, see note 1.
Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, which has been calculated after deducting 25 million (2018: 38 million; 2017: 57 million) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.
There were 24 million anti-dilutive share options and awards excluded from the calculation of diluted earnings per share (2018: none; 2017: none) .
Debt securities: Other public sector securities – 2,126 2,126 – 2,064 2,064
Accumulated amount of fair value adjustment on the hedged item Cash flow hedge reserve
Central bank balances5 (16) 30 20 1 Included within loans and advances to customers.
3 Included within financial assets at fair value through other comprehensive income.
Note 18: Financial assets at amortised cost Year ended 31 December 2019
Note 18: Financial assets at amortised cost continued The movement tables are compiled by comparing the position at 31 December to that at the beginning of the year. Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the asset is held at 31 December, with the exception of those held within Purchased or originated credit-impaired, which are not transferrable.
Later than 1 year and not later than 2 years 347 516
Later than 3 years and not later than 4 years 145 201
Later than 4 years and not later than 5 years 208 178
Later than 1 year and not later than 2 years 326 407
Charge to the income statement (note 13) 139 10 1,356 (193) 1,312
Loans and advances to customers: Debt securities – – 3 – 3
Provisions in relation to loan commitments and financial guarantees 95 77 5 – 177
Exchange and other adjustments include certain adjustments, prescribed by IFRS 9, in respect of purchased or originated credit-impaired financial assets.
Other items charged to the income statement 3 (45) (59) (193) (294)