About us lloyds Banking Group is a leading uK based financial services group providing a wide range of services, mostly in the uK, to individual and business customers.
The Group is quoted on the london Stock exchange and the new York Stock exchange and is one of the largest companies in the FTSe 100 index of leading uK companies.
Lloyds Banking Group Annual Report and Accounts 2013 1Lloyds Banking Group
A simple, low risk retail and commercial bank focused on becoming the best bank for customers and helping Britain prosper.
We provided more than 80,000 mortgages to first-time buyers in 2013.
In 2013, we made substantial progress on our strategy to become the best bank for customers and to create a customer focused, highly efficient, profitable and low risk bank: Grew lending in our core business by 3 per cent to support our customers and help Britain prosper
Achieve a low cost of equity and funds by further reducing costs and risk, resulting in a unique competitive position
Further strong performance in customer service with net Promoter Scores increasing by 11 per cent over the year
Balance sheet further strengthened and risk reduced as we simplify the Group Strong capital build despite legacy charges, with pro forma fully loaded CeT1 ratio of 10.3 per cent and core tier 1 ratio of 14.0 per cent
Return on risk-weighted assets increased to 2.14 per cent (2012: 0.77 per cent)
Core underlying profit increased by 24 per cent to £7,574 million
Impairment charge as a percentage of average advances expected to reduce to around 50 basis points for 2014
Our strategy We operate a simple, low risk, customer focused uK retail and commercial banking and insurance business. Our aim is to become the best bank for customers and we’ll do that by addressing our customers’ needs through superior insight, tailored products, better service and our focus on building a long-term relationship with them. By leveraging our capabilities we believe we can help Britain prosper and deliver strong and sustainable returns for our shareholders.
Performance measures Unlocking the Group’s potential We are reshaping our business portfolio to fit our assets, capabilities and risk appetite; we are strengthening the Group’s balance sheet and liquidity position; we are simplifying the Group to improve agility, efficiency and customer service; and we are investing to be the best bank for customers. A set of key performance indicators has been developed to track progress in each of these areas.
Going forward, we will also track our performance against the commitments of our new Helping Britain Prosper Plan.
We continue to improve our common equity tier 1 ratio, which now stands at 10.3 per cent on a pro forma* fully loaded CRD IV basis.
Through our Simplification programme and continued focus on becoming the best bank for customers, our FCA reportable banking complaints continued to fall. We now have a target of 0.9 banking complaints per 1,000 accounts. *Excluding PPI
We made strong progress in 2013 in improving staff engagement with the Employee Engagement Index (EEI) and Performance Excellence Index (PEI). The EEI measures the individual motivation of colleagues whilst the PEI measures how strongly colleagues believe the Group is committed to improving customer service.
Overview 2013 has been a significant year for lloyds Banking Group, and in my last year-end statement as Chairman I would like to reflect not just on the year’s performance, but also on the strong position the Group has built as a result of the significant progress we have made in the past four years.
I believed we could overcome these challenges and begin the process of restoring our customers’ trust in what is a great British institution, with a strong heritage. I was also determined that the positive role the Group has played in the uK economy in the past should once again be recognised, and that lloyds Banking Group should be a company of which we can all be proud.
The Board has taken a number of important, and in many instances difficult, decisions as we have worked towards these goals. They have included the capital restructuring of the business, the appointment of a new management team and the development and oversight of our new strategy.
Despite this progress we have continued to be affected by legacy issues, in particular Payment Protection Insurance for which we took additional provisions of £3,050 million in the year. Though very disappointing, I am confident that our customer focused strategy along with the new customer processes and reward structures we are implementing will prevent issues of this magnitude being repeated.
This was, is, and will continue to be, a bank focused on customers’ needs and building lasting relationships. Sir Winfried Bischoff Chairman
Directors As announced in 2013, I will retire from the Group in April 2014. I am delighted lord Blackwell has been chosen to succeed me as Chairman. He has an excellent understanding of the Group, having been a director of our Board and a member of the Group’s Audit and Risk Committees since June 2012, and chairman of Scottish Widows plc from September 2012. He brings broad experience in banking, insurance and consultancy to the position. I am confident he will continue to take the Group forward successfully in the years ahead.
Juan Colombás was appointed to the Board in november 2013. Juan has been the Group’s Chief Risk Officer and a member of the Group executive Committee since January 2011. He is responsible for the management of risk across the Group and has over 25 years of banking experience. His appointment highlights the importance of risk management in the Group and reflects the significant work that Juan has done to reshape the risk function over the past three years.
In addition to these areas of current focus, we are one of the largest community investors in the uK, providing £85 million per annum to worthy causes through various initiatives, including our charitable foundations.
We celebrated the graduation of our first cohort of lloyds Scholars in the summer. The scheme is a key part of our investment in the long-term economic future of the uK and helps young people from lower income households take their first steps on the career ladder. We also encourage our Scholars to volunteer in their local communities during the academic year to add to the Group’s wider support of communities.
Remuneration The Remuneration Committee undertook a further review of colleague and executive remuneration in 2013. Anthony Watson, the Committee’s Chairman, provides his annual review of our approach elsewhere in the report but, given the importance of remuneration to our stakeholders and the Group, I want as Chairman to give some context to the decisions we have taken.
The 2013 bonus awards for executives have been determined against robust financial performance measures, and will continue to be deferred into shares, not vesting before 2017. In recognition of the Group’s performance in 2013, the Remuneration Committee has decided to make an annual performance award to António Horta-Osório, the Group’s Chief executive Officer, of £1.7 million, payable in shares, with a five year deferral period. The award is subject to an additional condition requiring the share price to remain above 73.6p on average for any 126 consecutive trading days in the five years following grant or the uK government selling at least 50 per cent of its shareholding during the three years following grant. The shares will not be released before 2019. António has led the Group through a strong year resulting in the Group having the best performing share price amongst the FTSe 100 banks in 2013.
A commitment to good governance The Board is committed to achieving long-term success for the Group, and governance plays an integral part in ensuring consistency and rigour in decision making to allow us to maximise shareholder value over time.
an ongoing review of the adequacy of provisions in relation to legacy conduct issues such as Payment Protection Insurance (PPI) and the sale of interest rate hedging products to certain small and medium-sized businesses continued close scrutiny and control over executive remuneration arrangements, including adapting the structure to the requirements of CRD IV. We continued to maintain open and effective engagement with shareholders on a range of remuneration matters a Board effectiveness Review in which all board members participated, expressed their views, had individual meetings with the Chairman and collectively discussed at the Board the overall findings of 75 different assessments
We made excellent progress in our core business, where we have returned lending to growth in all our banking divisions, and underlying profit rose 24 per cent to £7,574 million. This growth in profit was largely driven by an 8 per cent increase in net interest income, and a 21 per cent reduction in the impairment charge. The return on risk-weighted assets in the core business improved by 72 basis points to 3.26 per cent.
The 4 per cent increase in customer deposits, together with non-core asset reduction, drove a further improvement in the Group’s loan to deposit ratio to 113 per cent at the end of 2013 from 121 per cent at the end of 2012, with the core loan to deposit ratio improving to 100 per cent by the end of 2013.
All of these changes help to put us firmly on the path to being the best bank for customers, enabling better service by making day-to-day tasks easier and freeing up colleague time to focus on our customers’ needs.
In telephone banking, we launched a number of improvements to our automated Interactive Voice Recognition (IVR) system in 2013, incorporating the latest speech recognition software to get things right first time when customers call us. With simplified menu structures, increased service functionality and improved call routing, nearly two-thirds of all calls are fulfilled at point of IVR first contact.
Supporting our customers and the economic recovery lloyds Banking Group is the uK’s largest retail and commercial lender, and in 2013 we continued to deliver on our pledge to help Britain prosper and support sustainable economic recovery. We were the first bank to access funding from the government’s Funding for lending (FlS) scheme, and are its largest lender, having committed over £37 billion of gross new lending with net core growth of £13 billion since the start of the scheme. We remain committed to passing on the benefits of this low cost funding to our uK customers.
In Commercial Banking, we continue to strengthen our client relationships, supporting businesses of all sizes from SMes to Global Corporates. We have demonstrated our focus to support clients consistently through the economic cycle with net lending to SMes growing by 6 per cent in 2013 despite a market contraction of 3 per cent; committing over £1.3 billion to the uK manufacturing sector by the end of September, exceeding our £1 billion target three months early; and providing finance to approximately 120,000 start-up enterprises, beating our target by 20,000. In 2013 we continued to approve eight out of 10 business loan and overdraft applications from SMes. Meanwhile the Hire Purchase and leasing team within Commercial Finance achieved record monthly lending levels. We have further supported loan growth by launching a partnership to deliver mobile card payment solutions to small businesses which is cutting technology costs and opening up growth opportunities.
In Insurance, we have seen excellent growth in our Corporate Pensions area, stimulated by the market changes as a result of the Retail Distribution Review and the support we are giving to our customers in managing the transition to auto-enrolment. We also launched an enhanced annuity product in both the intermediary and direct channels, expanding our offering, while enabling our retail bank customers to secure a higher retirement income via a new online comparison tool. We continue to enhance our market-leading bancassurance protection proposition as we look to address the uK population’s protection gap. In 2013, we addressed the protection needs of 200,000 new customers and paid out around £200 million in claims to existing customers. In General Insurance, in the aftermath of the October and December storms, our Home Claims teams worked hard to offer seamless service at a distressing time for many of our customers.
I would also like to take this opportunity to thank our Chairman, Sir Winfried Bischoff, who will retire from the Group in April 2014. His stewardship and guidance, in a challenging operating environment both from a regulatory and economic perspective, have been invaluable. I look forward to working closely with lord Blackwell, who will take over as Chairman from April, on the next steps in the evolution of the Group.
Colleague feedback is highly valued and in 2013, Community Bank and Telephone Banking colleagues made almost 3,000 suggestions, contributing towards a culture of continuous improvement and innovation, enabling us to deliver more tangible enhancements to our customer offering than ever before. Also vital are our Back to the Floor days which take our senior leaders from the wider Group back into the branches and operational centres to experience our services and processes first hand, giving them important insights into how improvements are being implemented.
Increase in customer service scores 2020 target for senior roles held by women
Government initiatives have supported recovery A number of government initiatives have helped support recovery. The Bank of england initially introduced ‘forward guidance’ for Bank Rate, ruling out any increase until the unemployment rate had fallen significantly, hoping to limit concerns that interest rates might rise before the economy was much stronger, and although the guidance has since been updated, this helped provide reassurance. The government launched a two-pronged Help to Buy scheme to help first-time house buyers struggling to raise deposits as well as existing home-owners constrained by low levels of equity in their current properties. Alongside the improving economy, this contributed to a rise in house prices of 6 per cent in 2013 compared to 2 per cent in 2012. The Funding for lending scheme, introduced in 2012, continued to support the economy with its beneficial impact on banks’ funding costs and consequent lowering in interest rates on lending products, although its support for mortgage lending has now been withdrawn. Our participation in both of these schemes has not only been beneficial to the Group but also illustrates our commitment to and focus on supporting the uK economy and helping Britain prosper.
The effect on our markets The weak economic recovery has kept many of our markets subdued. Growth in uK households’ deposits slowed to 3.7 per cent in 2013 from 5.7 per cent in 2012. net new mortgage lending amounted to just 0.9 per cent of outstanding balances during 2013, the fifth consecutive year around 1 per cent or less. unsecured consumer borrowing, net of repayments, increased by 4.7 per cent in 2013, the second consecutive year of positive net borrowing, but at less than 1 per cent of income this remains only one third of the level of the early 2000s. non-financial company deposits with uK banks and building societies rose by 8.8 per cent in 2013, up from 4.9 per cent in 2012 while they reduced their borrowing from banks for the fifth consecutive year. Overall levels of corporate debt have however remained fairly flat relative to GDP in recent years, as large corporates have been refinancing bank debt in bond markets.
Capital Requirements Directive IV (CRD IV) Final rules following the outcome of the Prudential Regulatory Authority’s consultation on future capital requirements were issued in December 2013, and have implemented the european union’s new capital requirements legislation, known as CRD IV, in the uK from 1 January 2014.
We are seeing a number of new or expanding players make an increasing impact into an already highly competitive sector and the TSB business, which we intend to float on the london Stock exchange through an Initial Public Offering (IPO) in 2014, will have the capability of being another strong and effective challenger. An enhanced industry-wide switching service was launched in September 2013, giving customers increased confidence to change provider when dissatisfied or offered a better deal elsewhere.
Our strategy, as outlined on the next few pages, reflects these market conditions and the changing needs of customers. Above all it recognises that we operate in a competitive market where additional challengers continue to emerge and the only way of ensuring success is by focusing on the ever-changing needs of our customers.
Key opportunities economic environment: significant progress in reducing the Group’s risk profile and strengthening the balance sheet along with strategic actions taken in the last couple of years means we are better positioned to benefit as the economy recovers.
Customer requirements: our differentiated customer focused strategy along with our comprehensive multi-channel distribution network, well recognised brands and high quality people mean we are well positioned to address changing customer needs.
Our strategy We are creating a simpler, more agile, efficient and responsive customer focused organisation concentrating on operating sustainably and responsibly and helping Britain prosper. We are reshaping and simplifying the business and investing a portion of the savings made from our Simplification programme in customer related growth initiatives.
We are unlocking the potential in our franchise and delivering value to customers and shareholders by creating a simpler organisation. Opportunities exist to increase the efficiency of operations and processes and reduce costs whilst addressing changing customer needs and the external environment more effectively.
Our action plan for success We are making significant progress on all four key elements of our action plan to deliver our strategy. This is outlined in more detail on the next few pages: Reshape our business portfolio to fit our assets, capabilities and risk appetite.
Aim We continue to strengthen our balance sheet and liquidity position to ensure the financial stability of the Group. We will further increase our capital ratios and maintain a stable funding base whilst meeting our regulatory requirements.
This improvement was driven by: Capital generation in our core business
Continue to exceed regulatory liquidity requirements Our liquidity position remains strong, with primary liquid assets of £89.3 billion. These represent 4.2 times our money-market funding with a maturity of less than one year and approximately two times our wholesale funding with a maturity of less than one year, providing a substantial buffer in the event of market dislocation. In addition to primary liquid assets, the Group has significant secondary liquidity holdings of £105.4 billion.
We have continued to improve our loan to deposit ratio which is now ahead of our target and we will look to further reduce it going forward.
Aim We are targeting a leading cost position through the delivery of our Simplification programme, which continues to focus on creating a more efficient organisation, reducing costs in the business whilst improving the customer and colleague experience. Together with our low risk business model, uK focus and strong competitive position, we expect this to deliver a low cost of equity and, in turn, a sustainable competitive advantage.
Our customer experience improvements continue to be reflected in falling complaint levels and improved customer advocacy scores. Our FCA reportable banking complaints (excluding PPI) are down to 1.0 per 1,000 accounts, 18 months ahead of our original target, giving us the lowest complaint level of any major uK bank at the end of 2013. net Promoter customer advocacy scores continue their upwards trend across all three branded channels, and are now up a third since the start of Simplification.
More agile organisation We have made great strides in creating a more agile organisation through de-layering our management structure and increasing spans of control. We have also made significant progress in reducing the number of legal entities, which are now down to 929, a reduction of over 40 per cent since the start of the Simplification programme.
Targeted investment in specific market segments including consumer lending, insurance and commercial.
Investing to be the best partner for our business customers As part of Commercial Banking’s strategy to be the best bank for clients, we continued to invest in our core infrastructure, implementing upgrades to deliver scalability, reduced operational risk and enhanced functionality in our Transaction Banking and Markets business. We launched a new mobile card payment solution for our small business clients and further enhanced its currency functionality. We played a leading role in the development of the uK retail bond market and became a market maker on the london Stock exchange for retail bond investors. We also continued to invest in enhancing our online capabilities.
Investing in the insurance proposition Insurance is a core part of our customer proposition and we continue to invest in our core systems, products and processes for the integrated uK life and Pensions and Investments and General Insurance businesses. Within the life and Pensions business we are improving our market leading pensions and protection products, which help customers protect themselves today and prepare for a secure future. Supporting customers through auto-enrolment is driving growth and we have already supported over 300 major employers in this area. In addition, we completed the roll out of our enhanced annuities product in both the intermediary and direct channels as a key step to expanding our participation in the annuity market. We see enormous potential to serve the retirement needs of our retail bank customers and are addressing this by leveraging Group expertise and investing in the capability of the direct channel.
In General Insurance we are enhancing our systems capability to improve the competitiveness of our offering and investing in our home insurance proposition to improve the flexibility and customer focus of our products.
Performance against our targets Strategic investment 2014 target c.£500m per annum
The Retail division is a leading provider of current accounts, savings, personal loans, credit cards and mortgages in the uK. With its strong stable of brands including lloyds Bank, Halifax, Bank of Scotland and TSB it serves over 30 million customers through the largest banking branch network in the uK and comprehensive digital, telephone and mobile services. Retail is also a major general insurance and bancassurance distributor, offering a wide range of long-term savings, protection and general insurance products.
Progress against strategic initiatives Significant progress made in our strategy to be the best bank for customers in the uK driven by continued investment in our products, services and distribution.
Further enhancements delivered to simplify the business resulting in customer service scores improving 11 per cent and complaints (excluding PPI) decreasing to 1.0 per 1,000 accounts.
exceeded lending commitment to new-to-market buyers, helping one in four to buy their first home, exceeding our target of 60,000 by over 20,000 at year end.
The Commercial Banking division supports our business clients from small businesses to large corporates, with a range of propositions fully segmented according to client needs. The division operates a client centric approach, primarily focused on uK and uK-linked businesses, with client segments comprising Small and Medium-sized enterprises (SMe), Mid Markets, Global Corporates and Financial Institutions.
Progress against strategic initiatives Continue to execute our strategy to be the best bank for clients.
2013 highlights Returned to profitability with underlying profit of £1,575 million driven by reduction in impairments, increased core income, partially offset by lower non-core income from our capital accretive asset reduction strategy.
Wealth, Asset Finance and International comprised our uK and international wealth businesses, our uK and international asset finance and online deposit businesses along with our international retail businesses.
Progress against strategic initiatives International presence reduced to nine countries, achieving our target of fewer than 10 by the end of 2014.
Wealth improved client service and accessibility through a new Private Banking Client Centre and the roll out of a new point of sale system.
2013 highlights losses reduced by 95 per cent to £42 million driven by lower impairments in non-core, mainly in Ireland, and strong profitable growth in the core business.
net interest income in the core business increased by 84 per cent driven by strong and improving margins in Wealth and in the Online Deposits businesses within Asset Finance, and by growth in Black Horse motor finance volumes.
We increased the focus on our uK business following the agreed sale of our German life insurance business Heidelberger leben.
International labour Organisation Fundamental Conventions and this is outlined within our Code of Business Responsibility.
The Helping Britain Prosper Plan We see ourselves as having a clear role to play in helping Britain prosper and, as a significant uK retail and commercial bank, we are already doing more than our peers to help people manage their finances. To demonstrate that responsible business is fully integrated into our broader business strategy, our management structures and the way we measure performance, we have launched a new Helping Britain Prosper Plan (see opposite page). This simple but ambitious Plan sets out seven long-term commitments and aspirations to help Britain prosper, covering the areas where we can make the biggest difference for our customers across households, businesses and communities.
People across Britain are facing some big issues – a lack of affordable housing, the challenge of finding a job or escaping the trap of financial exclusion, the health issues that arise as more of us live longer and the difficulties of starting or running a successful business in tough times. The Helping Britain Prosper Plan is our response to some of these big issues; the ones we’re best placed to help our customers tackle.
>90% score 4 We’ll help businesses to start up and scale up, and we will procure responsibly 4.1 Increased amount of net lending to SMes on an annual basis (total cumulative)
N.B: All of these metrics are subject to review in the Autumn pending the outcomes of Group Strategic Review www.lloydsbankinggroup-cr.com
Priorities for 2014 Make sure all our colleague reward structures take customer service standards into account.
Improve our systems, processes and products to keep it simple for customers.
Supporting home buyers In 2013, we lent £9.7 billion to help more than 80,000 first-time buyers get on the property ladder – accounting for one in four of all first-time buyer mortgages in Britain this year. Altogether we advanced £22.3 billion in new mortgage lending to customers buying homes, an increase of 37 per cent on 2012.
We also helped customers, particularly first-time buyers, who can only afford small deposits through lloyds innovative lend a Hand and local lend a Hand mortgage schemes. We accept deposits as low as 5 per cent if these are backed-up by a family member or friend’s savings or secured by a local Authority indemnity.
Exceeding our SME commitments We launched our SMe charter in 2010, pledging to support 300,000 new SMes over three years to the end of 2012. We beat this target, helping 350,000 SMes and pledged to help a further 100,000 new businesses start up in 2013. We again beat our target, by helping 120,000 new businesses.
Building our brands In September 2013, we relaunched the lloyds Bank brand and launched TSB as a new challenger to the high street. The creation of the two brands follows a ruling by the european Commission in 2009 requiring lloyds Banking Group to divest part of its business. The flotation of TSB will further strengthen competition in our sector.
In the third quarter of 2012 we launched our Manufacturing Commitment to provide £1 billion in new lending to SMe and mid-sized manufacturing businesses by September 2013. We met our target three months ahead of schedule; by September 2013 we were 30 per cent above this target.
Battling the elements Throughout 2013, we went the extra mile to help insurance customers affected by floods, high winds and in one instance, a tornado. The Home Insurance team deployed rapid response units to the worst affected areas, so that customer claims could be assessed quickly and funds released to complete vital repairs. Following the major storm that hit Britain in October 2013 colleagues successfully handled more than 1,700 claims in a single day, 10 times higher than normal business levels. As of December 2013, we had helped over 215,000 customers by resolving their claim, including 38,000 escape of water claims, 35,000 storm claims, 25,000 theft claims and 3,500 fire claims.
Including all our customers Being the best bank for customers means offering simple, relevant products to people at all levels of society. not just those enjoying relative prosperity, but also those facing financial difficulties, coping with disabilities, striving to buy their first home or find their first job.
Our Financial Inclusion Steering Group To help us become more integrated in the way we serve customers at risk of financial exclusion, early in 2013 we set up a Financial Inclusion Steering Group chaired by Sara Weller, non-executive Director. The Group brings together colleagues from all areas of the business to provide a single point of focus for financial inclusion.
This year, we introduced ‘talking ATMs’ to help customers who are visually or hearing impaired and we plan to roll these out to all our branches in time. We’ve also made the lloyds Bank customer website more accessible to customers with a range of disabilities, including visual impairments and dyslexia. The Halifax and Bank of Scotland websites will be updated in 2014.
Improving the quality of our products and services We need to keep pace with customers’ changing needs by providing simple, tailored products and services that make a positive difference. Improving customer satisfaction is also the best way to reduce customer complaints and build trust in our brands.
Simplifying our products and services We improved the way we use mobile interfaces and voice recognition technologies to make it easier for customers to reach us quickly and navigate to the right choices. We now have more than 10 million customers using our digital services, including four million mobile banking users.
Getting to the root of the problem This year our Root Cause Analysis team has carried out detailed analysis of the reasons why customers complain. The team contributed to a monthly reduction of around 1,555 complaints by talking with customers and colleagues, then making the appropriate changes in our processes and responses.
Shifting from avoidance to achievement We have made a big shift in the way we define, measure, incentivise and reward colleagues in relation to customer satisfaction this year – moving from a focus on ‘making the sale’ towards a focus on improving service and achieving positive outcomes for customers. We believe customer complaints will reduce as a consequence of this shift.
Dealing with legacy issues We still have some legacy issues, including the mis-selling of PPI, to deal with and we fully acknowledge that these are still a cause for concern amongst many customers and stakeholders. We were the first bank to offer redress to customers who were mis-sold PPI products and we’re continuing to deal with every outstanding complaint to ensure a fair outcome. Just as importantly, we are implementing processes and procedures to prevent such events happening again.
Combating cyber-crime Since 2011, we have invested £248 million to improve the security of our IT infrastructure, including £138 million this year. Our Group-wide hub ‘Prevent and Protect’, provides a wealth of information to help colleagues stay aware of the threats and take appropriate action. Most of the work we do is invisible to customers, but it has contributed to a downward trend in levels of fraud across our online retail channels in 2013.
Priorities for 2014 Build colleagues’ pride and trust in our Group.
Put customers at the heart of our performance and reward structures.
Achievements in 2013 launched the Agile Future Forum, highlighting the benefits of agile working for businesses in the 21st century.
Invested in a new technology platform and content to enhance colleague development opportunities.
The Line Management Index (LMI) shows how our colleagues feel about their individual Line Manager.
Diversity and inclusion Our 2013 Colleague engagement Survey results showed significantly higher engagement scores for female colleagues and improvements in colleagues’ perceptions of the Group’s commitment to diversity and inclusion.
Apprenticeships Building on the success of our 2012 national Apprenticeship pilot, we set a target to offer 1,000 apprenticeship places by the end of 2013 and achieved it by november.
Priorities for 2014 Increase participation in, and impact of, our community programmes.
Support colleagues in their volunteering activity as we strive towards 2.3 million volunteering hours by 2020.
34,000 colleagues volunteered help local good causes through our Day to Make a Difference programme.
Our community programmes cover four key areas: Investing in education, employability and enterprise
You can read about all of our community investment programmes in detail in our 2013 Responsible Business Report at www.lloydsbankinggroup-cr.com
Lloyds Scholars programme The lloyds Scholars programme offers students from lower income households a complete support package to help them meet the costs of a university education and improve their employment prospects. Working in partnership with eight leading universities, we supplement financial support with invaluable vocational support, provided by mentors from the business and through paid internships and development workshops. Since 2011, we’ve supported 240 students.
Social Entrepreneurs programme In 2012, we partnered with the School of entrepreneurs to launch our lloyds Bank and Bank of Scotland Social entrepreneurs programmes. These programmes help social entrepreneurs build businesses that support enterprise, create new jobs and have a positive social impact on their local communities. We aim to help more than 1,300 social entrepreneurs start-up or scale-up over the next five years of the programme, providing them with grants of between £4,000 to £25,000 and the support of a business mentor. This year 154 social entrepreneurs received grants through the programme. We will invest £5.9 million in the programme over five years, leveraged with £7 million of additional funding from the Big lottery.
Charity of the year Our Charity of the Year for 2013/14, chosen by colleagues, is Alzheimer’s Society and Alzheimer Scotland. In 2013 we raised £2.5 million to support the first uK dementia carers programme.
Supporting colleagues to make a difference Colleagues can volunteer their time and skills through our Day to Make a Difference scheme. During 2013 we saw a marked increase in skill-based volunteering activities, with colleagues, including senior executives, involved in activities that included employability skills training for young adults, literacy and numeracy classes for school kids, mentoring for SMes and business advice for local charities.
Discussed the Current Account Switching Service and ring-fencing with HM Treasury and regulators.
Shared our views about the future of care funding in Britain with the uK government.
Priorities for 2014 Roll out our new Supplier Code of Conduct and auditing suppliers against it.
Continue to engage with equity and debt investors to ensure they are well briefed on our strategic and financial performance.
As a responsible business we understand the importance of explaining our approach to paying and managing tax as clearly and transparently as possible. The Group’s tax strategy and tax policy has been approved by the Group Board. We are consistently one of the uK’s largest tax payers and in 2013 we paid a total of £1.7 billion in uK tax. We also collected a further £2.2 billion for the government (for example VAT and PAYe).
Continue to engage SMes to help them understand how to become more sustainable and realise the benefits to their businesses.
Buildings 20% of m2 floor area environmentally accredited 23% 1.5% 4.7%
Supporting the green economy We work together with government and others stakeholders to understand how we can help businesses that provide low carbon products and services or green technologies along with mainstream businesses who wish to do more in this emerging sector.
Strong control framework This framework is the foundation for the delivery of effective risk management as it ensures appropriate engagement in developing risk appetite and that business units operate within approved parameters.
Credit ratings Credit ratings reflected the progress the Group had made on delivery of its strategy. During 2013 both Fitch and Standard & Poor’s upgraded lloyds Bank’s standalone rating to bbb+, therefore affirming its long-term credit rating at A.
The framework articulates individual and collective accountabilities for risk management, risk oversight and risk assurance and supports the discharge of responsibilities to customers, shareholders and regulators. It establishes a common risk language which assigns risks to which the Group is exposed into categories which are used consistently to support risk aggregation and reporting. It will evolve and be periodically updated to reflect any changes in the nature of our business and the external environment.
Our approach to risk is founded on a robust control framework and a strong risk management culture which ensures that business units remain accountable for risk and therefore guides the way all employees approach their work, behave and make decisions. Board-level engagement, coupled with the direct involvement of senior management in Group-wide risk issues at Group executive Committee level, ensures that issues are promptly escalated and remediation plans are initiated where required. The interaction of the executive and non-executive governance structures relies upon a culture of transparency and openness that is encouraged by both the Board and senior management. A strong control framework remains a priority for the Group and is the foundation for the delivery of effective risk management. Performance is optimised by allowing business units to operate within approved parameters.
The risk appetite framework ensures our risks are being managed in line with our risk appetite
To maintain a robust control framework, identifying and escalating emerging risks and supporting sustainable growth
This is carried out by all three lines of defence and is an integral part of our control effectiveness assessment
Monitoring, oversight and assurance ensures effective risk management across the Group
Accountability for ensuring risks are managed consistently with Board approved Risk Framework
Robust credit processes and controls including well-established committees to ensure distressed and impaired loans are identified, considered and controlled with independent credit risk assurance.
Stress test the Group’s liquidity position against a range of scenarios.
Continue to support the uK economy through appropriate lending to SMes and first-time buyers.£5.7bn £3.0bn
Continue to meet all current regulatory ratios and ensure we meet all future regulatory ratios.
Commentary Significant progress has been made in strengthening the balance sheet and capital position through our strongly capital generative strategy.
Continue to support the government in the process of returning the Group back to private ownership.
underlying income grew by 2 per cent to £18,805 million, including the gain of £540 million from the sales of shares in St. James’s Place. excluding the gain on sales and income from St. James’s Place (together St. James’s Place effects), total underlying income was unchanged with a stronger contribution from net interest income offsetting a reduction in other income. Group net interest income improved by 5 per cent to £10,885 million as a result of improved net interest margin and growth in core lending volumes. Other income decreased by 6 per cent excluding St. James’s Place effects, primarily as a result of non-core disposals made during the course of the year.
The Group statutory profit before tax of £415 million for 2013 compared to a pre-tax loss of £606 million in 2012, driven by the improvement in underlying profit and a lower provision for legacy issues of £3,455 million compared to the £4,225 million charge in 2012. In 2013 the Group was subject to a higher effective tax rate than the uK statutory rate primarily due to an additional tax charge arising from the impacts on the net deferred tax asset of the reduction in the uK Corporation tax rate, the disposal of our Australian operation and policyholder tax. The loss after tax was £802 million and the loss per share was 1.2p, compared to the loss per share of 2.1p in 2012.
Total underlying income excluding St. James’s Place 18,143 18,057 – 17,582 16,956 4
Other income excluding St. James’s Place fell by 6 per cent to £7,259 million, reflecting the significant reduction in non-core assets and lower sales of bancassurance and protection products in the core business, partly as a result of changes in our product offering following implementation of the Retail Distribution Review (RDR). Around £400 million of the decline in other income excluding St. James’s Place related to businesses sold in the year.
The Group continues to make good progress on Simplification, improving service for customers through more streamlined end-to-end processes, and, among other initiatives, centralising support functions, reducing layers of management and rationalising its supplier base. We continue to reinvest a part of these savings in the core business.
Restated to reflect the implementation of IAS 19R and IFRS 10.
Asset sales, liability management and volatile items Asset sales included gains on the sale of government securities of £787 million (2012: £3,207 million) and a net loss of £687 million (after a related fair value unwind benefit of £1,384 million), principally from the significant reduction in non-core assets. Despite net losses in the year, non-core disposals were capital accretive in aggregate contributing to the £2.6 billion of capital generated by non-core reduction. The level of net losses from asset sales incurred in 2013 is not expected to be repeated in 2014.
Pro forma fully loaded common equity tier 1 ratio2 10.3% 8.1% 2.2pp
Pro forma fully loaded CRD IV leverage ratio2,3 4.1% 3.8% 0.3pp
Pro forma fully loaded Basel III leverage ratio (2014 rules)2,3,4 4.5%
Comparatives have not been restated to reflect the implementation of IAS 19R and IFRS 10.
Pro forma ratios include the benefit of the announced sales of Heidelberger leben, Scottish Widows Investment Partnership and Sainsbury’s Bank.
estimated in accordance with January 2014 revised Basel III leverage ratio framework.
The Group’s pro forma fully loaded CRD IV leverage ratio, including tier 1 capital, increased to 4.1 per cent from 3.8 per cent at the end of 2012 and to 3.4 per cent from 3.1 per cent excluding tier 1 capital. In January 2014 the Basel Committee published a revised Basel III definition of leverage ratio, and we anticipate that CRD IV will be amended in due course to align with this definition. As at 31 December 2013 the Group’s pro forma Basel III leverage ratio was 4.5 per cent including tier 1 capital, and 3.8 per cent excluding tier 1 capital.
Given its improved capital strength the Group will no longer seek to fund the payment of coupons on certain hybrid capital securities through the issuance of equity.
excludes reverse repos of £0.1 billion (31 December 2012: £5.1 billion).
excludes repos of £3.0 billion (31 December 2012: £4.4 billion) (all core).
non-core assets were £63.5 billion at December 2013, 35 per cent lower than at the end of 2012. non-core asset reductions included £6.6 billion in Australia as well as £6.7 billion in uK commercial real estate and £2.7 billion in the shipping portfolio. The higher risk non-retail element of the portfolio reduced by £23.8 billion, or 49 per cent, in the year to £24.7 billion, and is expected to reduce to around £15 billion by the end of 2014. The average risk weighting of the non-core portfolio reduced from 74 per cent to 61 per cent. non-core asset reductions continue to be capital accretive overall, releasing approximately £2.6 billion of capital in the year.
The Group’s wholesale funding requirement has reduced given the reduction in non-core assets and continued growth in customer deposits in the year. Together these have enabled us to reduce wholesale funding by £32 billion and, as reported at the half year, repay the full amount of the long Term Refinancing Operation funding from the european Central Bank of A13.5 billion ahead of schedule. The Group has so far committed over £37 billion of gross new lending to British customers under the Funding for lending Scheme (FlS) with drawings under the scheme amounting to £8 billion as at the end of 2013. The Group will continue to have a modest wholesale funding requirement and we anticipate that in 2014 this will be in the range of £5-10 billion of public issuance, while the Group’s aggregate usage of wholesale funding is expected to further reduce in 2014.
Key balance sheet items at 31 December 2013 £bn £bn £bn £bn £bn £bn loans and advances to customers1 341.9 126.4 24.2 2.7 495.2 2012 £m £m £m £m £m £m
In order to reflect the impact of the acquisition of HBOS, the amortisation of purchased intangible assets and the unwind of acquisition-related fair value adjustments have been excluded.
The following items, not related to acquisition accounting, have also been excluded from underlying profit: the effects of certain asset sales, liability management and volatile items; volatility arising in insurance businesses; Simplification costs; Verde costs; payment protection insurance provision; insurance gross up; certain past service pensions items in respect of the Group’s defined benefit pension schemes; and other regulatory provisions.
To enable a better understanding of the Group’s core business trends and outlook, certain income statement, balance sheet and regulatory capital information is analysed between core and non-core portfolios. The non-core portfolios consist of businesses which deliver below-hurdle returns, which are outside the Group’s risk appetite or may be distressed, are subscale or have an unclear value proposition, or have a poor fit with the Group’s customer strategy. The eC mandated retail business disposal (Project Verde) is included in core portfolios.
Core At 31 Dec loans and advances to customers2 £436.9bn £425.3bn 3
Key balance sheet items at 31 December 2013 £bn £bn £bn £bn £bn £bn
Return on risk-weighted assets increased to 4.11 per cent from 3.21 per cent in 2012, driven primarily by favourable income and continuing effective credit risk management.
Risk-weighted assets decreased by £9.8 billion to £85.7 billion driven by improving house prices and an improvement in the credit quality of retail assets.
Performance summary £m 20121 £m Change net interest income 7,536 7,195 5
Key balance sheet items loans and advances to customers2 318.2 317.3 – 23.7 26.0 (9)
Assumption changes and experience variances (158) 302 – (78) 66 (31)
‘Other’ includes the results of the european business in addition to income from return on free assets, interest expense and certain provisions.
Operating cash generation is derived from underlying profit by removing the effect of movements in intangible (non-cash) items and assumption changes. Intangible items include the value of in-force life business, deferred acquisition costs and deferred income reserves.
Cash generated from existing business 485 139 – 56 680 704
Change in intra group commission terms – – (77) – (77) –
The increase in intangibles is driven by the beneficial impact of assumption changes.
– Total costs in 2013 include the bank levy of £238 million (2012: £179 million).
Banking net interest margin is calculated by dividing banking net interest income by average interest-earning banking assets. A reconciliation of banking net interest income to Group net interest income showing the items that are excluded in determining banking net interest income follows: 2013 £m 2012 £m
Includes volatility relating to the Group’s interest in St. James’s Place.
Insurance volatility The Group’s Insurance business has policyholder liabilities that are supported by substantial holdings of investments, including equities, property and fixed interest investments, all of which are subject to variations in their value. The value of the liabilities does not move exactly in line with changes in the value of the investments, yet IFRS requires that the changes in both the value of the liabilities and investments be reflected within the income statement. As these investments are substantial and movements in their value can have a significant impact on the profitability of the Group, management believes that it is appropriate to disclose the division’s results on the basis of an expected return in addition to results based on the actual return.
Policyholder interests volatility The application of accounting standards results in the introduction of other sources of significant volatility into the pre-tax profits of the life, pensions and investments business. In order to provide a clearer representation of the performance of the business, and consistent with the way in which it is managed, adjustments are made to remove this volatility from underlying profits. The effect of these adjustments is separately disclosed as policyholder interests volatility.
Total income, net of insurance claims 18,478 20,517 20,802 24,868 22,526
(loss) profit for the year attributable to equity shareholders (838) (1,471) (2,963) (339) 2,769 31 December 31 December 31 December 31 December 31 December
Diluted earnings (loss) per ordinary share (1.2)p (2.1)p (4.3)p (0.5)p 7.3p
Capital ratios are in accordance with modified Basel II framework as implemented by the PRA.
Lord Blackwell Chairman (from 3 April 2014) and Independent Director Joined the Board in June 2012
External appointments: lord Blackwell is the Chairman of Interserve plc. He is a non-executive Director of Ofcom (until the end of March 2014) and Halma plc.
Skills and experience: David has many years of experience at board and executive management level in retail and commercial banking in the uK and internationally. As Chair of the Risk Committee, he has a deep understanding of risk management, underpinned by recent, in-depth knowledge of all aspects of banking operations. David’s valuable contributions to the deliberations of the Board and Committee meetings, combined with natural leadership qualities, make him an effective Deputy Chairman. David has a Diploma in Marketing from the Chartered Institute of Marketing, a degree in Mathematics & Applications from Birmingham university and an MBA from the university of Reading.
Skills and experience: Anita has extensive board, financial and general management experience across a range of sectors, including banking, asset management, manufacturing and utilities. Her breadth of experience and strong leadership qualities make her an effective non-executive Director. Anita is the Chairman of the Responsible Business Committee. She has a BA (Hons) in Business from the university of Strathclyde and a MRes in Humanities and Philosophy from the university of london.
Group Executive Committee 72 Directors’ report 74 Corporate governance report 78 Directors’ remuneration report 100
External appointments: Sir Winfried is a non-executive Director of eli lilly and Company and The McGraw Hill Companies Inc. He is Chairman of the Advisory Council of TheCityuK, a Member of the Akbank International Advisory Board and from 1 May 2014, will be Chairman of the Financial Reporting Council.
Former appointments: lord Blackwell is a former Senior Independent Director of Standard life and chaired their uK life and Pensions Board. He was a non-executive Director of Dixons Group and SeGRO, a member of the Board of the Centre for Policy Studies and a non-executive Member of the Office of Fair Trading. He was a partner of McKinsey & Co. and a Director of Group Development at natWest Group. From 1995 to 1997, lord Blackwell was Head of the Prime Minister’s Policy unit and was appointed a life Peer in 1997.
Nick Luff Independent Director Joined the Board on 5 March 2013
Skills and experience: With a background in retail and associated sectors, including financial services, Sara brings a broad perspective to the Board. She is a strong advocate of customers and of the application of new technology, both of which directly support lloyds Banking Group’s strategy. Sara has considerable experience of boards at both executive and non-executive level. She has an MA in Chemistry from Oxford university.
Skills and experience: António brings extensive experience in, and understanding of, both retail and commercial banking. This has been built over a period of more than 25 years, working both internationally as well as in the uK. António’s drive, enthusiasm and commitment to customers, along with his proven ability to build and lead strong management teams, brings significant value to all stakeholders of lloyds Banking Group. António has a Degree in Management & Business Administration from the universidade Católica Portuguesa, an MBA from InSeAD and has completed the Advanced Management Program at Harvard Business School.
António Horta-Osório Group Chief executive António joined the Board in January 2011 as an executive Director and became Group Chief executive in March 2011.
Juan Colombás Chief Risk Officer Juan joined the Group as Chief Risk Officer in January 2011 and joined the Board as an executive Director in november 2013.
Previous to this, Miguel worked as a Senior Partner at McKinsey & Co. for over 12 years where he specialised in the Banking, Insurance and Retail sectors in Germany, Switzerland, Spain, Italy and the uSA. Miguel holds a ‘Cum laude’ Bachelor Degree in Business Administration from the university of Barcelona and an MBA from IeSe Business School.
Prior to joining Mark was Chief executive Officer of ABn AMRO and was appointed as Chairman of the Managing Board in november 2007. Mark was a Director of The Royal Bank of Scotland Group from March 2006, and Chief executive of the Manufacturing division at RBS since 2000. Other achievements have included: Chairman of the Association for Payment Clearing Services (2003 – 2007).
Results The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2013 of £415 million.
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 42 and pages 171 to 177 and capital position on pages 178 to 192 and additionally have considered projections for the Group’s capital and funding position. Having considered these, the Directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts.
Corporate governance report The corporate governance report can be found on pages 78 to 99 and, together with this report of which it forms part, fulfils the requirements of the Corporate Governance Statement for the purpose of the Financial Conduct Authority’s Disclosure and Transparency Rules (DTR).
Substantial shareholders Information provided to the Company by substantial shareholders pursuant to the DTR is published via a Regulatory Information Service.
As at 31 December 2013 and the date of this report, the Company was notified under Rule 5 of the DTR that The Solicitor for the Affairs of Her Majesty’s Treasury had a direct interest in 23,326,529,533 ordinary shares, representing 32.7 per cent in the issued share capital with rights to vote in all circumstances at general meetings. no other notification has been received that anyone has an interest of 3 per cent or more in the issued ordinary share capital.
The CO2e emissions relating to this subset of emissions reported are calculated using the same methodology and emissions factors that have been applied to actual billed consumption data.
Intensity ratio As the Group uses an operational boundary for its emission reporting, an intensity ratio of GHG gases per FTe has been selected.
Verification Although not required by the new mandatory regulations the Group has retained the services of PricewaterhouseCoopers llP (PwC) to provide an independent and robust assessment of the Group’s scope 1, 2 and 3 emissions. PwC’s limited assurance report is included as part of the Group’s 2013 Responsible Business Report, www.lloydsbankinggroup-cr.com.
Significant contracts Details of related party transactions are set out in note 51 on pages 303 to 306.
A copy of the financial statements is placed on our website www.lloydsbankinggroup.com. The Directors are responsible for the maintenance and integrity of the Company’s website. legislation in the uK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Board is committed to achieving long term success for the Group and generating sustainable returns for shareholders. This is underpinned by our high standards of corporate governance, which are critical to the success of any business today.
Dear Shareholders I am pleased to present our corporate governance report for the 2013 financial year. This report explains how the Group applies the highest principles of corporate governance, in particular those laid down in the 2012 edition of the Financial Reporting Council (FRC)’s uK Corporate Governance Code (the Code). The Code can be accessed at www.frc.org.uk.
2013 has been a significant year for lloyds Banking Group. The Board has taken a number of important decisions as we work towards the goal of becoming the ‘best bank for customers’. I am pleased to report that during the year the Board and its Committees met their key objectives and carried out their key responsibilities effectively.
Set out below are some of the key corporate governance matters considered in 2013.
Changes to the remuneration reporting regime – The Remuneration Committee dedicated significant time in 2013 to assessing the impact of changes to the remuneration reporting regime on the Group’s approach to executive remuneration. The Committee has striven to ensure that the remuneration policies and practices detailed in the Directors’ Remuneration Policy, on pages 102 to 109, and in the Directors’ Remuneration Implementation Report on pages 110 to 122, are appropriate to supporting the delivery of the Company’s current and future strategy.
Authority and delegation Corporate governance framework The Group’s corporate governance framework, which is reviewed annually by the Board, comprises the board authority and the delegated executive authority.
Is available to shareholders if they have concerns which contact through the normal channels has failed to resolve or is inappropriate.
Manages the Group on a day-to-day basis, and in accordance with the strategy and long term objectives approved by the Board.
Provides entrepreneurial leadership of the Group within a framework of prudent effective controls.
The role of the Board Committees The Board is supported by its Committees which make recommendations to the Board on matters delegated to them, in particular in relation to internal control, risk, financial reporting, governance and remuneration matters. This enables the Board to spend a greater proportion of its time on strategic, forward looking agenda items. each Committee comprises non-executive Directors only and is chaired by an experienced Chairman. The Committee Chairs report to the Board on the activities of the Committee at each Board meeting. Terms of reference for each of the Committees can be found on our website at www.lloydsbankinggroup.com. Information on the membership, role and activities of each of the Committees can be found on pages 89 to 99.
Remuneration Approves the overall remuneration policy and philosophy of the Company.
Approves material changes in employee share schemes and policy relating to Group pensions.
Transition to initial public offering In January 2014, TSB Bank received a greater degree of autonomy. It has its own independent, non-executive chairman and board, with its own constitution and responsibilities. The regulatory approved executive teams have dotted reporting lines into their Group counterparts but no direct reporting lines. In accordance with its agreed strategy, plan and budget, TSB Bank is able to take independent operational decisions. Certain decisions, such as product pricing and marketing, remain subject to approval by the Group.
I am honoured to have been asked to become Chairman of Lloyds Banking Group. This is a great opportunity to be part of helping the bank go even further in serving its customers as it returns to full private ownership. I’d like to thank Win for the outstanding job he has done in steering the bank through a tremendous turnaround. Lord Blackwell
In addition, on 1 January 2014, Dyfrig John was appointed as a non-executive Director.
Anita Frew is a non-executive Director of the Group and Aberdeen Asset Management plc. During the year, Aberdeen Asset Management agreed to acquire Scottish Widows Investment Partnership from the Group. Anita excused herself from all discussions concerning the transaction and did not have access to any of the papers. She took the same action at Aberdeen Asset Management. On this basis, the Board approved the potential conflict of interest.
In 2013, the Board’s agenda was re-ordered to achieve a greater focus on key strategic and customer matters. As the bank works towards achieving its goal of becoming the ‘best bank for customers’, the Board intends to devote more time to strategic matters and also to customer related issues.
The attendance of Directors at Board and Committee meetings is shown in the table below. Whilst all Directors are invited to, and regularly attend, other Committee meetings, only their attendance at Committees of which they are members is recorded.
António Horta-Osório 8 8 1 2 – – – – – – – –
One of the ad hoc meetings was called at very short notice leading to a number of the Directors being unable to attend. However, each of those Directors provided their views to the Chairman in advance of the meeting so that their vote could be recorded at the meeting.
Effectiveness Board effectiveness The Chairman of the Board leads the rolling review of the Board’s effectiveness with the support of the nomination & Governance Committee, which he also chairs. A summary of the Board’s progress against the actions arising from its external 2012 Board effectiveness review are set out below: 2012 evaluation (external) 2013 action
The pattern of Board and Committee meetings and associated events was reviewed in 2013, allowing greater opportunity for informal interaction between Board members outside the boardroom.
This year’s evaluation was conducted between november 2013 and January 2014 and consisted of: – a detailed questionnaire, drafted by the Chairman in conjunction with the Company Secretary, to assess the effectiveness of the Board, its Committees and individual Directors; – follow up interviews with the Chairman and/or Deputy Chairman as required; – feedback to the nomination & Governance Committee; and – a recommended action plan.
The Board intends to increase further its focus on customers and customer outcomes in 2014 through more regular presentations on customer dashboards and peer analysis.
The Directors and senior management are committed to maintaining a robust control framework as the foundation for the delivery of effective risk management. They acknowledge their responsibilities in relation to the Group’s system of internal control and for reviewing effectiveness. The Group’s Policy Framework defines mandatory controls for all material risk types, and the requirement for all colleagues to comply with Policies is reinforced through the Codes of Business and Personal Responsibility, which ensure that colleagues understand they are accountable for the risks they take, and individual objectives expressed in the balanced scorecard.
Senior management complete an attestation to confirm the CeR findings which are reviewed and independently challenged by the Risk Division and Group Audit and reported to the Board. Action plans are implemented to address any control deficiencies. The process complies with the Internal Control Revised Guidance for Directors on the Combined Code issued by the Financial Reporting Council, and the conclusions are reported to and reviewed by the Board. The 2013 CeR found that, overall, the Group is well controlled and that the control environment has improved year-on-year. This improvement is consistent with the delivery of various action plans and an improvement in the operational risk profile of the Group.
The Board is kept advised of the views of major investors by means of regular updates at Board and Committee meetings. It also receives reports on market and investor sentiment, shareholder analysis and surveys of shareholder opinions.
The Group has adopted the Disclosure Code and its 2013 financial statements have been prepared in compliance with the Disclosure Code’s principles.
Chairman’s overview During 2013, the Committee continued to keep under review the Group’s governance arrangements, succession planning and the effectiveness of the Board and its Committees. In particular, considerable time was spent addressing the following matters: Board appointments – the Committee recommended that the Board appoint a number of new directors: nick luff was appointed to replace Martin Scicluna as Chairman of the Audit Committee; Juan Colombás, the Chief Risk Officer, was appointed as an executive Director as a reflection of the Board’s desire to elevate the importance of risk management; and Dyfrig John was appointed as a non-executive Director to increase the number of directors with significant banking experience.
Corporate governance Oversees the Board’s governance arrangements to ensure that they pay due regard to best practice principles and remain appropriate.
Monitors Board governance issues including the establishment of appropriate policies and practices to enable the Board to operate effectively and efficiently.
Composition, skills and independence Reviews the appropriate structure, size and composition of the Board, having regard to the balance of skills, experience, independence, knowledge and leadership needs of the Group.
Fundamental to the Board’s strategy are high standards of corporate governance designed to ensure rigour in Board discussions and decision making. Sir Winfried Bischoff Chairman, nomination & Governance Committee www.lloydsbankinggroup.com
Committee composition, skills and experience To ensure a broad representation of independent views, including perspectives from each of the Committees, membership of the nomination & Governance Committee comprises the Chairman, the Deputy Chairman, the Senior Independent Director, the Chairmen of the Risk and Remuneration Committees and one other independent non-executive Director. Anita Frew joined the Committee in 2013. Her experience as Chair and Senior Independent Director on other boards as well as her length of service and perspective further complements the composition of the Committee. The Group Chief executive attends meetings as appropriate.
Chairman’s overview I succeeded Martin Scicluna as Chairman of the Audit Committee on 31 March 2013 and am pleased to be able to continue his good work. During the year, the Audit Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review.
The Committee spent considerable time reviewing the adequacy of provisions relating to Payment Protection Insurance (PPI) every quarter. Two additional meetings were convened specifically for this purpose. Assessing the appropriate level for the provision involves considerable judgment, with significant uncertainty around the expected volume of future reactive complaints, the impact of proactive past business reviews and the operational costs of the PPI programme. Recognising these uncertainties, the Committee also oversaw enhancements to the disclosures relating to PPI at the year end.
Committee composition, skills and experience The Audit Committee acts independently of the executive to ensure that the interests of shareholders are properly protected in relation to financial reporting and internal control.
External audit Makes recommendations concerning the appointment, re-appointment and removal of the external auditor.
Oversees the relationship with the external auditor, including the terms of engagement (including remuneration) and their effectiveness, independence and objectivity.
The Audit Committee spent considerable time in 2013 challenging the assumptions made by management in determining the provision for PPI redress.
In the 2013 full year results, an additional provision of £130 million was made for derivatives mis-sold to small and medium-sized enterprises (SMes), taking the total provision to £530 million. There is a provision of £400 million in relation to the Group’s insurance branch business in Germany, and a number of other smaller provisions that total some £200 million in relation to other conduct and compliance matters.
The Group’s total deferred tax asset at 31 December 2013 included £6,338 million in respect of trading losses carried forward. Based on the Group’s forecast taxable profit, the losses are expected to be fully utilised by 2019.
– assessing control deficiencies identified as part of the assessment of the effectiveness of internal controls over financial reporting in accordance with the requirements of the uS Sarbanes Oxley Act.
– Victimisation: changes introduced by the enterprise and Regulatory Reform Act prompted measures to ensure whistleblowers are protected from harassment by co-workers.
Auditor independence and remuneration Both the Board and the external auditor have safeguards in place to protect the independence and objectivity of the external auditor. The Audit Committee has a comprehensive policy to regulate the use of the auditor for non-audit services. This policy sets out the nature of work the external auditor may not undertake and guidance on the hiring of former external audit staff.
How the Audit Committee assessed the effectiveness of the external audit process In 2013, the Group engaged an external provider, Independent Audit, to conduct a review of the effectiveness of the external audit process. The review included seeking views of Audit Committee members, senior executives across the business and members of Group Audit, through a questionnaire and a number of one to one interviews, together with consideration of the reports provided by PwC to the Audit Committee. The review concluded that the external audit process was effective and identified a number of areas where further enhancements could be made.
The Group’s strategy and strong risk discipline has led to a safer, low risk bank. David Roberts Chairman, Board Risk Committee www.lloydsbankinggroup.com
Divisional risks The Committee received ‘deep dive’ updates of the risk profile and emerging issues from each of the Divisions.
Capital and liquidity The Committee received regular reports on the capital and liquidity position of the Group under stress including the impact of regulatory changes.
Macro economic conditions The Committee received regular updates on the macro economic conditions and risks from the Chief economist, to enable it to effectively challenge strategy and risk appetite.
Capital and stress testing The Committee received regular presentations from management on capital and leverage, the evolving prudential regulatory expectations, including outputs from the Financial Policy Committee of the Bank of england, and appropriate updates on the rating agency views of the Group.
Alongside the risk management framework review, the Board Risk Committee also considered the approach and key findings of the annual control effectiveness review (see page 87), before referring it to the Audit Committee to review in conjunction with Group Audit’s control framework assessment.
Risk Division The Board Risk Committee is supported by the Risk Division and a number of management committees looking at different risk areas within the business. In 2013, the Committee conducted an annual review of the adequacy of the Risk Division’s resources, its authority and standing within the Group. The review scrutinised the Risk Division’s annual plan, which sets out how the Risk Division will achieve clear outcomes from individual teams in a structured and measurable manner.
Chairman’s overview I am pleased to report good progress has been made on remuneration matters and their governance over the past year. The Remuneration Committee met its key objectives and carried out it responsibilities and the annual effectiveness review concluded that the Committee continued to operate effectively.
Recommends to the Board the contents of the Directors’ remuneration policy and implementation reports.
A number of controls are in place to ensure compliance with the governance policy, PRA Remuneration Code and to mitigate risk. The main controls are summarised below: – an annual self-assessment of the Committee regarding its ability to fulfil its responsibilities; – an annual attestation by members of the Group executive Committee that remuneration decisions in the Divisions for which they are responsible have been made in accordance with the governance policy and are aligned with Group strategy and risk appetite; and
Linking remuneration to business strategy The Committee continues to place great importance on ensuring that remuneration supports the business strategy. This is achieved principally through the variable pay plans: – Annual bonus plan, which rewards for the delivery of financial targets (economic Profit and underlying Profit) and balanced scorecard objectives. These objectives are reviewed by the Committee annually to ensure alignment with the longer-term strategy. In determining awards, the Committee applies its judgement to adjust for any current or legacy issues. All awards for executive Directors under the bonus plan are subject to deferral and may be adjusted prior to release if the Committee deems it appropriate.
– Bonus opportunities have been reduced to reflect the increase in fixed pay. The maximum bonus opportunity will be 140 per cent of salary for the Group Chief executive and 100 per cent of salary for other executive Directors (compared with 225 per cent and 200 per cent of salary last year). In addition, the expected value of the bonus is reduced to 30 per cent of the maximum opportunity.
– long-term incentive will remain at up to 300 per cent of base salary and will follow a similar approach to 2013, but with some changes in performance measures and weighting to reflect the strategy; for example, cost:income ratio and new customer measures replace previous cost and non-core asset reduction measures.
– The overall impact is to encourage an appropriate balance of risk and reward, where the latter is competitive, compliant and aligned to the interests of shareholders, within what is prescribed by the new european requirements.
Performance of the Group in 2013 In 2013, we accelerated the delivery of our strategy and made substantial progress in creating a simple, customer-focused, low risk retail and commercial bank. The Group’s underlying profit more than doubled to £6.2 billion and a modest statutory profit was returned at the pre-tax level. The capital position was further strengthened.
Remuneration outcomes for 2013 The key challenges for the Remuneration Committee have been to determine how to remunerate appropriately for the strong underlying performance in 2013, whilst ensuring that adjustments are made for legacy issues, most notably the additional financial provision for PPI.
During the year, we consulted with our main regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). We also consulted extensively with uK Financial Investments (uKFI) and a number of our other major shareholders to gather their views and feedback on all significant aspects of remuneration, including our approach for addressing the regulatory changes. We are grateful for the generally supportive feedback we have received for the changes proposed from our shareholders.
The actual awards for the year are stated in the Implementation Report.
Our pension policy aims to support executive Directors in building long-term retirement savings.
The maximum allowance for other executive Directors is 25 per cent of base salary.
– Benefits for comparable roles in comparable publicly listed financial services groups of a similar size.
Maximum potential Participation levels may be increased up to HMRC limits as amended from time to time. With effect from April 2014, the monthly savings limits for SAYe is £500. The maximum value of shares that may be purchased under SIP in any year is £1,800 with a two for one match (although currently a one for one match is operated) and the maximum value of free shares that may be awarded in any year is £3,600.
Maximum potential The maximum annual bonus opportunities are 140 per cent of base salary for the GCe and 100 per cent of base salary for other executive Directors.
Performance measures Measures and targets are set annually by the Committee in line with the Group’s strategic business plan and further details are set out in the Implementation Report for the relevant year.
At least 50 per cent of the awards are weighted towards financial measures, with the balance on strategic objectives. For example, for 2014, the measures will include economic Profit and underlying Profit as well as specific strategic objectives including risk, customer and employee measures. All assessments of performance are ultimately subject to the Committee’s judgement, but no award will be made if threshold performance is not met for financial measures and the individual is rated ‘Developing performer’ or below. The expected value of the bonus is 30 per cent of maximum opportunity.
Performance measures Measures and targets are set by the Committee annually and are set out in the Implementation Report each year.
For example, for 2014, the measures and respective weighting will be economic Profit (30 per cent); absolute TSR (30 per cent); strategic measures (40 per cent) split into: cost:income ratio (10 per cent), customer satisfaction (10 per cent), net promoter score (10 per cent), SMe lending (5 per cent), and share of first-time buyer market (5 per cent).
Shareholding guidelines executive Directors are required to build up a holding of a value of 200 per cent of base salary and fixed share award for the GCe and 150 per cent for other executive Directors.
Illustration of application of remuneration policy The charts below illustrate possible remuneration outcomes under the following three scenarios: 1. The maximum that may be paid, assuming full bonus payout and full vesting under the long-term plan.
no share price growth has been assumed and dividends have not been included. The amounts are based on salaries as at 1 January 2014 and assume fixed share awards and bonuses which reflect the implementation of the policy in 2014 as set out below. They also assume long-term incentive grants of 300 per cent of salary, which is normally the maximum award.
Approach to recruitment and appointment to the Board In determining appropriate remuneration arrangements on hiring a new executive Director, the Committee will take into account all relevant factors. This may include the experience and calibre of the individual, local market practice, the existing remuneration arrangements for other executives and the business circumstances. The Committee will seek to ensure that arrangements are in the best interests of both the Group and its shareholders and will seek not to pay more than is necessary.
– An executive Director recruited from a business or location where benefits are provided that do not fall into the definition of ‘variable remuneration forfeited’ but where the Committee considers it reasonable to buy-out these benefits.
Any discretion is however limited to the maximum level of variable remuneration (excluding buy-out awards) that may be awarded to new executive Directors which is equal to 200 per cent of fixed remuneration, including any discount permitted by the european Banking Authority for long-term incentive awards. In making any such remuneration decisions, the Committee will apply appropriate performance measures in line with those applied to other executive Directors.
Service agreements The service contracts of all current executive Directors are terminable on 12 months’ notice from the Group and six months’ notice from the individual. The Chairman also has a service agreement. His engagement may be terminated on six months’ notice by either the Group or the individual.
Notice periods newly-appointed executive Directors will be employed on contracts that include the following provisions: – The individual will be required to give six months’ notice if they wish to leave and the Group will give 12 months’ notice other than for material misconduct or neglect or other circumstances where the individual may be summarily dismissed by written notice. In exceptional circumstances, new joiners will be offered a longer notice period (typically reducing to 12 months within two years of joining).
– 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.
Base salary Fixed Share Award Pension, benefits and other fixed remuneration
Awards continue and are released at the normal time and the number of shares subject to the award in the current year will be reduced to reflect the fact that the executive Director has left early.
Where an executive Director is in receipt of expatriate or relocation expenses at the time of termination (as at the date of the AGM no current executive Directors are in receipt of such expenses), the cost of actual expenses incurred may continue to be reimbursed for up to 12 months after termination or, at the Group’s discretion, a one-off payment may be made to cover the costs of premature cancellation. The cost of repatriation may also be covered.
– Pay for comparable roles in comparable publicly listed financial services groups, of a similar size.
The Committee appoints independent consultants to provide advice on specific matters according to their particular expertise. During the year, Deloitte llP advised the Committee. Deloitte was appointed following a competitive tendering process. Deloitte has voluntarily signed up to the Remuneration Consultants’ Code of Conduct. The Committee has evaluated Deloitte during 2013 and has judged its advice as objective and independent.
The Committee believes that the proposed structure of the Group’s remuneration is appropriate, given the regulatory requirements. We have consulted extensively with our major shareholders but we also welcome feedback from all of our shareholders on our remuneration arrangements and on this report.
Implementation of the policy in 2014 As mentioned in the Chairman’s statement and remuneration policy above, the Group is required to comply with the Prudential Regulation Authority’s (PRA) Remuneration Code (the ‘Code’), as amended on 1 January 2014 to implement the fourth amendment of the Capital Requirements Directive (‘CRD IV’). under the Code, the Group and certain employees who have a material impact on the Group’s risk profile (‘Code Staff’) including executive Directors, are subject to certain rules regarding the provision of remuneration.
GCe: 50 per cent of reference salary less flexible benefit allowance
The GCe is also entitled to the provision of an unfunded unapproved retirement benefit scheme (uuRBS), subject to performance conditions, as described further in the Implementation Report.
All employee plans executive Directors are eligible to participate in the Sharesave and Sharematch scheme on the same basis as other employees.
For 2014 the annual bonus will be based on: – Financial measures (underlying profit and economic profit) – 50 per cent
Awards in 2014 will be made as follows: GCe: 300 per cent of reference salary
Set relative to 2016 targets Threshold: 1.15 Maximum: 1.05 net promoter score Major Group average ranking over 2016 Threshold: 3rd Maximum: 1st
Set relative to targets for market share over 3 year period
Measure excludes PPI complaints, but includes Banking, Home Finance, General Insurance, life, Pensions and Investment complaints.
non-executive Directors may receive more than one of the above fees.
The following pages contain information that is required to be audited in compliance with the Directors’ Remuneration requirements of the Companies Act 2006. All narrative and quantitative tables are unaudited unless otherwise stated.
Annual bonus For each executive Director, the 2013 bonus was based on performance against: – Profit measures (50 per cent): underlying Profit and economic Profit
– Successful relaunch of the lloyds Bank brand in the second half of the year.
– The sale by the uK government of 6 per cent of its stake in the Group in September 2013, thereby reducing its holding to 32.7 per cent. A major milestone in our recovery, and marks the start of the journey to full re-privatisation, which is a key priority for the Group.
– Return on risk-weighted assets improved to 2.14 per cent from 0.77 per cent, driven by increased earnings and by risk-weighted asset reductions, predominantly in the non-core business.
– The Group’s wholesale funding requirement has reduced given the reduction in non-core assets and continued growth in customer deposits in the year. These have, together, enabled us to reduce wholesale funding by £32 billion and repay the full amount of the long Term Refinancing Operation funding from the european Central Bank of €13.5 billion ahead of schedule.
– The underlying impairment charge improved by 47 per cent to £3,004 million, driven by the reduction in non-core assets and the sustained improvement in Group asset quality.
– Strong management of the Group’s conduct strategy programme, which addresses every area of the organisation and is driving improvements in the customer experience.
The bonuses awarded are summarised in the table below: Name António
If either condition is met earlier than the third anniversary of grant, vesting will still only occur on the third anniversary. In this event, the award will be subject to a further two year holding period following vesting up to a maximum of five years in total.
Vesting % of maximum economic profit 33.33% of the award £567m £1,534m 25% 100% £1,737m 100.0%
Payments within the reporting year to past directors (audited) As part of arrangements on leaving the Group, contractual payments of monthly salary and benefits were made in respect of January 2013 totalling £76,746 to Mr T Tate.
Total £000 nick luff (from 05/03/13) 108 – – – 108 –
Fees for chairing the Responsible Business Steering Group (a non-Board level committee).
Fees for chairing the Finance Inclusion Committee (a non-Board level committee).
To provide further context, we have also shown below lloyds Banking Group’s annual TSR change compared with the FTSe 100 and against a european Banking index calculated for each period since 1 January 2008. We believe this highlights more clearly the positive impact of the current management team which was formed in 2011.
Payout range set relative to 2015 targets Threshold: <=£37bn Maximum: <=£28bn
Deferred bonus awarded in 2013 Bonus is deferred into shares normally released at the end of a three year period. The face value of the share awards in respect of bonuses granted in March 2013 was £1,485,000 (3,012,781 shares) for the GCe and £700,000 (1,420,166 shares) for the CFO. The share price used to calculate face value is the average price over the five days prior to grant (18 March to 22 March 2013), which was 49.29 pence.
Share buy-out award granted on 30 March 2011 for the loss of deferred share awards forfeited on leaving the Santander Group. Awards are consistent with those forfeited and have a nil option price.
not exercisable as the option has not been held for the period required by the relevant scheme.
Share buy-out awards lapsed as the performance conditions were not met.
Values are based on the 31 December 2013 closing price of 78.88 pence.
Directors’ interests – summary of awards vested, purchases and sales made by directors in 2013 (unaudited)
Further information on Risk Management can be found: Risk overview 40
Other information: for an analysis of where Enhanced Disclosure Task Force (EDTF) recommendations are disclosed 391
Risk appetite – The Group defines risk appetite as ‘the amount and type of risk that the Group is prepared to seek, accept or tolerate.’
Governance and control – Governance is maintained through delegation of authority from the Board down through the management hierarchy, supported by a committee-based structure designed to ensure open challenge and that the Group’s risk appetite, principles, policies, procedures, controls and reporting are fully in line with regulations, law, corporate governance and industry good-practice.
Risk decision making and reporting – Taking risks which are well understood, consistent with strategy and with appropriate margin is a key driver of shareholder value.
As a separate regulated entity with its own Board, the Insurance Division maintains its own regulatory risk capital and liquidity requirements, including appropriate management buffers. The Insurance Division operates within the Group’s overall risk framework against agreed risk appetites, with Risk Division, represented by the Insurance Divisional Risk Officer, and Group Audit providing assurance to both the Insurance Board and Group Board through the respective risk and audit committees.
Predominantly relates to various non-financial assets, including fixed assets, cash, items in the course of collection, prepayments, sundry debtors and deferred tax assets, the RWAs for which are reported within credit risk for regulatory capital purposes.
Principal risks The Group’s principal risks are shown in the Risk Overview (pages 42 to 43). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk drivers are on pages 133 to 196.
– Coordinated scenario analysis and planning through the Ring-Fencing and Resolution Programme under GeC sponsorship. – Mobilisation of resources across the Group to assess impacts and propose potential responses aligned to Group strategy.
Culture A cultural change is needed in banking to restore trust, with greater evidence of genuinely client-centred behaviour and enterprise-wide management of risks. Key mitigating actions – Further embedding and implementation of the Group’s Risk Management Framework.
– Meet the standards required and information needs of internal and external stakeholders, including regulators.
Methodology The Chief economist’s Office develops the macroeconomic scenarios to be used by the Group. Internal scenarios are developed based on key uncertainties for the economic outlook. A wide set of economic parameter assumptions is constructed, with over 150 metrics provided such as Gross Domestic Product, Base Rate, unemployment, Property Indices, Insolvencies, Corporate Failures to facilitate modelling of scenarios across the Group. Where an external scenario is provided, the Chief economist’s Office broadens the supplied parameter to the level of detail required by the Group.
Below is an overview of the principal output responsibilities by team.
The Group Financial Risk Committee (GFRC), chaired by the Chief Risk Officer, is the Committee that has primary responsibility for overseeing the development and execution of the Group’s stress tests.
The main economic assumptions developed by the Chief economist’s Office are reviewed and challenged at Group Risk Committee (GRC), Group executive Committee (GeC) and Board Risk Committee (BRC), and approved by the Board before being cascaded across the Group.
Risk governance The Group’s Risk Management Framework (RMF) provides a robust and consistent approach to risk management across the Group in order to drive its risk profile in line with risk appetite. It articulates individual and collective accountabilities for risk management, risk oversight and risk assurance; supports the discharge of responsibilities to customers, shareholders and regulators; and establishes a common risk language which assigns the risks to which the Group is exposed into categories which are used consistently to support risk aggregation and reporting.
Group executive Committee (GeC) Supports the Group Chief executive in ensuring the effectiveness of the Group’s risk management framework and the clear articulation of the Group’s risk policies, while also reviewing the Group’s aggregate risk exposures and concentrations of risk.
Group Rectification Committee ensures appropriate control and oversight of material events which have a customer impact.
– Business lines (first line) have primary responsibility for risk decisions, measuring, monitoring and controlling risks within their areas of accountability. They are required to establish effective governance, and control frameworks for their business compliant with Group Policy requirements, to maintain appropriate risk management skills, mechanisms and toolkits, and to act within Group Risk Appetite parameters set and approved by the Board.
Risk monitoring, aggregation and reporting – identified risks are logged and reported on a monthly basis or as frequently as necessary to the appropriate committee. The extent of the risk is compared to the overall risk appetite as well as specific limits or triggers. When thresholds are breached, committee minutes are clear on the actions and timeframes required to resolve the breach and bring risk within given tolerances. There is a clear process for escalation of risks.
Full analysis of risk drivers The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives. A detailed description of each category is provided below.
The Group considers these to be principal risks. See Risk Overview pages 40 to 43 for further details.
This statement of the Group’s overall appetite for credit risk is reviewed and approved annually by the Board.
Exposures The principal sources of credit risk within the Group arise from loans and advances, contingent liabilities, commitments, debt securities and derivatives to customers, financial institutions and sovereigns. The credit risk exposures of the Group are set out in note 54 on page 327. Credit risk exposures are categorised as ‘retail’, arising primarily in the Retail and Wealth, Asset Finance and International divisions, ‘commercial’ and ‘corporate’, ‘financial institutions’ or ‘sovereigns’ arising in the Commercial Banking and Wealth, Asset Finance and International divisions.
Cross-border exposures: The Board sets country risk appetite. Within this, country limits are authorised by the country limits committee, taking into account economic, financial, political and social factors. Group policies stipulate that these limits must be consistent with, and support, the approved business and strategic plans of the Group.
Credit risk assurance within Commercial Banking is also undertaken by Commercial Risk Assurance. Commercial Risk Assurance is an independent credit risk oversight function operating within Commercial Banking Risk, part of the Group’s second line of defence, while Group Audit performs third line of defence assurance.
Additional mitigation for retail customers (lending to individuals in Retail and Wealth, Asset Finance and International divisions) The Group uses a variety of lending criteria when assessing applications for mortgages and unsecured lending. The general approval process uses credit acceptance scorecards and involves a review of an applicant’s previous credit history using information held by credit reference agencies (CRA). The Group also assesses the affordability of the borrower under stressed scenarios including increased interest rates. In addition, the Group has in place quantitative limits such as product maximum limits, the level of borrowing to income and the ratio of borrowing to collateral. Some of these limits relate to internal approval levels and others are hard limits above which the Group will reject the application. The Group also has certain criteria that are applicable to specific products such as for applications for a mortgage on a property that is to be let by the applicant.
Collateral The principal collateral types for loans and advances, contingent liabilities and derivatives with commercial counterparties/customers are: – mortgages over residential and commercial real estate; – charges over business assets such as premises, inventory and accounts receivables; – charges over financial instruments such as debt securities and equities; and
Master netting agreements Where it is appropriate and likely to be effective, the Group seeks to enter into master netting agreements. Although master netting agreements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis, they do reduce the credit risk to the extent that, if an event of default occurs, all amounts with the counterparty are 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.
– Mortgage Rescue Scheme – This is a government short-term initiative for borrowers in difficulty and facing repossession, who would have priority for re-housing by a local authority (e.g. the elderly, disabled, single parents). eligible customers can have their property bought in full or part by the social rented sector and then remain in their home as a tenant or shared equity partner. If the property is sold outright the mortgage is redeemed in full.
It is Group policy that where forbearance has been granted for a commercial customer, it must be managed either within the Group’s good book watchlist Credit Risk Classification framework or within a BSu. Any concession requested by a customer is reviewed and must be approved by the independent Risk Division. If approved and Risk Division determines that the customer is in financial difficulty, then any off market concession granted is treated as forbearance and the loan reviewed monthly. Any event that causes concern over future payments from the customer is likely to result in the asset being assessed for impairment and, if required, an impairment allowance recognised. If impairment is identified, the customer is immediately transferred to BSu and will be treated as an impaired asset. If no impairment is identified, the Risk Division will determine if the customer should remain in the good book (categorised as watchlist), or transfer to BSu for more intensive monitoring.
Core BSu and Global non-Core case officers are part of the independent Risk Division. They are highly experienced and operate in a closely controlled and monitored environment, including regular oversight and close scrutiny by senior management. Risk is minimised through a combination of appropriate work-out strategies, such as asset/loan sales and debt restructuring.
A detailed assessment is undertaken by the specialist risk team for cases in Core BSu and Global non-Core to assist in reducing risk exposure and to highlight potential strategic options. A range of information is required to fully appraise and understand the customer’s business, cashflow (and therefore debt serviceability) and will involve the Group, in addition to using its own internal sector experts, engaging professional advisers to perform asset valuations, strategic reviews and where applicable independent business reviews. The assessment may also involve: – critically assessing customer’s ability to successfully manage the business effectively in a distressed situation where turnaround is required; – analysis of market sector factors, i.e. products, customers, suppliers, pricing and margin issues; – performance review of operational areas that should be considered in terms of current effectiveness and efficiency and scope for improvements; – financial analysis to model plans and factor in potential sensitivities, vulnerabilities and upsides; and
The above assessment, monitoring and control processes continue throughout the period the case is managed within the BSu. All the analysis performed around cash flows is used to determine appropriate impairment provisions.
The Group’s accounting policy for loan renegotiations and forbearance is set out in note 2 on page 213.
– Impaired loans as a percentage of closing advances reduced to 6.3 per cent at 31 December 2013, from 8.6 per cent at 31 December 2012, driven by improvements in Retail and Commercial Banking and reflecting reductions in both the core and non-core books.
Wealth, Asset Finance and International 31,450 10,358 32.9 7,242 69.9 Reverse repos and other items 2,779 – –
Impairment provisions (15,707) Fair value adjustments3 (516) Total Group (audited) 495,281 Core
Not settled by central counterparties Total Notional balances £bn £bn £bn £bn
At 31 December 2013 equity and other 4 – 15 19
The fair value of derivatives settled by central counterparties was a net liability of £419 million, comprising assets of £3,220 million and liabilities of £3,639 million.
Overview – The Retail impairment charge decreased by 13 per cent to £1,101 million primarily driven by a reduction in impaired loans in the secured portfolio.
Non-core unsecured: Total non-core gross lending 24,153 1,368 5.7 316 24.0
Impairment provisions as a percentage of impaired loans are calculated excluding unsecured loans in recoveries.
Lloyds Banking Group Annual Report and Accounts 2013146 loans and advances to customers Impaired loans
Secured: Buy to let 52,791 49,568 unsecured: Total gross lending 344,673 346,560
Table 1.13: Mortgages greater than three months in arrears (excluding repossessions)
The stock of repossessions decreased to 2,229 cases at 31 December 2013 compared to 2,438 cases at 31 December 2012.
Secured loan to value analysis The average indexed loan to value (lTV) on the mortgage portfolio at 31 December 2013 decreased to 52.8 per cent compared with 56.4 per cent at 31 December 2012. The average lTV for new mortgages and further advances written in 2013 was 63.6 per cent compared with 62.6 per cent for 2012.
Table 1.14: Actual and average LTVs across the Retail mortgage portfolios
Table 1.15: Analysis of residential interest-only balances excluding Buy to Let mortgages
Impairment provisions decreased by £141 million, compared with 31 December 2012. This reduction was driven by fewer assets entering arrears and recoveries assets being written down to the present value of future expected cash flows. Impairment provisions as a percentage of impaired loans in collections increased to 86.9 per cent at 31 December 2013 from 82.6 per cent at 31 December 2012.
Overview – Commercial Banking impairment charge decreased by 60 per cent to £1,167 million, driven by lower charges mainly in the non-core portfolio, reflecting continued proactive management and deleveraging. Charges also reduced significantly in the core portfolio, reflecting better quality origination, together with higher releases in 2013 compared to the same period in 2012.
– The impairment charge as a percentage of average loans and advances improved to 0.83 per cent from 1.85 per cent in 2012. Core impairment charge as an annualised percentage of average loans and advances to customers improved to 0.39 per cent compared to 0.67 per cent in 2012.
Corporate Real estate and other Corporate2 11,571 8,131 70.3 3,320 40.8
Includes the specialised lending portfolio which is now managed with the Specialist Finance assets which were previously disclosed in Other.
Core At 31 December 2013 £112 billion of gross loans and advances to customers in the Commercial Banking core portfolio are segmented across four different coverage segments as follows: SME SMe serves business customers with turnover up to £25 million. Impaired loans decreased by £399 million to £2,271 million compared with £2,670 million at 31 December 2012. The impairment charge has reduced to £188 million in 2013 compared to £259 million in 2012 reflecting stable or improved portfolio credit quality across all key metrics.
The core portfolio related to trading companies continues to be predominantly investment grade focused; the overall portfolio asset quality remains good; and corporate balance sheets generally remain conservatively structured following a period of de-leveraging through the downturn.
The impairment charge in this portfolio fell to £522 million compared to £1,453 million in 2012. The fall in the impairment charge reflects lower gross charges on a reduced portfolio, favourable market movements on impaired derivatives and the continuing proactive management enabling some write backs on previously impaired loans.
Secured loan to value analysis for uK Direct Real estate lending The Group classifies Direct Real estate as exposure which is directly supported by cash flows from property activities, as opposed to trading activities (such as hotels, care homes and housebuilders). The Group manages its exposures to Direct Real estate across a number of different coverage segments.
Acquisition (leverage) Finance lending Gross drawn lending in the core Acquisition Finance portfolio totalled £2,128 million (net £2,111 million) as at 31 December 2013. The portfolio comprises leveraged financing facilities made available, predominantly, to uK borrowers owned by private equity sponsors. The majority of transactions have been structured in the past three years and all are in line with the Group’s risk appetite. Refinancing risk is not considered a material issue for the portfolio due to the relatively young vintage of the book and conservative risk parameters.
Asia retail (1) 35 latin America and Middle east – (33)
Impairment charge as a % of average advances 1.79% 3.12% (133)bp
Impaired loans and provisions Total impaired loans decreased by £3,650 million to £10,358 million compared with £14,008 million at 31 December 2012 and, as a percentage of closing loans and advances to customers, increased to 32.9 per cent from 32.6 per cent at 31 December 2012. This is primarily driven by reductions in Ireland wholesale.
Table 1.25: Environmental risk management approach uK renewable energy policy Over the past two years, the uK government has undertaken an electricity Market Reform review, in line with its aim to introduce a more stable investment regime – Contract for Difference (CFD). Primary legislation for this was passed in December 2013, with secondary legislation likely to be passed by July 2014. From then on, the current Renewables Obligation will run alongside CFD through to 2017. At present, it appears that given the limited availability of commercially acceptable or bankable Power Purchase Agreements under the Renewable Obligation regime, independent generators are restricting their investment in the uK.
The Group’s leadership team is committed to embedding the Conduct Strategy within the business and to creating the right customer centric culture. The Board and Group Risk Committees receive regular reports and metrics to track progress on how the Group is meeting customer needs and minimising conduct risk.
All Group divisions have applied significant resources to the Conduct Strategy and set ambitious conduct transformation plans.
The Group’s Conduct Strategy continues to evolve and be enhanced. The Group actively engages with regulatory bodies and other stakeholders in developing its understanding of current customer treatment concerns to ensure that the implementation of the Group’s conduct strategy meets evolving stakeholder expectations.
(b) transactional exposure: where assets and liabilities are denominated in currencies other than the business’ functional currency. The Group has a policy of forward hedging its forecasted currency income less impairments to year end.
– Insurance’s surplus assets also result in market risk exposure. These assets are held primarily in three portfolios: (i) in the long-term funds within the life insurance companies; (ii) in the corresponding shareholder funds; and (iii) in investment portfolios within the general insurance business.
Scenario based measures include the use of five different economic multi-risk scenarios which the Group introduced as part of its Board risk appetite. These assess the impact of unlikely, but plausible adverse scenarios on income, with the worst case for defined benefit pensions, trading portfolios, banking activities and insurance portfolios being reported against the Board risk appetite.
– Profit and loss triggers are used in the trading books in order to ensure that mitigating action is considered if profit and loss becomes volatile.
The average VaR for 2013 was lower than the average over 2012 due primarily to lower credit spread and interest rate exposure and improvement in market conditions. Trading book VaR assumes no diversification across risk type, instead it is a simple sum of interest rate, foreign exchange, credit spread, and inflation risk.
(b) Interest income sensitivity: this measures the impact on future net interest income arising from an instantaneous 25, 100 and 200 basis points parallel rise or fall in all the yield curves over a rolling 12 month basis (subject to a floor at zero per cent). unlike the market value sensitivities, the interest income sensitivities incorporate additional behavioural assumptions as to how and when individual products would reprice in response to such change.
Insurance portfolios Investment holdings are diversified across markets and, within markets, across sectors. Holdings are diversified to minimise specific risk and the relative size of large individual exposures is monitored closely. For assets held outside unit-linked funds, investments are only permitted in countries and markets which are sufficiently regulated and liquid. Where considered appropriate, hedges are in place to reduce exposure to market risk, principally equity and interest rate risk, but also foreign currency.
For annuity liabilities the aim is to invest in assets such that the cash flows on investments will match those on the projected future liabilities. It is not possible to eliminate risk completely as the timing of insured events is uncertain and bonds are not available at all of the required maturities. As a result, the cash flows cannot be precisely matched and so sensitivity tests are used to test the extent of the mismatch. Further, in assessing the current value of these future cashflows, it is not always possible to achieve equally resilient levels of matching between the different capital measures that are used to assess regulatory solvency.
under this governance structure, the surplus or deficit in the schemes is tracked on a monthly basis along with various single factor and scenario stresses which consider the assets and liabilities holistically. Performance against risk appetite limits and triggers is also tracked regularly including an assessment of the impact on Group capital resources. Hedges in place and asset/liability matching positions are also actively monitored.
The aim of operational risk management is to manage operational risks in line with defined appetites, and to protect both customers and the Group whilst delivering sustainable growth. The Group Operational Risk framework is the method by which operational risks are managed in terms of setting risk appetite, evaluating key exposures, measuring risk, mitigating risk, and monitoring risks on an ongoing basis, as set out below.
Risk appetite The Group’s Operational Risk appetite is designed to safeguard the interests of customers, internal and external stakeholders, and shareholders. Appetite is expressed through five high level statements summarised below, each of which are defined with limits and triggers approved by the Board, and are regularly monitored by executive and Board risk committees: – Customer: The Group builds trust and does not expect its customers to be impacted negatively.
– Management time and resources: The Group does not expect internal events that divert excessive senior management time from running the business or have extensive impact on colleague time and/or morale.
– Risks arising from inadequate customer facing processes, including transactions, processing and information capture.
The risks below also have potential to negatively impact customers and the Group’s future results: – The sale of TSB may result in disruption of senior management’s ability to lead and manage the Group effectively. In addition, the Group is committed to providing service for TSB, with potential for customer detriment, plus reputational and financial exposure for the Group in the event of any significant issues in maintaining services.
– The Group adopts a risk based approach to mitigate the external fraud risks it faces, reflecting the current and emerging external fraud risks within the market. This approach drives an annual programme of enhancements to the Group’s technology, process and people related controls, with an emphasis on preventative controls supported by real time detective controls wherever feasible. Through Group-wide policies and operational control frameworks, the Group has developed a robust fraud operating model with centralised accountability. The Group’s fraud awareness programme is a key component of its fraud control environment.
– Significant investment has been made in increasing the Group’s cyber defence, for example through the IT Security Improvement Programme, to protect customers and the Group’s infrastructure.
– The Group continues to place appropriate and significant focus on improving customer processing by remediating known issues and addressing root cause through its rectification programmes, and seeking to improve the overall servicing environment in key areas through the Simplification programme. In addition, incident management capability has been revised and enhanced to increase speed of response to customer impacting incidents.
– The Group has adopted policies and procedures to detect and prevent the use of its banking network for money laundering and related activities, and it regularly reviews and assesses these to keep them current and effective. These activities include ‘know-your-customer’ requirements, training and awareness, transaction monitoring technologies and reporting of suspicions of money laundering to the applicable regulatory authorities.
Measurement A series of measures are used across the Group to monitor both short and long-term liquidity including: ratios, cash outflow triggers, wholesale funding maturity profile, early warning indicators and stress test survival period triggers. The Board approved liquidity risk appetite covers a range of metrics considered key to maintaining a strong liquidity and funding position, with regular reporting to GAlCO and the Board. Strict criteria and limits are in place to ensure highly liquid marketable securities are available as part of the portfolio of liquid assets.
Monitoring liquidity is actively monitored at Group level. Routine reporting is in place to senior management and through the Group’s committee structure, in particular GAlCO which meets monthly. In a stress situation the level of monitoring and reporting is increased commensurate with the nature of the stress event. liquidity policies and procedures are subject to independent internal oversight.
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. These are a mixture of quantitative and qualitative measures including daily variation of customer balances, changes in maturity profiles, cash outflows, funding concentration, changes in primary liquidity portfolio, credit default swap (CDS) spreads and changing funding costs.
In addition, the monitoring framework has two other important components: – Firstly, the Group carries out stress testing of its liquidity and potential cash flow mismatch position over both short (up to two weeks) and longer term (up to three months) horizons against a range of scenarios, including those prescribed by the PRA, (the idiosyncratic, market wide and combined stresses) and the Group’s own scenarios reflecting possible future liquidity risks. The Group’s scenarios cover uS market disruption, market counterparty failure, uK sovereign rating downgrade and a eurozone stress. The key risk driver assumptions applied to the scenarios are: Liquidity risk driver Market wide and Group specific stresses
– Secondly, the Group maintains a Contingency Funding Plan which is designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing. Contingency Funding Plan invocation and escalation processes are based on analysis of five major quantitative and qualitative components, comprising assessment of: early warning indicators, prudential and regulatory liquidity risk limits and triggers, stress testing results, event and systemic indicators and market intelligence.
Cash balances and balances at central banks – primary are combined in the Group’s balance sheet.
Primary liquidity assets are PRA eligible liquid assets including uK Gilts, uS Treasuries, euro AAA government debt and unencumbered cash balances held at central banks.
excluding repurchase agreements of £3.0 billion (31 December 2012: £4.4 billion).
Table 1.33: Reconciliation of Group funding figure to the balance sheet (audited)
Restated to reflect the implementation of IAS 19R and IFRS 10. See note 56, page 353.
Encumbered assets The Board monitors and manages total balance sheet encumbrance via a risk appetite metric. During 2013 the Group had term issuance of £0.5 billion from securitisations and no issuance from covered bonds. Maturities have led to a reduction in externally held notes from residential mortgage backed securitisation and covered bond issuance. The table below summarises the assets encumbered through the Group’s external issuance transactions.
In addition the Group retained internally £7.6 billion (31 December 2012: £26.3 billion) of notes secured with £12.5 billion (31 December 2012: £37.5 billion) of assets.
Pro-rated by programme (31 December 2012 number restated on this basis).
Liquidity portfolio At 31 December 2013, the Group had £89.3 billion (2012: £87.6 billion) of highly liquid unencumbered assets in its primary liquidity portfolio which are available to meet cash and collateral outflows and PRA regulatory requirements, as illustrated in the table overleaf. In addition the Group had £105.4 billion (2012: £117.1 billion) of secondary liquidity which is eligible for use in a range of central bank or similar facilities. This liquidity is managed as a single pool in the centre and is under the control of the function charged with managing the liquidity of the Group. It is available for deployment at immediate notice, subject to complying with regulatory requirements, and is a key component of the Group’s liquidity management process.
The Group notes that the liquidity Coverage Ratio (lCR) will become the Pillar I standard for liquidity in the uK in 2015, and that the PRA has the ability to impose firm specific liquidity requirements. The european Commission is to adopt further legislation by 30 June 2014 to specify the definition, calibration, calculation and phase-in of the lCR for implementation in 2015. The Group expects to meet the new requirements ahead of the implementation dates.
Stress testing results Internal stress testing results at 31 December 2013 show that the Group has liquidity resources representing 130.9 per cent of modelled outflows from all wholesale funding sources, retail and corporate deposits, intra-day requirements and rating dependent contracts under the Group’s most severe liquidity stress scenario (the three month PRA combined scenario).
Over the course of 2013 there have been significant regulatory developments in the area of capital and the related management. The principal changes relate to the finalisation of CRD IV and subsequent consultation and finalisation of PRA requirements for their implementation in the uK and the 2013 announcement that major uK banks are expected to meet specific targets on an adjusted basis for CeT1 and leverage ratios. The Group notes the final statements from the PRA on the implementation of capital requirements in the uK and will continue to work with the regulator to ensure that the Group continues to meet the regulator’s capital expectations. The Group continuously evaluates the efficiency of its capital structure, management of which may result in significant one-off charges or gains, and its capital structure’s alignment with the regulatory framework. With the adoption of CRD IV, the Group is considering opportunities to raise new Additional tier 1 securities which would rank senior to ordinary shares, and be automatically convertible into ordinary shares if the Group’s common equity tier 1 ratio fell below a specified trigger point.
Beyond CRD IV there have been a number of draft technical standards issued for consultation which relate to both capital and leverage and both Basel and european regulatory bodies continue to develop their thinking on both capital resources and capital requirement measures. Within the uK the PRA have been active in requiring enhanced capital standards and encouraging further disclosure developments and HM Treasury have been consulting on practical aspects of the application of a counter cyclical buffer.
The Group monitors these developments very closely, participating actively in the regulatory consultation processes and analysing the potential financial impacts to ensure that the Group continues to have a strong loss absorption capacity that exceeds the regulatory requirements and the Group’s risk appetite and is consistent with market expectations.
– Pro forma fully loaded CeT1 ratio under the CRD IV rules increased 2.2 percentage points from 8.1 per cent to 10.3 per cent whilst the ratio excluding pro forma impacts increased to 10.0 per cent.
Capital position at 31 December 2013 The Group’s capital position applying prevailing rules as at 31 December 2013 is set out in the following section. Additionally, information about the Group’s capital position on a CRD IV basis is set out on page 183.
50 per cent excess of expected losses over impairment provisions (373) (636)
Dated subordinated debt 18,567 19,886 unrealised gains on available-for-sale equity investments provisions 135 56
Total capital £m loss attributable to ordinary shareholders (838) – – – (838)
Material holdings deduction – 1,704 1,703 – 3,407 eligible provisions – – (618) – (618)
Includes the impact to other comprehensive income and movement in the retirement benefit asset.
Divisional analysis of risk-weighted assets: Wealth, Asset Finance and International 25,886 36,167
The reductions of risk-weighted assets of £26.7 billion in Commercial Banking and £10.3 billion in Wealth, Asset Finance and International primarily reflect further non-core asset reduction, the move to slotting models for Commercial Real estate (CRe) businesses and the impact of macroeconomic factors.
– Management of the balance sheet includes risk-weighted asset movements arising from new lending and asset run-off. During 2013 there was a small risk-weighted asset reduction of £1.8 billion in this category.
Tier 2 unrealised gain on available-for-sale equity investments 135 – –
less: deductions from tier 2 excess of expected losses over impairment provisions (373) – –
Pro forma impacts4 771 – – 771 31 December 2012 comparatives have not been restated to reflect the implementation of IAS 19R and IFRS 10.
exposure measure estimated in accordance with the January 2014 revised Basel III leverage ratio framework.
Other regulatory adjustments consist of other balance sheet assets that are required under CRD IV to be deducted from tier 1 capital. The removal of these assets from the exposure measure ensures consistency is maintained between the capital and exposure components of the ratio.
Life insurance businesses The business transacted by the life insurance companies within the Group comprises unit-linked business, non-profit business and with-profits business. Several companies transact either unit-linked and/or non-profit business, but Scottish Widows plc (Scottish Widows) and Clerical Medical Investment Group limited (Clerical Medical) hold the only With-Profit Funds managed by the Group.
Held within the long-term funds – – 6,259 – 225 6,484
Adjustments onto a regulatory basis: unallocated surplus within insurance business 205 62 – – – 267
new business and other factors 45 (6) 732 (240) 60 591
uK life Shareholder Funds Available capital in the uK life Shareholder Funds has decreased from £3,854 million at 31 December 2012 to an estimated £2,314 million at 31 December 2013. The decrease mainly reflects the funding used to pay the dividend from Scottish Widows Group to lloyds Bank.
Overseas life business Available capital has decreased during 2013 due to a dividend payment which was partially offset by profits emerging on new and in force business.
Options and guarantees outside the With-Profit Funds A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (e.g. term assurance) or guaranteed income for life (e.g. annuities). In addition, certain personal pension policyholders in Scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £63 million (2012: £56 million) in respect of those guarantees. If future salary growth were 0.5 per cent per annum greater than assumed, the liability would increase by approximately £1 million. If yields were 0.5 per cent lower than assumed, the liability would increase by approximately £9 million.
Definition Regulatory risk is defined as the risk that the Group is exposed to fines, censure, or legal or enforcement action due to failing to comply with applicable laws, regulations, codes of conduct or legal obligations.
Mitigation Mitigation is undertaken across the Group and comprises the following key components: – Risks are assessed by the business and controls put in place to mitigate them; – enhanced regulatory reporting; – Regulatory horizon scanning; – Oversight and assurance of the regulatory risks within the business; – Quality assurance theme reviews to assess compliance with rules, regulations and policies; – Continued investment in the Group’s IT systems is enabling the Group to meet its regulatory commitments; – Senior business leaders monitor the progress of these assessments and mitigations; – Material risks and issues are escalated to Group-level bodies which challenge the business on its management of risks and issues; and
Measurement Insurance risks are measured using a variety of techniques including stress and scenario testing, and where appropriate, stochastic modelling. Current and potential future insurance risk exposures are assessed and aggregated on a range of stresses including risk measures based on 1-in-200 year stresses for Insurance’s Individual Capital Assessment (Group defined benefit pension schemes utilise 1-in-20 year stresses) and other supporting measures where appropriate, including those set out in notes 36 and 37 to the financial statements.
Insurance risk is mitigated through pooling and through diversification across large numbers of individuals, geographical areas, and different types of risk exposure. A number of processes are used to control insurance risk including: underwriting (the process to ensure that new insurance proposals are properly assessed); pricing-to-risk (new insurance proposals are priced to cover the underlying risks inherent within the products); claims management; product design and management; policy wording; reinsurance and cost controls and efficiencies.
Exposure exposure represents the sufficiency of the Group’s policies and procedures to maintain adequate systems, processes and controls to support statutory, prudential regulatory and tax reporting, to prevent and detect financial reporting fraud, to manage the Group’s tax position and to support market disclosures.
– ensure that disclosures are made on a timely basis in accordance with statutory and regulatory requirements and as far as possible are consistent with best practice and in compliance with the British Bankers’ Association Code for Financial Reporting Disclosure.
Notes to the consolidated financial statements 212 1. Basis of preparation 2. Accounting policies 3. Critical accounting estimates and judgements 4. Segmental analysis 5. Net interest income 6. Net fee and commission income 7. Net trading income 8. Insurance premium income 9. Other operating income 10. Insurance claims 11. Operating expenses 13. Investments in joint ventures and associates 14. Taxation 15. Earnings per share 16. Disposal groups 17. Trading and other financial assets at fair value through profit or loss 18. Derivative financial instruments 19. Loans and advances to banks 20. Loans and advances to customers 21. Securitisations and covered bonds 22. Structured entities 23. Debt securities classified as loans and receivables 24. Allowance for impairment losses on loans and receivables 25. Available-for-sale financial assets 26. Investment properties 27. Goodwill 28. Value of in-force business 29. Other intangible assets 30. Tangible fixed assets 31. Other assets 32. Deposits from banks 33. Customer deposits 34. Trading and other financial liabilities at fair value through profit or loss 35. Debt securities in issue 36. Liabilities arising from insurance contracts and participating investment contracts 37. Life insurance sensitivity analysis 38. Liabilities arising from non-participating investment contracts 39. Unallocated surplus within insurance businesses 40. Other liabilities 41. Retirement benefit obligations 42. Deferred tax 43. Other provisions 44. Subordinated liabilities 45. Share capital 46. Share premium account 47. Other reserves 48. Retained profits 49. Ordinary dividends 50. Share-based payments 51. Related party transactions 52. Contingent liabilities and commitments 53. Financial instruments 54. Financial risk management 55. Consolidated cash flow statement 56. Restatement of prior period information 57. Future accounting developments 58. Approval of financial statements
Our opinion In our opinion: – the financial statements, defined below, give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2013 and of the Group’s loss and of the Group’s and Parent Company’s cash flows for the year then ended; – the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the european union; – the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the european union and as applied in accordance with the provisions of the Companies Act 2006; and
What an audit of financial statements involves We conducted our audit in accordance with International Standards on Auditing (uK and Ireland) (‘ISAs (uK & Ireland)’). An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: – whether the accounting policies are appropriate to the Group’s and Parent Company’s circumstances and have been consistently applied and adequately disclosed; – the reasonableness of significant accounting estimates made by the directors; and
Based on our professional judgement, we determined materiality for the Group financial statements as a whole to be £265 million. In arriving at this judgement we have had regard to interest and other income rather than profitability given the variability in performance in recent periods.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £10 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Areas of particular audit focus In preparing the financial statements, the directors made a number of subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. We primarily focused our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and evaluating the disclosures in the financial statements.
In our audit, we tested and examined information, using sampling and other auditing techniques, to the extent we considered necessary to provide a reasonable basis for us to draw conclusions. We obtained audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
We focused on identifying products and businesses with exposures and assessing whether a provision was necessary.
We tested the design and operating effectiveness of controls around management’s processes for identifying exposures in relation to conduct risk areas and assessing whether provisions were necessary. We also assessed potential exposures based upon our own knowledge and experience of emerging industry issues and the regulatory environment.
For all provisions made, we understood and critically assessed the provisioning models and underlying assumptions used. For those underlying assumptions based on historic experience, we assessed whether this was appropriate and where it was not deemed to be appropriate, the basis for and appropriateness of changes made was assessed.
We examined the analysis performed by management setting out the basis for their judgement in respect of the material exposures identified, together with relevant supporting evidence such as correspondence with tax authorities and legal opinions obtained.
InDePenDenT AuDITORS’ RePORT TO THe MeMBeRS OF llOYDS BAnKInG GROuP PlC
Going concern under the listing Rules we are required to review the directors’ statement, set out on page 74, in relation to going concern. We have nothing to report having performed our review.
– the funding and liquidity position of the Group to be able to meet its liabilities as they fall due, including in a market stress.
– the Parent Company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns.
Corporate Governance Statement under the listing Rules we are required to review the part of the Corporate Governance Statement relating to the Parent Company’s compliance with nine provisions of the uK Corporate Governance Code (‘the Code’). We have nothing to report having performed our review.
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group and Parent Company acquired in the course of performing our audit; or
COnSOlIDATeD InCOMe STATeMenT for the year ended 31 December note £ million £ million £ million
COnSOlIDATeD STATeMenT OF COMPReHenSIVe InCOMe for the year ended 31 December
COnSOlIDATeD BAlAnCe SHeeT at 31 December note £ million £ million £ million
Items in the course of collection from banks 1,007 1,256 1,408
The directors approved the consolidated financial statements on 5 March 2014.
Trading and other financial assets at fair value through profit or loss 17 142,683 160,620 148,614 loans and receivables: loans and advances to banks 19 25,365 32,757 32,877 loans and advances to customers 20 495,281 517,225 565,638
(loss) profit for the year – – (1,471) (1,471) 84 (1,387)
Currency translation differences (tax: £nil) – (14) – (14) – (14)
Post-retirement defined benefit scheme remeasurements, net of taxation – – 469 469 – 469
Net cash (used in) provided by operating activities (15,531) 3,049 19,893
Proceeds from sale and maturity of financial assets 21,552 37,664 36,523
Disposal of businesses, net of cash disposed 55(F) 696 37 298
effects of exchange rate changes on cash and cash equivalents (53) (8) 6
Cash and cash equivalents at end of year 55(D) 66,797 101,058 85,889
cost and adjusted each year to reflect the Group’s share of the post-acquisition results of the joint venture or associate based on audited accounts which are coterminous with the Group or made up to a date which is not more than three months before the Group’s reporting date. The share of any losses is restricted to a level that reflects an obligation to fund such losses.
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. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Refer to note 3 (Critical accounting estimates and judgements: Fair value of financial instruments) and note 53 (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.
The Group is permitted to reclassify, at fair value at the date of transfer, non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the trading category if they are no longer held for the purpose of being sold or repurchased in the near term, as follows: – if the financial assets would have met the definition of loans and receivables (but for the fact that they had to be classified as held for trading at initial recognition), they may be reclassified into loans and receivables where the Group has the intention and ability to hold the assets for the foreseeable future or until maturity; or
Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable. effective interest rates for financial assets reclassified to the loans and receivables and held-to-maturity categories are determined at the reclassification date. Any previous gain or loss on a transferred asset that has been recognised in equity is amortised to profit or loss over the remaining life of the investment using the effective interest method or until the asset becomes impaired. Any difference between the new amortised cost and the expected cash flows is also amortised over the remaining life of the asset using the effective interest method.
Impairment allowances are assessed individually for financial assets that are individually significant. Such individual assessment is used primarily for the Group’s wholesale lending portfolios in the Commercial Banking and Wealth, Asset Finance and International divisions. Impairment allowances for portfolios of smaller balance homogenous loans such as most residential mortgages, personal loans and credit card balances in the Group’s retail portfolios in both the Retail and Wealth, Asset Finance and International divisions that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet date, are determined on a collective basis.
loan renegotiations and forbearance 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. Where the renegotiated payments of interest and principal will not recover the original carrying value of the asset, the asset continues to be reported as past due and is considered impaired. Where the renegotiated payments of interest and principal will recover the original carrying value of the asset, the loan is no longer reported as past due or impaired provided that payments are made in accordance with the revised terms. Renegotiation may lead to the loan and associated provision being derecognised and a new loan being recognised initially at fair value.
The Group’s income statement charge includes the current service cost of providing pension benefits, past service costs, net interest expense (income), and plan administration costs that are not deducted from the return on plan assets. Past service costs, which represents the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment, are recognised when the plan amendment or curtailment occurs. net interest expense (income) is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.
The Group’s balance sheet includes the net surplus or deficit, being the difference between the fair value of scheme assets and the discounted value of scheme liabilities at the balance sheet date. Surpluses are only recognised to the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes.
(O) Insurance The Group undertakes both life insurance and general insurance business. Insurance and participating investment contracts are accounted for under IFRS 4 Insurance Contracts, which permits (with certain exceptions) the continuation of accounting practices for measuring insurance and participating investment contracts that applied prior to the adoption of IFRS. The Group, therefore, continues to account for these products using uK GAAP, including FRS 27 Life Assurance, and uK established practice.
Products sold by the life insurance business are classified into three categories: – Insurance contracts – these contracts transfer significant insurance risk and may also transfer financial risk. The Group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were not to occur. These contracts may or may not include discretionary participation features.
Deposits and withdrawals are not accounted for through the income statement but are accounted for directly in the balance sheet as adjustments to the non-participating investment contract liability.
(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 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.
The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on the acquisition of a foreign entity, are translated into sterling at foreign exchange rates ruling at the balance sheet date.
– The income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions in which case income and expenses are translated at the dates of the transactions.
Provision is made for irrevocable undrawn loan commitments if it is probable that the facility will be drawn and result in the recognition of an asset at an amount less than the amount advanced.
Given the relative size of the mortgage portfolio, a key variable is house prices which determine the collateral value supporting loans in such portfolios. The value of this collateral is estimated by applying changes in house price indices to the original assessed value of the property. If average house prices were ten per cent lower than those estimated at 31 December 2013, the impairment charge would increase by approximately £310 million in respect of uK mortgages and a further £36 million in respect of Irish mortgages.
In addition, a collective unimpaired provision is made for loan losses that have been incurred but have not been separately identified at the balance sheet date. This provision is sensitive to changes in the time between the loss event and the date the impairment is specifically identified. This period is known as the loss emergence period. In the Commercial Banking division, an increase of one month in the loss emergence period in respect of the loan portfolio assessed for collective unimpaired provisions would result in an increase in the collective unimpaired provision of approximately £105 million (at 31 December 2012, a one month increase in the loss emergence period would have increased the collective unimpaired provision by an estimated £130 million).
note 43 contains more detail on the nature of the assumptions that have been made and key sensitivities.
Valuation techniques for level 2 financial instruments use inputs that are based on observable market data. level 3 financial instruments are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Determining the appropriate assumptions to be used for level 3 financial instruments requires significant management judgement.
Commercial Banking provides banking and related services for all uK and multinational business clients, from small and medium-sized enterprises to major corporate and financial institutions.
Insurance provides long-term savings, protection and investment products distributed through the bancassurance, intermediary and direct channels in the uK. It is also a distributor of home insurance in the uK with products sold through the retail branch network, direct channels and strategic corporate partners. The business consists of life, Pensions and Investments uK; life, Pensions and Investments europe; and General Insurance.
For the majority of those derivative contracts entered into by business units for risk management purposes, the business unit recognises the net interest income or expense on an accrual accounting basis and transfers the remainder of the movement in the fair value of the derivative to the central group segment where the resulting accounting volatility is managed where possible through the establishment of hedge accounting relationships. Any change in fair value of the hedged instrument attributable to the hedged risk is also recorded within the central group segment. This allocation of the fair value of the swap and change in fair value of the hedged instrument attributable to the hedged risk avoids accounting asymmetry in segmental results and leads to accounting volatility in the central group segment where it is managed.
Other income (net of insurance claims) 1,410 2,708 1,809 1,880 113 7,920
Other segment items: Additions to tangible fixed assets 484 178 1,429 373 518 2,982
Other income (net of insurance claims) 1,660 2,806 2,230 2,344 (204) 8,836
Other segment items: Additions to tangible fixed assets 189 197 1,452 451 806 3,095
Comprises the effects of asset sales (gain of £100 million), volatile items (loss of £678 million), liability management (loss of £142 million), Simplification costs related to severance, IT and business costs of implementation (£830 million), eC mandated retail business disposal costs (£687 million), the amortisation of purchased intangibles (£395 million) and the past service pensions charge (£104 million, see note 11).
Total underlying income, net of insurance claims 20,802 (841) 838 (168) – 415 21,046
Interest and similar expense: Deposits from banks, excluding liabilities under sale and repurchase transactions 0.65 1.14 0.80 (129) (324) (222)
liabilities under sale and repurchase agreements 1.21 1.47 1.39 (79) (245) (335)
Total interest and similar expense 2.32 2.41 1.95 (13,825) (15,830) (13,618)
During February 2012, the Group completed the exchange of certain subordinated debt securities issued by the HBOS group for new subordinated debt securities issued by lloyds Bank plc (formerly lloyds TSB Bank plc). As part of the exchange, the Group announced that all decisions to exercise calls on those original securities that remained outstanding following the exchange offer would be made with reference to the prevailing regulatory, economic and market conditions at the time. The Group adjusted the carrying amount of these securities to reflect the revised estimated cash flows and recognised a credit of £109 million in interest expense in the year ended 31 December 2012 (in 2011 there was a gain following a similar adjustment to carrying value of £570 million).
Fee and commission income: Credit and debit card fees 984 941 877
Change in provision for unearned premiums (note 36(2)) 49 72 70
Change in provision for ceded unearned premiums (note 36(2)) (6) (7) –
Movement in value of in-force business (note 28) 416 269 (622)
During February 2012, the Group completed the exchange of certain subordinated debt securities issued by the HBOS group for new subordinated debt securities issued by lloyds Bank plc (formerly lloyds TSB Bank plc). This exchange resulted in a gain on the extinguishment of the existing securities of £59 million being the difference between the carrying amount of the securities extinguished and the fair value of the new securities issued together with related fees and costs. Additionally, during the second half of 2012 losses totalling £397 million arose on the buy-back of other debt securities.
During December 2011, the Group completed the exchange of certain subordinated debt securities which resulted in a gain on extinguishment of the existing securities of £599 million.
Other During 2013 the Group completed a number of disposals of assets and businesses, including: – On 15 March 2013 the Group completed the sale of 102 million shares in St James’s Place plc, reducing the Group’s holding in that company to approximately 37 per cent. As a result of that reduction in holding the Group ceased to consolidate St James’s Place plc in its accounts, instead accounting for the residual investment as an associate. The Group realised a gain of £394 million on the sale of those shares and the fair valuation of the Group’s residual stake. Subsequently, on 29 May 2013 the Group completed the sale of a further 77 million shares, generating a profit of £39 million and on 13 December 2013 completed the sale of the remainder of its holding, generating a profit of £107 million.
– On 31 May 2013, the Group sold a portfolio of uS RMBS (residential mortgage backed securities) for a cash consideration of £3.3 billion, realising a profit of £538 million.
– On 21 August 2013 the Group announced the sale of its German life insurance business, Heidelberger lebensversicherung AG (Heidelberger leben), with the sale expected to complete in the first quarter of 2014; an impairment of £382 million has been recognised in the year ended 31 December 2013.
Change in non-participating investment contracts: Change in gross liabilities (5,409) (5,058) 520
Regulatory provisions: Payment protection insurance provision (note 43) 3,050 3,575 3,200
The Group has agreed certain changes to early retirement and commutation factors in two of its principal defined benefit pension schemes, resulting in a cost of £104 million recognised in the Group’s income statement in the year ended 31 December 2013.
Performance-based compensation expense comprises: Awards made in respect of the year ended 31 December 394 362 363
Performance-based awards expensed in 2013 include cash awards amounting to £126 million (2012: £128 million; 2011: £160 million).
Other non-audit fees: Services relating to corporate finance transactions 0.3 0.5 6.3
The Group has procedures that are designed to ensure auditor independence, including that fees for audit and non-audit services are approved in advance. This approval can be obtained either on an individual engagement basis or, for certain types of non-audit services, particularly those of a recurring nature, through the approval of a fee cap covering engagements of that type provided the fee is below that cap. All statutory audit work as well as non-audit assignments where the fee is expected to exceed the relevant fee cap must be pre-approved by the Audit Committee on an individual engagement basis. On a quarterly basis, the Audit Committee receives a report detailing all pre-approved services and amounts paid to the auditors for such pre-approved services.
During the year, the auditors also earned fees payable by entities outside the consolidated lloyds Banking Group in respect of the following: £m £m £m
Total impairment losses on loans and receivables (note 24) 2,726 5,121 8,069
Share of other comprehensive income – 6 (6) – – – – 6 (6)
Share of total comprehensive income 7 40 25 36 (6) – 43 34 25
In March 2013 the Group sold a tranche of shares in St James’s Place plc, reducing the Group’s holding in that company to approximately 37 per cent and from that point commenced accounting for the residual investment as an associate. The Group sold its remaining shareholding in May and December 2013 so that the entire investment had been disposed of by the end of the year.
Foreign tax: Current tax on profit for the year (60) (86) (90)
Factors affecting (charge) credit: uK corporation tax rate change (594) (320) (423)
Changes to the taxation of pension business: Policyholder tax cost – (182) –
Deferred tax on Australian tax losses not previously recognised 60 12 –
effect of results of joint ventures and associates 9 23 8
Tax (charge) credit on (loss) profit on ordinary activities (1,217) (781) 861
The Finance Act 2013 (the Act) was substantively enacted on 2 July 2013. The Act further reduced the main rate of corporation tax to 21 per cent with effect from 1 April 2014 and 20 per cent with effect from 1 April 2015. The change in the main rate of corporation tax from 23 per cent to 20 per cent has resulted in a reduction in the Group’s net deferred tax asset at 31 December 2013 of £636 million, comprising the £594 million charge included in the income statement and a £42 million charge included in equity.
Note 15: Earnings per share £m £m £m loss attributable to equity shareholders – basic and diluted (838) (1,471) (2,963)
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 18 million (2012: 13 million; 2011: 10 million) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.
loans and advances to banks 101 7 loans and advances to customers 244 84
Other financial assets at fair value through profit or loss £m Total £m loans and advances to customers 21,083 27 21,110 13,598 34 13,632 loans and advances to banks 8,333 – 8,333 919 – 919
Asset-backed securities: Corporate and other debt securities 1,929 18,691 20,620 1,172 26,387 27,559
Note 17: Trading and other financial assets at fair value through profit or loss (continued)
Note 17: Trading and other financial assets at fair value through profit or loss
Trading and other exchange rate contracts: Spot, forwards and futures 38,213 699 639
Options written 101,136 – 3,194 embedded equity conversion feature – 1,212 –
Derivatives designated as fair value hedges: Interest rate swaps 135,516 6,018 1,772
Derivatives designated as cash flow hedges: Interest rate swaps 86,190 4,653 4,438
Note 19: Loans and advances to banks £m £m lending to banks 2,168 591
Total loans and advances to banks before allowance for impairment losses 25,365 32,760
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £183 million (2012: £662 million). Collateral is held with a fair value of £183 million (2012: £662 million), all of which the Group is able to repledge.
Personal: Total loans and advances to customers before allowance for impairment losses 507,247 532,475
The net investment in finance leases represents amounts recoverable as follows: £m £m not later than 1 year 277 835 later than 1 year and not later than 5 years 1,140 1,491
The unguaranteed residual values included in finance lease receivables were as follows: £m £m not later than 1 year 31 49 later than 1 year and not later than 5 years 20 126 later than 5 years – 14
Securitisation programmes loans and advances to customers and debt securities classified as loans and receivables include loans securitised under the Group’s securitisation programmes, the majority of which have been sold by subsidiary companies to bankruptcy remote structured entities. As the structured entities are funded by the issue of debt on terms whereby the majority of the risks and rewards of the portfolio are retained by the subsidiary, the structured entities are consolidated fully and all of these loans are retained on the Group’s balance sheet, with the related notes in issue included within debt securities in issue. In addition to the structured entities described below, the Group sponsors three conduit programmes, Argento, Cancara and Grampian.
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements and the carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 35.
The Group has not voluntarily offered to repurchase assets from any of its public securitisation programmes during 2013 (2012: £471 million was voluntarily repurchased). Such repurchases are made in order to ensure that the expected maturity dates of the notes issued from these programmes are met.
Debt securities classified as available-for-sale financial assets: Asset-backed securities 356 – – 356
During the year the Group has not provided any non-contractual financial or other support to these unconsolidated collective investment vehicles.
The Group’s asset management businesses sponsor a range of diverse investment funds and limited partnerships where it acts as the fund manager or equivalent decision maker and markets the funds under one of the Group’s brands.
The Group earns fees from managing the investments of these funds. The investment management fees that the Group earned from unconsolidated collective investment vehicles, including those in which the Group held no interest at 31 December 2013, are reported in note 51.
Note 23: Debt securities classified as loans and receivables Debt securities accounted for as loans and receivables comprise: £m £m
Total debt securities classified as loans and receivables before allowance for impairment losses 1,480 5,479
Charge (release) to the income statement (note 12) 5,125 – (4) 5,121 exchange and other adjustments 291 – – 291
Of the total allowance in respect of loans and advances to customers, £10,217 million (2012: £13,936 million) related to lending that had been determined to be impaired (either individually or on a collective basis) at the reporting date.
Debt securities: Bank and building society certificates of deposit – 208 208 – 188 188
Asset-backed securities: Corporate and other debt securities – 1,855 1,855 – 1,848 1,848
Note 26: Investment properties £m £m exchange and other adjustments 11 22
Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements 2 24
The investment properties are valued at least annually at open-market value, by independent professionally qualified valuers, who have recent experience in the location and categories of the investment properties being valued.
The recoverable amount of Scottish Widows has been based on a value-in-use calculation. The calculation uses pre-tax projections of future cash flows based upon budgets and plans approved by management covering a five-year period, and a discount rate of 12 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. Cash flows beyond the five-year period have been extrapolated using a steady 3 per cent growth rate which does not exceed the long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.
The recoverable amount of Asset Finance has also been based on a value-in-use calculation using pre-tax cash flow projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 14 per cent. The cash flows beyond the five-year period are extrapolated using a growth rate of 0.5 per cent which does not exceed the long-term average growth rates for the markets in which Asset Finance participates. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Asset Finance to fall below the balance sheet carrying value.
Note 28: Value of in-force business The gross value of in-force business asset in the consolidated balance sheet is as follows: 2013 £m 2012 £m
Economic assumptions each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to achieve the same result, where the cash flows are either independent of or move linearly with market movements, a method has been applied known as the ‘certainty equivalent’ approach whereby it is assumed that all assets earn a risk-free rate and all cash flows are discounted at a risk-free rate. The certainty equivalent approach covers all investment assets relating to insurance and participating investment contracts, other than the annuity business (where an illiquidity premium is included, see below).
Risk-free rate (value of in-force non-annuity business) 0.00 to 4.04 2.32
Non-economic assumptions Future mortality, morbidity, expenses, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience.
Accumulated amortisation: exchange and other adjustments – – – – 25 25 exchange and other adjustments – – – – 9 9
Balance sheet amount at 31 December 2013 1,567 2,321 3,682 7,570
Balance sheet amount at 31 December 2012 1,425 2,043 3,874 7,342
Total future minimum rentals receivable 2,574 2,765 equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2013 and 2012 no contingent rentals in respect of operating leases were recognised in the income statement.
Assets arising from reinsurance contracts held (note 36 and note 38) 732 2,320
Note 33: Customer deposits £m £m non-interest bearing current accounts 40,802 36,909
Included in the amounts reported above are deposits of £258,384 million (2012: £246,965 million) which are protected under the uK Financial Services Compensation Scheme.
In August 2013 the Group announced the sale of Heidelberger leben, which is expected to complete in the first quarter of 2014.
Key changes in assumptions A detailed review of the Group’s assumptions in 2013 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£210 million decrease).
Cash paid for claims settled in the year (455) 1 (454)
Change in liabilities charged to income statement (note 10) (74) 1 (73)
exchange and other adjustments 6 – 6 notified claims 263 – 263
Accident year estimate of ultimate claims costs: At end of accident year 317 205 639 609 446 421 349 2,986
The liability of £278 million shown in the above table excludes £10 million of unallocated claims handling expenses and £5 million of unexpired risk reserve.
At 31 December 2013 non-annuitant mortality and morbidity1 5% reduction 39 31
This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Swap curves, the risk-free rate and illiquidity premia are all assumed to be unchanged.
This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall spreads on assets are unchanged and hence market values are unchanged. Swap curves and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.
The total amount recognised in the balance sheet relates to: £m £m
The latest full valuations of the three main schemes were carried out as at 30 June 2011; the results have been updated to 31 December 2013 by qualified independent actuaries. The last full valuations of other Group schemes were carried out on a number of different dates; these have been updated to 31 December 2013 by qualified independent actuaries.
During 2009, the Group made one-off contributions to the lloyds Bank Pension Scheme no 1 and lloyds Bank Pension Scheme no 2 of approximately £1 billion in aggregate. These contributions took the form of interests in limited liability partnerships for each of the two schemes which contained assets of approximately £5.4 billion in aggregate entitling the schemes to annual payments of approximately £215 million in aggregate until 31 December 2014. Thereafter, assuming that all distributions have been made, the value of the partnership interests will equate to a nominal amount. At 31 December 2013, the limited liability partnerships held assets of approximately £5.4 billion and cash payments of £215 million were made to the pension schemes during the year (2012: £215 million). The limited liability partnerships are consolidated fully in the Group’s balance sheet (see note 22).
The Group has also established two private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final Salary Pension Scheme and a section of the lloyds Bank Pension Scheme no 1. At 31 December 2013 these held assets of approximately £2.6 billion in aggregate; they do not make any distributions to the pension schemes. The private limited companies are consolidated fully in the Group’s balance sheet.
The Group currently expects to pay contributions of approximately £525 million to its defined benefit schemes in 2014.
Net amount recognised in the balance sheet net defined benefit pension expense (496) (99)
Return on plan assets excluding amounts included in interest income 1,133 484
Index linked government bonds 6,955 – – – – – 6,955
Corporate and other debt securities 127 442 1,305 1,206 482 75 3,637
Index linked government bonds 6,288 – – – – – 6,288
At 31 December 2013, the assumed rate of RPI inflation is 3.3 per cent and CPI inflation 2.3 per cent (2012: RPI 2.90 per cent and CPI 2.00 per cent).
The sensitivity analysis (including the inflation sensitivity) does not include the impact of any possible change in the rate of salary increases. These increases are capped at a maximum of 2 per cent per annum, and have been assumed to increase at this maximum rate in both 2012 and 2013, therefore there is no sensitivity to an increase in this assumption. The Group is currently in formal consultation with the members of its defined benefit pension schemes regarding proposed changes to the way pensionable pay is calculated, which if introduced would reduce the rate of salary increases to zero. If implemented these changes would have the effect of decreasing both the Group’s income statement charge and net defined benefit scheme liability.
There was no change in the methods and assumptions used in preparing the sensitivity analysis from the re-stated prior year.
The current asset-liability matching strategy has the objective of mitigating approximately 54 per cent (2012: 45 per cent) of the interest rate volatility and 71 per cent (2012: 54 per cent) of the inflation rate volatility of the liabilities.
Benefits expected to be paid between 2 and 5 years 3,420 3,210
Benefits expected to be paid between 5 and 10 years 7,207 6,739
Benefits expected to be paid between 10 and 15 years 8,945 8,446
Benefits expected to be paid between 25 and 35 years 20,851 19,767
Maturity analysis method and assumptions The projected benefit payments are based on the assumptions underlying the assessment of the obligations, including allowance for expected future inflation. They are shown in their undiscounted form and therefore appear large relative to the discounted assessment of the defined benefit obligations recognised in the Group’s balance sheet. They are in respect of benefits that have been accrued prior to the respective year-end date only and make no allowance for any benefits that may have been accrued subsequently.
Other post-retirement benefit schemes The Group operates a number of schemes which provide post-retirement healthcare benefits and concessionary mortgages to certain employees, retired employees and their dependants. The principal scheme relates to former lloyds Bank staff and under this scheme the Group has undertaken to meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January 1996. The Group has entered into an insurance contract to provide these benefits and a provision has been made for the estimated cost of future insurance premiums payable.
Movements in the other post-retirement benefits obligation: £m £m exchange and other adjustments – (3)
Amount credited (charged) to equity: Post-retirement defined benefit scheme remeasurements 28 491
Asset at 31 December 5,101 4,586 Asset at 31 December 5,101 4,586
Deferred tax (charge) credit in the income statement (752) (564) 1,154
Average redress paid per upheld policy5 £1,600 £1,600 £100 = £110m
Interest rate hedging products In June 2012, a number of banks, including the Group, reached agreement with the FSA (now FCA) to carry out a review of sales made since 1 December 2001 of interest rate hedging products (IRHP) to certain small and medium-sized businesses. As at 31 December 2013 the Group had identified 1,771 sales of IRHPs to customers within scope of the agreement with the FCA which are being reviewed and, where appropriate, redressed. The Group agreed that on conclusion of this review it would provide redress to any in-scope customers where appropriate.
Total preferred securities 4,301 4,394 a These securities have passed their first call date, and are callable at specific dates as per the terms of the securities at the option of the issuer and with approval from the PRA.
5.75% undated Subordinated Step-up notes (£500 million) 4 4 6.5% undated Subordinated Step-up notes callable 2029 (£450 million) – –
Primary Capital undated Floating Rate notes: Total undated subordinated liabilities 1,916 1,927 a These securities have passed their first call date, and are callable at specific dates as per the terms of the securities at the option of the issuer and with approval from the PRA.
With the exception of the two series identified in footnote b below, the eCns were issued in lower tier 2 format and are convertible into ordinary shares on the breach of a defined trigger. The trigger is if the published core tier 1 ratio of the Group (as defined by the Financial Services Authority in May 2009) falls below 5 per cent.
Enhanced Capital Notes 7.625% enhanced Capital notes due 2019 (£151 million) 145 144 8.125% enhanced Capital notes due 2019 (£4 million) 4 4 9% enhanced Capital notes due 2019 (£97 million) 102 98 7.8673% enhanced Capital notes due 2019 (£331 million) 333 332 15% enhanced Capital notes due 2019 (£775 million) 1,064 1,093 15% enhanced Capital notes due 2019 (e487 million) 567 571 8.875% enhanced Capital notes due 2020 (e125 million) 116 113 9.334% enhanced Capital notes due 2020 (£208 million) 231 230 7.375% enhanced Capital notes due 2020 (e95 million) 80 78
d The interest rate payable on this security was reset from 6.305 per cent fixed to 3-month libor plus 1.2 per cent with effect from 18 October 2012.
(1) Authorised share capital As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual general meeting on 5 June 2009. This change took effect from 1 October 2009.
Issued in relation to the payment of coupons on certain hybrid capital securities 712,973,022 479,297,215 – 71 47 –
Issued under employee share schemes 312,618,630 1,136,919,962 652,497,658 32 114 66
In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/ or voting rights.
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary and preference shares as granted at the annual general meeting on 16 May 2013. The authority to issue shares and the authority to make market purchases of shares will expire at the next annual general meeting. Shareholders will be asked, at the annual general meeting, to give similar authorities.
Ordinary shares The holders of ordinary shares (excluding the limited voting ordinary shares), who held 99.9 per cent of the total ordinary share capital at 31 December 2013, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions of the Company’s articles of association) and on a winding up may share in the assets of the Company.
Revaluation reserve in respect of available-for-sale financial assets (615) 399 1,326
Options granted in 2004 became exercisable as the performance condition was met on the re-test. The performance condition vested at 14 per cent for executive Directors, 24 per cent for Managing Directors, and 100 per cent for all other executives.
– the full grant of options became exercisable only if the Group was ranked in the top four places of the comparator group. A sliding scale applied between fourth and eighth positions. If lloyds Banking Group was ranked below the median (ninth or below) the options would lapse.
Movements in the number of share options outstanding under the executive share option schemes during 2012 and 2013 are set out below: Number of options
Movements in the number of share options outstanding under the SAYe schemes are set out below: Number of options
The weighted average fair value of SAYe options granted during 2013 was £0.24. no options were granted in 2012. The fair values of the SAYe options have been determined using a standard Black-Scholes model.
Lloyds Banking Group Executive Share Plan 2003 The Plan was adopted in December 2003 and under the Plan share options may be granted to senior employees. Options under this plan have been granted specifically to facilitate recruitment and as such were not subject to any performance conditions. The Plan’s usage has now been extended to not only compensate new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in some instances, the grant being made subject to individual performance conditions.
Lloyds Banking Group Share Buy Out Awards As part of arrangements to facilitate the recruitment of certain executives, options have been granted by individual deed and, where appropriate, in accordance with the listing Rules of the uK listing Authority.
Vesting between threshold and maximum would be on a straight line basis.
If the adjusted ePS reaches 6.4p, 25 per cent of this element of the award, being the threshold, will vest.
(ii) EP: relevant to 50 per cent of the award. The performance target is based on 2013 adjusted eP outcome.
If non-core assets amount to £80 billion or less, 100 per cent of this element will vest.
If the ATSR reaches 16 per cent per annum, 100 per cent of this element will vest.
If adjusted total costs are £8,973 million or less, 100 per cent of this element will vest.
If non-core assets amount to £28 billion or less, 100 per cent of this element will vest.
(iii) Funds under management (FUM) growth: relevant to 20 per cent of the award. The performance target is based on growth in the value of third party assets managed by SWIP by the end of the three year period. If third party FuM reaches a specified target level, 100 per cent of this element of the award will vest. If third party FuM reaches 80 per cent of the target level, 25 per cent of this element, being the threshold, will vest. If third party FuM reaches 120 per cent of the target level, 200 per cent of this element of the award, being the maximum, will vest.
(iii) Funds under management (FUM) growth: relevant to 15 per cent of the award. The performance target is based on growth in the value of third party assets managed by SWIP by the end of the three year period. If third party FuM reaches a specified target level, 100 per cent of this element of the award will vest. If third party FuM reaches 80 per cent of the target level, 25 per cent of this element, being the threshold, will vest. If third party FuM reaches 120 per cent of the target level, 200 per cent of this element of the award, being the maximum, will vest.
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.2 million (2012: £0.1 million; 2011: £0.2 million).
Repayments (includes loans of former key management personnel) (2) (4) (1)
no provisions have been recognised in respect of loans given to key management personnel (2012 and 2011: £nil).
Subsidiaries Details of the principal subsidiaries are given in note 9 to the parent company financial statements. In accordance with IFRS 10 Consolidated financial statements, transactions and balances with subsidiaries have been eliminated on consolidation.
St. James’s Place plc In March 2013 the Group sold 102 million shares in St. James’s Place plc; fees totalling some £5 million in relation to the sale were settled by St. James’s Place plc.
Joint ventures and associates The Group provides both administration and processing services to its principal joint venture, Sainsbury’s Bank plc. The amounts receivable by the Group during the year were £35 million (2012: £32 million), of which £10 million was outstanding at 31 December 2013 (2012: £16 million). At 31 December 2013, Sainsbury’s Bank plc also had balances with the Group that were included in loans and advances to banks of £806 million (2012: £1,299 million) and deposits by banks of £927 million (2012: £1,268 million).
In addition to the above balances, the Group has a number of other associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2013, these companies had total assets of approximately £6,913 million (2012: £10,759 million), total liabilities of approximately £7,084 million (2012: £10,956 million) and for the year ended 31 December 2013 had turnover of approximately £6,989 million (2012: £8,169 million) and made a net loss of approximately £16 million (2012: net loss of £488 million). In addition, the Group has provided £3,355 million (2012: £5,146 million) of financing to these companies on which it received £170 million (2012: £208 million) of interest income in the year.
Interchange fees On 24 May 2012, the General Court of the european union (the General Court) upheld the european Commission’s 2007 decision that an infringement of eu competition law had arisen from arrangements whereby MasterCard issuers charged a uniform fallback multilateral interchange fee (MIF) in respect of cross border transactions in relation to the use of a MasterCard or Maestro branded payment card.
MasterCard has appealed the General Court’s judgment to the Court of Justice of the european union. MasterCard is supported by several card issuers, including the Group. Judgment is not expected until the summer of 2014 or later.
The ultimate impact of the investigations and any regulatory or legislative developments on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings and once regulatory or legislative proposals are more certain.
The Group is also reviewing its activities in relation to the setting of certain foreign exchange daily benchmark rates, following the FCA’s publicised initiation of an investigation into other financial institutions in relation to this activity. In addition, the Group, together with a number of other banks, has been named as a defendant in several actions in the District Court, in which the plaintiffs allege that the defendants manipulated WM/Reuters foreign exchange rates in violation of uS antitrust laws. The time-frame for the Group and the other defendants to move to dismiss these claims has not yet been set.
It is currently not possible to predict the scope and ultimate outcome on the Group of the various regulatory investigations, private lawsuits or any related challenges to the interpretation or validity of any of the Group’s contractual arrangements, including their timing and scale.
Following the default of a number of deposit takers in 2008, the FSCS borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. Although the substantial majority of this loan, which totalled approximately £17 billion at 31 March 2013, will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, any shortfall will be funded by deposit-taking participants of the FSCS. In July 2013, the FSCS confirmed that it expects to raise compensation costs levies of approximately £1.1 billion on all deposit-taking participants over a three year measurement period from 2012 to 2014 to enable it to repay the balance of the HM Treasury loan which matures in 2016. The Group has provided for its share of the 2012 and 2013 element of the levy. The amount of future compensation costs levies payable by the Group depends on a number of factors including participation in the market at 31 December, the level of protected deposits and the population of deposit-taking participants.
Tax authorities The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities. This includes open matters where Her Majesty’s Revenue and Customs (‘HMRC’) adopt a different interpretation and application of tax law which might lead to additional tax. The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In the second half of 2013 HMRC informed the Group that their interpretation of the uK rules, permitting the offset of such losses, denies the claim; if HMRC’s position is found to be correct management estimate that this would result in an increase in current tax liabilities of approximately £600 million and a reduction in the Group’s deferred tax asset of approximately £400 million. The Group does not agree with HMRC’s position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due.
Other legal actions and regulatory matters In addition, during the ordinary course of business the Group is subject to other threatened and actual legal proceedings (including class or group action claims brought on behalf of customers, shareholders or other third parties), and regulatory challenges, investigations and enforcement actions, both in the uK and overseas. All such material matters are periodically reassessed, with the assistance of external professional advisers where appropriate, to determine the likelihood of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is established to management’s best estimate of the amount required to settle the obligation at the relevant balance sheet date. In some cases it will not be possible to form a view, either because the facts are unclear or because further time is needed properly to assess the merits of the case and no provisions are held against such matters. However the Group does not currently expect the final outcome of any such case to have a material adverse effect on its financial position, operations or cash flows.
Trading and other financial liabilities at fair value through profit or loss – 38,319 5,306 – – – – 43,625
Derivative financial instruments 4,518 25,946 – – – – – 30,464 notes in circulation – – – – – 1,176 – 1,176
Items in the course of collection from banks – – – – – 1,256 – 1,256
Trading and other financial assets at fair value through profit or loss – 23,345 137,275 – – – – 160,620
Deposits from banks – – – – – 38,405 – 38,405
(2) Reclassification of financial assets no financial assets have been reclassified in 2013.
a) Additional fair value gains (losses) that would have been recognised had the reclassifications not occurred The table below shows the additional gains (losses) that would have been recognised in the Group’s income statement if the reclassifications had not occurred.
From held for trading to loans and receivables 1 1 (3) (34) 208 (347)
From held for trading to loans and receivables: £m £m £m £m £m £m
Trading and other financial assets at fair value through profit or loss 142,683 142,683 160,620 160,620 loans and receivables: loans and advances to banks 25,365 25,296 32,757 32,746 loans and advances to customers: unimpaired 473,239 464,453 484,868 474,061 loans and advances to customers: impaired 22,042 22,042 32,357 32,357
Trading and other financial liabilities at fair value through profit or loss 43,625 43,625 33,392 33,392
level 3 level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that require significant management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3.
Total financial assets carried at fair value 124,786 87,298 7,700 219,784
Trading and other financial liabilities at fair value through profit or loss liabilities held at fair value through profit or loss – 5,267 39 5,306
Bank and building society certificates of deposit 68 3,326 – 3,394
Trading liabilities: liabilities in respect of securities sold under repurchase agreements – 24,553 – 24,553
– Credit derivatives which are valued using standard models with observable inputs, except for the items classified as level 3, which are valued using publicly available yield and credit default swap (CDS) curves.
Trading and other financial assets at fair value through profit or loss Availablefor -sale Derivative assets
Gains recognised in the income statement within other income 166 (356) (335) (525)
Transfers out of the level 3 portfolio (91) (13) – (104)
Gains recognised in the income statement within other income – (227) (3) (230)
Transfers out of the level 3 portfolio – (1) – (1)
Gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 31 December 2012 – 223 3 226
Trading and other financial assets at fair value through profit or loss Debt securities Discounted cash flows Credit spreads (bps) n/a3 equity and venture capital investments
– earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a higher fair value.
Unlisted equity, venture capital investments and investments in property partnerships The valuation techniques used for unlisted equity and venture capital investments vary depending on the nature of the investment. Reasonably possible alternative valuations for these investments have been calculated by reference to the approach taken, as appropriate to the business sector and investment circumstances and as such the following inputs have been considered: – for valuations derived from earnings multiples, consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting an appropriate multiple; – the discount rates used in discounted cash flow valuations; and
Valuation hierarchy The table below analyses the fair values of the financial assets and liabilities of the Group which are carried at amortised cost. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable.
Subordinated liabilities – 34,449 – 34,449 note: Comparatives not provided as disclosure not required in 2012.
The CVA is sensitive to: – the current size of the mark-to-market position on the uncollateralised asset; – expectations of future market volatility of the underlying asset; and
The Group has also recognised a Funding Valuation Adjustment to adjust for the net cost of funding certain uncollateralised derivative positions where the Group considers that this cost is included in market pricing. This adjustment is calculated on the expected future exposure discounted at a suitable cost of funds. A ten basis points increase in the cost of funds will increase the funding valuation adjustment by approximately £9 million.
Own credit adjustments The carrying amount of issued notes that are designated at fair value through profit or loss is adjusted to reflect the effect of changes in own credit spreads. The resulting gain or loss is recognised in the income statement.
The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities lending transactions, the associated liabilities represent the Group’s obligation to repurchase the transferred assets. For securitisation programmes, the associated liabilities represent the external notes in issue (note 35). except as otherwise noted below, none of the liabilities shown in the table below have recourse only to the transferred assets.
Trading and other financial assets at fair value through profit or loss 10,832 927
Available-for-sale financial assets 8,967 4,693 loans and receivables: loans and advances to customers 19,015 6,662
Securitisation programmes loans and receivables: loans and advances to customers1 118,183 28,0592
B. Transferred financial assets derecognised in their entirety with ongoing exposure The following information by type of ongoing exposure relates to assets and liabilities arising from contractual rights or obligations retained or obtained in connection with financial assets that have been derecognised in their entirety.
At fair value through profit or loss loans and receivables £m
Amounts recognised in the income statement In respect of debt securities shown above, an amount of £1 million was recognised during the year (2012: £2 million; £6 million cumulatively since derecognition) within net interest income.
(6) Financial instruments subject to offsetting, enforceable master netting agreements and similar arrangements The following information relates to financial assets and liabilities which have been set off in the balance sheet and those which have not been set off but for which the Group has enforceable master netting agreements in place with counterparties.
Trading and after financial liabilities at fair value through profit or loss² 14,723 – – 14,723
Amounts set off in the balance sheet³ £m net amounts presented in the balance sheet £m
Trading and other financial assets at fair value through profit or loss¹ 146,187 (612) – 145,575 loans and receivables: loans and advances to banks¹ 32,095 – (135) 31,960 loans and advances to customers¹ 512,138 (13,140) (2) 498,996
The Group enters into derivatives and repurchase and reverse repurchase agreements with various counterparties which are governed by industry standard master netting agreements. The Group holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non-payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.
Note 54: Financial risk management As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group.
Trading and other financial assets at fair value through profit or loss (excluding equity shares)4: loans and advances 29,443 14,551
Includes assets within the Group’s unit-linked funds for which credit risk is borne by the policyholders and assets within the Group’s With-Profits funds for which credit risk is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for such assets which back related contract liabilities.
B. Credit quality of assets loans and receivables The disclosures in the table below and those on pages 330 and 331 are produced under the underlying basis used for the Group’s segmental reporting. The Group believes that, for reporting periods following a significant acquisition such as the acquisition of HBOS in 2009, this underlying basis, which includes the allowance for loan losses at the acquisition date on a gross basis, more fairly reflects the underlying provisioning status of the loans. The remaining acquisition-related fair value adjustments in respect of this lending are therefore identified separately in this table.
Past due but not impaired 146 12,329 580 786 13,695 –
Past due but not impaired 31 12,880 922 1,527 15,329 –
Total loans and advances which are neither past due nor impaired 32,726 319,613 41,223 117,613 478,449 14,551
Total loans and advances which are past due but not impaired 31 12,880 922 1,527 15,329 –
Asset-backed securities: Corporate and other debt securities 150 – – – – 252 402
Asset-backed securities: Corporate and other debt securities 1,083 174 191 351 37 19 1,855
Treasury bills and other bills 15 852 8 – – – 875
Asset-backed securities: Corporate and other debt securities 293 281 567 600 85 22 1,848
Bank and building society certificates of deposit – 787 704 – – – 1,491
Asset-backed securities: Mortgage-backed securities – – – – 5 – 5
Total held as trading assets 4,581 1,315 1,570 403 47 14 7,930
Total debt securities held at fair value through profit or loss 8,256 13,462 8,425 6,353 619 1,738 38,853
Total other assets held at fair value through profit or loss 19,648 5,212 9,591 8,526 2,911 1,906 47,794
Assets arising from reinsurance contracts held Of the assets arising from reinsurance contracts held at 31 December 2013 of £732 million (2012: £2,320 million), £383 million (2012: £764 million) were due from insurers with a credit rating of AA or above.