Divisional results Retail 54 Wholesale 59 Commercial 66 Wealth and International 70 Insurance 77 Group Operations 84
Lloyds Banking Group is proud to be the official banking and insurance partner for the London 2012 Olympic and Paralympic Games.
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– Increased focus on the core business, while substantially decreasing non-core assets
– Simplification run-rate cost savings of £242 million at end 2011
The impairment charge reduced significantly, by 26 per cent to £9,787 million, with improvements seen across all divisions, reflecting improving portfolio credit quality
– In-year cost savings target for 2014 increased by £200 million to £1.7 billion; end 2014 run-rate target increased to £1.9 billion
In 2012, on a combined businesses basis, we expect: – Income to be lower than in 2011 given the economic outlook, further non-core asset reductions, subdued demand in the core loan book, higher wholesale funding costs, and interest rates likely to remain at low levels for longer
31–33 More on customer satisfaction 34–37 More on our staff engagement score
Unlocking the Group’s potential We are reshaping our business portfolio to fit our assets, capabilities and risk appetite, simplifying the Group to improve agility and efficiency, investing to be the best bank for customers and strengthening the Group’s balance sheet and liquidity position. A comprehensive set of Key Performance Indicators (KPIs) has been developed to track progress in these areas and is outlined in the Strategy section. Selected Group KPIs are outlined below: Cost:income ratio %
The integration programme is now largely complete and successfully delivered more than £2 billion per annum of cost synergies. We are now progressing the simplification initiatives.
Customer-foCused operating divisions… Retail Retail operates the largest retail bank in the UK and is the leading provider of current accounts, savings, personal loans, credit cards and mortgages. With its strong stable of brands, including Lloyds TSB, Halifax, Bank of Scotland and Cheltenham & Gloucester, it serves customers through one of the largest branch networks in the UK. Retail is also a major general insurance and bancassurance distributor, offering a wide range of long-term savings, investment and general insurance products.
Key product markets – Wealth management – Asset management – International Banking
…leveraged through our strategiC assets Iconic and distinct brands The Group operates a range of well recognised brands across our five operating divisions with different brands utilised for different customer segments, geographies and markets. The main four brands operated by the Group are Lloyds TSB, Halifax, Bank of Scotland and Scottish Widows though a number of other brands are used in specialist markets.
Our telephony system gives, with 24/7 access, the ability to either use automated facilities for speed or speak to an operator, meaning that customers can complete their banking needs day or night, at home or abroad.
Our industry leading and award winning internet platform allows people to access and view all their products via a secure network. We have developed and launched innovative internet tools such as Money Manager, which breaks down customer spending in to specific categories, allowing customers to track their spending more effectively.
Digital banking has also taken advantage of other technological and social changes. Our mobile banking apps have had over 1.5 million downloads and have been some of the most popular free financial apps in the Apple App Store in recent months. We are also using social media to reach our customers, gaining praise for our use of Twitter and Facebook and Lloyds TSB was the first UK bank to launch a branded YouTube channel.
With respect to the LTIP, Shareholders will recall that awards for Executive Directors have not paid out in any of the past three years. The annual pay-out of the LTIP, averaged over the last four years, is under 0.2 per cent of total pay, in stark contrast to what is the general perception.
We are also well aware of the public concern around the banking industry and recognise that further progress needs to be made in rebuilding public trust industry-wide. We can only earn that trust by addressing the fundamental requirements of all our stakeholders, and by being open, transparent and engaged in the broader debate about the role of banking in the UK. We will continue to demonstrate that we are meeting our obligations to customers and society in a responsible and appropriate way. At the same time we believe, whatever the sector’s shortcomings, the debate about the banking industry has become one-sided which is unhelpful in achieving what those both inside and outside the banking industry want: a growing, strong economy supported by a strong banking sector.
António Horta-Osório started as Group Chief Executive on 1 March 2011 and we were pleased to recruit someone with his knowledge and experience of financial services, particularly in the retail and commercial area. The actions taken by him have already had a positive impact on the Group. António took a two month leave of absence at the end of last year and the Board was pleased that he was able to return to his role on 9 January 2012. In conjunction with the Board, António has implemented a number of changes to the structure of the management team since his return to ensure that the most important aspects of our business are prioritised and the responsibility of managing our Group is effectively shared.
We announced in September 2011 that Tim Tookey, our Group Finance Director, would leave the organisation at the end of February 2012. Tim has been an important member of our Board since October 2008 and helped guide us through the largest merger in UK banking history and subsequent capital raisings. I thank Tim for his commitment throughout that time, not least in the last two months of 2011, when he took on the role of Group Chief Executive on an interim basis in addition to his responsibilities as Group Finance Director.
As a Board and throughout the organisation we continue to focus on our commitment to meeting the targets set by the Review on Gender Diversity on Boards by Lord Davies, and are working proactively to promote diversity in ethnicity, gender and skills.
People We employ over 100,000 people. Our colleagues have performed well in a year which was characterised by much change and a difficult economic environment for both customers and themselves. Customer service is at the heart of our activities and I applaud their efforts to reduce complaints, evidenced by the data for 2011 which show a 24 per cent reduction in year over year FSA reportable banking complaints excluding PPI. Our colleagues share the Board’s view that more needs to be done and I feel confident that 2012 will bring further progress in this area.
We are excited to be the Official Banking and Insurance Partner of the London 2012 Olympic and Paralympic Games. We have played a key role in bringing London 2012 to communities across the UK, by inspiring children to do more sport through National School Sport Week, by giving our customers the chance to take part in the Olympic Torch Relay and by funding and mentoring future stars of Team GB and
ParalympicsGB through our Local Heroes programme. We have also supported one in three of all businesses who have won London 2012 Games related contracts. We are now entering the final few months before the Games start and I fully expect that the country at large will enjoy this historic event, be inspired by its achievements and benefit from the legacy of this once-in-a-lifetime event.
Our support for the wider economy and the communities where we operate, in conjunction with our prudent risk appetite, a strengthened balance sheet and integrated systems are a sound platform for a positive financial trajectory.
Our Board is grateful for the support of our shareholders in 2011 and is very conscious that they – including most of our staff who themselves are shareholders – have suffered through the decline of the share price and the absence of a dividend. We have the right strategy in place and given our significant assets, our committed leadership team and the skill of our dedicated workforce we are well positioned over time to deliver sound performance for our customers, shareholders, colleagues and communities.
Our Board There have been significant changes to the composition of the Board this year. Though experience and a detailed understanding of financial services will remain important attributes for Board members, a broader mix of skills is key to the overall effectiveness of the Board. I believe that the current Board provides the Group with a good balance of skills and experience, which helps the quality of our decision-making. We remain committed to keeping this balance right as we respond to further Board changes in 2012. I continue to ensure that the majority of Directors are independent and that sufficient emphasis is placed on ensuring that the Board’s membership reflects appropriate diversity. In the interests of good governance, all directors now retire voluntarily each year and submit themselves for re-election at every AGM.
Board oversight in 2011 The Board’s governance processes have placed us in a good position to deal with key issues which arose during the course of the year, including with respect to: the review and approval of the Group’s new strategy; the change of Group Chief Executive and other significant management changes; the short leave of absence for António Horta-Osório, including ensuring that effective interim arrangements were in place and that a rigorous process was followed with respect to his return to work; and the decision to take a significant provision with respect to PPI.
Ensuring that the right mechanisms are in place at the time of change is critical and I believe that the decisions made in these areas, and others, have helped ensure that the Group is effectively positioned to deliver sound performance for all of the Group’s stakeholders over time.
Becoming the Best Bank for customers In 2011, we delivered a resilient performance and made good progress against the key elements of our strategic plan to become the best bank for customers.”
While this means that we now have a much more resilient balance sheet, our income performance was affected by these risk and asset reductions, as well as by the subdued UK economic environment. On a statutory basis, our results were affected by, amongst other things, the responsible position we took on Payment Protection Insurance (PPI), which resulted in a £3.2 billion provision. In addition, with over £2 billion of run-rate cost savings now realised from integration, we have now commenced the simplification initiatives which will significantly improve our efficiency and are allowing us to invest in growing our core customer business.
In reducing risk and strengthening the balance sheet, our proactive management of the non-core portfolio and of our funding position meant that we reduced non-core assets by £53 billion to £141 billion, against a commitment to decrease the non-core portfolio to less than £90 billion by the end of 2014, and significantly strengthened our funding position, raising £35 billion of total term wholesale funding, around £10 billion more than initially budgeted.
Deposit growth and our progress in funding and non-core asset reductions facilitated further substantial pay-down of government and central bank facilities from £97 billion at the 2010 year end to £24 billion at the end of 2011 (with nothing outstanding under the UK Special Liquidity Scheme). Non-core asset reductions, which were made broadly in line with book value, were a substantial driver behind the improvement in our core tier 1 capital ratio from 10.2 per cent at the 2010 year end to 10.8 per cent, notwithstanding the impact of the PPI provision of around 60 basis points.
Matthew joined the Group in February 2011, having previously been Communications Director at Santander UK. Matt has worked in a variety of senior management roles within the industry, including Abbey National and NatWest.
Angie joined in May 2007 and outside of Lloyds Banking Group is also a Non‑Executive Director of Serco Group plc and a member of the government’s Employment Engagement Task‑Force. Before joining the Group, Angie was Group HR Director and an Executive Director on the board for Whitbread Plc.
Our strategy will create shareholder value through simplifying processes, systems and products and policies, and investing a proportion of the savings realised from this simplification in growth initiatives targeted at high-return areas of our business, and by ensuring that capital is primarily allocated to core growth businesses.
Our integration programme has now delivered single platforms supporting the Halifax, Bank of Scotland and Lloyds TSB brands and, by the end of 2011, had achieved more than £2 billion per annum of run-rate cost synergies and other operating efficiencies.
A portion of the savings realised from our simplification programme will allow us to further invest to be the best bank for our customers, and to grow our core customer businesses which is at the heart of our strategy. We commenced the implementation of a number of key initiatives in 2011, with the revitalisation of the Halifax brand and strengthening our support for Small and Medium-sized Enterprises both resulting in a significant outperformance of those business areas against market trends.
Supporting our customers and the UK economy As part of our strategy to be the best bank for customers, and as a leading financial services provider in the UK, we continue to actively support sustainable growth in the UK economy through the focused range of products and services we provide to our business and personal customers, as well as through partnerships we have built with industry and Government.
SMEs are a particularly important source of job creation and growth in the UK. Our core Commercial business is focused on serving these customers, and we demonstrated our support for SME customers in 2011 with year on year net lending growth of 3 per cent in this business area. This compared favourably with the negative growth in SME lending across the industry reported in the latest available market statistics from the Bank of England. In 2012, we have pledged to make at least £12 billion of gross new lending available to SMEs, with a further pledge to deliver positive net lending growth, to help stimulate economic output and improve confidence in the sector.
Our commitment to our employees Our success depends on our employees, the service they provide for our customers, and the long-term partnerships they build with them. We are committed to attracting, retaining and developing our people, and in 2011 launched a number of initiatives to identify and develop our future leaders, to simplify the link between performance and reward, and to ensure colleagues have the capabilities to deliver excellent service through learning and development resources such as our Learning Academies, through supporting external qualifications, and by introducing development and review programmes.
While we remain mindful of the challenges of the external environment, Lloyds Banking Group is now in a significantly stronger position than it was twelve months ago, and I would like to thank all our people for their contribution to our progress in 2011. Given we are likely to have lower interest rates for longer and higher regulatory costs along with deleveraging in credit markets, it will be those banks who can create competitive advantage through a lower risk premium combined with best in class efficiency who will achieve superior returns and will capture the opportunities as economic conditions improve. Absent a material deterioration in the economic environment, we remain confident in our ability to continue to execute against our strategic plan, and therefore continue to believe we are well positioned to realise over time the full potential of our organisation, brands and capabilities, and to achieve strong, stable and sustainable returns for shareholders.
The external macro economic and regulatory environment in which we operate remains uncertain but we have endeavoured to outline below some of the key regulatory, economic and social factors impacting our markets.
The quantum of regulatory change remains high and the regulatory environment remains challenging but we are starting to see greater clarity in a number of areas. There are however a number of different issues that are likely to have a fundamental impact on the business going forward including the recommendations arising from the Independent Commission on Banking, future capital and liquidity requirements, and the changes to the UK banking supervisory structure
UK Banking Supervisory Structure The recent ongoing difficulties in global financial markets have prompted a review and alteration to the banking supervisory structure in the UK. In April 2011, the FSA commenced an internal reorganisation as a first step in a process towards the formal transition of regulatory and supervisory powers from the FSA to the new Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA) in 2012. Until this time the responsibility for regulating and supervising the activities of the Lloyds Banking Group and its subsidiaries will remain with the FSA. However, the reorganisation could lead to changes in how the Group is regulated and supervised on a day-to-day basis. In addition, the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority as new EU Supervisory Authorities are likely to have greater influence on regulatory approaches across the EU.
The economy The global economy was split in 2011 between relatively strong growth in emerging markets, and economies struggling to recover from recession in much of the Western world. Indeed, the extent of the UK economic recovery has now fallen behind even the weak recovery after the late 1970’s recession.
First estimates suggest the UK economy grew by 0.9 per cent in 2011, well below the long term average of 2.3 per cent. The economy is currently estimated to have shrunk slightly in the final quarter of the year as consumers’ and businesses’ confidence fell, the result of relatively high inflation reducing consumers’ spending power, a faster than expected reduction in public sector employment, and the worsening outlook for the Eurozone which caused companies to postpone investment spending and recruitment. Unemployment rose from 7.7 per cent in the first quarter of 2011 to 8.4 per cent by December. Company failures in England and Wales rose from a low point of 3,973 in the final quarter of 2010 to 4,260 by the fourth quarter of 2011, although the failure rate remained steady over that period at just 0.7 per cent of companies, close to its pre-recession trough. Property prices were broadly flat through the year, however – house prices on average fell marginally by 2 per cent in the year to December 2011, and commercial property prices rose on average by just 1 per cent.
For the market as a whole, net new mortgage lending has amounted to just 0.7 per cent of outstanding balances during 2011, very similar to 2010. Consumers made net repayments of unsecured debt (excluding student loans) of around 2 per cent of outstanding balances for the third consecutive year in 2011. Household deposits rose by 2.6 per cent in 2011 similar to the rate of increase in the previous two years but well down from the 8-9 per cent growth per year pre-recession.
We expect that another weak year for the UK economy in 2012 will be accompanied by weak customer deposit growth and a continued period of declining demand for borrowing, particularly from companies. The continuation of low interest rates, and the substantial adjustments that many companies and households have already made to their indebtedness, is likely to minimise any deterioration in arrears. Our central expectation of broadly flat property prices in the UK in 2012 is consistent with the subdued market expected.
Key challenges Economic environment: a weak, short term outlook for the UK economy, along with continuing economic uncertainty in the Eurozone and ongoing pressure on the Euro currency.
Competition: Increasingly competitive market for lending and deposits creates margin pressure.
Lloyds Banking Group is a leading UK based financial services group providing a wide range of banking and financial services, primarily in the UK, to personal, commercial and corporate customers. Our business model is designed around our distinctive capabilities in serving personal, commercial and corporate customers across the UK, with a focused range of banking, insurance, investment, debt financing and risk management products to meet customer needs.
Halifax is being repositioned as a leading challenger brand in UK retail banking, with a value for money proposition and innovative products.
Our customer focus remains the key driver for strategy and business decision making and substantial customer related investment is planned. Our strategy reflects our customers’ needs for product simplicity and transparency, access to credit, help in planning and saving for retirement, demands for access through multiple channels, value for money products and services and the importance of our staff in managing customer relationships.
Our action plan for success The four key elements of our action plan to deliver our strategy are outlined on the next few pages: reshape… our business portfolio to fit our assets, capabilities and risk appetite.
We will invest behind core areas which offer strong returns and attractive growth: these are businesses which are capital and liquidity efficient, with sustainable competitive advantage, and which are central to our core customer strategy.
Non-core assets are generally businesses which deliver below-hurdle returns, which are outside our risk appetite or are distressed, are subscale or have an unclear value proposition, or have a poor fit with our customer strategy.
We will streamline our international presence from circa 30 countries to less than half that number by 2014.
Sourcing: We will optimise our demand management and further strengthen our supplier relationships, reducing the number of suppliers to the Group to under 10,000, and further focusing on a core group of lead suppliers, to achieve approximately a 15 per cent saving on addressable spend. In 2011 we reduced supplier numbers by around 2,500.
We are now targeting a further £1.7 billion of cost savings in 2014 through a series of simplification initiatives. Savings will be realised by focusing on the four areas below: Operations and processes Channels and products Sourcing More agile organisation
Aim We intend to invest approximately £500 million annually by 2014, equivalent to approximately one-third of the savings from our simplification initiatives, to grow our core income, with approximately £2 billion invested between 2011 and 2014.
Our investment will be subject to disciplined tests, including the financial returns, fit to our risk appetite and alignment with our strategy to be the best bank for customers. The investment will primarily be focused on: Becoming the best bank for personal customers Becoming the best through-the-cycle partner for our business customers Maintaining bancassurance as a core element of our proposition
Increasing share of capital light business in the corporate and commercial business
Robust capital position We are targeting a core tier 1 capital ratio prudently in excess of 10 per cent from 1 January 2013 when the transition period to Basel III commences. Although we already have a core tier 1 capital ratio of 10.8 at the end of 2011 we expect the implementation of Basel III to have a negative effect and we therefore continue to target further improvement.
Exceeding regulatory liquidity requirements We expect to meet the requirement for our Liquidity Coverage Ratio and our Net Stable Funding Ratio to be in excess of 100 per cent by 2014, in advance of regulatory requirements. This will require us to increase our holdings of primary liquid assets to a level broadly equivalent to our wholesale funding with a maturity of less than one year, although the quantum of this will be lower than currently as we reduce the levels of wholesale funding.
A stable funding base Given the significant progress made in the last couple of years on non-core asset reductions, deposit growth and funding our wholesale funding requirement has fallen significantly. As a result our annual wholesale term issuance requirement has also now fallen and we now expect term issuance of £20 to £25 billion per annum going forward.
With over 30 million personal and business customers and a presence in communities across the country, we are uniquely placed to help unlock the potential of families, businesses and communities we serve, making a significant contribution to the future strength and prosperity of the UK. Our vision of being the best bank for customers along with our focus on operating sustainably and responsibly underpins our approach to business. Over the next few pages we set out our approach to: Customers…
CUSTOMERS only by focusing on customers’ needs and addressing those needs can we expect to deliver benefit to our stakeholders.
Summary the strategy for the Group is built on being the best bank for customers, and to create value by investing where we can make a real difference for these customers. the Customer is therefore at the heart of everything we do, whether it be our branches, our brands or our people and is a key driver for our Group values.
despite the challenging environment the Group exceeded its full year contribution to the ‘Merlin’ lending commitments which were agreed in February with the UK government, both for sMe s and in total. in the full year we provided £45.3 billion of committed gross lending to UK businesses of which £12.5 billion was to sMes. in the same period the Group supported the start up of nearly 124,000 new sMe businesses. the Group actively looks at all opportunities to support UK businesses and we continue to innovate in the market to meet our customers’ needs.
Aim our aim is to be the best bank for customers. becoming the best bank for customers means being the best bank for families, for businesses and for our communities. We will achieve this by focusing on: UK customers and those connected to the UK
Complaint handling As part of our strategy to become the best bank for customers we publicly committed to reduce the level of FsA reportable banking complaints, excluding ppi, we receive by 20 per cent. We achieved a reduction from 2.1 complaints per 1,000 accounts in the second half of 2010, to 1.5 in the second half of 2011. We aim to reduce this further in 2012 to 1.3 complaints per 1,000 accounts, and to 1.0 complaint per 1,000 accounts in 2014. the progress to date has been accomplished through the success of our phone-a-friend service, a specialist team which branch staff can refer to, and the training we have provided to our 40,000 front line colleagues. As a result of these initiatives, we are now resolving over 90 per cent of complaints at first touch. We are the first financial services organisation to roll out to all our complaint handling staff an externally accredited complaint handling qualification. in addition we have extended the opening hours of the specialist teams so they can deal with complaints 24 hours a day, 7 days a week, ensuring customers get the right outcome faster.
We have also introduced a group wide team that focuses on listening to customers and making improvements to remove the cause of customers’ complaints. this has reduced complaints received from customers by more than 30,000 per month in 2011. All these changes have been driven by listening to our customers.
– After sales: we listen carefully to customer feedback, and take a proactive stance to after sales.
As the UK’s biggest provider of social bank accounts, we make a significant investment in helping to bring people into the financial system. We currently provide over 4.2 million such accounts and in 2011 opened around 250,000 new accounts. We are also the only bank to offer basic banking facilities to prisoners, in conjunction with the national offender Management service. Almost as importantly, we can help our customers move to a full facility current account. in 2011 over 100,000 customers who previously had a social bank account either upgraded to or opened a mainstream bank account. We have recently made a number of improvements to make it easier for social bank account customers to upgrade.
We are committed to making lloyds banking Group the best bank for Customers. the image shows how our customers are at the heart of everything we do in our retail business. the wheel brings together how we’ll make the most of our brands, the investment we’re making in our branch network, and what’s needed from colleagues to bring this to life for our customers.
Building long lasting relationships through people lloyds banking Group’s continued success depends on our colleagues. our colleagues aim to provide excellent service everyday and spend time listening to customers to understand what is important to them. building valued relationships with customers enables our teams to support customers in getting the most from their money.
As a leader in financial services, we are committed to professional development and creating outstanding learning opportunities that enable people to reach their potential. We invest in our people, offering the best coaching and training. learning@lloyds banking Group is one of the largest corporate learning facilities in europe.
during 2011 we set out our new strategy to achieve our vision of becoming the best bank for customers. to help make that vision a reality, we consulted with colleagues from across the business to identify the things that will be important in achieving our vision. this led us to our three lloyds banking Group values – putting Customers First. Keeping it simple. Making a difference together.
Colleagues received an average of 6.9 days formal learning in 2011 reflecting ongoing commitment to learning and development.
Integration inevitably in bringing the two organisations together, there has been a requirement to rationalise and this has led to a reduction in roles. Where possible we have redeployed colleagues to other areas of the Group or reduced numbers through natural attrition. Where it has been necessary for colleagues to leave the organisation, this has been achieved by offering voluntary severance and using fewer contractors and agency colleagues. Compulsory redundancies are always a last resort.
the focus has been on enabling the business to integrate, while also building foundations for the future to ensure the organisation can attract, retain and develop the best talent. people have been at the heart of the change programme, and a robust communications process has been followed to ensure that colleagues were aware of the changes before they happened. We have four recognised Unions who have been consulted on all changes.
the year has seen an ongoing harmonisation process of different heritage employment policies, and the unions have been involved in these discussions.
the question set was explicitly designed to support the outcomes of our strategic Review and to provide an early indication of the extent to which employees identify with our three new values – putting Customers First, Keeping it simple and Making a difference together.
the overriding principles of the training approach were to ensure colleagues were confident, competent and that the customer experience was consistent and smooth.
in all, c800,000 hours of training was invested in colleagues, ensuring that the integration programme delivered for the business, colleagues and customers.
Talent, recruitment and retention one of our uppermost priorities is recruiting, retaining and developing talented leaders. identifying and developing leaders to strengthen succession planning is vital in supporting our strategic review initiatives.
We have undertaken detailed organisational reviews centred on assessing our leaders performance and potential to undertake bigger roles as well as succession planning for our most senior leaders. the approach led by Group executive Committee, incorporates a rigorous assessment of the performance, potential and development needs of the top three layers of leadership in the organisation and was presented to the board.
Learning and development becoming the best bank for customers means our colleagues must have the capabilities to deliver excellent service.
“last year i secured the opportunity of bank Manager at the new lloyds tsb olympic branch in europe’s largest shopping centre – Westfield stratford City. With a successful opening in september i’m delighted that we managed to deliver outstanding performance whilst providing high quality customer service.”
our executive and leadership development approach in 2011 was driven by our strategy to create a high-performance culture within the Group. integral to this strategy, has been the need to develop a clear articulation internally and externally of the leadership behaviours and capabilities required to take our business from integration to transformation.
during 2011, we have delivered the high-profile executive leadership programme and a new group wide talent development programme. embedded in both these programmes is the requirement for leaders to take ownership in progressing our work around diversity and inclusion. our investment in developing leaders in 2011 included the launch of 360 degree feedback to the top three layers in the organisation.
in addition, our recently launched management licence programmes provide foundation line management and leadership skills to managers.
Diversity and inclusion A key element to achieving our vision is having a diverse and inclusive workforce; an area in which we have made positive progress during 2011.
We received a technology4good award for our workplace adjustments programme, improving the way we support colleagues with disabilities or long-term health conditions. We have launched a new online disability awareness programme to ensure colleagues and line managers have the support they need.
We have also begun an unconscious bias programme, starting with our most senior leaders. the workshop raises issues in a meaningful way, encouraging participants to draw links with their day-to-day work and behaviours, and equipping them with tools and techniques to help combat bias in the workplace.
We will continue to build upon our progress during 2012 to ensure we reflect the diverse needs of our customers, colleagues and communities.
communitiES by doing more through our responsible business strategy, we aim to help build thriving communities.
Launch a Fund that will enable colleagues to help their chosen community organisation with financial support
Launch a five year partnership that will support social entrepreneurs and create hundreds of jobs across the UK
Employee volunteering our employees are our closest link with the communities in which we operate, and, as one of the biggest employers in the UK, our colleague volunteering initiatives can make a real difference. our day to Make a difference volunteering programme enables colleagues across the UK to spend one day a year volunteering for a charity or community project of their choice. in 2011, over 16,000 colleagues volunteered, compared with 7,300 in 2010. however, we know there is more we can do to support colleagues in connecting with their communities. We are redesigning our volunteering programme to make it simpler and more rewarding for colleagues to participate and hope to engage even more colleagues in 2012.
Lloyds Scholars lloyds scholars, the Group’s flagship higher education programme, was launched in 2011 for students attending the University of sheffield and University of bristol. the programme aims to encourage and support young people from families with below average income to attend some of britain’s top universities. We believe lloyds scholars is the only corporate social mobility programme of its kind in the UK.
the national Union of students has always been supportive of business contributing to the cost of higher education, so it’s great to see lloyds banking Group starting the lloyds scholars scheme. of course higher education is massively beneficial to the public, as well as to the student, but business also benefits from students who have a higher level of education and an enriched world-view.”
Money for Life Money for life is lloyds banking Group’s flagship £4 million financial capability and personal money skills programme, targeted at the Further education, Adult and Community learning sector. We are providing tutors and support workers with the skills they need to talk confidently about money management, and to support their learners to stay out of debt and save for the future.
We also launched the Money for life Challenge in 2011, a national competition providing small grants for 16-24 year olds to run a money management project in their local community. the most innovative and impactful projects will be rewarded at national and UK finals in 2012.
Many of the women have recently returned to work after long-term unemployment and wanted to better manage their finances,” Jeff explains.
i provided advice on basic budgeting and explained how they could use banking products and services to help them manage their money.”
Summary the Group’s strategic vision recognises that being the best bank for customers also means being the best bank for communities. We believe that, over time, our new responsible business strategy will help us rebuild public trust and colleague pride in the Group by making a difference to the UK.
London 2012 In 2011 we continued to bring the London 2012 Games closer to people and communities across the UK.
Lloyds TSB is the only Presenting Partner of both the London 2012 Olympic and Paralympic Torch Relays and in 2011 we gave our customers and the wider public the chance to become Torchbearers and carry the Flame in the Relay(s).
Activation Programmes Olympic and Paralympic Torch Relays In 2011 we ran public campaigns to find hundreds of people who have made a positive difference in their community to be Torchbearers and carry the Flame in the London 2012 Olympic Torch Relay or Paralympic Torch Relay. We received thousands of nominations from customers and the public across the UK, many of whom had uplifting and inspirational stories to share.
Local Heroes The Local Heroes programme helps some of the most talented emerging athletes in the UK during one of the toughest stages of their career.
His nominator and friend, Eleanor Noakes said, “Simon has not had an easy journey on his road to recovery and has battled with the impact of his injuries. He now uses those experiences to help others overcome their own difficulties and is a true inspiration to his community.”
Our loan to deposit ratio, excluding repos, improved to 135 per cent (31 December 2010: 154 per cent), and to 109 per cent in our core business (31 December 2010: 120 per cent). Customer deposits excluding repos increased by 6 per cent, reflecting good growth in relationship deposits.
We also continue to closely monitor, control and reduce our exposures to selected European countries. The Group’s aggregate exposure to Greece, Ireland, Italy, Portugal and Spain totalled £25 billion, of which £16 billion relates to Ireland. Total exposure has reduced by £9 billion since 31 December 2010. Further information on our exposures to these countries, including to banking groups, asset backed securities, and corporate, retail and other exposures, is given on pages 156 to 161.
The Group made good progress against its balance sheet reduction plans in the year despite challenging market conditions. In 2011, we achieved a substantial reduction in the non-core portfolio of £53 billion, resulting in the residual portfolio at 31 December 2011 amounting to £141 billion. Notable progress was made through treasury asset reductions of £26 billion, UK commercial real estate reductions of £4.5 billion and Irish portfolio reductions of £4.9 billion. Approximately half of the reduction arose from disposals, primarily treasury assets but pleasingly we also saw gross sales of £0.9 billion in Ireland and around £1.8 billion in Australia. Asset sales overall were made broadly in line with the net book value at a Group level.
In the non-core business, the 54 per cent fall in income reflected the loss of income from the significant reductions achieved in the non-core portfolio, and losses on asset disposals of £677 million, including losses on treasury assets of £758 million which were largely offset by a related fair value unwind of £737 million included elsewhere in the income statement. Excluding the losses on disposals of assets, non-core income decreased by 36 per cent. Net interest margin fell 45 basis points to 1.01 per cent, principally reflecting higher wholesale funding costs, and higher levels of impaired assets.
Non-core loans and advances to customers generated 76 per cent of the Group’s impaired loans reflecting their higher risk profile, with a coverage ratio of 48 per cent at 31 December 2011.
Non-core loss before tax was £3,664 million (2010: loss before tax £3,940 million), with the improvement principally driven by reductions in impairment and costs, partly offset by lower income, and lower fair value unwind.
Change in fair valuation of equity conversion feature of ECNs 5 620
Group net interest income decreased by £1,910 million, or 14 per cent, to £12,233 million in 2011. This fall primarily reflects the fall of 6 per cent in average interest-earning banking assets in the year, along with the 14 basis points reduction in net interest margin.
The net interest margin in our banking businesses was 2.07 per cent, with the decline from 2.21 per cent in 2010 principally reflecting higher wholesale funding costs, higher deposit rates and the effect of refinancing a significant amount of government and central bank facilities, partially offset by an improvement in customer margins and funding mix. This fully incorporates the methodology changes outlined in our October 2011 announcement (New Allocation Methodologies for Funding Costs and Capital).
Change in fair valuation of equity conversion feature of ECNs 259 (490)
In the fourth quarter of 2011, total income, net of insurance claims, increased by 16 per cent to £5,870 million when compared to the third quarter of 2011. Excluding effects of liability management, volatile items and asset sales, income increased by 4 per cent, with a fall in net interest income more than offset by an increase in other operating income.
Comparison of fourth quarter 2011 costs with third quarter 2011 costs Total costs increased by 5 per cent to £2,712 million in the fourth quarter compared to the third quarter of 2011 as we recognised costs of the bank levy and Financial Services Compensation Scheme. These were partially offset by a reduction in bonus accruals in the quarter.
Impaired loans decreased by 7 per cent compared to December 2010 to £60.3 billion, representing 10.1 per cent of closing advances, driven by a decrease in Retail and Wholesale as a result of asset sales, repayments, and write-offs, partially offset by an increase in impaired loans in Ireland. The Group’s overall coverage ratio was little changed at 46.0 per cent. Further detail on impaired asset trends and coverage ratios is given in the Credit Risk review commencing on page 129.
The Wholesale impairment charge decreased from £4,064 million in 2010 to £2,901 million in 2011. The reduction was primarily driven by lower impairment from the corporate real estate and real estate related asset portfolios partly offset by higher impairment on leveraged acquisition finance exposures. The continued low interest rate environment helped to maintain defaults at a reduced level. In addition, newly impaired assets, being generally of better quality, are requiring a lower level of provisions once impaired than previously impaired assets. The impairment charge as a percentage of average loans and advances to customers improved significantly to 1.95 per cent in 2011 compared to 2.23 per cent in 2010. Impaired loans as a percentage of lending increased slightly to 20.5 per cent from 20.0 per cent but the coverage ratio fell to 41.6 per cent from 46.9 per cent reflecting write-offs of impaired assets with a higher impairment rate, the substantial reductions of poorer quality non-core assets and lower required impairment rates on newly impaired assets.
As anticipated at the time of our Q3 Interim results Statement on 8 November 2011, the impairment charge increased in the fourth quarter, largely reflecting higher charges in Other International, primarily as a result of further provisioning in the Group’s Australasian portfolio.
By the end of 2011, our loan to deposit ratio, excluding repos and reverse repos, had improved to 135 per cent and we expect this will continue to improve as we reduce our non-core lending balances further. Our core loan to deposit ratio also improved to 109 per cent from 120 per cent at the end of 2010.
Strong term issuance in 2011 also allowed the Group to further reduce its short-term wholesale funding and extend its maturity profile of wholesale funding with 55 per cent of wholesale funding having a maturity date greater than one year at 31 December 2011 (50 per cent as at 31 December 2010). Of the funding with maturity less than one year of £113 billion, £24 billion is secured and £24 billion relates to the UK Credit Guarantee Scheme, leaving £65 billion of other unsecured wholesale funding.
Verde The Verde business comprises a network of 632 branches, and the TSB and Intelligent Finance brands, and serves approximately 5.5 million customers. Our preferred option for the disposal of the Verde business is a direct sale and the preferred bidder for the business is The Co-operative Group. Any final transaction will be subject to regulatory approval and certain other conditions. We continue to expect to be in a position to update shareholders on progress towards the end of March 2012 at which time, and if appropriate, we will provide further details on the proposed transaction. We will continue to progress an IPO as an alternative to a direct sale.
Provision in relation to German insurance business litigation As previously disclosed, Clerical Medical Investment Group Limited (CMIG) has received a number of claims in the German courts, relating to policies issued by CMIG but sold by independent intermediaries in Germany. The Group has recognised a provision of £175 million in 2011 and management believes this represents the most appropriate estimate of the financial impact, based upon a series of assumptions, including the number of claims received, the proportion upheld, and resulting legal and administration costs.
Costs: Share of results of joint ventures and associates 11 14 – 3 – (1) 27
Impairment as a percentage of average advances5 0.54% 1.95% 1.06% 7.37% 1.62%
Costs: Share of results of joint ventures and associates 17 (95) – (8) (10) 5 (91)
Halifax shakes up savings Each month, our registered savings customers have the ability to win one of 3x £100,000, 100x £1,000 or 1,000x £100 prizes in our Savers Prize Draw. Over 450,000 customers registered for the first prize draw, which is the first of its kind, giving customers this chance in addition to their individual product’s interest rate.
Mobile Banking We’ve now had over 1 million downloads of the Lloyds TSB app launched in October 2011, and 1.5 million across Lloyds TSB, Halifax and Bank of Scotland. The app allows customers to access their online accounts, transfer funds and make payments to new and existing recipients.
Total income decreased by 10 per cent – Net interest income was 13 per cent lower – Other income increased by 3 per cent
Retail is committed to understanding more fully what individual customers want from our products and services. Retail has a significant asset in the customer information it manages and we are investing to further develop our insight into customer needs. This will ensure we continue to do more to anticipate and meet customers’ financial needs, and help us develop relationships with customers so that they trust us to meet more of their needs, and stay with us for longer, thereby creating more profitability for the Group.
Retail is committed to a multi‑brand strategy operating relationship brands for Lloyds TSB and Bank of Scotland with a challenger brand for Halifax and other tactical brands in the portfolio. Through our strategy, Retail can reach more customers with more distinct and considered proposals and product offerings.
Retail has been successful at developing new challenger propositions that appeal to customers like the savers prize draw in Halifax. The prize draw offers customers the opportunity to win up to £100,000 and has achieved strong enrolment (with over 450,000 customers registered for the first draw) and improved customer advocacy. Retail also developed the Halifax ISA promise which delivers a clear service promise that resonates with customers and helped support record new ISA business performance in 2011. The mortgage offering has also been developed, including the roll‑out of a new mortgage sales platform that has improved the processing of mortgage applications and significantly simplified the mortgage application process for both customers and advisors.
The impairment charge reduced by 28 per cent, primarily driven by a reduced unsecured charge which reflected our continued conservative approach to risk, effective portfolio management, and continued focus on existing customers.
Against its strategic objectives, Retail’s strategy remains focused on building deeper customer relationships, driven by superior customer insight, and investment in its multi‑brand strategy, new products, multiple channels, and in colleagues. Retail was notably successful in developing new products to address customer needs, such as the Halifax savers prize draw and ISA promise, and developing new digital technologies, such as mobile banking, to allow customers multi‑channel access. The majority of integration activity is now complete and Retail has made good progress on products, sourcing, systems and processes.
Investing to be the best bank for customers Changing our business to be simpler and more customer‑centric will help us to achieve our vision, but we also need to invest in growth to be the best bank for customers. That means deepening our customer relationships, growing the capabilities and skills of our colleagues, and helping our communities to grow and prosper.
Other income increased by 3 per cent in 2011 to £1,649 million from £1,607 million largely as a result of higher bancassurance income, driven by an increase in the value of protection products sold through the branch network. Income also includes the gain on the disposal of VISA Inc shares.
Asset Finance consists of a number of leasing and speciality lending businesses including Lex Autolease and Consumer Finance (Black Horse Motor and Personal Finance).
Total income decreased 38 per cent – Net interest income decreased by 25 per cent – Other income decreased by 48 per cent
Wholesale continued to deepen its customer relationships through a measured build out of products and capabilities
Arena Our Wholesale business has launched ‘Arena’ which is now fully operational. This online portal allows quick and easy access to foreign exchange and money market deposits, allowing our customers to ensure their business is suitably financed in a way that suits their needs.
Reshaping the business Against the backdrop of a challenging operating environment, in 2011 Wholesale made significant progress in serving more fully the wider needs of the core customer franchise in a capital and funding efficient way. Whilst maintaining the through-the-cycle commitment to making lending available, Wholesale is rebalancing the business towards customers’ known fee based banking and financing needs. This growth path for the core business is complemented by a clear mandate to limit or reduce the consumption of capital and funding in non-core areas.
Operating expenses decreased by 9 per cent, with further integration cost savings, reduced operating lease depreciation and lower bonus accruals, partially offset by continued investment in core customer facing resource and systems, in line with the priorities set out in June in the Group’s Strategic review.
Fair value unwind decreased by 29 per cent, mainly driven by decreased impairments in the loan book, lower release from the reduced treasury asset portfolio and reduced general release given a more cautious outlook for the value of certain assets, partially offset by favourable exchange rate movements.
Wholesale also achieved double success at Euroweek’s Syndicated Loan and Leveraged Finance Awards 2011 winning the ‘Best Arranger of UK Loans’ and ‘Best Arranger of Mid-Cap Loans’ awards. This was the second consecutive year that the Group has won these awards, reinforcing the market’s recognition of Wholesale’s expertise in arranging these transactions, as well as the ongoing commitment that the Group have made to our customers. Further notable successes include the Leveraged Finance House of the Year in the Private Equity News Awards for Excellence in Private Equity, three awards at the Project Finance International Awards 2011 and in debt capital markets where the bank ranked first in 2011 for sterling corporate UK parent bond issuance (Dealogic).
Balance sheet progress In 2011 Wholesale continued to focus on strengthening the balance sheet by reducing non-core assets. Assets (comprising loans and advances to customers and banks, debt securities and available-for-sale financial assets) reduced by £38.7 billion, or 18 per cent, to £173.6 billion, primarily reflecting deleveraging by customers and continued active de-risking of the non-core balance sheet by either selling down or reducing holdings in debt securities and available-for-sale assets, as well as disposal of £4.8 billion of non-core commercial real estate customer balances. The non-core reduction was £35.2 billion, primarily driven by a reduction in treasury assets of £26 billion. This overall balance sheet reduction was net of an increase in reverse repo balances as liquidity was invested in high quality primary liquid assets on a secured basis.
Total income decreased by £2,165 million to £2,601 million, mainly driven by a decrease in other operating income. This principally reflects losses of £676 million on the disposal of assets in 2011, (offset by a related fair value unwind of £737 million, reflected elsewhere in the income statement), net derivative valuation adjustments of £718 million and the effect of a reduced balance sheet. Excluding asset sales and temporary volatility, income decreased by £1,066 million or 21 per cent, broadly in line with the balance sheet movement.
Other income decreased by £419 million, or 16 per cent, to £2,212 million, primarily reflecting the lower trading revenue and reduced fees and commissions.
The impairment charge decreased by £1,099 million to £2,701 million in 2011, reflecting a sustained decrease since the peak in 2009. As a percentage of average loans and advances to customers, the impairment charge improved to 1.93 per cent in 2011 compared to 2.22 per cent in 2010. This reflected robust and proactive risk management and lower defaults from continued low interest rates despite a subdued economic environment
The share of results from joint ventures and associates comprised a small profit of £13 million, an improvement of £108 million, due to the non-recurrence of losses and impairments taken in 2010.
Total income decreased by £302 million, or 17 per cent, to £1,458 million as a result of lower business volumes, including assets held under operating leases, the non-recurrence of VAT claims settled in the prior year and a £21 million loss on disposal of Hill Hire plc. The lower business volumes are in-line with the targeted reduction in this asset class and were partly offset by improved margins.
2011 highlights Profit before tax increased by 71 per cent, due to higher income, combined with a reduction in impairments and costs.
Strategic focus Commercial’s goal is to be the best bank for smaller and medium sized businesses. The main strategic focus is to improve the depth of relationship with SMEs through specialist customer propositions in key markets, by improving relationship management skills and capacity to cross-sell and optimising customer service through efficiencies that also contribute to cost effectiveness targets.
The Business Support Unit (BSU) is helping businesses in financial difficulties, in line with the commitment to support customers through the economic cycle. Since 2009 the BSU has restructured facilities for around 10,000 businesses and has protected more than 250,000 UK jobs.
Commercial supports businesses across the SME sector and has supported 124,000 start up businesses in 2011 as part of the three year commitment to help 300,000 businesses. Support to SME customers will be improved through deepening customer relationships, with internal investment resources agreed along with detailed plans to achieve this.
Impairment has decreased £79 million, 21 per cent, due to an overall improvement in the credit quality of the portfolio leading to a reduction in observed default and delinquency rates. Impairment charges as an annualised percentage of average loans and advances to customers has reduced to 1.06 per cent from 1.24 per cent in 2010, an improvement of 18 basis points year-on-year.
Wealth and International combines the private banking and asset management businesses and the Group’s international businesses.
So far the academy has helped over 1,400 of our employees develop their skills and deliver more for customers as a result.
Simplifying the division to right-size cost base and deliver operational efficiencies The group wide Simplification initiative is well underway, the focus of which is on simplifying operations and processes, delayering management structures, consolidating supplier relationships and increasing the efficiency of distribution channels. Wealth & International is in the process of realising additional efficiencies and cost savings through its initiatives to develop a single customer platform across all International Wealth businesses, streamlining of operating models and creation of a shared support infrastructure.
Developing a more focused business and investing in growth The division will focus on serving customers both within the UK and also those with UK connections. In International, corporate lending has been refocused around selected customers aligned to UK product and sector plans and the Group’s international risk appetite. In Wealth, the focus of propositions will be within the existing UK customer franchise in addition to customers with UK connections in Commonwealth countries, Europe, Middle East, and on the Indian Subcontinent.
Significant investment is being made towards growing market share in what is viewed as a key growth opportunity for the Group – UK and International Wealth. The investment is geared towards developing compelling propositions for mass affluent, affluent and high net worth customers; this will address a key gap for the Group in the mass affluent market and will enhance our investment management offering in the affluent and high net worth segments. Underpinning this, we are consolidating our platforms and simplifying the operating model to deliver a better customer experience in a more efficient manner, thereby improving customer onboarding, retention and value capture through cross sales.
Other income increased by 7 per cent, mainly due to foreign exchange benefits in International. Excluding the impact of foreign exchange, other income decreased by 1 per cent.
The impairment charge reduced by 23 per cent to £4,610 million. Following increased charges in the last quarter of 2010, driven by the significant deterioration in the economic environment in Ireland, the rate of impaired loan migration has slowed in 2011.
Customer deposits increased by £9.2 billion to £42.0 billion mainly due to continued strong deposit inflows in the on-line deposit businesses.
In Wealth, our key focus has been to grow our market share in UK and International Wealth primarily through growing the total amount of deposits and funds under management that we manage on behalf of franchise customers, whilst improving margins and operating efficiency. Although funds under management within Private and International Banking decreased by 5 per cent to £12.8 billion, this primarily reflected market movements and a consequent shift of customer appetite away from investment products.
Profit before tax and fair value unwind decreased by 14 per cent to £189 million mainly due to increased impairment losses partly offset by higher income. Excluding non-recurring gains on sale of non-core businesses of £36 million which were recognised in the first half of 2010, profit before tax and fair value unwind increased by 3 per cent.
Balance sheet progress Net loans and advances to customers decreased by £0.6 billion or 7 per cent, to £8.5 billion due to net repayments of £0.7 billion and increased impairment provisions across the non-core portfolios and foreign exchange movements of £0.1 billion.
Balance sheet progress Net loans and advances to customers decreased by £10.9 billion or 24 per cent, to £35.3 billion due to net repayments of £5.2 billion across all businesses (including the sale of £1 billion of commercial real estate assets in Australia and New Zealand), further impairment provisions and foreign exchange movements of £0.8 billion. The division is focused on de-risking and right-sizing the balance sheet, focusing on key Group relationships, as well as reducing concentrations in Commercial Real Estate.
The Insurance division provides long term savings, protection and investment products and general insurance products to customers in the UK and Europe and consists of three business units: Life, Pensions and Investments UK (LP&I UK): The UK Life, Pensions and Investments business is the leading bancassurance provider in the UK and has one of the largest intermediary channels in the industry. The business provides long-term savings, protection and investment products distributed through the bancassurance, intermediary and direct channels through the Lloyds TSB, Halifax, Bank of Scotland and Scottish Widows brands.
Scottish Widows was awarded Defined Contribution (Bundled Services) Provider of the Year in the Pension and Investment Provider Awards 2011
Rapid Response The Group’s new Rapid Response Vehicle enables quicker service and greater support for General Insurance customers impacted by events affecting multiple households.
The Rapid Response Vehicle was called to the scene and colleagues from Insurance used the van to co-ordinate customer visits, settle claims and assess the scope of repairs. Fortunately, we were able to reach a number of customers before they contacted us.
2011 highlights Profit before tax increased by 7 per cent. In 2010 income was reduced by a non-recurring charge of £70 million in respect of the Group’s decision to cease writing new payment protection insurance (PPI) business. Excluding this charge profit before tax and fair value unwind increased by 2 per cent in 2011.
Total income, net of insurance claims, increased by 2 per cent, (reduction of 1 per cent excluding the £70 million charge in 2010). This is attributable to strong sales of corporate pensions through the intermediary channel and the continued change in new business mix within Life, Pensions and Investments UK (LP&I UK) towards more profitable protection business reflecting a focus on meeting customer needs in an area where there is a general level of under provision in the UK. Improved claims experience within General Insurance which has been offset by lower PPI related income is also a significant contributor to this.
LP&I UK sales of £10,219 million (PVNBP) reduced by 1 per cent, partly reflecting the continuing change in mix towards protection products to meet customer protection needs, which generate a lower PVNBP compared to investments but generate a higher new business profit. Sales through our Intermediary channel have increased by 20 per cent to £6,415 million reflecting strong sales of Corporate Pensions.
Reshaping the business In 2012, Insurance is being reshaped to run as one insurance business with a customer focused corporate and management structure. By operating as one business and actively managing the combined capital, Insurance expects to leverage significant benefits from risk diversification which will give further competitive advantage. Insurance continues to progress well with the implementation of Solvency II requirements.
Strong and enduring relationships with distributors are essential to the success of the business. The business is working collaboratively with our colleagues across the Group to design and deliver value adding propositions aligned to channel customers’ insurance needs. In the intermediary channel, it continues to support Independent Financial Advisers (IFAs) in their preparation for the Retail Distribution Review (RDR). Inevitably, as a result of RDR, some IFAs will choose to exit markets and therefore some customers will no longer receive advice from their IFAs. The business is committed to providing a direct proposition to maintain a high quality of service to these customers.
Life, Pensions and Investments (LP&I UK) delivered profit growth, before tax and fair value unwind, of £56 million, or 7 per cent. In 2010 income was reduced by a non-recurring charge of £70 million in respect of the Group’s decision to cease writing new payment protection insurance (PPI) business which, although a General Insurance product, impacted LP&I as a result of the life cover contained within PPI contracts. Excluding this charge profit before tax and fair value unwind decreased by 2 per cent in 2011.
European business Profit before tax decreased by £45 million, 35 per cent, to £82 million. The reduction is driven largely by a non-recurring charge following clarification by the German regulator (BaFin) surrounding the deduction of tax and policy-holder distributions and experience and assumption charges.
Sales (PVNBP), excluding OEICs have increased by 11 per cent, and although OEIC sales have decreased by 40 per cent the new business margin on these sales has increased, reflecting the focus on value over volume.
The total VIF has decreased from 2010 to 2011. The increase in VIF from new business has been more than offset by a combination of the expected run-off in VIF on in-force business, the reduction in VIF from market volatility (particularly on equities) and the change in assumptions used in the calculation of the VIF over the year.
Direct costs: Result before recharges to divisions (2,623) (2,985) 12 total net recharges to divisions 2,567 2,930 (12)
end to end processes: we will conduct an end-to-end redesign of our processes, which will include significant process automation, simplifying processes for our staff, increasing accuracy, and reducing complaints. this will result in more time to serve customers, generate sales, and create an improved customer experience.
group operations will also play a key role in delivering the technical expertise and support for the other group strategic initiatives.
sourcing includes the cost of running the department and certain centrally managed contracts. Costs have decreased by 3 per cent and sourcing has also played a major part in helping to deliver group wide sourcing synergies.
incorporates the methodology changes outlined in the October 2011 announcement (new Allocation methodologies for Funding costs and capital).
Total income, net of insurance claims 1,587 3,421 operating expenses (884) (1,044)
the basis of preparation of the core and non-core income statement is set out on page 5.
Group operations & central items 636 – 0.4 15.7 0.9 non-core portfolios includes reverse repos and repos.1
Reverse repos 16.8 3.1 loans and advances to banks 32.0 29.9 7
Available-for-sale financial assets 27.9 20.9 33 other assets: trading and other financial assets at fair value through profit and loss 138.8 154.6 (10)
total income, net of insurance claims 9,695 4,793 1,543 1,295 2,061 636 20,023 other costs (46) – – – – – (46)
Group £m effects of liability management, volatile items and asset sales – (677) – – – – (677)
Profit before tax – non-core 275 146 10 (4,136) 96 (55) (3,664)
Group £m effects of liability management, volatile items and asset sales – (181) – 37 – – (144)
total income, net of insurance claims 560 1,733 41 915 172 – 3,421 costs: other costs – (150) – – – – (150)
Profit before tax – non-core 575 462 32 (5,140) 131 – (3,940)
Assets loans and advances to customers excl reverse repos 30.0 56.1 2.0 47.2 135.3 customer deposits excluding repos – 4.0 0.3 1.2 5.5
Volatility arising in insurance businesses the Group’s statutory result before tax is affected by insurance volatility, caused by movements in financial markets, and policyholder interests volatility, which primarily reflects the gross up of policyholder tax included in the Group tax charge.
Insurance volatility the Group’s insurance business has liability products 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.
the most significant of these additional sources of volatility is policyholder tax. Accounting standards require that tax on policyholder investment returns should be included in the Group’s tax charge rather than being offset against the related income. the impact is, therefore, to either increase or decrease profit before tax with a corresponding change in the tax charge. over the longer term the charges levied to policyholders to cover policyholder tax on investment returns and the related tax provisions are expected to offset. in practice timing and measurement differences exist between provisions for tax and charges made to policyholders. consistent with the normalised approach taken in respect of insurance volatility, differences in the expected levels of the policyholder tax provision and policyholder charges are adjusted through policyholder interests volatility. other sources of volatility include the minorities’ share of the profits earned by investment vehicles which are not wholly owned by the long-term assurance funds.
the gain relating to the 2011 transaction consists of £599 million recognised in other operating income relating to the extinguishment of the existing liability in respect of the exchange Securities for which new securities were issued and £570 million recognised in net interest income, principally relating to the change in carrying value, arising as a result of a change in the estimated maturities of the remaining exchange Securities. the gain recognised in net interest income will reverse as the securities accrete to par over the remaining life.
Integration costs and benefits the Group has successfully achieved the integration programme target of delivering run-rate cost synergies and other operating efficiencies of £2 billion per annum from the programme by the end of 2011.
integration costs of £1,097 million were incurred in the year and have been excluded from the combined businesses results. this brings the total integration costs since the hBoS acquisition to £3,846 million.
there were three major components to the system migrations: – the lloyds tSB Branch counter System (icS) was introduced to all halifax and Bank of Scotland branches and 3,800 hBoS Automated teller machines (Atms) and 667 intelligent Deposit machines (iDms) were moved across to the lloyds Banking Group it network
– in September 2011 30 million hBoS current accounts and savings accounts and commercial and UK Private Banking accounts, were migrated onto the lloyds Banking Group it system. this customer data migration was successfully achieved after five proving cycles, 11 dress rehearsals including two full trial account migrations, over 250,000 business tests and 27,000 colleagues trained totalling 1.5 million hours the vast majority of integration activity is now complete, with a handful of peripheral migrations to be completed in 2012.
Simplification costs and benefits the successful delivery of the integration programme has provided a platform and single set of processes that now enables the Group to commence its next transformational journey. A core element of this transformational agenda is the Simplification programme. the programme is structured around four key initiatives: operations & Processes – getting our processes right end-to-end, with the right it in the right places.
Sourcing – better understanding what we need across the Group and getting the right deals from our suppliers.
The financial statements for each of the years presented have been audited by PricewaterhouseCoopers LLP, independent auditors.
Number of ordinary shares in issue (millions)2 68,727 68,074 63,775 5,973 5,648
Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
the group’s approach to risk is founded on a robust control framework and a strong risk management culture which guides the way all employees approach their work, the way they behave and the decisions they make.
Progress in 2011 The Group has a fully embedded conservative approach to, and prudent appetite for, risk and has in place disciplined controls over the risk profile for all new business, aligned to the strategic review.
– Risk analysis and reporting supports the identification of opportunities as well as risks and provide an aggregate view of the overall risk portfolio.
– Business executives have specified risk management objectives, and incentive schemes take account of performance against these.
Risk Division – During 2011 good progress has been made in creating a more agile Risk function through further delayering the management structure and simplifying the operating model.
Risk Transformation – the group’s continued investment agenda, ensures Risk systems, processes and management information continue to meet the needs of the group and external stakeholders.
the group made a number of undertakings to Hm treasury arising from the capital and funding support, including the provision of additional lending to certain mortgage and business sectors for the two years to 28 February 2011, and other matters relating to corporate governance and colleague remuneration. the lending commitments were subject to prudent commercial lending and pricing criteria, the availability of sufficient funding and sufficient demand from creditworthy customers. these lending commitments were delivered in full in the second year.
in addition, the group is subject to european state aid obligations in line with the Restructuring Plan agreed with Hm treasury and the eU College of Commissioners in november 2009, which is designed to support the long-term viability of the group and remedy any distortion of competition and trade in the european Union (eU) arising from the state aid given to the group. this has placed a number of requirements on the group including an asset reduction target from a defined pool of assets by the end of 2014 and the disposal of certain portions of its retail business by the end of november 2013. in June 2011 the group issued an information memorandum to potential bidders of this retail banking business, which the european Commission confirmed met the requirements to commence the formal sale process for the sale no later than 30 november 2011. On 14 December 2011 the group announced that having reviewed the formal offers made, its preferred option was for a direct sale and that it was entering into exclusive discussions with the Co-operative group. the group is also continuing to progress an initial Public Offering (iPO) in parallel. the group continues to work closely with the eU Commission, Hm treasury and the monitoring trustee appointed by the eU Commission to ensure the successful implementation of the Restructuring Plan.
the risk governance structure is intended to strengthen risk evaluation and management, whilst also positioning the group to manage the changing regulatory environment in an efficient and effective manner. the risk governance structure for Lloyds Banking group is shown in table 1.1.
the Group Executive Committee 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, whilst also reviewing the group’s aggregate risk exposures and concentrations of risk. throughout 2011 businesses provided the group executive Committee with regular updates on business performance, always including a review of their key risks. the group executive Committee is supported by other group committees as shown in table 1.1, and in particular by: – the Group Asset and Liability Committee is responsible for the strategic management of the group’s assets and liabilities and the profit and loss implications of balance sheet management actions. it is also responsible for the risk management framework for market risk, liquidity risk, capital risk and earnings volatility.
– the Insurance Risk Committee monitors, reviews and makes recommendations on the risk management framework, risk strategy and appetite for the insurance business, ensuring that the policy and oversight framework for insurance risk management is appropriate. the committee reviews and challenges relevant insurance reporting and issues arising, including: the group’s aggregate portfolio of insurance risk against approved plans and risk appetite and the need and opportunity for effecting insurance risk mitigation.
this approach provides the group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. it also seeks to facilitate effective communication on these matters across the group.
– High-level group policy: policy statements for the main risk types which align to each risk driver
Proportionate control activities are in place mitigating or transferring risk where appropriate. Risk and control assessments including the annual control effectiveness review are undertaken assessing the effectiveness of mitigating actions and whether risk exposures are consistent with the group’s risk appetite.
Risk reporting is reviewed by the business executive sitting as a risk committee, to ensure that senior management is satisfied with the overall risk profile, risk accountabilities and progress on any necessary action plans and tracking. information is provided to Risk Division for review and aggregation to feed into regular reporting on risk exposures and material issues.
the key dependencies on successfully funding the group’s balance sheet include the continued functioning of the money and capital markets; successful right-sizing of the group’s balance sheet; the repayment of the government Credit guarantee scheme facilities in accordance with the agreed terms; no more than limited further deterioration in the Uk’s and the group’s credit rating; and no significant or sudden withdrawal of deposits resulting in increased reliance on money markets. Additionally, the group has entered into a number of eU state aid related obligations to achieve reductions in certain parts of its balance sheet by the end of 2014. these are assumed within the group’s funding plan. the requirement to meet this deadline may result in the group having to provide funding to support these asset reductions and/or disposals and may also result in a lower price being achieved.
– Retail customers (including those in Wealth and international): have seen Uk bad debts reduce further in 2011 as a result of risk management activity and more stable, low interest rate Uk economic conditions. these portfolios will remain strongly linked to the economic environment, with inter alia house price falls, unemployment increases, consumer over-indebtedness and rising interest rates being possible impacts to the secured and unsecured retail exposures.
Lloyds Banking group faces increased political and regulatory scrutiny as a result of the group’s perceived size and systemic importance following the acquisition of HBOs group.
Capital and Liquidity the group is continuously assessing the impacts of regulatory developments which could have a material effect on the group and is progressing its plans to implement regulatory changes and directives through change management programmes.
Anti Bribery the group has no appetite for bribery and explicitly prohibits the payment, offer, acceptance or request of a bribe, including ‘facilitation payments’.
US and European Regulation the group is continuously assessing the impacts of regulatory developments which could have a material effect on the group and is progressing its plans to implement regulatory changes and directives through change management programmes. the group is also continuing to progress its plans to achieve solvency ii compliance.
Risk Definition the risk of reductions in earnings and/or value, through financial or reputational loss, from unfavourable market moves; including changes in, and increased volatility of, interest rates, market-implied inflation rates, credit spreads, foreign exchange rates, equity, property and commodity prices.
Customer treatment Principal Risks Customer treatment and how the group manages its customer relationships affect all aspects of the group’s operations and are closely aligned with achievement of the group’s strategic vision to be the best bank for customers. As a provider of a wide range of financial services products across different brands and numerous distribution channels to an extremely broad and varied customer base, we face significant conduct risks, such as: products or services not meeting the needs of our customers; sales processes which could result in selling products to customers which do not meet their needs; failure to deal with a customer’s complaint effectively where we have got it wrong and not met customer expectations.
Mitigating Actions the group takes many mitigating actions with respect to this principal risk, key examples include: the group’s Conduct Risk strategy and supporting framework have been designed to support our vision and strategic aim to put the customer at the heart of everything we do. We have developed and implemented a framework to enable us to deliver the right outcomes for our customers, which is supported by policies and standards in key areas, including product governance, sales, responsible lending, customers in financial difficulties, claims and complaints handling.
Risk Definition the risk of regulatory censure and/or a reduction in earnings/ value, through financial or reputational loss, from inappropriate or poor customer treatment.
– strengthening risk management culture and capability across the group, together with further embedding of risk objectives in the colleague performance and reward process.
through the group’s risk management processes, these risks are assessed on an ongoing basis and seek to ensure optimisation of risk and reward and that, where required, appropriate mitigation is in place. Both quantitative and qualitative factors are considered in assessing the group’s current and potential future risks.
Definition Liquidity risk is defined as the risk that the group does not have sufficient financial resources to meet its commitments when they fall due, or can secure them only at excessive cost. Funding risk is further defined as the risk that the group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient.
exposure Liquidity exposure represents the amount of potential outflows in any future period less committed inflows. Liquidity is considered from both an internal and regulatory perspective.
the group’s funding and liquidity position is underpinned by its significant customer deposit base, and has been supported by stable funding from the wholesale markets with a reduced dependence on short-term funding. A substantial proportion of the retail deposit base is made up of customers’ current and savings accounts which, although repayable on demand, have traditionally in aggregate provided a stable source of funding. Additionally, the group accesses the short-term wholesale markets to raise interbank deposits and to issue certificates of deposit and commercial paper to meet short-term obligations. the group’s short-term money market funding is based on a qualitative analysis of the market’s capacity for the group’s credit. the group has developed strong relationships with certain wholesale market segments, and also has access to corporate customers to supplement its retail deposit base.
During the year, the individual entities within the group, and the group, complied with all of the externally imposed liquidity and funding requirements to which they are subject.
A reconciliation to the group’s balance sheet is provided on page 116.
medium-term notes include £23.5 billion of funding from the Credit guarantee scheme.
total wholesale funding is analysed by residual maturity as follows: table 1.5: Wholesale funding by residual maturity (audited)
Cash balances and balances at central banks – primary are combined in the group’s balance sheet.
the group’s borrowing costs and issuance in the capital markets are dependent on a number of factors, and increased cost or reduction of capacity could materially adversely affect the group’s results of operations, financial condition and prospects. in particular, reduction in the credit rating of the group or deterioration in the capital markets’ perception of the group’s financial resilience, could significantly increase its borrowing costs and limit its issuance capacity in the capital markets. As an indicator over the last 12 months the spread between an index of A rated long term senior unsecured bank debt and an index of similar BBB rated bank debt, both of which are publicly available, has ranged between 60 and 115 basis points. the applicability to and implications for the group’s funding cost would depend on the type of issuance, and prevailing market conditions. the impact on the group’s funding cost is subject to a number of assumptions and uncertainties and is therefore impossible to quantify precisely.
Primary liquid assets of £94.8 billion represent approximately 133 per cent (95 per cent at 31 December 2010) of our money market funding positions and are approximately 84 per cent (66 per cent at 31 December 2010) of all wholesale funding with a maturity of less than a year, and thus provides substantial buffer in the event of continued market dislocation.
in addition to primary liquidity holdings the group has significant secondary liquidity holdings providing access to open market operations at a number of central banks which the group routinely makes use of as part of its normal liquidity management practices. Future use of such facilities will be based on prudent liquidity management and economic considerations, having regard for external market conditions.
the group notes the Basel Committee’s Principles of sound Liquidity Risk management and supervision (sound Principles). the planned introduction of the Liquidity Coverage Ratio (LCR - January 2015) and net stable Funding Ratio (nsFR - January 2018) contained within CRD iV are intended to raise the resilience of banks to potential liquidity shocks and provide the basis for a harmonised approach to liquidity risk management. the LCR measure promotes short term resilience of the liquidity profile by ensuring that banks have sufficient high quality liquid assets to meet potential funding outflows in a stressed environment within a one month period. the nsFR promotes resilience over a longer time horizon by requiring banks to fund their activities with a more stable source of funding on a going concern basis. this has a time horizon of one year and has been developed to ensure a sustainable maturity structure of assets and liabilities.
Risk appetite Capital risk appetite is set by the Board and reported through various metrics that enable the group to manage capital constraints and market expectations. the group Chief executive, assisted by the group Asset and Liability Committee, regularly reviews performance against risk appetite. A key metric is the group’s core tier 1 capital ratio which the group currently aims to maintain prudently in excess of 10 per cent. this and other aspects of appetite will be kept under review in the light of further clarity of regulatory and accounting reforms.
exposure A capital exposure arises where the group has insufficient regulatory capital resources to support its strategic objectives and plans, and to meet external stakeholder requirements and expectations. the group’s capital management approach is focused on maintaining sufficient capital resources to prevent such exposures whilst optimising value for shareholders.
A number of limits are imposed by the FsA on the proportion of the regulatory capital base that can be made up of subordinated debt and preferred securities; for example the amount of qualifying tier 2 capital cannot exceed that of tier 1 capital.
in order to address the requirements of pillar 2 of the Basel ii framework, the FsA currently sets additional minimum requirements through the issuance of individual Capital guidance (iCg) for each Uk bank calibrated by reference to the CRR. A key input into the FsA’s iCg setting process is each bank’s internal Capital Adequacy Assessment Process. the group has been given an iCg by the FsA. the FsA has made it clear, however, that iCg remains a confidential matter between each bank and the FsA.
the second exercise, in December 2011, required banks to strengthen their capital position by building up temporary capital buffers against sovereign debt exposures to reflect market prices. in addition, it required banks to establish a buffer such that the core tier 1 ratio reaches a minimum level of 9 per cent by the end of June 2012. the group’s consolidated core tier 1 ratio from this exercise was 10.1 per cent.
many of the details of the way these reforms will be integrated within the Uk are still to be finalised. in the meantime the group continues to monitor their development very closely and to analyse their potential impact whilst ensuring that the group continues to have a strong loss absorption capacity exceeding regulatory requirements as currently formulated.
the group has in issue, as part of tier 2 capital resources, enhanced Capital notes which will convert to core tier 1 capital in the event that group’s published core tier 1 ratio (as defined by the FsA in may 2009) falls below 5 per cent.
Wealth and international 47,278 58,714 group Operations and Central items 12,626 15,688
Retail risk weighted assets reduced by £6,017 million mainly due to lower lending balances and the reducing mix of unsecured lending.
tier 1 capital Core tier 1 capital has decreased by £3,380 million largely reflecting losses in the period. in addition there has been an increase in excess of expected losses over impairment losses, reflecting the reduction of legacy lending that is subject to very high provision levels and replacement with new lending.
Decrease in goodwill and intangible assets deductions 80 80 increase in excess of expected losses over impairment allowances (720) (1,440)
For scottish Widows and Clerical medical, no Resilience Capital Requirement is required. However, a further test is required in respect of the With Profit Funds. this involves comparing the statutory basis of assessment with a realistic basis of assessment as described below.
‘Realistic’ basis. the FsA requires each life insurance company which contains a With Profit Fund in excess of £500 million to also carry out a ‘realistic’ valuation of that fund. the group has two such funds; one within scottish Widows and one within Clerical medical. the word ‘realistic’ in this context reflects the fact that assumptions are best-estimate as opposed to prudent. this realistic valuation is an assessment of the financial position of a With Profit Fund calculated under a methodology prescribed by the FsA.
the valuation of with-profits assets in a With Profit Fund on a realistic basis differs from the valuation on a statutory basis as, in respect of nonprofits business written in a With Profit Fund, it includes the present value of the anticipated future release of the prudent margins for adverse deviation. in addition, the realistic valuation uses the market value of assets without the limit affecting the statutory basis noted above.
the realistic valuation of liabilities includes an allowance for future bonuses. Options and guarantees are valued using a stochastic simulation model which values these liabilities on a basis consistent with tradable market option contracts (a ‘market-consistent’ basis). the model takes account of policyholder behaviour on a best-estimate basis and includes an adjustment to reflect future uncertainties where the exercise of options by policyholders might increase liabilities. Further details regarding the stochastic simulation model are given in the section entitled ‘Options and guarantees’ on page 127.
Capital statement the following table provides more detail regarding the capital resources available to meet regulatory capital requirements in the life insurance businesses. the figures quoted are based on management’s current expectations pending completion of the annual financial returns to the FsA. the figures allow for an anticipated transfer of £85 million from the non Profit Fund of scottish Widows Annuities Ltd to its shareholder fund. During 2011, as part of a project to rationalise the group structure Clerical medical was purchased by scottish Widows for £1,846 million. scottish Widows recovered £1,485 million of this amount as a result of capital transactions with its holding company.
Adjustments onto a regulatory basis: Unallocated surplus within insurance business 322 321 – – – 643
estimated share of ‘realistic’ liabilities consistent with the FsA reporting treatment (409) (58) – – – (467)
Formal intra-group capital arrangements scottish Widows has a formal arrangement with one of its subsidiary undertakings, scottish Widows Unit Funds Limited, whereby the subsidiary company can draw down capital from scottish Widows to finance new business which is reinsured from the parent to its subsidiary. scottish Widows has also provided subordinated loans to its fellow group undertaking scottish Widows Bank plc. no such arrangement exists for Clerical medical.
Constraints over available capital resources Scottish Widows scottish Widows was created following the demutualisation of scottish Widows Fund and Life Assurance society in 2000. the terms of the demutualisation are governed by a Court-approved scheme of transfer (the ‘scheme’) which, inter alia, created a With Profit Fund and a non-Participating Fund and established protected capital support for the with-profits policyholders in existence at the date of demutualisation. much of that capital support is held in the non-Participating Fund and, as such, the capital held in that fund is subject to the constraints noted below.
Overseas life business includes several life companies outside the Uk, including germany and ireland. in all cases the available capital resources are subject to local regulatory requirements, and transfer to other parts of the group is subject to additional complexity surrounding the transfer of capital from one country to another.
the model includes a matrix of the correlations between each of the underlying modelled asset types. the correlations used are consistent with long-term historical returns. the most significant non-economic assumptions included in the model are management actions (in respect of investment policy and bonus rates), guaranteed annuity option take-up rates and assumptions regarding persistency (both of which are based on recent actual experience and include an adjustment to reflect future uncertainties where the exercise of options by policyholders might increase liabilities), and assumptions regarding mortality (which are based on recent actual experience and industry tables).
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.
the group also has in place an assurance process to support its prudential regulatory reporting and monitoring activities designed to identify and review tax exposures on a regular basis. there is ongoing monitoring to assess the impact of emerging regulation and legislation on financial, prudential regulatory and tax reporting.
this statement of the group’s overall appetite for credit risk is reviewed and approved annually. With the support of the group Risk Committee, the group Chief executive allocates this risk appetite across the group.
in terms of loans and advances, credit risk arises both from amounts lent and commitments to extend credit to a customer as required. these commitments can take the form of loans and overdrafts, or credit instruments such as guarantees and standby, documentary and commercial letters of credit. With respect to commitments to extend credit, the group is potentially also exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most retail term commitments to extend credit can be cancelled without notice and the creditworthiness of customers is monitored frequently. in addition, most wholesale commitments to extend credit are contingent upon customers maintaining specific credit standards, which are monitored regularly.
For regulatory capital purposes the group’s rating systems assess probability of default and if permitted, exposure at default and loss given default, in order to derive an expected loss. if not permitted, regulatory prescribed exposure at default and loss given default values are used in order to derive an expected loss. in contrast, impairment allowances are recognised for financial reporting purposes only for loss events that have occurred at the balance sheet date, based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements differs from the amount determined from the expected loss models that are used for internal operational management and banking regulation purposes.
the above assessment, monitoring and control processes continue throughout the period the case is managed within the BsU.
Collateral the principal collateral types for loans and advances 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
the group maintains guidelines on the acceptability of specific classes of collateral.
Other credit risk transfers the group also undertakes asset sales, securitisations and credit derivative based transactions as a means of mitigating or reducing credit risk, taking into account the nature of assets and the prevailing market conditions.
Monitoring in conjunction with Risk, businesses identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed in terms of credit risk exposure. this entails the production and analysis of regular portfolio monitoring reports for review by senior management. Risk Division in turn produces an aggregated review of credit risk throughout the group, including reports on significant credit exposures, which are presented to the group Risk Committee and the Board Risk Committee.
Assistance is provided through trained colleagues in branches and dedicated telephony units, and via online guidance material. For those customers requiring more intensive help, assistance is provided through dedicated support units where tailored repayment programmes can be agreed. Customers are actively supported and referred to free money advice agencies when they have multiple credit facilities, including those at other lenders, that require restructuring. Within the Collections and Recoveries functions, the sharing of best practice and alignment of policies across the group has helped to drive more effective customer outcomes and achieve operational efficiencies.
Customer support provides intensive care and support to Commercial sme customers in difficulty. Whilst the customer relationship remains with the Relationship manager, they are supported by a Customer support manager to oversee and manage identified risk.
the main types of forbearance for wholesale customers in financial distress could include: – Covenant resets and breach of covenant waivers
multiple types of forbearance concessions often occur on the more distressed cases managed in BsU or Customer support. each case is treated depending on its own specific circumstances and our strategy and offer of forbearance is largely dependent on the individual situation. early identification, control and monitoring are key.
Concessions granted under forbearance would be classified in our Credit Risk Classification system according to the severity of the customer’s financial distress. management information is produced which gives a high level view of asset quality, with clearly defined parameters and features. trends and warning signs are reported and advised to senior management promptly, which include issues not yet identified by rating models. A robust review and challenge process is applied to each credit if asset quality declines, initiating an appropriate and measured response. As the financial stress of a credit deteriorates the Credit Risk Classification helps to determine the route and management of the customer. Repeat
transgressions of forbearance would be reflected in the strategy to manage the customer and an objective reassessment of any impairment will be undertaken on a regular basis. this is subject to independent review and sanctioning.
– the group’s non-core impairment charge in 2011 was also materially lower compared to 2010. this is primarily driven by lower impairment from the non-core corporate real estate and real estate related lending portfolios in Wholesale, together with the non-core irish portfolio.
– the group continues to proactively manage down sovereign as well as banking and trading book exposure to selected eurozone countries.
Overview – the Retail impairment charge was £1,970 million in 2011, a decrease of £777 million, or 28 per cent, from 2010.
– the decrease in the Retail impairment charge was driven by the unsecured portfolio as a result of the improved quality of new business and effective portfolio management. the Retail impairment charge for loans and advances to customers, as an annualised percentage of average loans and advances to customers, decreased to 0.54 per cent in 2011 from 0.74 per cent in 2010.
the Retail division’s loans and advances to customers are analysed in the following table: table 1.27: Impairments on Retail loans and advances (audited)
Secured impairment charge the impairment charge increased by £171 million, to £463 million in 2011 compared to the previous year. the impairment charge as a percentage of average loans and advances to customers, increased to 0.14 per cent from 0.09 per cent in 2010. the provision coverage increased reflecting a less certain outlook on house prices and appropriate provisioning against existing credit risks which have longer emergence periods due to current low interest rate environment, partially offset by underlying improvements in the quality of the portfolio.
Secured impaired loans impaired loans decreased by £0.3 billion to £6.5 billion at 31 December 2011 and, as a percentage of closing loans and advances to customers, reduced to 1.9 per cent from 2.0 per cent at 31 December 2010.
table 1.31: Mortgages greater than three months in arrears (excluding repossessions) (unaudited)
table 1.32: Actual and average LTVs across the Retail mortgage portfolios (audited)
Unsecured in 2011 the impairment charge on loans and advances to customers reduced by £948 million to £1,507 million compared with 2010. this reflected continued improving business quality and portfolio trends resulting from the group’s conservative risk appetite, with a focus on lending to existing customers.
– A robust credit risk management and control framework is in place across the combined portfolios and a prudent risk appetite approach continues to be embedded across the division. significant resources continue to be deployed into the Business support Units, which focuses on key and vulnerable obligors and asset classes.
impaired loans and provisions – non-core non-core impaired loans reduced by £3,376 million to £23,852 million compared with 31 December 2010. the reduction reflects the strategy to de-risk the group through deleverage of the non-core portfolio, with significant disposals achieved mostly in the real estate and leveraged finance portfolios. these portfolios continue to be the main contributor of newly impaired assets, but lower coverage ratios are required now than seen in previous years. this is driving the reduced coverage ratio. non-core impairment provisions as a percentage of non-core impaired loans reduced to 38.6 per cent from 46.1 per cent at 31 December 2010. As a percentage of closing non-core advances, impaired loans increased to 42.1 per cent from 38.8 per cent at 31 December 2010. this increase is a result of impaired loans reducing more slowly than total non-core advances.
As at 31 December 2011 treasury and trading 2,220 – – – –
Of which Wholesale markets is £12,135 million, Wholesale equity £195 million, treasury and trading £150 million, Asset Finance £7 million, and Corporate £2 million.
Of which Wholesale markets is £7,798 million, Wholesale equity £1,797 million, treasury and trading £2,922 million and Corporate £37 million.
Corporate the £68,772 million of loans and advances to customers in the Corporate portfolio is structured across a number of different portfolios and sectors as detailed below: UK Corporate – major Corporate balance sheets remained relatively stable during the first half of 2011 with corporates continuing to reduce debt and build up liquidity reserves. mergers and acquisition activity has been minimal and focus has been on refinancing existing facilities. in line with economic commentary, some consumer related sectors in the Uk are now feeling the impact of a slowdown in spending. Commodity price volatility is a potential concern in terms of required funding and customer profitability.
Mid-Markets Corporate – Customers in this sector are predominantly Uk-focused and mainly dependent on the performance of the domestic economy. some of our clients’ trading has, unsurprisingly, proved challenging in a number of sectors in 2011, particularly those reliant on consumer discretionary expenditure. Retail, hotels, leisure and construction have all been vulnerable to the wider economic environment during the year, with the majority of impairments in the year arising in these sectors. the impact of public sector austerity measures has also been evident in some sectors, with these also contributing to the impairment charge in the year. the mid-markets segment of the Uk Corporate market appears to have limited direct vulnerability to events in the weaker eurozone countries, however the segment is more directly exposed to any flow-through effect on the Uk economy resulting from weaker export demand.
Corporate Real Estate – Outside of London and the south east, activity in the Corporate Real estate market remains weak, in part due to declining values and the focus on only prime properties and prime tenants. Rental growth, where achievable by our clients in the regions, is slow. market demand for debt is low, especially for new facilities from our core customers, despite messaging that we are open for business which meets our lending criteria. Customers are adopting a ‘wait and see’ approach, de-gearing where they can, and conserving cash. in addition, with a significant proportion of our assets supporting property investments, tenant default is an area of continuing vulnerability especially where the lending is underpinned by secondary or tertiary assets. With a continuing high level of loan maturities due over the next few years, refinancing risk remains a market-wide issue. However, our core portfolios are characterised by strong management teams with proven asset management skills and/or acceptable lease maturity profiles with borrowers meeting their interest cover and debt service obligations. new propositions are structured and priced in line with our prudent risk appetite.
Despite capital values improving 17.8 per cent from their trough in 2009, we have seen the improving trend in the real estate market in 2011 weaken for all but prime or central London based real estate.
Over the past two years, a total of over £8.5 billion of asset sales through managed disposals has occurred which has resulted in an overall £14.6 billion reduction of gross loan exposure in the Uk. We have also concluded one of the largest loan portfolio sales in the market in December which provided a significant £923 million deleveraging of our real estate exposure.
Asset Finance there has been a marginal improvement in credit quality in relation to the retail portfolios during the year. impairments remain lower than anticipated, particularly in the Personal Financial services portfolios and the retail motor loans portfolio. Asset quality also continues to improve in response to the continuing strategy to enhance the quality of new business written (especially motor Finance) and following the closure of Personal Financial services to new business. the credit quality profile across the non-retail portfolios also remains relatively stable, and underlying impairment levels have reduced against 2010 levels, reflecting a material slow down in new default cases.
Overview – impairment losses for 2011 decreased significantly to £303 million, from £382 million for 2010.
Loans and advances to customers 26,539 impairment provisions include collective unimpaired provisions.
Overview – in Wealth and international, impairment charges totalled £4,610 million, a decrease of 23 per cent from £5,988 million in 2010. the reduction predominantly reflects lower impairment charges in our irish portfolio where the rate of impaired loan migration has slowed.
– Further provisioning has been necessary in the group’s Australasian portfolio primarily reflecting geographical real estate concentrations where market conditions and asset valuations have remained weak in 2011.
– the majority of Wealth and international’s assets are non-core and in run-off.
international: Total impairment charge 4,610 5,988 23 table 1.42: Wealth and International impairment charge – core (unaudited)
£2.6 billion of wholesale lending within the Commercial Real estate and corporate portfolios relates to sterling loans secured on Uk property.
Within the Commercial Real estate portfolio, over 90 per cent of the portfolio is now impaired. the average impairment coverage ratio has increased in the year to 63 per cent (52 per cent 31 December 2010) reflecting the continued deteriorating irish economic conditions and irish commercial property market.
impairment charges decreased by £328 million to £1,034 million compared to 2010. impairment charges as an annualised percentage of average loans and advances to customers decreased to 8.2 per cent from 9.3 per cent in 2010.
Other international impairments mainly relate to the corporate business in Dubai and the Dutch mortgage business. total impaired loans decreased by £91 million, or 26 per cent to £259 million compared with £350 million at 31 December 2010 and as a percentage of closing loans and advances decreased to 3.8 per cent from 4.6 per cent at 31 December 2010. impaired loans predominantly relate to a limited number of corporate exposures and the reduction in impaired balances primarily reflects write offs in respect of two loans that have been exited in the period. impairment charges decreased by £21 million to £85 million compared to 2010. impairment charges as an annualised percentage of average loans and advances to customers decreased to 1.2 per cent from 1.3 per cent in 2010.
net trading assets relate to exposures within the credit trading market-making business. there has been a large reduction in trading assets in the year in line with the overall group balance sheet.
exposures to other financial institutions primarily relate to balances held within insurance companies and funds. no impairments are held against these exposures.
spain – the corporate exposure in spain is mainly local lending (90 per cent of the total spanish exposures) comprising corporate loans and project finance facilities (81 per cent) and commercial real estate portfolio (19 per cent).
Amortised cost: Off balance sheet exposures – – – – 92 92
Assets held by the insurance Business are held outside the with profits and unit linked funds. Approximately £127 million of these exposures relate to direct investments where the issuer is resident in spain, italy or ireland and the credit rating is consistent with the tight credit criteria defined under the appropriate investment mandate. the remaining exposures relate to interests in two funds administered by sWiP (the global Liquidity Fund and the short term Fund) where in line with the investment mandates, cash is invested in the money markets. For these funds, which are domiciled in ireland, the exposure is analysed on a look through basis to the underlying assets held and the insurance business’s pro rata share of these assets rather than treating all the holding in the fund as exposure to ireland. Within the above exposures there are no sovereign exposures.
table 1.55: Other European Exposures (unaudited) the group has the following exposures to sovereigns, banks, asset backed securities and other financial institutions in the following european countries: Austria Belgium France Germany Luxembourg Netherlands Switzerland £m £m £m £m £m £m £m
environmental risk management We work in line with group policies and procedures to manage the environmental impact of our lending activities. Our group wide Credit Risk Policy requires all business loans to be assessed for material environmental risks as part of the credit sanctioning process.
We have a robust, group wide approach to assess, monitor and report equator Principle transactions. We also provide ongoing training for lending officers; information on the equator Principles is included in all our training and we offer more in-depth training for staff working in project finance.
Category C – Projects with minimal or no social or environmental impacts.
in 2011, we participated in the equator Principles strategic Review process which examined the scope of application, transparency, implementation and governance of the Principles. it is the first step of a longer term process to determine the future direction of the Principles and ensure they are fit for purpose. We believe that the collective effort of financial institutions will ensure that the equator Principles continue to play an industry leading role and will continue to engage in the update process.
A B C Total table 1.58: Status of Projects by Industry (unaudited)
market risk in the group’s retail portfolios and in the group’s capital and funding activities arises from the different repricing characteristics of the group’s non-trading assets and liabilities. interest rate risk arises predominantly from the mismatch between interest rate insensitive liabilities and interest rate sensitive assets.
Foreign currency risk also arises from the group’s investment in its overseas operations.
– surplus assets are held primarily in four portfolios: (a) in the long-term funds of scottish Widows plc and its subsidiaries; (b) in the shareholder funds of life assurance companies; (c) investment portfolios within the general insurance business and (d) within the main fund of Heidelberger Lebensversicherung Ag.
trading assets and other treasury positions Based on the 95 per cent confidence level, assuming positions are held overnight and using observation periods of the preceding 300 business days, the VaR for the years ended 31 December 2011 and 2010 based on the group’s global trading positions as detailed in table 1.61.
Close Average Maximum Minimum Close £m £m £m £m £m equity risk – – – – –
Base case market value is calculated on the basis of the Lloyds Banking group current balance sheet with re-pricing dates adjusted according to behavioural assumptions. the above sensitivities show how this projected market value would change in response to an immediate parallel shift to all relevant interest rates – market and administered.
this is a risk based disclosure and the amounts shown would be amortised in the income statement over the duration of the portfolio.
– investment strategy for surplus assets held in excess of liabilities takes account of the legal, regulatory and internal business requirements for capital to be held to support the business now and in the future.
the group also agrees strategies for the overall mix of pension assets with the pension scheme trustees.
there are a number of categories of operational risk: Regulatory Regulatory risk is the risk of reductions in earnings and/or value, through financial or reputational loss, from failing to comply with the applicable laws, regulations or codes.
supplier management the risk of reductions in earnings and/or value through financial or reputational loss from services with outsourced partners or third-party suppliers.
Customer processes the risk of reductions in earnings and/or value, through financial or reputational loss, resulting from poor externally facing business processes. Customer process risk includes customer transaction and processing errors due to incorrect capturing of customer information and/or system failure.
Change the risk of reductions in earnings and/or value, through financial or reputational loss, from change initiatives failing to deliver to requirements, budget or timescale, failing to implement change effectively or failing to realise desired benefits.
Organisational infrastructure the risk of reductions in earnings and/or value, through financial or reputational loss, resulting from poor internally facing business processes at group, divisional or business unit level. Organisational infrastructure in this context embraces the structures, systems and processes that provide direction, control and accountability for the enterprise.
Measurement Operational risks are measured against a set of risk appetite metrics, with appropriate limits and triggers, which have been approved by the Board.
Monitoring Business unit risk exposure is reported to Risk Division where it is aggregated at group level and a report prepared. the report is discussed at the monthly group Operational Risk Committee and Compliance & Conduct Committee. these committees can escalate matters to the Chief Risk Officer, or higher committees, if appropriate.
the insurance programme is monitored and reviewed regularly, with recommendations being made to the group’s senior management annually prior to each renewal. insurers are monitored on an ongoing basis, to ensure counterparty risk is minimised. A process is in place to manage any insurer rating changes or insolvencies.
Risk appetite insurance risk appetite is defined with regard to the quantum and composition of insurance risk that exists currently in the group and the group’s risk preferences. it takes account of the need for each entity in the group to maintain solvency in excess of the minimum level required by the entity’s jurisdictional legal or regulatory requirements.
the group’s appetite for solvency and earnings in insurance entities is reviewed and approved annually by the Board.
Mitigation A key element of the control framework is the consideration of insurance risk by a suitable combination of high level Committees/Boards. For the life assurance businesses the key control bodies are the Board of scottish Widows group Limited (sWg) with the more significant risks also being subject to review by the group executive Committee and/or Board. For the general insurance businesses the key control bodies which are subsidiary entity Boards of sWg are the Boards of the legal entities including Lloyds tsB general insurance Limited, st. Andrew’s insurance plc and the irish subsidiaries. All group staff pension schemes issues are covered by the group Asset and Liability Committee and the group Risk Committee.
the most significant insurance risks in the life assurance companies are longevity risk and persistency risk. the merits of longevity risk transfer and hedging solutions are regularly reviewed.
– external factors: economic, technological, political, social and ethical, environmental, regulatory, market expectations, reputation and competitive behaviour.
Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the financial approval process. significant mergers and acquisitions by business units require specific approval by the Board. in addition to the standard due diligence conducted during a merger or acquisition, Risk Division conducts, where appropriate, an independent risk assessment of the target company.
Joined the Board in October 2005 and was appointed Deputy Chairman in May 2009. Appointed Chairman of Scottish Widows in 2007. Held a number of senior and general management appointments in Allied Dunbar, Eagle Star and Threadneedle Asset Management before the merger of Zurich Group and British American Tobacco’s financial services businesses in 1998. Subsequently served as Chairman and Chief Executive Officer of Zurich Financial Services United Kingdom, Ireland, Southern Africa and Asia Pacific, until his retirement in 2004. Chairman of the Government’s Review of Skills (published in December 2006). Chairman of BUPA and Intrinsic Financial Services. Chairman of Medical Aid Films and Chancellor of Carnegie College. Former Chairman of the National Employment Panel and of the ABI. Aged 64.
Joined the Board in September 2008. Chairman of Deloitte UK from 1995 to 2007 and a member of the Board from 1991 to 2007. Joined the firm in 1973 and was a partner from 1982 until he retired in 2008. A member of the Board of directors of Deloitte Touche Tohmatsu from 1999 to 2007. Chairman of Great Portland Estates. A Governor of Berkhamsted School. Aged 61.
Joined the Board in March 2009. President and Chief Executive of the Securities Industry and Financial Markets Association. Held a number of senior appointments in JP Morgan Chase from 1993 to 2008 including Vice Chairman, financial institutions and governments, from 2005. A Director of the US-Japan Foundation, Great-West Life Insurance Co., Power Corporation of Canada and Power Financial Corporation and a member of the Global Markets Advisory Committee for the National Intelligence Council. A former Director in the Office of Thrift Supervision, US Department of the Treasury and Koram Bank and the International Foundation of Election Systems. Aged 66.
Glen R Moreno Senior Independent Director (Until 17 May 2012) (Deputy Chairman from 1 March 2012 to 17 May 2012)
Financial risk management objectives and internal control policies in relation to the use of financial instruments 99 to 170 (and in note 56 on pages 320 to 339)
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: liquidity and funding on pages 106 and 107 and financial soundness on pages 112 to 128 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 177 to 186 and, together with this directors’ report of which it forms part, fulfils the requirements of the Corporate Governance Statement for the purpose of the FSA’s Disclosure and Transparency Rules.
Employees Lloyds Banking Group is committed to providing employment practices and policies which recognise the diversity of our workforce and ensure equality for employees regardless of sex, race, disability, age, sexual orientation or religious belief.
Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in Lloyds Banking Group.
Policy and practice on payment of creditors The Company has signed up to the ‘Prompt Payment Code’ published by the Department for Business Innovation and Skills, regarding the making of payments to suppliers. Information about the ‘Prompt Payment Code’ may be obtained by visiting www.promptpaymentcode.org.uk.
Statement of directors’ responsibilities The directors are responsible for preparing the annual report, the directors’ remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group and parent Company financial statements in accordance with IFRSs as adopted by the European Union. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; and state whether applicable IFRSs as adopted by the European Union have been followed.
The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
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 management report contained in the business review includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face.
Leadership and accountability The Chairman has overall responsibility for the leadership of the Board. His role is separate from that of the Group Chief Executive who manages and leads the business. A sound relationship between the Chairman and Group Chief Executive, based on a mutual understanding of their respective roles, is essential to maintaining an open culture with the Board. Establishing an effective working relationship with António Horta-Osório, the new Group Chief Executive, has therefore been a key area of focus for the Chairman this year.
Key activities of the Nomination & Governance Committee are summarised in the Committees’ section on page 184. Given the importance of its role in ensuring effective governance of the Board, a more detailed review of the work of the Nomination & Governance Committee is provided here.
On 1 February 2012 the Group announced the appointment of Sara Weller as a Non-Executive Director and as a member of each of the Remuneration and Risk Committees. Sara’s career, characterised by strong advocacy of customers and of the application of new technology, directly supports the Group’s strategy. In addition, her background in a range of retail and associated sectors enhances the diversity of perspectives on the Board.
On 27 February 2012, the Group announced that with effect from 17 May 2012, the Board had appointed David Roberts as Deputy Chairman and Tony Watson as Senior Independent Director.
On 2 November 2011, the Board announced that, acting on medical advice, António Horta-Osório would be taking a short leave of absence due to exhaustion. He returned to work in full health on 9 January 2012. In the period from 2 November 2011 to 8 January 2012, Tim Tookey was appointed Interim Group Chief Executive in addition to his role as Group Finance Director. Interim governance arrangements were implemented to ensure that: – all authorities vested in the Group Chief Executive were automatically deemed to vest in the Interim Group Chief Executive for as long as that office was required; and
Throughout António’s absence, the Board kept its contingency arrangements under review. On 21 November 2011, the Board announced that one of its Non-Executive Directors, David Roberts, would be appointed to the role of Interim Group Chief Executive in the event that António HortaOsório was unable to return by the end of the year. In the event, this contingency was not required.
Since the year end the following announcements have been made: – On 1 February 2012, the Group announced that Sir Julian Horn-Smith would retire from the Board at the annual general meeting and would not stand for re-election as a Director; – On 6 February 2012, the Group announced that Truett Tate would resign from the Board with immediate effect; and
– On 27 February 2012, the Group announced that Glen Moreno would retire from the Board at the annual general meeting and would not stand for re-election as a Director.
Directors’ induction All Directors are expected to make an informed contribution based on an understanding of the Group’s business model and the key challenges facing the Group and its businesses. To ensure that they can contribute from an early stage, all Directors undergo an extensive three stage induction on appointment comprising: – a corporate induction, which provides an overview of the Group, its strategy, operational structures and main business activities; – governance and directors’ responsibilities, which explains the role and statutory duties of a Non-Executive Director including the roles and responsibilities owed by banks and other financial services firms to the FSA and other regulatory bodies; and
Remuneration The Remuneration Committee, chaired by Anthony Watson, is responsible for overseeing the Group’s remuneration arrangements and compliance with the FSA’s Remuneration Code. The Remuneration Committee’s terms of reference are available on the website at www.lloydsbankinggroup.com.
Scottish Widows Investment Partnership, one of Europe’s largest asset managers and a Group company, complies with the principles of the Financial Reporting Council’s Stewardship Code, as published in July 2010. Details of Scottish Widows Investment Partnership’s approach to stewardship and corporate governance can be found on its website, www.swip.com.
Regular Ad hoc Total Regular Ad hoc Regular Regular Regular Ad hoc
Director until 18 May 2011. Archie Kane attended all Board meetings prior to the announcement that he would be retiring from the Board.
Director until 18 May 2011. Helen Weir attended all Board meetings prior to the announcement that she would be stepping down from the Board.
– reviewed and recommended to the Board the Group annual and interim reports and accounts; – reviewed significant accounting matters as discussed with the auditors; – reviewed the Group’s position as a going concern; – reviewed the appointment of the auditors and approved their remuneration; – attended one full day and five half day ‘deep dive’ sessions with each of the divisions; – reviewed litigation and regulatory risks; – received reports from the Divisional Financial Control Committees and the Group Risk Committee; – received reports from the internal audit department on internal controls, including SOX reports; – reviewed the Group’s key finance programmes; – reviewed details of the Group’s whistle blowing procedures and incidents; and
– reviewed the adequacy of the Group’s succession plan, including contingency arrangements during the Group Chief Executive’s leave of absence.
Information about the Remuneration Committee’s activities during 2011 is given in the Directors’ remuneration report on pages 187 to 204.
Risk To review and report its conclusions to the Board on: (a) the Group’s risk appetite; and
Members Sir Winfried Bischoff Anita Frew Sir Julian Horn-Smith (until 17 May 2012) Tim Ryan Martin Scicluna Sara Weller (from 1 February 2012)
The Group and other major UK banks have voluntarily adopted the Disclosure Code in their 2011 financial statements. The Group’s 2011 financial statements have therefore been prepared in compliance with the Disclosure Code’s principles.
Each year the Audit Committee establishes a limit on the fees that can be paid to the external auditors in respect of non-audit services and monitors quarterly the amounts paid to the auditors in this regard. The external auditors also report regularly to the Audit Committee on the actions that they have taken to comply with professional and regulatory requirements and current best practice in order to maintain their independence. This includes the rotation of key members of the audit team. Total auditor remuneration analysed between audit and other services is shown in note 11 to the financial statements on page 243.
Statement by the Chairman of the Remuneration Committee As Chairman of the Group’s Remuneration Committee, I am pleased to introduce the Directors’ Remuneration Report for 2011 and highlight some of the key decisions and activities of the Remuneration Committee this year.
Based on role and market competitiveness10% Paid into pension or taken as cash
The split in the components in the above chart are for Executive Directors. Comparable numbers for the Group Chief Executive are: long-term incentive 24 per cent, short-term incentive 32 per cent, salary 29 per cent and pension and benefits 15 per cent.
Furthermore, the Committee has proactively taken the decision to adjust bonus awards made to Executive Directors and certain senior executives in respect of the performance year 2010 to reflect the PPI provision made in this year’s accounts. While there is no suggestion of wrongdoing or culpability, the Committee has made the adjustment, known as malus, to reflect the provision that was made after the annual results and bonus awards were finalised in February 2011.
Despite the uncertain economic outlook, the market for talent is no less competitive and the Group must compete for this in the UK and overseas markets with varying levels of regulation and scrutiny. Nonetheless, the Committee recognises the impact that recruitment premiums can have on the total pay bill, and therefore we have continued to recruit successfully paying at appropriate market levels. Where possible, we also seek to link recruitment awards to Company performance (as demonstrated by the share price targets applied to the Group Chief Executive's pension opportunity) and through a recently introduced process to carefully monitor new joiners’ performance as they become established in their roles.
The Committee’s terms of reference are available from the Company Secretary and are displayed on the Group’s website, www.lloydsbankinggroup. com. These terms were last updated in March 2011 to ensure continued compliance with the FSA Code.
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 has voluntarily signed up to the Remuneration Consultants’ Code of Conduct and are judged by the Committee to be independent. Deloitte’s fees for 2011 amounted to £350,000.
During 2011, Deloitte provided information on behalf of the Committee for the testing of TSR performance conditions for the Group’s long-term incentive plans (calculated by reference to both dividends and growth in share price).
Our incentive measures are not just financial. Our Balanced Scorecards, which all of our senior executives have as part of their objectives for the year, include objectives that cover effective risk management, lending to Corporates including SMEs and retail customers, performance against targets that measure how satisfied our customers are and the extent to which our employees feel engaged with and committed to working for Lloyds Banking Group.
Pension Defined contribution pension provision for new entrants Enable executives to build long-term retirement savings Retention
Annual incentive 200 per cent of salary maximum (225 per cent for the Group Chief Executive)
Absolute TSR Growth in share price including dividends Threshold: 12% per annum Maximum: 30% per annum
Annual incentive plan The annual incentive scheme for Executive Directors is designed to reflect specific goals linked to the performance of the business.
These targets apply differently for the Executive Directors, reflecting differing strategic priorities. The non-financial measures include key performance indicators relating to risk management, SME lending, process efficiency, service quality and employee engagement.
In the case of the Nomination & Governance Committee, membership currently comprises the Deputy Chairman, Senior Independent Director and chairs of the Board Committees (the fees for which include membership of the Nomination & Governance Committee) and one other Independent Non-Executive Director. Only this director receives an attendance fee, which is £5,000.
ALL PLANS (10% OF THE ISSUED ORDINARY SHARE CAPITAL OF THE GROUP IN ANY CONSECUTIVE 10 YEARS)
External appointments The Group recognises that Executive Directors may be invited to become Non-Executive Directors of other companies and that these appointments may broaden their knowledge and experience, to the benefit of the Group. Fees are normally retained by the individual directors as the post entails personal responsibility.
Performance graph The graph below illustrates the performance of the Group measured by TSR against a ‘broad equity market index’ over the past five years. The Group has been a constituent of the FTSE 100 index throughout this five year period.
António Horta-Osório (from 17 January 2011) 1,019 514 172 50 10 1,765
The non-cash benefits column includes amounts relating to the use of a company car, use of a company driver and private medical insurance. It also includes a spouse's travel allowance for Truett Tate, Sir Winfried Bischoff and Eric Daniels and the value of any matching shares which are received under the terms of Sharematch, through which employees have the opportunity to purchase shares up to a maximum of £125 per month and receive matching shares on a one for one basis up to a maximum value of £30 per month, rounded down to the nearest whole share.
Bonuses awarded in respect of 2011 performance will be subject to 100 per cent deferral into shares until at least 2014.
Directors’ pensions (audited) The Executive Directors are members of one of the pension schemes provided by Lloyds Banking Group with benefits either on a defined benefit or defined contribution basis. There are now no Directors accruing further pensionable service on a defined benefit basis.
The beneficial interests for Mr T J W Tookey relate to changes to ‘partnership’ and ‘matching’ shares acquired under the Lloyds Banking Group Share Incentive Plan between 31 December 2011 and 24 February 2012, the date of his resignation from the Board of Lloyds Banking Group.
A summary of the awards vested, purchases and sales made by directors is shown on page 204.
Former directors who served during 2011 a Sharesave. Mrs Weir’s Sharesave award lapsed during 2011 at her request.
j 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.
k Award exercised on 30 March 2011 at a price of 58.75p.
l The extent that the award will become exercisable is subject to performance. The performance condition has not changed since the award was made.
None of the other directors at 31 December 2011 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
March 2011 (Applicable only to award made to António Horta-Osório on 30 March 2011 over 1,707,763 shares)
Lloyds TSB executive retention plan 2006 On 26 March 2008 (prior to his appointment as an Executive Director), Tim Tookey was granted an award under the Lloyds TSB Executive Retention Plan 2006. The award is satisfied in cash only and, subject to continued employment, gave him the right to receive an amount equal to the total value of 218,400 Lloyds Banking Group shares on the dates of vesting. On 26 March 2011 50 per cent of his award vested at 60.48p. Mr Tookey had agreed to reinvest the cash proceeds and he acquired 52,896 Lloyds Banking Group shares. Following notification of Mr Tookey’s resignation from Lloyds Banking Group, the remaining 50 per cent of the award lapsed.
c The Absolute Share Price element of this award has an end of performance period date of 26 March 2013.
Deloitte provided information for the testing of the TSR performance conditions for the Company’s long-term incentive plan. EPS is the Group’s normalised earnings per share as shown in the Group’s report and accounts, subject to such adjustments as the Remuneration Committee regards as necessary for consistency.
Monthly 4,420 2011 Share Incentive Plan purchase and matching shares 30/3/11 22,750 2008 Long Term Incentive Plan release 30/3/11 52,896 2006 Executive Retention Plan release 8/6/11 57,810 2008 Deferred Bonus Plan release 8/6/11 -57,810 Sale
Notes to the parent company financial statements 348 1. Accounting policies 2. Deferred tax asset 3. Amounts due from subsidiaries 4. Share capital and share premium 5. Other reserves 6. Retained profits 7. Subordinated liabilities 8. Debt securities in issue 9. Related party transactions 10. Financial instruments 11. Approval of the financial statements and other information financial statements
Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement on page 176, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
– have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
– the information given in the Corporate Governance Report set out on pages 177 to 186 with respect to internal control and risk management systems and about share capital structures is consistent with the financial statements.
– a corporate governance statement has not been prepared by the parent company.
Share of results of joint ventures and associates 13 31 (88) (752)
Other comprehensive income for the year, net of tax 2,242 278 1,739
Currency translation differences, net of tax – (84) – (84) – (84)
Value of employee services: Share option schemes – – 154 154 – 154
Effects of exchange rate changes on cash and cash equivalents 6 479 (210)
Cash and cash equivalents at end of year 57(D) 85,889 62,300 65,690
Note 2: Accounting policies The Group’s accounting policies are set out below.
(A) Consolidation The assets, liabilities and results of Group undertakings (including special purpose entities) are included in the financial statements on the basis of accounts made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures.
(E) Financial assets and liabilities On initial recognition, financial assets are classified into fair value through profit or loss, available‑for‑sale financial assets, held‑to‑maturity investments or loans and receivables. Financial liabilities are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss on initial recognition which are held at fair value. Purchases and sales of securities and other financial assets and trading liabilities are recognised on trade date, being the date that the Group is committed to purchase or sell an asset.
(F) Derivative financial instruments and hedge accounting All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and using valuation techniques, including discounted cash flow and option pricing models, as appropriate. Derivatives are carried in the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 3 (Critical accounting estimates and judgements: Fair value of financial instruments) and note 55(3) (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.
(G) Offset Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of set‑off and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. In certain situations, even though master netting agreements exist, the lack of management intention to settle on a net basis results in the financial assets and liabilities being reported gross on the balance sheet.
Individual assessment In respect of individually significant financial assets in the Group’s wholesale lending portfolios, assets are reviewed on a regular basis and those showing potential or actual vulnerability are placed on a watch list where greater monitoring is undertaken and any adverse or potentially adverse impact on ability to repay is used in assessing whether an asset should be transferred to a dedicated Business Support Unit. Specific examples of trigger events that would lead to the initial recognition of impairment allowances against lending to corporate borrowers (or the recognition of additional impairment allowances) include (i) trading losses, loss of business or major customer of a borrower, (ii) material breaches of the terms and conditions of a loan facility, including non‑payment of interest or principal, or a fall in the value of security such that it is no longer considered
adequate, (iii) disappearance of an active market because of financial difficulties, or (iv) restructuring a facility with preferential terms to aid recovery of the lending (such as a debt for equity swap).
Collective assessment Impairment is assessed on a collective basis for (1) homogenous groups of loans that are not considered individually impaired, and (2) to cover losses which have been incurred but have not yet been identified on loans subject to individual impairment.
Incurred but not yet identified impairment The collective provision also includes provision for inherent losses, that is losses that have been incurred but have not been separately identified at the balance sheet date. The loans that are not currently recognised as impaired are grouped into homogenous portfolios by key risk drivers. Risk drivers for secured retail lending include the current indexed loan‑to‑value, previous mortgage arrears, internal cross‑product delinquency data and external credit bureau data; for unsecured retail lending they include whether the account is up‑to‑date and, if not, the number of payments that have been missed; and for wholesale lending they include factors such as observed default rates and loss given default. An assessment is made of the likelihood of each account becoming recognised as impaired within the loss emergence period, with the economic loss that each portfolio is likely to generate were it to become impaired. The loss emergence period is determined by local management for each portfolio and the Group has a range of loss emergence periods which are dependent upon the characteristics of the portfolios. Loss emergence periods are reviewed regularly and updated when appropriate. In general the periods used across the Group vary between one month and twelve months based on historical experience. Unsecured portfolios tend to have shorter loss emergence periods than secured portfolios.
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. There are a number of different types of loan renegotiation, including the capitalisation of arrears, payment holidays, interest rate adjustments and extensions of the due date of payment (see note 56 Credit risk sections F and G). 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.
Full actuarial valuations of the Group’s principal defined benefit schemes are carried out every three years with interim reviews in the intervening years; these valuations are updated to 31 December each year by qualified independent actuaries, or in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows. For the purposes of these annual updates scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method adjusted for unrecognised actuarial gains and losses. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high‑quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability.
The Group’s income statement charge includes the current service cost of providing pension benefits, the expected return on the schemes’ assets, net of expected administration costs, and the interest cost on the schemes’ liabilities. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are not recognised unless the cumulative unrecognised gain or loss at the end of the previous reporting period exceeds the greater of 10 per cent of the scheme assets or liabilities (‘the corridor approach’). In these circumstances the excess is charged or credited to the income statement over the employees’ expected average remaining working lives. Past service costs are charged immediately to the income statement, unless the charges are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortised on a straight‑line basis over the vesting period.
(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.
Non‑participating investment contracts – these contracts do not transfer significant insurance risk or contain a discretionary participation feature.
Liabilities of the Group’s with‑profit funds, including guarantees and options embedded within products written by these funds, are stated at their realistic values in accordance with the Financial Services Authority’s realistic capital regime, except that projected transfers out of the funds into other Group funds are recorded in the unallocated surplus (see below). Further details on the realistic capital regime are given on page 123. Changes in the value of these liabilities are recognised through insurance claims.
Liabilities for unit‑linked insurance contracts and participating investment contracts are stated at the bid value of units plus an additional allowance where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Changes in the value of the liability are recognised in the income statement through insurance claims. Benefit claims in excess of the account balances incurred in the period are also charged through insurance claims. Revenue consists of fees deducted for mortality, policy administration and surrender charges.
(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 are 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.
Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net investment hedges. Non‑monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non‑monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on available‑for‑sale non‑monetary financial assets, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge.
(1) Share issue costs Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net of tax, from the proceeds.
(3) Treasury shares Where the Company or any member of the Group purchases the Company’s share capital, the consideration paid is deducted from shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity.
Allowance for impairment losses on loans and receivables At 31 December 2011 gross loans and receivables totalled £629,736 million (2010: £667,555 million) against which impairment allowances of £19,022 million (2010: £18,951 million) had been made (see note 25). The Group’s accounting policy for losses arising on financial assets classified as loans and receivables is described in note 2(H)(1); this note also provides an overview of the methodologies applied.
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 2011, the impairment charge would increase by approximately £285 million in respect of UK mortgages and a further £75 million in respect of Irish mortgages.
Unwind of HBOS acquisition fair value adjustments The acquisition of HBOS in January 2009 required the Group to recognise the identifiable assets acquired and liabilities assumed at their acquisition‑date fair values. The overall effect was to increase the book value of HBOS’s net assets by £1,241 million primarily reflecting a reduction in the value of HBOS’s debt securities and subordinated liabilities of £15,439 million, partially offset by a reduction in the carrying value of HBOS’s loans and receivables of £14,880 million, including loans and advances to customers of £13,512 million (see note 14).
In the periods subsequent to the acquisition, all of the fair value adjustments unwind. The fair value adjustments made to debt securities and subordinated liabilities unwind over the expected remaining life of the related securities except in the event that the liability is extinguished, in which case the remaining unamortised fair value adjustment is recognised in the income statement immediately. The timing of the unwind of the fair value adjustment relating to loans and receivables requires significant management judgement. This includes the identification of losses which were expected at the date of acquisition and assessing whether anticipated losses will still be incurred. In 2011, there was a benefit of £1,943 million (2010: £3,118 million) to the income statement either from the reversal of a fair value adjustment being credited to the income statement or through a lower impairment charge as a result of the initial HBOS acquisition fair value adjustments.
The Group’s total deferred tax asset includes £5,862 million (2010: £6,572 million) in respect of trading losses carried forward. The tax losses have arisen in individual legal entities and will be used as future taxable profits arise in those legal entities, though substantially all of the unused tax losses for which a deferred tax asset has been recognised arise in Bank of Scotland plc and Lloyds TSB Bank plc. The deferred tax asset will be utilised over different time periods in each of the entities in which the tax losses arise. The Group’s assessment is that these tax losses will be fully used within eight years.
The effect on the net accounting surplus or deficit and on the pension charge in the Group’s income statement of changes to the principal actuarial assumptions is set out in note 43.
The Group will re‑evaluate the assumptions underlying its analysis at each reporting date as more information becomes available. As noted above, there is inherent uncertainty in making estimates; actual results in future periods may differ from the amount provided.
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 fair value of the swap 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 records volatility in the central group segment where it is managed.
Investments in joint ventures and associates at end of year 147 80 – 104 – 3 334
Effects of liability management, volatile items and asset sales – (295) – 37 15 150 (93)
Costs: Impairment of tangible fixed assets – (150) – – – – (150)
Effects of liability management, volatile items and asset sales – (77) – – – 1,529 1,452
Total income, net of insurance claims 9,347 7,157 1,573 2,268 2,248 1,371 23,964
Investments in joint ventures and associates at end of year 30 189 – 123 (14) 151 479
Comprises the pension curtailment gain (£910 million, see note 43), integration costs (£1,653 million), amortisation of purchased intangibles (£629 million) and the effects of liability management, volatile items and asset sales (£93 million).
Comprises the gain on acquisition (£11,173 million), the Government Asset Protection Scheme fee (£2,500 million), integration costs (£1,096 million), amortisation of purchased intangibles (£753 million), goodwill impairment (£240 million) and the effects of liability management, volatile items and asset sales (£1,452 million).
There was no individual non‑UK country contributing more than 5 per cent of total income or total assets.
Liabilities under sale and repurchase agreements 1.39 1.18 1.95 (335) (744) (1,655)
During 2011 the Group has revised its treatment of offset accounts; average balances for 2009 and 2010 have been restated accordingly.
Securities and other gains comprise net gains arising on assets and liabilities held at fair value through profit or loss and for trading as follows: £m £m £m
Net income arising on assets held at fair value through profit or loss: Debt securities, loans and advances 5,293 2,292 4,297
Total net income arising on assets held at fair value through profit or loss 376 12,625 15,772
Claims and surrenders: Change in insurance and participating investment contract liabilities (note 38(1)): Change in gross liabilities 1,383 (4,622) (5,922)
Life insurance and participating investment contracts gross claims can also be analysed as follows: Total life insurance gross claims (8,622) (9,397) (8,010)
Pensions and other post‑retirement benefit schemes (note 43): Curtailment gain2 – (910) –
Financial services compensation scheme management expenses levy (note 54) 179 46 73
Depreciation and amortisation: Depreciation of tangible fixed assets (note 32) 1,434 1,635 1,716
Performance‑based compensation expense comprises: Awards made in respect of the year ended 31 December 363 505 480
Performance‑based compensation expense deferred until later years comprises: Awards made in respect of the year ended 31 December 43 39 60
Fees payable for other services: Audit of the Company’s subsidiaries pursuant to legislation 16.9 17.9 18.8
The following types of services are included in the categories listed above: Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory filings. Other services supplied pursuant to legislation relate primarily to the costs associated with the Sarbanes‑Oxley Act audit requirements together with the cost of the audit of the Group’s Form 20‑F filing.
Reviews of the financial position of corporate and other borrowers 11.0 17.2 19.3
Acquisition due diligence and other work performed in respect of potential venture capital investments 1.0 1.2 1.4
Total impairment losses on loans and receivables (note 25) 8,069 10,771 16,028
Note 13: Investments in joint ventures and associates The Group’s share of results of and investments in joint ventures and associates comprises: Joint ventures Associates Total 2011 £m 2010 £m 2009 £m 2011 £m 2010 £m 2009 £m 2011 £m 2010 £m 2009 £m
Movement in investments over the year: Adjustment on acquisition – – 956 – – 219 – – 1,175
Share of post‑tax results 31 (39) (549) – (49) (203) 31 (88) (752)
The calculation of consideration was based on the closing price of Lloyds TSB ordinary shares of 98.4p on 16 January 2009; 12,852 million HBOS shares were exchanged for Lloyds Banking Group shares at a ratio of 0.605 shares per HBOS share.
In the first half of 2010, as a result of a deteriorating market, the Group impaired the oil drilling rigs under construction held by the business by £150 million to reflect their reduced value in use. This impairment was recognised in the Wholesale segment.
UK corporation tax: Current tax on profit for the year (93) (146) (227)
The credit (charge) for tax on the profit for 2011 is based on a UK corporation tax rate of 26.5 per cent (2010 and 2009: 28.0 per cent).
Factors affecting credit (charge): UK corporation tax rate change (404) (137) –
(Loss) profit attributable to equity shareholders – basic and diluted (2,787) (320) 2,827 million million million
Weighted average number of ordinary shares in issue – basic 68,470 67,117 37,674
Weighted average number of ordinary shares in issue – diluted 68,470 67,117 37,929
The weighted‑average number of anti‑dilutive share options and awards excluded from the calculation of diluted earnings per share was 619 million at 31 December 2011 (2010: 92 million; 2009: 393 million).
Asset‑backed securities: Corporate and other debt securities 1,576 20,282 21,858 4,919 16,190 21,109
The maximum exposure to credit risk at 31 December 2011 of the loans and advances to banks and customers designated at fair value through profit or loss was £124 million (2010: £325 million); the Group does not hold any credit derivatives or other instruments in mitigation of this risk. There was no significant movement in the fair value of these loans attributable to changes in credit risk which is determined by reference to the publicly available credit ratings of the instruments involved.
For amounts included above which are subject to repurchase agreements see note 56.
– Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre‑set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place. The Group also uses credit default swaps to securitise, in combination with external funding, £3,436 million (2010: £4,149 million) of corporate and commercial banking loans.
Derivatives designated as net investment hedges: Cross currency swaps 49 – 1
The principal amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure. Further details are provided in note 56 Credit risk.
The embedded equity conversion feature of £1,172 million (31 December 2010: £1,177 million) reflects the value of the equity conversion feature contained in the Enhanced Capital Notes issued by the Group in 2009; the loss of £5 million arising from the change in fair value over 2011 (2010: loss of £620 million; 2009: loss of £427 million) is included within net gains on financial instruments held for trading within net trading income (note 7).
Hedged forecast cash flows expected to occur: Hedged forecast cash flows affect profit or loss: There were no transactions for which cash flow hedge accounting had to be ceased in 2011 or 2010 as a result of the highly probable cash flows no longer being expected to occur.
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £508 million (2010: £4,185 million). Collateral is held with a fair value of £511 million (2010: £3,909 million), all of which the Group is able to repledge.
Total loans and advances to customers before allowance for impairment losses 584,370 610,970
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £16,835 million (2010: £3,096 million). Collateral is held with a fair value of £16,936 million (2010: £2,987 million), all of which the Group is able to repledge. Included within this are collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £34 million (2010: £42 million).
Gross investment in finance leases, receivable: Not later than 1 year 1,168 1,358
Later than 1 year and not later than 5 years 2,754 2,522
Equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and other large individual value items. During 2011 and 2010 no contingent rentals in respect of finance leases were recognised in the income statement. The allowance for uncollectable finance lease receivables included in the allowance for impairment losses is £92 million (2010: £287 million).
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 special purpose entities (SPEs). As the SPEs 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 SPEs 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 SPEs described below, the Group sponsors three conduit programmes, Argento, Cancara and Grampian.
Of the total allowance in respect of loans and advances to customers, £3,832 million (2010: £6,076 million) was assessed on a collective basis.
Bank and building society certificates of deposit – 366 366 – 407 407
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.
Capital expenditure contracted for at the balance sheet date but not recognised in the financial statements 33 86
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 17.75 per cent (gross of tax). 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.
This breakdown shows the movement in the value of in‑force business only, and does not represent the full contribution that each item in the breakdown contributes to profit before tax. This will also contain changes in the other assets and liabilities, including the effects of changes in assumptions used to value the liabilities, of the relevant businesses. Economic variance is the element of earnings which is generated from changes to economic experience in the period and to economic assumptions over time. The presentation of economic variance includes the impact of financial market conditions being different at the end of the reporting period from those included in assumptions used to calculate new and existing business returns.
A market consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. The risk‑free rate used for the value of financial options and guarantees is defined as the spot yield derived from the relevant government bond yield curve in line with FSA realistic balance sheet assumptions. Further information on options and guarantees can be found on page 127.
The table below shows the resulting range of yields and other key assumptions at 31 December for UK business: Risk‑free rate (value of in‑force non‑annuity business) 2.48 3.99
Lapse (persistency) and paid-up rates Lapse and paid up rates assumptions are reviewed each year. The most recent experience is considered along with the results of previous analyses and management’s views on future experience. In determining this best estimate view, a number of factors are considered, including the credibility of the results (which will be affected by the volume of data available), any exceptional events that have occurred during the period under consideration and any known or expected trends in underlying data.
Balance sheet amount at 31 December 2010 550 1,977 182 479 308 3,496
The customer‑related intangibles include customer lists and the benefits of customer relationships that generate recurring income. The purchased credit card relationships represent the benefit of recurring income generated from the portfolio of credit cards purchased and the core deposit intangible is the benefit derived from a large stable deposit base that has low interest rates.
Premises Equipment Operating lease assets Total tangible fixed assets £m £m £m £m
Accumulated depreciation and impairment: Exchange and other adjustments 2 (3) 30 29
At 31 December the future minimum rentals receivable under non‑cancellable operating leases were as follows: £m £m
Note 36: Trading and other financial liabilities at fair value through profit or loss £m £m
Liabilities designated at fair value through profit or loss represent debt securities in issue which either contain substantive embedded derivatives which would otherwise need to be recognised and measured at fair value separately from the related debt securities, or which are accounted for at fair value to significantly reduce an accounting mismatch.
The most recent experience is considered along with the results of previous analyses and management’s views on future experience, taking into consideration potential changes in future experience that may result from guarantees and options becoming more valuable under adverse market conditions, in order to determine a ‘best estimate’ view of what persistency will be. In determining this best estimate view a number of factors are considered, including the credibility of the results (which will be affected by the volume of data available), any exceptional events that have occurred during the period under consideration, any known or expected trends in underlying data and relevant published market data.
German insurance business is written through the Group’s subsidiary Heidelberger Leben and comprises policies similar to the UK definitions above, except that there is participation by the policyholder in the investment, insurance and expense profits of Heidelberger Leben. A minimum level of policyholder participation is prescribed by German law. The following types of life insurance contracts are written: – Traditional and unit linked endowment or pensions business; and
(iii) Assumptions Generally, assumptions used to value non‑profit fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This margin for adverse deviation is based on management’s judgement and reflects management’s views on the inherent level of uncertainty. The key assumptions used in the measurement of non‑profit fund liabilities are: Interest rates The rates used are derived in accordance with the guidelines set by local regulatory bodies. These limit the rates of interest that can be used by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.
Key changes in assumptions A detailed review of the Group’s assumptions in 2011 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£5 million increase)
Note 38: Liabilities arising from insurance contracts and participating investment contracts (continued)
The movements in non‑life insurance contract liabilities and reinsurance assets over the year have been as follows: Gross Reinsurance Net £m £m £m
Non-life insurance claims development table The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The top half of the table below illustrates how the Group’s estimate of total claims outstanding for each accident year shown has changed at successive year ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the balance sheet. The accident year basis is considered the most appropriate for the business written by the Group.
Estimate of ultimate claims costs: At end of accident year 211 208 317 205 639 609 446 2,635
Current estimate of claims relating to general insurance business acquired in 2009 273 316 388 256 – – – 1,233
Current estimate of cumulative claims 474 519 673 443 494 517 446 3,566
This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall corporate bond spreads are unchanged and hence market values are unchanged. Government bond yields and the non‑annuity risk‑free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk‑free rate.
The Group’s obligations in respect of its defined benefit schemes are funded. During 2009, the Group made one‑off contributions to the Lloyds TSB Group Pension Scheme No 1 and Lloyds TSB Group 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 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 2011, the limited liability partnerships held assets of approximately £4.7 billion; cash payments of £215 million were made to the pension schemes during the year (2010: £215 million). The limited liability partnerships are fully consolidated in the Group’s balance sheet (see note 23).
At 31 December 2011, the assumed discount rate is 5.00 per cent (31 December 2010: 5.50 per cent).
The expected return on scheme assets in 2012 will be calculated using the following assumptions: %
Experience gains (losses) on scheme assets 926 1,624 886 (3,520) 139 314
The expense recognised in the income statement for the year ended 31 December comprises: £m £m £m
Note 44: Deferred tax The movement in the net deferred tax balance is as follows: £m £m
Income statement credit (charge) (note 16): Due to change in UK corporation tax rate (404) (137)
Deferred tax liabilities Scottish Widows plc has a taxable difference of £152 million (2010: £152 million) in respect of its holding of a life insurance subsidiary. No deferred tax liability is required to be recognised in respect of this taxable temporary difference as Scottish Widows plc does not intend to dispose of this subsidiary company.
On 8 October 2010, the British Bankers’ Association (BBA), the principal trade association for the UK banking and financial services sector, filed an application for permission to seek judicial review against the FSA and the FOS. The BBA sought an order quashing the FSA Policy Statement and an order quashing the decision of the FOS to determine PPI sales in accordance with the guidance published on its website in November 2008.
The Judicial Review hearing was held in late January 2011 and on 20 April 2011 judgment was handed down by the High Court dismissing the BBA’s application. On 9 May 2011, the BBA confirmed that the banks and the BBA did not intend to appeal the judgment.
After publication of the judgment, the Group entered into discussions with the FSA with a view to seeking clarity around the detailed implementation of the Policy Statement. As a result, and given the initial analysis that the Group has conducted of compliance with applicable sales standards, which is continuing, the Group has concluded that there are certain circumstances where customer contact and/or redress will be appropriate. Accordingly the Group has made a provision in its financial statements for the year ended 31 December 2011 of £3,200 million in respect of the anticipated costs of such contact and/or redress, including administration expenses. During 2011, the Group made redress payments of £1,045 million to customers. The Group anticipates that all claims will have been settled by 2015. However, there are still a number of uncertainties as to the eventual costs from any such contact and/or redress given the inherent difficulties of assessing the impact of the detailed implementation of the Policy Statement for all PPI complaints, uncertainties around the ultimate emergence period for complaints, the availability of supporting evidence and the activities of claims management companies, all of which will significantly affect complaints volumes, uphold rates and redress costs.
These securities will, in the event of the winding‑up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination of specific subordinated liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preference shares and preferred securities are generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the dated subordinated liabilities. The subordination of the dated Enhanced Capital Notes ranks equally with that of the dated subordinated liabilities. The Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during the year (2010: none). No repayment or purchase by the issuer of the subordinated liabilities may be made prior to their stated maturity without the consent of the Financial Services Authority.
6.5% Undated Subordinated Step‑up Notes callable 2019 (£270 million) a – 1 7.375% Undated Subordinated Guaranteed Bonds (£200 million) (Clerical Medical Finance plc) 36 35 5.625% Cumulative Callable Fixed to Floating Rate Undated Subordinated Notes callable 2019 (£500 million) a – –
6% Undated Subordinated Step‑up Guaranteed Bonds callable 2032 (£500 million) a 11 10
e Following an exchange, on 1 December 2011, certain holders elected to exchange some or all of the notes they held for dated subordinated liabilities issued by Lloyds TSB Bank plc.
Enhanced Capital Notes 7.625% Enhanced Capital Notes due 2019 (£151 million) 142 142 8.125% Enhanced Capital Notes due 2019 (£4 million) 4 4 9% Enhanced Capital Notes due 2019 (£97 million) 98 103 7.8673% Enhanced Capital Notes due 2019 (£331 million) 330 336 15% Enhanced Capital Notes due 2019 (£775 million) 1,120 1,145 15% Enhanced Capital Notes due 2019 (e487 million) 601 635 8.875% Enhanced Capital Notes due 2020 (e125 million) 107 116 9.334% Enhanced Capital Notes due 2020 (£208 million) 232 233 7.375% Enhanced Capital Notes due 2020 (e95 million) 79 82
Number of shares Number of shares Number of shares £m £m £m
Information regarding significant direct or indirect holdings of shares in the Company can be found on page 175.
Subject to any rights or restrictions attached to any shares, on a show of hands at a general meeting of the Company every holder of shares present in person or by proxy and entitled to vote has one vote and on a poll every member present and entitled to vote has one vote for every share held.
Further details regarding voting at the annual general meeting can be found in the notes to the notice of the annual general meeting.
The revaluation reserve in respect of available‑for‑sale financial assets represents the cumulative after tax unrealised change in the fair value of financial assets classified as available‑for‑sale since initial recognition, or in the case of available‑for‑sale financial assets obtained on acquisitions of businesses, since the date of acquisition.
Charge to the income statement The charge to the income statement is set out below: £m £m £m
Executive and SAYE plans: Options granted in the year 13 59 13
To meet the performance conditions, the Group’s ranking against the comparator group was required to be at least ninth. The full grant of options only became exercisable if the Group was ranked first. A performance multiplier (of between nil and 100 per cent) was applied below this level to calculate the number of shares in respect of which options granted to Executive Directors would become exercisable, and were calculated on a sliding scale. If Lloyds Banking Group plc was ranked below median the options would not be exercisable.
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 weighted average share price at the time that the options were exercised during 2011 was £0.54 (2010: £0.69). The weighted average remaining contractual life of options outstanding at the end of the year was 1.7 years (2010: 2.7 years).
No SAYE options were granted in 2011. The weighted average fair value of SAYE options granted during 2010 was £0.33. The values for the SAYE options have been determined using a standard Black‑Scholes model.
For the HBOS sharesave plan, no options were exercised during 2011 or 2010. The options outstanding at 31 December 2011 had an exercise price of £1.8066 (2010: £1.8066) and a weighted average remaining contractual life of 2.0 years (2010: 2.9 years).
The weighted average fair value of options granted in the year was £0.46 (2010: £0.63). The weighted average share price at the time that the options were exercised during 2011 was £0.51 (2010: £0.63). The weighted average remaining contractual life of options outstanding at the end of the year was 2.1 years (2010: 2.4 years).
HBOS share option plans The table below details the outstanding options for the HBOS Share Option Plan and the St James’s Place Share Option Plan. The final award under the HBOS Share Option Plan was made in 2004. Under this plan, options over shares, at market value with a face value equal to 20 per cent of salary, were granted to employees with the exception of certain senior executives. A separate option plan exists for some partners of St James’s Place, which granted options in respect of Lloyds Banking Group plc shares. The final award under the St James’s Place Share Option Plan was made in 2009. Movements in the number of share options outstanding under these schemes are set out below: Number of options
Lloyds Banking Group long-term incentive plan The Long‑Term Incentive Plan (LTIP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary.
In 2008, awards were made of 375 per cent of base salary to the Group Chief Executive and two of the Executive Directors for retention purposes, and in light of data reviewed by the Remuneration Committee which showed total remuneration to be behind median both for the FTSE 20, and the other major UK banks.
An additional discretionary award was made in April, May and September 2009. The performance conditions for those awards are as follows: (i) Synergy Savings: The release of 50 per cent of the shares will be dependent on the achievement of target run‑rate synergy savings in 2009 and 2010 as well as the achievement of sustainable synergy savings of at least £1.5 billion by the end of 2011. The award will be broken down into three equally weighted annual tranches. Performance will be assessed at the end of each year against annual performance targets based on a trajectory to meet the 2011 target. The extent to which targets have been achieved will determine the proportion of shares to be banked each year. Any release of shares will be subject to the Remuneration Committee judging the overall success of the delivery of the integration programme.
(ii) EP: relevant to 50 per cent of the award. Performance will be measured based on the compound annual growth rate of adjusted EP over the three financial years starting on 1 January 2010 relative to an adjusted 2009 EP base.
For awards made to Executive Directors, a third performance condition was set, relating to Absolute Share Price, relevant to 28 per cent of the award. Performance will be measured based on the Absolute Share Price on 26 March 2013, being the third anniversary of the award date. If the share price at the end of the performance period is 75 pence or less, none of this element of the award will vest. If the share price is 114 pence or higher, 100 per cent of this element will vest. Vesting between threshold and maximum will be on a straight line basis, provided that shares comprised in the Absolute Share Price element may only be released if both the EPS and EP performance measures have been satisfied at the threshold level or above. The EPS and EP performance conditions will each relate to 36 per cent of the total award.
The performance conditions for awards made in March and September 2011 are as follows: (i) EPS: relevant to 50 per cent of the award. The performance target is based on 2013 adjusted EPS outcome.
(ii) EP: relevant to 50 per cent of the award. The performance target is based on 2013 adjusted EP outcome.
The fair value calculations at 31 December 2011 for grants made in the year, using Black‑Scholes models and Monte Carlo simulation, are based on the following assumptions: Executive Share Plan 2003 LTIP Share Buy
Matching shares The Group undertakes to match shares purchased by employees up to the value of £30 per month; these matching shares are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non‑market based condition: if an employee leaves within this three year period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. Similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.
2010 includes adjustments, using a standard HMRC formula, to negate the dilutionary impact of the Group’s 2009 capital raising activities.
Subsidiaries Details of the principal subsidiaries are given in note 9 to the parent company financial statements. In accordance with IAS 27, transactions and balances with subsidiaries have been eliminated on consolidation.
Special liquidity scheme and credit guarantee scheme The Bank of England’s UK Special Liquidity Scheme was launched in April 2008 to allow financial institutions to swap temporarily illiquid assets for treasury bills, with fees charged based on the spread between 3‑month LIBOR and the 3‑month gilt repo rate. The scheme will operate for up to three years after the end of the drawdown period (30 January 2009) at the Bank of England’s discretion. At 31 December 2011, the Group did not utilise the Special Liquidity Scheme.
HM Treasury launched the Credit Guarantee Scheme in October 2008 as part of a range of measures announced by the UK Government intended to ease the turbulence in the UK banking system. It charged a commercial fee for the guarantee of new short and medium term debt issuance. The fee payable to HM Treasury on guaranteed issues was based on a per annum rate of 50 basis points plus the median five‑year credit default swap spread. The drawdown window for the Credit Guarantee Scheme closed for new issuance at the end of February 2010. At 31 December 2011, the Group had £23.5 billion of debt in issue under the Credit Guarantee Scheme (31 December 2010: £45.4 billion). During the year, fees of £28 million paid to HM Treasury in respect of guaranteed funding were included in the Group’s income statement.
Business Growth Fund In May 2011 the Group agreed, together with The Royal Bank of Scotland plc (and three other non‑related parties), to subscribe for shares in the Business Growth Fund plc which is the company created to fulfil the role of the Business Growth Fund as set out in the British Bankers’ Association’s Business Taskforce Report of October 2010. During 2011, the Group has incurred sunk costs of £4 million which have been written off.
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 £21 million (2010: £31 million), of which £10 million was outstanding at 31 December 2011 (2010: £8 million). At 31 December 2011, Sainsbury’s Bank plc also had balances with the Group that were included in loans and advances to banks of £1,173 million (2010: £1,277 million), deposits by banks of £780 million (2010: £1,358 million) and trading liabilities of £340 million (2010: nil).
Interchange fees The European Commission has adopted a formal decision finding that an infringement of European Commission competition laws has arisen from arrangements whereby MasterCard set a uniform Multilateral Interchange Fee (MIF) in respect of cross‑border transactions in relation to the use of a MasterCard or Maestro branded payment card. The European Commission has required that the MIF be reduced to zero for relevant cross‑border transactions within the European Economic Area. This decision has been appealed to the General Court of the European Union (the General Court). Lloyds TSB Bank plc and Bank of Scotland plc (along with certain other MasterCard issuers) have successfully applied to intervene in the appeal in support of MasterCard’s position that the arrangements for the charging of the MIF are compatible with European Union competition laws. The UK Government has also intervened in the General Court appeal supporting the European Commission position. An oral hearing took place on 8 July 2011 but judgment is not expected for six to twelve months. MasterCard has reached an understanding with the European Commission on a new methodology for calculating intra‑European Economic Area MIF on an interim basis pending the outcome of the appeal.
Whilst it is expected that the substantial majority of the principal 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, to the extent that there remains a shortfall, the FSCS will raise compensation levies on all deposit‑taking participants. The amount of any future compensation levies also depends on a number of factors including the level of protected deposits and the population of deposit‑taking participants and will be determined at a later date. As such, although the Group’s share of such compensation levies could be significant, the Group has not recognised a provision in respect of them in these financial statements.