If the absolute improvement in adjusted ePS reached 158 per cent, 25 per cent of this element of the award, being the threshold, would vest. If absolute improvement in adjusted ePS reached 180 per cent, 100 per cent of this element would vest.
If the adjusted eP reaches £567 million, 25 per cent of this element of the award, being the threshold, will vest. If the adjusted eP reaches £1,534 million, 100 per cent of this element will vest.
At the end of the performance period for the ePS and eP measures, the targets had not been fully met and therefore these awards will vest in 2014 at a rate of 68 per cent (54 per cent for members of the Group executive Committee, including executive Directors).
If the adjusted eP reaches £225 million, 25 per cent of this element of the award, being the threshold, will vest.
If the adjusted eP reaches £2,330 million, 100 per cent of this element will vest.
(iv) Non-core assets at the end of 2014: relevant to 10 per cent of the award. Performance will be measured by reference to balance sheet non-core assets at 31 December 2014.
If a run rate of net Simplification benefits of £1.5 billion is achieved, 25 per cent of this element of the award, being the threshold, will vest.
If the adjusted eP reaches £1,881 million, 100 per cent of this element will vest.
(iv) Non-core assets excluding UK Retail at the end of 2015: relevant to 10 per cent of the award. Performance will be measured by reference to balance sheet non-core assets at 31 December 2015.
If the movement in SMe lending equates to this market movement, 25 per cent of this element of the award, being the threshold, will vest.
If the movement in SMe lending is 4 per cent or more greater than the market movement, 100 per cent of this element will vest.
In addition, short-term funding must remain within that stated in the Group’s Risk Appetite throughout the three year period to 31 December 2015.
Scottish Widows Investment Partnership Long-Term Incentive Plan The Scottish Widows Investment Partnership (SWIP) long-Term Incentive Plan applicable to senior executives and employees of SWIP, which had previously been a cash-only scheme, was amended in May 2012 for awards granted on or after that date. The amendment introduced the receipt of shares in lloyds Banking Group plc as an element of the total award. For awards made in June 2012, the other element continued to be cash-based, with the split between cash-based and share-based determined by the Remuneration Committee. Awards made in June 2013 were fully share-based. The amendment is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of SWIP over a three year period. Awards are made within limits set by the rules of the Plan, with the maximum limits for combined cash and shares awarded equating to 3.5 times annual salary. In exceptional circumstances this may increase to four times annual salary.
The relevant period commenced on 1 January 2012 and ends on 31 December 2014.
The relevant period commenced on 1 January 2013 and ends on 31 December 2015.
The fair value of the share awards granted in 2013 was £0.43. The fair values of share awards granted have been determined using a standard Black-Scholes model.
Key management personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the Group’s key management personnel are the members of the lloyds Banking Group plc Group executive Committee together with its non-executive Directors.
Granted, including certain adjustments1 (includes entitlements of appointed key management personnel) 5 8 20 exercised/lapsed (includes entitlements of former key management personnel) (16) (5) (4)
Granted, including certain adjustments1 (includes entitlements of appointed key management personnel) 42 45 35 exercised/lapsed (includes entitlements of former key management personnel) (7) (33) (33)
National Loan Guarantee Scheme The Group has participated in the uK Government’s national loan Guarantee Scheme, which was launched on 20 March 2012. Through the scheme, the Group is providing eligible uK businesses with discounted funding, subject to continuation of the scheme and its financial benefits, and based on the Group’s existing lending criteria. eligible businesses who have taken up the funding benefit from a 1 per cent discount on their funding rate for a certain period of time.
Subsequently, the Group entered into a commercially negotiated agreement with lloyds Bank Pension Trust (no.1) limited to jointly sell a portfolio of uS Residential Mortgage-Backed Securities with a book value of £3.5 billion. As a result of selling the portfolio together a price premium was achieved compared to selling the notes separately. under the terms of the agreement the Group and lloyds Bank Pension Trust (no.1) limited agreed to share any price premium achieved above an agreed minimum threshold amount. The joint sale resulted in the Group realising a total pre-tax gain of approximately £538 million, of which £99 million related to the premium sharing agreement.
In parallel: – the european Commission is also considering further action, and has proposed legislation to regulate interchange fees, following its 2012 Green Paper (Towards an integrated european market for cards, internet and mobile payments) consultation; – the european Commission has consulted on commitments proposed by VISA to settle an investigation into whether arrangements adopted by VISA for the levying of the MIF in respect of cross-border credit card payment transactions also infringe european union competition laws. VISA has proposed inter alia to reduce the level of interchange fees on cross-border credit card transactions to the interim level (30 basis points) also agreed by MasterCard. VISA has previously reached an agreement (which expires in 2014) with the european Commission to reduce the level of interchange fees for cross-border debit card transactions to the interim levels agreed by MasterCard; – the Office of Fair Trading (OFT) has placed on hold its examination of whether the levels of interchange fees paid by retailers in respect of MasterCard and VISA credit cards, debit cards and charge cards in the uK infringe competition law. The OFT has placed the investigation on hold pending the outcome of the MasterCard appeal to the Court of Justice of the european union; and
– the uK Government held a consultation in 2013, Opening up uK Payments. The consultation included a proposal to legislate to introduce a new economic regulator with responsibility for payment systems, including three and four party card schemes, and a role in setting or approving interchange fees.
Investigations and litigation relating to interbank offered rates, and other reference rates A number of government agencies in the uK, uS and elsewhere, including the uK Financial Conduct Authority, the Serious Fraud Office, the uS Commodity Futures Trading Commission, the uS Securities and exchange Commission, the uS Department of Justice and a number of State Attorneys General, as well as the european and Swiss Competition Commissions, are conducting investigations into submissions made by panel members to the bodies that set various interbank offered rates including the BBA london Interbank Offered Rates (lIBOR) and the european Banking Federation’s euribor, along with other reference rates. Certain Group companies were (at the relevant times) and remain members of various panels whose members make submissions to these bodies including the BBA lIBOR panels. no Group company is or was a member of the euribor panel. Certain Group companies have received subpoenas and requests for information from certain government agencies and the Group is co-operating with their investigations.
Derivative financial instruments 6,787 26,338 – – – – – 33,125 loans and receivables: loans and advances to banks – – – – 25,365 – – 25,365 loans and advances to customers – – – – 495,281 – – 495,281
Items in course of transmission to banks – – – – – 996 – 996
During the year ended 31 December 2013, the carrying value of assets reclassified to loans and receivables decreased by £173 million due to sales and maturities of £173 million.
From available-for-sale financial assets to loans and receivables: Gains (losses) on disposal (5) – – – – –
Trading and other financial assets at fair value through profit or loss loans and advances to customers – 21,110 – 21,110 loans and advances to banks – 8,333 – 8,333
Equity investments unlisted equity and fund investments are valued using different techniques in accordance with the Group’s valuation policy and International Private equity and Venture Capital Guidelines.
Liabilities held at fair value through profit or loss These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose inputs are based on observable market data.
Total level 3 financial liabilities carried at fair value £m £m £m £m exchange and other adjustments – 10 – 10
(losses) gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 31 December 2013 (10) 20 (3) 7
Available-for-sale financial assets Asset-backed securities lead manager or broker quote/ consensus pricing equity and venture capital investments
Trading and other financial liabilities at fair value through profit or loss 39 1 (1) – – –
(i) Uncollateralised derivative valuation adjustments, excluding monoline counterparties The following table summarises the movement on this valuation adjustment account during 2013 and 2012: 2013 £m 2012 £m
The risk exposures that are used for the CVA and DVA calculations are strongly influenced by interest rates. Due to the nature of the Group’s business the CVA/DVA exposures tend to be on average the same way around such that the valuation adjustments fall when interest rates rise. A one per cent rise in interest rates would lead to a £187 million fall in the overall valuation adjustment to £177 million. The CVA model used by the Group does not assume any correlation between the level of interest rates and default rates.
Available-for-sale financial assets 6,093 3,726 loans and receivables: loans and advances to customers 19,074 3,936
In respect of fund investments shown above, an amount of £nil million was recognised during the year (2012: £3 million; £55 million cumulatively since derecognition) within net trading income.
Trading and after financial liabilities at fair value through profit or loss² 14,723 – 14,723
Trading and after financial liabilities at fair value through profit or loss² 8,839 – 8,839
The amounts set off in the balance sheet as shown above represent derivatives and repurchase agreements with central clearing houses which meet the criteria for offsetting under IAS 32.
At 31 December 2013 the aggregate notional principal of interest rate swaps designated as fair value hedges was £154,657 million (2012: £135,516 million) with a net fair value asset of £3,663 million (2012: asset of £4,246 million) (note 18). The losses on the hedging instruments were £933 million (2012: gains of £572 million). The gains on the hedged items attributable to the hedged risk were £872 million (2012: losses of £560 million).
The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. These risks reside in the authorised trading centres who are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and liquidity risk function in london. Associated VaR and the closing, average, maximum and minimum are disclosed on page 166.
The Group’s main overseas operations are in the Americas, Asia, Australasia and europe. Details of the Group’s structural foreign currency exposures, after net investment hedges, are as follows: Functional currency of Group operations £m £m euro: Gross exposure 567 919 net investment hedge (464) (842)
2013 £m 20121 £m loans and receivables: loans and advances to banks, net2 25,365 32,757 loans and advances to customers, net2 495,281 517,225
loans and advances Loans and advances designated at fair value through profit or loss £m
At 31 December 20121 neither past due nor impaired 32,726 319,613 41,223 117,613 478,449 14,551
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 2(H). All impaired loans which exceed certain thresholds, principally within the Group’s Commercial Banking division, are individually assessed for impairment by reviewing expected future cash flows including those that could arise from the realisation of security. Included in loans and receivables are advances which are individually determined to be impaired with a gross amount before impairment allowances of £22,390 million (31 December 2012: £34,533 million).
The table below sets out the reconciliation of the allowance for impairment losses of £11,966 million (2012: £15,250 million) shown in note 24 to the allowance for impairment losses on an underlying basis of £15,707 million (2012: £21,772 million) shown above: 2013 £m
The definitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the same, reflecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided. Wholesale lending has been classified using internal probability of default rating models mapped so that they are comparable to external credit ratings. Good quality lending comprises the lower assessed default probabilities, with other classifications reflecting progressively higher default risk. Classifications of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating models. Further information about the Group’s internal probabilities of default rating models can be found on page 134.
Debt securities: Bank and building society certificates of deposit – 163 45 – – – 208
Debt securities: Bank and building society certificates of deposit – 75 71 42 – – 188
Trading assets: Other public sector securities 14 – – – – – 14
Other assets held at fair value through profit or loss: Other public sector securities 1,962 195 26 – – – 2,183
Asset-backed securities: Corporate and other debt securities 385 148 330 278 30 1 1,172
Derivative assets An analysis of derivative assets is given in note 18. The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the Group’s maximum credit risk relating to derivative assets of £13,646 million (2012: £18,399 million), cash collateral of £3,188 million (2012: £5,429 million) was held and a further £2,372 million was due from OeCD banks (2012: £1,387 million).
An analysis by loan-to-value ratio of the Group’s residential mortgage lending is provided below. The value of collateral used in determining the loan-to-value ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowance for indexation error and dilapidations.
The majority of non-mortgage retail lending is unsecured. At 31 December 2013, impaired non-mortgage lending amounted to £1,696 million, net of an impairment allowance of £1,044 million (2012: £2,328 million, net of an impairment allowance of £1,326 million). The fair value of the collateral held in respect of this lending was £144 million (2012: £48 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation and the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
At 31 December 2013, impaired secured wholesale lending amounted to £9,845 million, net of an impairment allowance of £11,063 million (2012: £17,257 million, net of an impairment allowance of £15,193 million). The fair value of the collateral held in respect of impaired secured wholesale lending was £6,915 million (2012: £9,414 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured wholesale lending, the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
unimpaired secured wholesale lending is predominantly managed on a cash flow basis. On occasion, it may include an assessment of underlying collateral, although, for impaired lending, this will not always involve assessing it on a fair value basis. no aggregated collateral information for the entire unimpaired secured wholesale lending portfolio is provided to key management personnel.
Repo and stock lending transactions The Group pledges assets primarily for repurchase agreements and securities lending transactions which are generally conducted under terms that are usual and customary for standard securitised borrowing contracts.
Secured retail lending – UK At 31 December 2013, retail secured loans and advances currently or recently subject to forbearance were 2.0 per cent (31 December 2012: 2.9 per cent) of total retail secured loans and advances. The Group no longer offers temporary interest only as a forbearance treatment to secured lending customers in financial difficulty, which is the primary driver of the reduction in forbearance balances in 2013. Further analysis of the forborne loan balances is set out below: Total loans and advances which are currently or recently forborne
Permanent treatments within last 12 months 90 208 38 110 13.2 11.8 £170 million of current and recent forborne loans and advances were not impaired at 31 December 2013 (31 December 2012: £233 million).
Includes repayment plans and short-term payment holidays granted in collections where the customer is currently benefitting from the treatment and where the concession has ended within the previous six months.
Asset Finance retail lending Asset Finance operates a number of retail portfolios including Black Horse Motor Finance as well as a number of portfolios closed to new business and currently in run-off. The reduction in the level of forborne loans in 2013 was driven by the continuing run-off and sale of non-core portfolios. The table below includes both the open and closed retail portfolios in the Asset Finance business. For temporary forbearance arrangements, it includes accounts that are currently on a forbearance treatment. For permanent forbearance treatments, it includes capitalisation of arrears which commenced during the previous 12 months.
All non-retail loans and advances in Commercial Banking are reviewed at least annually by the independent Risk Division. As part of our long established Credit Risk Classification system, every loan and advance in the good book is categorised as either ‘good’ or ‘watchlist’.
Any concession granted to a customer is reviewed and must be approved by the independent Risk Division. If Risk Division determines that the customer is in financial difficulty, then any off-market concession granted is treated as forbearance and the loan reviewed monthly. Forbearance does not arise if the customer is not in financial difficulty or if the risk profile of the customer following the concession is within the Group’s current risk appetite.
All impaired assets are considered forborne. At 31 December 2013, £6,221 million (31 December 2012: £9,027 million) of its unimpaired assets are also considered forborne as a result of proactive management of cases to help customers in financial difficulties. Of this figure, £3,789 million was classified as non-core, with the remaining £2,432 million classified as core.
Ireland wholesale (part of Wealth, Asset Finance and International division) All loans and advances in Ireland wholesale (whether impaired or unimpaired) are treated as forborne and all assets are classified as non-core.
Derivative financial instruments, trading and other financial liabilities at fair value through profit or loss 19,321 12,458 3,974 2,165 1,414 5,029 9,182 20,546 74,089 liabilities arising from insurance and investment contracts 1,486 6,579 2,317 2,244 3,046 8,430 21,300 65,356 110,758
Trading and other financial liabilities at fair value through profit or loss 11,622 4,720 7,874 6,931 3,764 34,911 liabilities arising from non-participating investment contracts 27,205 – – – 27,167 54,372
Other commitments – – – – 494 – – – 494 up to 1 month £m £m £m £m £m years £m years £m
Capital risk appetite is set by the Board, reflecting the Group’s strategic plans, regulatory capital constraints and market expectations. It includes a number of minimum capital ratios in normal and stressed conditions as well as a specific measure for the Insurance business, set by the Insurance Board, taking account of the need to maintain regulatory solvency including appropriate management buffers. The Board and the Group Chief executive, assisted by the Group Asset and liability Committee and the Group Risk Committee, regularly review performance against the risk appetite. A key metric is the Group’s common equity tier 1 (CeT1) capital ratio which the Group currently aims to maintain in excess of 10 per cent.
Additionally, a series of stress analyses is undertaken during the year to determine the adequacy of the Group’s capital resources in adverse economic scenarios including those provided by the PRA.
Cash and balances at central banks 49,915 80,298 60,722 less: mandatory reserve deposits1 (937) (580) (1,070)
loans and advances to banks 25,365 32,757 32,877 less: amounts with a maturity of three months or more (7,546) (11,417) (6,640)
Note 56: Restatement of prior period information As explained in note 1, the Group has adopted IFRS 10 Consolidated Financial Statements and Amendments to IAS 19 Employee Benefits (IAS 19R) on 1 January 2013.
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: Remeasurements before taxation – – (2,136) (2,136)
Other comprehensive income for the year, net of tax (918) – (1,645) (2,563)
effects of exchange rate changes on cash and cash equivalents (8) – – (8)
Trading and other financial assets at fair value through profit or loss 153,990 6,630 – 160,620 loans and receivables: loans and advances to banks 29,417 3,340 – 32,757 loans and advances to customers 517,225 – – 517,225
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements
Items that may subsequently be reclassified to profit or loss: Movements in revaluation reserve in respect of available-for-sale financial assets: Change in fair value 2,527 – 2,527
Movements in cash flow hedging reserve: effective portion of changes in fair value 916 – 916 net income statement transfers 70 – 70
Derivative financial instruments 58,212 53 – 58,265 notes in circulation 1,145 – – 1,145
Note 57: Future accounting developments The following pronouncements may have a significant effect on the Group’s financial statements but are not applicable for the year ending 31 December 2013 and have not been applied in preparing these financial statements. Save as disclosed below, the full impact of these accounting changes is being assessed by the Group.
Provides relief from discontinuing hedge accounting in circumstances where a derivative designated as a hedging instrument is novated to a central counterparty as a consequence or introduction of laws or regulations. These amendments are not expected to have a significant impact on the Group.
IFRS 9 is the standard which will replace IAS 39. Further changes to IFRS 9 are expected dealing with impairment of financial assets measured at amortised cost, which will be based on expected rather than incurred credit losses, and limited amendments to classification and measurement which include the introduction of a third measurement category, fair value through other comprehensive income. until the standard is complete, it is not possible to determine the overall impact of the standard on the financial statements.
Note 58: Approval of financial statements The consolidated financial statements were approved by the Directors of lloyds Banking Group plc on 5 March 2014.
Sir Winfried Bischoff António Horta-Osório George Culmer Chairman Group Chief executive Chief Financial Officer
Total comprehensive income comprises only the profit (loss) for the year; no statement of comprehensive income has been shown for the parent company, as permitted by section 408 of the Companies Act 2006.
Percentage of equity share capital and voting rights held Nature of business lloyds Bank plc (formerly lloyds TSB Bank plc) Ordinary england 100% Banking and financial services
Loans to subsidiaries £m £m exchange and other adjustments 35 46 new issues 3,082 –
In addition the Company carries out banking activities through its subsidiary, lloyds Bank plc. At 31 December 2013, the Company held deposits of £511 million with lloyds Bank plc (2012: £2,231 million). Given the volume of transactions flowing through the account, it is not meaningful to provide gross inflow and outflow information. Included within subordinated liabilities is £nil (2012: £2,355 million) and within other liabilities is £14,821 million (2012: £10,630 million) due to subsidiary undertakings. In addition, at 31 December 2013 the Company had interest rate and currency swaps with lloyds Bank plc with an aggregate notional principal amount of £2,454 million and a net positive fair value of £1,452 million (2012: notional principal amount of £2,442 million and a net positive fair value of £1,693 million). Of this amount an aggregate notional principal amount of £1,854 million and a net positive fair value of £226 million (2012: notional principal amount of £1,842 million and a net positive fair value of £260 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities and debt securities in issue.
Other related party transactions Related party information in respect of other related party transactions is given in note 51 to the consolidated financial statements.
The derivative assets designated as hedging instruments represent level 2 portfolios. The derivative assets classified as held for trading (not being designated as hedging instruments) shown above represent level 3 portfolios. The level 3 derivatives reflect the value of the equity conversion feature of the enhanced Capital notes issued in December 2009 as part of lloyds Banking Group’s recapitalisation and exit from the Government Asset Protection Scheme.
As discussed in note 9, the Company has entered into interest rate and currency swaps with its subsidiary, lloyds Bank plc, to manage these risks.
Annual general meeting The annual general meeting will be held at the edinburgh International Conference Centre, The exchange, edinburgh eH3 8ee on Thursday 15 May 2014 at 11.00 am. Further details about the meeting, including the proposed resolutions, can be found in our notice of annual general meeting which will be available shortly on our website www.lloydsbankinggroup.com
Share sale fraud and scams Shareholders should exercise caution when unsolicited callers offer the chance to buy or sell shares with promises of huge returns. If it sounds too good to be true, it usually is. Please take steps to protect yourself. We strongly recommend that you seek advice from an independent financial adviser authorised by the Financial Conduct Authority (FCA). If you are uncertain you can check if they are authorised via the Financial Services Register which is available at www.fca.org.uk.
This annual report contains certain forward looking statements with respect to the business, strategy and plans of the lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about the lloyds Banking Group or its directors’ and/or management’s beliefs and expectations, are forward looking statements. Words such as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ’will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and variations of these words and similar future or conditional expressions are intended to identify forward looking statements but are not the exclusive means of identifying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future.
Commercial Paper Commercial paper is an unsecured promissory note issued to finance short-term credit needs. It specifies the face amount paid to investors on the maturity date. Commercial paper can be issued as an unsecured obligation of the Group or, for example when issued by the Group’s conduits, as an asset-backed obligation (in such case it is referred to as asset-backed commercial paper). Commercial paper is usually issued for periods from as little as a week up to nine months.
Counterparty credit risk Counterparty credit risk is the risk that the counterparty to a transaction could default before the final settlement of the transaction’s cash flows. Such transactions relate to contracts for financial instruments and may include derivative contracts and repo contracts.
Credit valuation adjustments These are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. Further details are given in note 53.
Market risk The risk that unfavourable market moves (including changes in and increased volatility of interest rates, market-implied inflation rates, credit spreads and bond prices, foreign exchange rates, equity, property and commodity prices and other instruments) lead to reductions in earnings and/or value.
The ratio of available stable funding to required stable funding over a one year time horizon, assuming a stressed scenario. The ratio is required to be over 100% with effect from 2018. Available stable funding would include such items as equity capital, preferred stock with a maturity of over 1 year, or liabilities with a maturity of over 1 year.
Net interest margin net interest margin is net interest income as a percentage of average interest-earning assets. Details of the Group’s banking net interest margin are given on page 66.
Disclosures arising from Enhanced Disclosure Task Force (EDTF) recommendations The 32 recommendations listed below are made in the report ‘enhancing the Risk Disclosures of Banks’ issued by the enhanced Disclosure Task Force of the Financial Stability Board on 29 October 2012.
12 Discuss capital planning, including a description of management’s view of the required or targeted level of capital and how this will be established.