About us We are a UK financial services provider with around 27 million customers and a presence in nearly every community.
Our main business activities are retail and commercial banking, general insurance and long-term savings, provided under well recognised brands including Lloyds Bank, Halifax, Bank of Scotland and Scottish Widows.
Remuneration Our approach to reward aims to provide a clear link between remuneration and delivery of the Group’s key strategic objectives, namely, becoming the best bank for customers whilst delivering long-term, superior and sustainable returns to shareholders. We believe in offering fair reward where colleagues are rewarded for performance aligned to the long-term sustainable success of the business, our commitment to rebuilding trust and changing the culture of the Group.
Helping Britain Prosper Plan In 2014 we launched our Helping Britain Prosper Plan to support the people, businesses and communities in the UK. The financial success of the Group is inextricably linked to the health of the UK and we are working hard to support the whole economy. Since the launch of the plan four years ago, we have lent more than £47 billion to firsttime buyers, supported more than 440,000 start-ups, been the largest UK corporate tax payer and donated £72 million to the Group’s independent Foundations. Also, in 2017 we have trained over 700,000 individuals, businesses and charities in digital skills. In 2014 we were the first FTSE 100 company to make a commitment on the number of senior positions held by women. At that time women made up 29 per cent of senior management. In 2017 we met our 34 per cent target and we are on track to achieve 40 per cent by 2020. We also recently became the first FTSE 100 company to set a target to increase the proportion of senior roles held by Black, Asian and Minority Ethnic colleagues. Our target is 8 per cent by 2020 for senior managers and 10 per cent for the overall Group.
Strategic priorities We have identified four strategic priorities focused on the financial needs and behaviours of the customer of the future: further enhancing our leading customer experience; further digitising the Group; maximising Group capabilities; and transforming ways of working. We will invest more than £3 billion in these strategic initiatives through the plan period that will drive our transformation into a digitised, simple, low risk, customer focused UK financial services provider.
Maximising the Group’s capabilities We will deepen customer relationships, grow in targeted segments and better address our customers’ banking and insurance needs as an integrated financial services provider. This will include: increasing Financial Planning and Retirement (FP&R) open book assets by more than £50 billion by 2020 with more than 1 million new pension customers; implementing an integrated FP&R proposition with single customer view; and start-up, SME and Mid Market net lending growth (more than £6 billion in the plan period).
Financial returns The UK economy has proven resilient and going forward our plans and projections assume this performance continues with a steady increase in base rate to 1.25 per cent by the end of 2020.
We expect to deliver an improved return on tangible equity (RoTE) of 14.0–15.0 per cent from 2019 onwards on a higher CET1 capital base of c.13 per cent plus a management buffer of around 1 per cent.
Statutory profit of £5.3 billion, an increase of 24 per cent on 2016
The FCA changed the approach to complaint reporting from 30 June 2016 so our complaint reporting is now presented on this basis. Overall incoming complaints excluding PPI and claims management companies have fallen by nearly 70 per cent since 2011 and by around 18 per cent since 2016.
Our share price increased by 9 per cent in 2017, and when dividends are included, our total shareholder return was 14 per cent.
Our asset quality ratio remains strong, reflecting our effective risk management and the continued benign credit environment. The increase reflects lower write-backs and recoveries rather than any deterioration in the underlying portfolio.
Our net promoter score is the measure of customer service at key touch points and the likelihood of customers recommending us. Despite being slightly down in the year it remains nearly 50 per cent higher than at the end of 2011.
The index is the outcome of a survey of more than 62,000 colleagues which shows an increasing number of colleagues believe we are committed to becoming the best bank for customers.
1 New baseline score introduced to tie in with new Group behaviours.
Looking ahead, impairments are expected to remain at benign levels at an industry level, with contributing factors including the slow pace of expected interest rate increases, unemployment remaining close to its current 40-year low, and the benefit of both continuing to support property prices. Meanwhile, business confidence has to date held up well in the face of global and domestic uncertainties. Manufacturers and exporters have been aided by sterling’s depreciation since late 2015, and businesses generally are benefiting from low debt service costs.
Challenges Households’ spending power has been squeezed over the past year as the rise in inflation to 3 per cent by the end of 2017 has outpaced growth in pay that has remained subdued in a broadly 2-2.5 per cent range over the year, partly reflecting weak productivity growth. While inflation is expected to slow, it is likely to trend towards 2 per cent only gradually through the next three year chapter of our strategy, and whilst we expect wage growth to improve and end the spending power squeeze, it is uncertain how quickly this will happen. Meanwhile, the economy is more reliant than normal on business investment and exports to drive growth.
Open banking and customer data In January 2018 open banking regulation was implemented in the UK, with the aim of enabling customers to view their personal financial data in one place. Customer protection is at the heart of this and other upcoming regulations regarding personal data, with robust data systems and processes having been developed to ensure that customer data can be transferred securely, and only once consent has been given.
Customer behaviours are changing, with a greater focus on personalised customer experiences and instantly accessible services
The pace of digital adoption continues to surpass expectations and is likely to increase further in the coming years. Addressing customer expectations in this area is key to future success
Outlook Building upon our strong starting position, we have a unique opportunity to further enhance the customer experience and improve operational efficiency through the use of technology. In doing this, we must ensure that we continue to respond to innovation and meet the needs of our diverse customer base whilst ensuring system resilience and security.
Market challenge Our competitive landscape continues to evolve. A number of domestic incumbents are intensifying their focus on the UK market, with restructuring phases largely complete. In addition, collaboration among non-traditional competitors is increasing in order to build scale and drive efficiency. Tech giants such as Apple and Google are also posing an increasing threat to the financial services sector, underpinned by large customer bases, strong brand loyalty, access to significant customer data and a focus on delivering great customer experiences.
UK’s largest digital bank, branch reach and customer franchise Our scale and reach across the UK means that our customer franchise extends to around 27 million customers with more than 13 million active online users.
The transformation of customer journeys has made it simpler, faster and more convenient for us to meet customers’ evolving needs
Despite the uncertain macroeconomic environment, we have continued to support the UK economy while operating within our prudent risk appetite
We have maintained market leadership across our key retail business lines, while growing in a number of targeted areas where we were underrepresented including SME, Mid Markets, credit cards and motor finance
Performance highlights 76pts – employee engagement at an all-time high 34 per cent of senior roles held by women, up 5 per cent
At the start of the year we identified four major strategic themes, each of which was developed further by dedicated teams, with support and challenge provided centrally and by executive management.
During the course of the year, the Board discussed and reviewed the proposed change initiatives in a number of deep dive sessions and at mid-year the Board debated at length the preliminary findings and broad strategic options for each of these priority themes over the course of two days. This resulted in a set of clear strategic priorities for further development.
Over the page, we outline the strategic priorities for the business to 2020.
Over the past two years we have developed a new strategy to further transform the Group and deliver sustainable value to our stakeholders.
Largest digital bank, branch reach and customer franchise with leading integrated propositions
Rigorous execution and management discipline focusing on key skills of the future
While basic transaction volumes within branches continue to decline, there remains strong demand for face-to-face interaction for more complex needs and advice. We will therefore maintain our leading branch market share.
As part of this approach, we will tailor the format of our branches to the needs of the customers and communities they serve.
Why this is important To better address our customers’ banking and insurance needs as an integrated financial services provider and improve their overall experience, we will make better use of our competitive Group strengths and unique business model.
Over the next three years we will also bring a number of new customer journeys into scope for transformation as well as a number of our internal processes, or enterprise journeys, within our central functions.
Leveraging new technologies To support our transformation and deliver further efficiency savings, we will simplify and modernise our IT architecture while deploying new technologies such as cloud computing to enhance our capabilities and increase resilience.
To generate additional efficiencies and improve customer experiences we will also increase our use of machine learning and cognitive engines, such as chatbots to help both colleagues and customers. To enable us to tailor our propositions to our customers’ specific needs, we will need to be able to access customer data more effectively. We will therefore invest to create a single, scalable and modern data platform through which this data can be accessed more easily. This will enable us to provide personalised experiences based on deeper insight and analysis, greater security and resilience as well as enabling further innovation to our platforms.
Opportunities exist across the Group with those in financial planning and retirement and Commercial Banking described in further detail below.
In addition to meeting our future skills requirements, we will seek to achieve a shift in the Group’s culture to ensure our values and behaviours around simplicity, collaboration, agility and trust are fully embedded. As part of this, we will change the way that we communicate with our colleagues to increase engagement and will develop our leaders as role models for the required change.
We will enhance our digital capabilities to enable our clients to self-serve their simpler banking needs while ensuring that they continue to have relationship manager support for their more complex needs.
We will develop these enhancements to our client offering according to the specific needs of our different client segments, with the expectation of achieving growth in our SME and Mid Markets client segments and deepening our relationships with our Global Corporate and Financial Institutions clients. Through this approach, we will improve the customer experience by shortening the time clients have to wait for simple banking decisions and broadening our product range.
We can only achieve our strategic priorities and help Britain prosper if we continue to operate responsibly. We know that if Britain prospers we can too, so we must continue to use our scale and reach to make a difference to people, businesses and communities across the UK.
Our Responsible Business Committee In 2017 our Board-level committee focused on developing the Helping Britain Prosper Plan and how the Group’s approach to doing business responsibly should evolve. The Group’s sustainability strategy was discussed with colleagues from relevant business areas and external advisors.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 19
We’re helping businesses of all types and sizes to start-up, grow, improve productivity, build their skills base and become successful exporters.
Building digital skills Number of individuals, SMEs and charities trained in digital skills including internet banking
Supporting businesses to start up and grow Increased amount of net lending to start-up, SME and Mid Markets businesses £2bn £6bn
Evolving the Plan To show our continuing support for the low carbon economy, we have added a new target: to help provide power for 5 million homes in the UK by 2020 through our support for renewable energy projects. We are still focused on supporting business growth and building an inclusive and diverse business. We have set two new targets to increase the percentage of roles held by BAME colleagues to 10 per cent and to increase the percentage of senior roles held by BAME colleagues to 8 per cent by 2020.
Our areas of focus Through our full Plan, we are tracking our performance against 22 stretching targets in total. We have prioritised six of these to focus on in 2018, as shown in the table below. These support the UN Sustainable Development Goals, which aim to tackle the world’s most pressing challenges by promoting sustainable development.
Internationals. Excludes leavers, Group Non-Executive Directors, contractors, temps and agency staff. Also excludes MBNA colleagues, who became part of Lloyds Banking Group plc in June 2017, as they are currently on a separate grading structure.
Diversity scope: Payroll headcount including parental leavers. Excludes MBNA colleagues, who became part of Lloyds Banking Group plc in June 2017, as they are currently on a separate grading structure. Also excludes contractors. Gender information includes International colleagues. All other diversity information is UK Payroll only. Senior Managers: Grades F+. Managers: Grade D-E. Data source: HR system (HR Online). Apart from gender data, all diversity information is based on colleagues’ voluntary self-declaration. As a result this data is not 100 per cent representative; our systems do not record diversity data for the proportion of colleagues who have not declared this information.
We seek to run our business responsibly, sustainably and successfully, delivering value for all our stakeholders.
Supporting colleagues with disabilities This year, the Department for Work and Pensions designated the Group as a Disability Confident Leader for our inclusive
We offer bespoke development programmes and recruitment processes for colleagues and job applicants with disabilities. We aim to appoint the best candidate into any role and give full and fair consideration to job applications from those with disabilities, and we are unbiased in the way we assess, select, appoint, train and promote people. We offer a guaranteed interview scheme for candidates who declare a disability and meet the minimum requirements of the role. We continue to run a Disability Work Experience Programme in partnership with Remploy. This is one of the largest disability-focused work experience initiatives in the financial services sector; we’ve increased our number of candidates from 96 in 2016 to 392 in 2017.
Engaging colleagues We want colleagues to be engaged and enthusiastic about our strategy, responsible approach and culture. We regularly and systematically update them on the Group’s performance and changes in the economic and regulatory environment including matters that concern their role. We also want them to share their ideas and views to help us shape our future. One of the most effective ways they do this is through the ‘Best Bank for Customers’ and ‘Building the Best Team’ surveys that are run by an independent thirdparty every year. They give colleagues the opportunity to share their thoughts in order to inform decisions and support improvements in team performance. This year, 86 per cent of colleagues participated in the two surveys – 2 per cent more than in 2016 and 5 per cent
Our Strategic Leaders Programme, which 175 colleagues completed, concluded this year. From 2018, colleagues in our Strategic Leadership Group will undertake a new ‘Horizon’ development programme that supports our ‘Bank of the Future’ objectives. 80 per cent of colleagues who completed our ‘Building the Best Team’ survey confirmed that they get the support they need to improve their skills and meet customer demands, an annual increase of 3 per cent and 18 per cent above the UK norm.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 23
MEETING CHANGING CUSTOMER NEEDS We are investing significantly in a major branch transformation programme to better serve our customers now and for many years to come. We have expanded our mobile branch service this year and we now have 28 mobile branches, which visit 169 different locations to support rural communities across Scotland, England and Wales.
Rewarding colleagues We offer a competitive and fair reward package that supports our aims as a responsible business – with customer-facing colleagues in Retail incentivised on the basis of actions and behaviours that put customers first. We offer colleague share schemes to encourage shared ownership of our Group.
Customer privacy and data security We use advanced technology to protect customers’ money and data, including secure log on and log off features and systems that prevent fraud or that detect fraudulent payments in real time. In 2017, as part of the multi-stakeholder Joint Fraud Task Force, we helped to set the strategic direction for fraud prevention. We also championed the national rollout of the Banking Protocol, which now includes 38 police forces. This enables colleagues to request immediate police support when customers are at risk. An estimated £9 million of fraud was prevented through the Protocol this year and 100 arrests were made.
We aim to comply with all laws and regulations wherever we operate and have a comprehensive anti-bribery policy that applies to all colleagues, including directors, contractors and others acting on our behalf. All colleagues and contractors complete annual anti-bribery training and we encourage them to report suspected bribery. The Group is a member of Transparency International UK’s Business Integrity Forum, a network of major international companies committed to anti-corruption and high ethical standards in business practices.
Building trust Our performance as a responsible business during the past year has helped to rebuild trust in our Group and in the future stability and sustainability of the banking sector. In May we returned to full private ownership and the sale marked the successful delivery of our strategy to transform into a simple, low risk, UK focused retail and commercial bank. In 2017 we continued to build trust by taking steps to become even more transparent in the way we communicate with our stakeholders, providing them with greater detail about where we stand on environmental, social, governance and ethical issues.
We are helping the housing sector as a whole. In 2017 we lent more than £42 billion to home buyers and exceeded our target to build 1,500 homes through our Housing Growth Partnership. We also helped the construction sector acquire skills through the Londonbased Construction Skills Centre, where 166 people obtained an industry recognised qualification. We also provided a further £2 billion of new funding support to the social housing sector.
Working with suppliers We aim to source responsibly and sustainably, requiring our suppliers to comply with our Code of Supplier Responsibility. We source a range of products and services from an active supply base of around 4,000 suppliers. In 2017, our supplier expenditure was £5.0 billion (£5.3 billion in 2016) with 94 per cent of this spent with UK-based suppliers. Our responsible business objectives are embedded into our sourcing and supplier activities. For example, we further enhanced the questions we ask prospective and existing suppliers in our Financial Supplier Qualification System in relation to issues such as human trafficking and slavery, and have implemented new contractual requirements. We have also worked with key suppliers to build partnerships with social enterprises and embed social responsibility practices.
Managing environmental impacts Delivering the science-based carbon reduction and climate resilience targets set out in the Paris Agreement will have significant structural implications for the economy and the businesses and communities we serve. That is why we are evolving our Group-wide sustainability strategy.
Supporting the low carbon economy We are helping more of our commercial clients to understand and manage their sustainability risks and we complete an environmental risk assessment at the start of every new client relationship. We are currently exploring ways to build sustainability considerations into our policies and risk management processes. We offer customers products and services that
Indicator is subject to Limited ISAE3000 (revised) assurance by Deloitte LLP for the 2017 Annual Responsible Business Reporting. Deloitte’s 2017 assurance statement and the 2017 Reporting Criteria are available online at www.lloydsbankinggroup.com/rbdownloads help them embrace sustainability. In 2016, we launched an innovative £1 billion Green Loan Initiative to incentivise commercial real estate to become more energy efficient and this year exceeded our target to help 2 million square feet of real estate.
Environment A sustainable and responsible approach is integral to how we operate
We will also consider the supplementary industry specific recommendations for the financial sector.
Equality, inclusion and diversity, page 21 Health, safety and wellbeing, page 22 Learning and development, page 22 Responsible conduct and culture, page 24 Diversity, skills and composition, page 58
Board Diversity Policy, page 72 People risk, page 136 Governance risk, page 150
Now able to provide bespoke financial support to customers suffering from cancer, following training from Macmillan.
Improved digital capability simplifying processes for customers: – Rolled out over 4,440 iPad Pros across our branches, integrating the multi-channel customer experience – Simplified online processes for mortgage intermediaries to offer a faster service – Customers now able to check both loan and credit card eligibility up front
Divisional overview Retail £4,403m Underlying profit £13bn Lending to first-time buyers £1.0bn Open mortgage book growth >124,000 business start-ups supported >100,000 Lex Autolease fleet growth within 5 year ambition
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 29
Financial performance 2017 results include completion of the acquisition of MBNA on 1 June. MBNA has performed ahead of expectations and generated incremental income of £448 million, operating costs of £135 million and impairments of £118 million.
Other income was 3 per cent higher, driven by fleet growth in Lex Autolease. Operating lease depreciation increased reflecting fleet growth and increased conservatism in residual value management.
Through its four client facing segments – SME, Mid Markets, Global Corporates and Financial Institutions – it provides clients with a range of products and services such as lending, transactional banking, working capital management, risk management and debt capital markets services.
Progress against strategic priorities Commercial Banking delivered a return on risk-weighted assets of 2.82 per cent in 2017, exceeding the commitment of a return of 2.40 per cent, while continuing to focus on improving the client experience grow lending in key client segments.
Becoming simpler and more efficient Over 16,000 SME business accounts opened using the transformed end-to-end process.
The transformed process includes additional digital functionality, such as the option to review and approve banking agreements online and upload signatures.
Continued investment in the business offset by efficiencies, leading to flat operating costs.
The increase in impairment charge to £115 million and asset quality ratio to 12 basis points is due to a lower level of write-backs and provision releases and also includes a single large corporate impairment.
Loans and advances decreased 2 per cent to £100.0 billion, with year-on-year lending growth of 2 per cent in SME remaining at above market growth levels, offset by reductions in Global Corporates.
Continued portfolio optimisation, including capital efficient securitisation activity, to achieve an 8 per cent reduction in risk-weighted assets to £85.6 billion.
£2,489m Underlying profit growth in SME lending growth in Mid Corporate lending 37bps increase in return on risk-weighted assets to 2.82%
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 31
Progress against strategic priorities The Group continues to direct significant investment towards developing Insurance and Wealth, seeking to grow in areas where it has competitive advantage and is under-represented, for the benefit of both customers and shareholders.
Improved the Wealth customer experience through reduction in time taken to provide customer advice by up to 40 per cent, which allows the Group to help more customers.
Insurance capital Estimated pre final dividend Solvency II ratio is unchanged at 160 per cent (31 December 2016: 160 per cent) and represents the shareholder view of Solvency II surplus. The ratio reflects in-year earnings, capital management actions and favourable market movements offset by capital invested in new business and dividends paid in the year.
Estimated excess capital of £890 million was generated in 2017 from which dividends totalling £575 million were paid in the year with a further dividend of £600 million paid to the Group in February 2018.
Our approach to risk is founded on an effective control framework, which guides how our colleagues work, behave and the decisions they make. Risk appetite – the amount and type of risk we are prepared to seek, accept or tolerate – is approved by the Board and embedded in policies, authorities and limits across the Group.
Business focus and accountability Effective risk management is a key focus and is included in key performance measures against which business units are assessed. Business units in the first line of defence are accountable for risk with oversight from a strong and independent, second line of defence Risk division.
Defined processes exist to identify, measure and control our current and emerging risks
Accountability for ensuring risk is managed consistently with the Risk Management Framework approved by the Board
The links shown here between these five factors and our principal risks and strategic priorities are not an exhaustive list.
Risk and potential impact The financial services industry continues to experience significant legislative and regulatory change and interpretation giving rise to uncertainty surrounding the nature, scale and complexity of implementation requirements.
We consider an array of scenarios as part of our operating plan and stress testing exercises, to identify and implement appropriate mitigating actions.
The risks of changing legislation, regulation, policies, voluntary codes of practice and their interpretation in the markets in which we operate may have a significant impact on the Group’s operations, business prospects, structure, costs and/or capital requirements and ability to enforce contractual obligations.
We seek to support sustainable growth in our targeted segments. We have a conservative and well balanced credit portfolio, managed through the economic cycle and supported by strong credit portfolio management.
Key risk indicators Mandatory, legal and regulatory investment spend £886m 2016: £555m
As part of the Group’s ongoing assessment of the potential implications of the UK leaving the European Union, the Group continues to consider the impact to its customers, colleagues and products – as well as legal, regulatory, tax, financial and capital implications.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2017 35
Working with industry bodies and law enforcement agencies to identify and combat fraud and money laundering.
Example The most significant conduct cost in recent years has been PPI mis-selling.
Learning from past mistakes through root cause analysis and clear customer accountabilities for colleagues, with rewards driven by customer-centric metrics.
Further enhancements and embedding of our framework to support customers in vulnerable circumstances.
Our focus on embedding a customer-centric culture and delivering good outcomes through good conduct is subject to robust review by the Group Customer First Committee. This supports our vision of being the best bank for customers, enabling the delivery of a leading customer experience through effective root cause analysis and learning from customer feedback.
Key people risks include the risk that we fail to maintain organisational skills, capability, resilience and capacity levels in response to organisational, political and external market change and evolving business needs.
Effective remuneration arrangements to promote appropriate colleague behaviours and meet regulatory expectations.
Continued regulatory change relating to personal accountability and remuneration rules could affect the Group’s ability to attract and retain the calibre of colleagues required to meet our changing customer needs. We will continue to invest in the development of colleague capabilities and agile working practices in order to deliver a leading customer experience, and to respond quickly to the rapidly evolving change in customers’ decision making in an increasingly digital marketplace.
The risk that we have a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.
Ensuring we hold an appropriate level of capital to maintain financial resilience and market confidence, underpins our strategic objectives of supporting the UK economy and growth in targeted segments.
The risk that we have insufficient financial resources to meet our commitments as they fall due.
Processes for underwriting, claims management, pricing and product design seek to control exposure. Longevity and bulk pricing experts support the bulk annuity proposition.
The merits of longevity risk transfer and hedging solutions are regularly reviewed for the Insurance business.
We are committed to meeting the changing needs of customers by working to provide a range of insurance products via multiple channels. The focus is on delivering a leading customer experience by helping customers protect themselves today whilst preparing for a secure financial future.
The risk that our capital or earnings profile is affected by adverse market rates, in particular interest rates and credit spreads in the banking business, equity and credit spreads in the Insurance business, and credit spreads in the Group’s defined benefit (DB) pension schemes.
Adverse impacts on funding or liquidity, or the Group’s earnings and profits.
A comprehensive model risk management framework including: Defined roles and responsibilities, with clear ownership and accountability.
Principles regarding the requirements of data integrity, development, validation, implementation and ongoing maintenance.
HELPING BRITAIN’S BUSINESSES BECOME GREENER Through our £1 billion Green Loan Initiative, we are supporting Britain’s businesses to make their real estate more energy efficient. In 2017, we agreed a £50 million loan to help Ei Group, Britain’s largest leased and tenanted pub company, introduce energy saving upgrades across its network. This is the first loan made outside the commercial real estate sector through the Initiative, which we launched in 2016.
Strong financial performance with improved profit and returns on both statutory and underlying bases The Group’s statutory profit before tax was £5,275 million, 24 per cent higher than in 2016 driven by increased underlying profit and lower volatility and other items which more than offset the increased PPI charge. Statutory profit after tax increased by 41 per cent to £3,547 million (2016: £2,514 million) and the return on tangible equity was 8.9 per cent.
The balance sheet remains strong and the Group generated 245 basis points of CET1 capital in the year. The pro forma CET1 ratio at 31 December 2017 after accruing for ordinary dividends and allowing for the share buyback was 13.9 per cent compared to 13.0 per cent (pro forma after dividends and adjusting for MBNA) at 31 December 2016. The pro forma leverage ratio increased to 5.4 per cent (31 December 2016: 5.3 per cent) and tangible net assets per share were 53.3 pence.
Impaired loans as a % of closing advances 1.6% 1.8% (0.2) pp
Total impaired loans fell by £0.7 billion to £7.8 billion (31 December 2016: £8.5 billion) and represent 1.6 per cent of closing advances to customers (31 December 2016: 1.8 per cent). Provisions as a percentage of impaired loans increased to 45.6 per cent (31 December 2016: 43.4 per cent).
Amortisation of purchased intangibles was lower at £91 million (2016: £340 million) as certain intangible assets are now fully amortised.
Return on tangible equity The underlying return on tangible equity increased to 15.6 per cent (2016: 14.1 per cent) primarily reflecting increased underlying profit. The return on tangible equity was 8.9 per cent up from 6.6 per cent in 2016, reflecting the increase in statutory profit after tax.
The Group’s liquidity surplus exceeds the regulatory minimum and internal risk appetite with a Liquidity Coverage Ratio of 127 per cent based on the EU Delegated Act at 31 December 2017.
Pro forma CET1 ratio post dividend and share buyback1 13.9% 13.0% 0.9pp
2 The 2017 capital and leverage ratios do not, unless otherwise indicated, recognise the share buyback as this will be reflected in 2018.
5 Tangible net assets per share at 31 December 2016 equivalent to 53.4 pence after adjusting for the impact of MBNA.
The Group generated 245 basis points of CET1 capital (pre ordinary dividends and share buyback) in the year. This included c.250 basis points from underlying capital generation; the Group also had a benefit of c.80 basis points from the reduction in risk-weighted assets and c.40 basis points from market and other movements, which were offset by the c.120 basis point impact of conduct provisions.
The Group remains highly capital generative and continues to expect ongoing capital generation of 170 to 200 basis points per annum.
The Board continues to give due consideration at each year end to the return of any surplus capital and for 2017, the Board intends to implement a share buyback of up to £1 billion, equivalent to up to 1.4 pence per share. This represents the return of capital over and above the Board’s view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties. The share buyback programme will commence in March 2018 and is expected to be completed during the next 12 months.
Given the total ordinary dividend of 3.05 pence per share and the intended share buyback, equivalent to up to 1.4 pence per ordinary share, the total capital return for 2017 will be up to 4.45 pence per share, an increase of up to 46 per cent on the prior year, equivalent to up to £3.2 billion.
Pensions The Group's defined benefit schemes have been significantly derisked over recent years including being materially hedged for both interest rates and inflation.
Terms have now been agreed in principle with the Trustee in respect of the valuations of the Group’s three main defined benefit pension schemes. The valuations showed an aggregate ongoing funding deficit of £7.3 billion as at 31 December 2016 (£5.2 billion deficit at 30 June 2014). The increase in the ongoing deficit over the period was mainly driven by lower gilt yields, offset primarily by hedging and asset returns.
Over the course of 2018, in order to comply with the ring-fencing legislation, certain businesses will be transferred out of Lloyds Bank plc and its subsidiaries to other parts of the Group, by means of statutory or contractual transfers. This will include the transfer of certain wholesale and international businesses to Lloyds Bank Corporate Markets and the transfer of Scottish Widows Group and other insurance subsidiaries to Lloyds Banking Group plc.
2 Excludes repos of £2.6 billion (31 December 2016: £2.5 billion) .
Pro forma CET1 ratio post dividend and share buyback3 13.9% 13.0% 0.9pp
Tangible net assets per share 53.3p 54.8p (1.5) p 1 Excludes reverse repos of £16.8 billion (31 December 2016: £8.3 billion).
Excluding bulk annuities and 2016 with profits fund annuity transfer within planning and retirement, new business income remains stable, reflecting lower margins as a result of the competitive environment and strengthening of underlying assumptions. Existing business income is flat with positive impact of economics offset by legacy products run-off.
Banking net interest margin The net interest margin is calculated by dividing underlying banking net interest income by average interest-earning banking assets.
Net loans and advances to customers1 455.7 454.6 453.2 444.7 449.7
Average interest-earning banking assets (year-to-date) 434.9 433.4 430.9 430.9 435.9 1 Excludes reverse repos of £16.8 billion (31 December 2016: £8.3 billion).
SUPPORTING BRITAIN’S SOCIAL ENTREPRENEURS In 2017 we helped a further 260 social entrepreneurs through our School for Social Entrepreneurs programme.
social entrepreneurs helped to start-up and grow their social businesses since 2012
Good governance is vitally important as it underpins the delivery of our strategy to help Britain prosper and become the best bank for customers, colleagues and shareholders. It is essential to ensure good corporate governance and the associated values are embedded into the thinking and processes of the business, and driven by the Board.
Non ring-fenced bank One of the largest change initiatives for the Group this year is the implementation of the ring-fencing regulatory requirements which come into effect on 1 January 2019. The Group’s approach aims to minimise the impact on both colleagues and customers and for the vast majority there will be no changes. There has been significant progress during the year towards the establishment of the new non ring-fenced bank, Lloyds Bank Corporate Markets plc (‘LBCM’). The Board has played an active role in identifying and appointing members of the LBCM board, as well as helping to establish the governance framework to ensure that the framework is both fit for purpose for the new bank and complements that of the Group. An overview by the Chairman of LBCM, Lord Lupton, of the establishment and governance structures of LBCM can be found on page 60.
Board effectiveness The Board carried out an annual evaluation of its effectiveness during the year. This was an internal evaluation overseen by the Nomination and Governance Committee. The process which was undertaken and the findings of the review are set out on pages 66–67, together with information about our progress against the 2016 review actions.
The Group’s aim is to increase ethnic diversity in our workforce and unlock the potential of our ethnic minority colleagues. The Group has publicly committed to increase the proportion of senior roles held by Black, Asian and Minority Ethnic colleagues to eight per cent by 2020. This is being achieved through career development programmes, a programme of visible role models, and a focus on increasing cultural awareness to help all colleagues interact more effectively, regardless of ethnic background. Our commitment to diversity is led from the top, with Executive Committee sponsorship of the initiatives. More information on both diversity and the importance of succession planning is provided on page 72.
In early 2016, following discussions with the Chairman and Board, the Group Chief Executive initiated a major exercise to explore the characteristics required to succeed as the ’Bank of the Future’. Working groups across the Group were engaged in looking forward to the likely impact of changing technology, customer needs and competition, and developing scenarios for different economic backdrops.
Having agreed the key initiatives and the overall scale and pace of the transformation, the Board reviewed the more detailed plan and immediate priorities in an extended session in November 2017, placing particular emphasis on the effective management of the programme and the mitigation of potential execution risks. The final proposals were reviewed again in January and confirmed with the 2018 budget in February.
External appointments: Governor of the Yehudi Menuhin School and a member of the Governing Body of the Royal Academy of Music.
Skills and experience: Deep international experience in board level strategy and execution
Skills and experience: Extensive executive background in managing technology, operations and new digital innovations across banking, payments and institutional investment
Deborah is Chair of the Board Risk Committee’s IT Resilience and Cyber Sub-Committee. She is a former Chief Executive Officer, Global Enterprise Payments and President, Personal Banking and Wealth Management at Citibank. Deborah was previously President of Institutional Services at Charles Schwab Corporation and held executive roles at Engage Media Services Group, Visa International and Bank of America, where she held senior roles in Consumer Banking. She holds a BSc in Communications from the University of Montana.
7. Nick Prettejohn Independent Director and Chairman of Scottish Widows Group
External appointments: Non-Executive Director of United Utilities Group and Chair of their Remuneration Committee and a member of their Nomination Committee, Lead Non-Executive Director at the Department for Work and Pensions, a Governing Council Member of Cambridge University, Board member at the Higher Education Funding Council and Trustee of Lloyds Bank Foundation for England and Wales, with effect from 1 February 2018.
Skills and experience: Extensive experience in, and understanding of, both retail and commercial banking built over a period of more than 30 years, working both internationally and in the UK
External appointments: Non-Executive Director of EXOR N.V., Fundação Champalimaud and Sociedade Francisco Manuel dos Santos in Portugal, a member of the Board of Stichting INPAR and Chairman of the Wallace Collection.
Juan joined the Group as Chief Risk Officer in January 2011 and joined the Board as an Executive Director in November 2013. He became Chief Operating Officer in September 2017. Read his full biography on page 55.
Karin is Group Services Director and is responsible for Global Payments, Customer Services, Property, Divestment and Development, the Chief Security Office, Credit Operations and Sourcing. Having worked in financial services for 27 years, prior to joining the Group as COO Commercial Banking in 2013, Karin led global operational, finance, and technology functions at HSBC, Morgan Stanley and Goldman Sachs. She is a Non-Executive Director of Scottish Widows and the Group’s Executive Sponsor for Sexual Orientation and Gender Identity. She was named in the prestigious 2017 OUTstanding FT list as one of the Top 50 Allies globally, and is proud that the Group was also recognised as the 2017 Stonewall employer of the year. Karin holds a degree in Modern and Medieval Languages from Cambridge University.
4. Antonio Lorenzo Chief Executive, Scottish Widows and Group Director, Insurance and Wealth
Janet joined the Group in 2008 to run the Savings business. She was previously Chief Executive at Alliance Trust Savings, prior to which she was EVP Global Strategy at Visa International. Janet spent 10 years at Standard Chartered Bank where she held a variety of roles including Retail Banking MD for Africa and non-executive directorships at Standard Chartered Bank Zimbabwe, Kenya, Zambia and Botswana. Janet is Chairman of the Charities Aid Foundation Bank and a Non-Executive Director of the Banking Standards Board. Janet studied at the London School of Economics. She has a Master’s degree in Economics and holds an MBA from Cass Business School. She is also the Group’s Executive Sponsor for Inclusion and Diversity.
Nick Luff 2 4/5 4/4 4/4 C 3 3/4 – –
5 Sara Weller joined the Nomination and Governance Committee on 11 May 2017.
‘Deep Dives’ on various elements of market development and business strategy (see below)
The integration programme has moved into the delivery phase and has developed plans with Bank of America to complete the customer, systems and process integration by early 2019.
In June we debated the priorities of the business and the four strategic pillars which will help the Group progress towards the ‘Bank of the Future’. It was extremely helpful to gain the input of our Board members, leveraging the broad range of experience and perspectives the Board has, resulting in a set of clear strategic priorities we will focus on.
Group policies such as antibribery, expenses, gifts and hospitality, and share dealing
Key performance indicators, including KPIs on which incentive plans are measured
Notices of any general meetings held in the last three years
Meetings were held during May and June with all the GEC to discuss aspects such as: Customer products and marketing
Meetings were also held specifically to deal with regulatory aspects, including: Ring-fencing
Induction pack prepared and sent to Lord Lupton prior to and on appointment
The AGM is an opportunity for shareholders to hear directly from the Board on the Group’s performance and strategic direction, and importantly, to ask questions. – over 200 shareholders represented – over 65 per cent of total voting rights voted – all resolutions voted on by way of a poll.
The Group’s aim is to become the best bank for customers, colleagues and shareholders. As part of this, the Board constantly reviews the strategy, receives updates on implementation and reviews progress as part of the governance process.
Members of the Board have visited branches in various locations including Nottingham, Liverpool and Jersey during the year to help build understanding of the business and meet with colleagues.
Whistleblowing We encourage colleagues to speak up if they suspect wrongdoing or witness behaviours that do not meet the standards set out in our Codes of Responsibility or Group policies and procedures. This whistleblowing service is known internally as ‘Speak Up’ and it gives colleagues a way to raise concerns confidentially and without fear of reprisal.
Meeting packs are uploaded and communicated to all Directors via a secure electronic board portal typically a week in advance of the meeting to ensure sufficient time to review the matters which are to be discussed and seek clarification or any additional information.
Before the meeting Executive meetings are held ahead of all Board and Committee meetings to ensure all matters being presented to the Board have been through a thorough discussion and escalation process.
After the meeting The Board meetings offer the Board the chance to meet colleagues within the business, and if any additional meetings are required to provide more details, these are arranged.
Those responsible for matters arising are asked to provide updates to the next meeting by way of an update paper.
Beyond Board meetings Non-Executive Directors see attendance at Board and Committee meetings as only one part of their role. In addition to the annual schedule of Board and Committee meetings, the Non-Executive Directors undertake a full programme of activities and engagement each year, as set out on page 62–63.
In April, the Board held a joint discussion with the Board of Scottish Widows Group Limited allowing in-depth focus on insurance matters.
The process of escalating issues and agenda setting is reviewed at least annually as part of the Board Effectiveness Review with enhancements made to the process, where necessary, to ensure it remains effective. Details of the meeting process are provided on page 64.
During the year, the sub-committee of the Board Risk Committee dedicated to IT resilience and cyber security considered a wide range of issues including: cyber and IT controls; technology resilience; cyber security; and roles and responsibilities of the Chief Security Officer.
How the Board performs and is evaluated The Board is in the third year of its three year evaluation cycle. An external evaluation was conducted in 2015, facilitated by JCA Group1, with an internal evaluation having been carried out in 2016 and this year. The annual evaluation is facilitated externally at least once every three years and an externally facilitated evaluation will be conducted in 2018. The Chairman of the Board leads the annual review of the Board’s effectiveness and that of its Committees and individual Directors with the support of the Nomination and Governance Committee, which he also chairs. Performance evaluation of the Chairman is carried out by the Non-Executive Directors, led by the Senior Independent Director, taking into account the views of the Executive Directors.
2017 evaluation of the Board’s performance The 2017 evaluation was conducted internally between October 2017 and December 2017 by the Company Secretary, and was overseen by the Nomination and Governance Committee.
Individual meetings held between each Director and the Company Secretary to discuss responses and opportunity for Directors to raise any other matters concerning the Board or its Committees.
Continuous improvement The Group’s Controls Frameworks are continuously improved and enhanced, addressing known issues and keeping pace with the dynamic environment. Progress continues to be made in IT, Cyber and Conduct. The 2017 CER assessment provides reasonable assurance that the Group’s controls are effective or that where control weaknesses are identified, they are subject to management oversight and action plans. The Audit Committee, in conjunction with the Board Risk Committee, concluded that the assessment process was effective and recommended them to the Board for approval.
Review and continue to evolve the quality and content of Board papers to ensure effective use of meetings and improve discussions.
The Non-Executive Directors challenge constructively and help develop and set the Group’s strategy. They actively participate in Board decision-making and scrutinise management performance. The Non-Executive Directors satisfy themselves on the integrity of financial information and review the Group’s risk exposures and controls. The Non-Executive Directors, through the Remuneration Committee, determine the remuneration of Executive Directors.
The Company Secretary advises the Board on matters such as governance and ensures good information flows and comprehensive practical support are provided to Directors. He maintains the Group’s Corporate Governance Framework and organises Directors’ induction and training. The Company Secretary communicates with shareholders as appropriate and ensures due regard is paid to their interests. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole.
2 Lord Lupton joined the Board with effect from 1 June 2017.
A2. Division of responsibilities There is clear division of responsibility at the head of the Company, which is documented in the Group’s Corporate Governance Framework.
A4. Role of the Non-Executive Directors The Board has a Senior Independent Director (‘SID’), Anita Frew, who acts as a sounding board to the Chairman and Group Chief Executive. She can be contacted by shareholders and other Directors as required. Anthony Watson served as SID until 11 May 2017.
More details about succession planning can be found on page 72. More information about the work of the Nomination and Governance Committee can be found on pages 70–72.
B5. Provision of information and support The Chairman, supported by the Company Secretary, ensures that Board members receive appropriate and timely information.
The Group provides access, at its expense, to the services of independent professional advisers in order to assist Directors in the role.
C. Accountability C1. Financial and business reporting The Directors’ and Auditors’ Statements of Responsibility can be found on pages 83 and 158 respectively.
During the year, the Committee dedicated a substantial part of its time to Executive succession planning, building on the progress made over the previous years. The work undertaken included additional analysis and benchmarking, which led to the establishment of development plans for identified candidates (further details can be found opposite). These were important considerations in the executive reorganisation announced in the summer.
The Group aspires to the highest standards of corporate and internal governance in accordance with the expectations of the Board, ensuring that governance is in compliance with the latest regulation. As part of this, the Board’s Diversity Policy was reviewed by the Committee during the year. The review included the consideration of aspects of new and emerging best practice and regulatory developments in the area of senior management and Board diversity. This led to amendments to the existing policy explicitly to broaden the range of diversity criteria which will be taken into consideration in future appointments. Specifically, the policy now includes race, age, gender, educational and professional background as attributes.
During the year, the Committee, led by the Chairman, reviewed the succession plans for key senior management roles. Full details of the process are provided on the next page.
Helping to establish governance for the non ring-fenced bank, including agreeing the Terms of Reference to the non ring-fenced bank preparatory board
Annual review of the share dealing policy for Directors and GEC
In addition to the changes noted in the Chairman’s letter on page 52, Board appointments must also take into account independence and knowledge in addition to specific skills and experience to ensure a diverse Board composition. The full Diversity Policy can be found at www.lloydsbankinggroup.com.
A review as to whether Non-Executive Directors were demonstrably independent and free of relationships and other circumstances that could affect their judgement.
Evidenced progress against the development plans reported to the Committee and PRA in the third quarter.
The Board places great emphasis on ensuring that its membership reflects diversity in its broadest sense. A combination of demographics, skills, experience, race, age, gender, educational and professional background and other relevant personal attributes on the Board is important in providing the range of perspectives, insights and challenge needed to support good decision making.
This report covers in more detail how the Committee operates and the issues on which we focused. Noting the environment in which we operate I am pleased to be able to report that in the opinion of the Audit Committee, your Company has met its obligations for financial reporting and disclosure and that the internal control framework is both effectively designed and operated.
The Group has also made provisions totalling £865 million in respect of other conduct matters, including £245 million for packaged bank accounts; £245 million for secured and unsecured arrears handling activities; and £100 million in respect of HBOS Reading, all largely reflecting issues caused prior to the implementation of the Group’s Conduct Strategy in 2013.
Ring-fencing The Committee discussed the accounting and control implications of the Government’s structural reform programme (‘ring-fencing’).
Financial reporting During the year, the Committee considered the following issues in relation to the Group’s financial statements and disclosures, with input from management, Group Internal Audit and the external auditor:
The Group has open tax matters which require it to make judgements about the most likely outcome for the purposes of calculating its tax position.
The Group must make both financial and demographic assumptions of a judgemental nature to determine the value of the defined benefit obligation.
The Committee considered the assumptions underlying the calculation of the defined benefit liabilities. The most critical assumptions reviewed were in respect of the mortality assumptions, inflation and the discount rate, which have been updated to reflect the Group’s recent experience, the latest CMI mortality tables and the results of the latest full actuarial review of the Group’s main schemes.
The Committee was satisfied that the Group’s quantitative and qualitative disclosures made in respect of retirement benefit obligations are appropriate. The relevant disclosures are set out in note 35: ‘Retirement benefit obligations’ on page 206 of the financial statements. The defined benefit obligation at 31 December 2017 was £44,384 million (31 December 2016: £45,822 million).
The Group completed its acquisition of MBNA on 1 June 2017.
The viability statement is disclosed on page 82 of the Directors’ report.
IFRS 9 The Committee has devoted a substantial amount of time to understanding and challenging management on its IFRS 9 implementation programme. The Group adopted IFRS 9 on 1 January 2018.
The Committee has received regular updates facilitating detailed discussion and challenge, including a dedicated extended session to review the key decisions taken by management to implement IFRS 9. During these updates, the Committee has discussed the Group’s processes to assess the classification and impairment of its financial assets; the proxies and simplifications used in the data for the models, noting the Model Governance Committee’s approval of the integrity, adequacy and methodology of the Group’s critical models; the estimated financial and capital impact (including the Group’s approach to the transitional arrangements); the industry-wide concerns raised by the PRA and the Group’s response to these concerns; the key methodology decisions made by management; and the changes to the Group’s key controls and governance.
The Committee has discussed the requirements of IFRS 15 (Revenue), which the Group adopted on 1 January 2018, and IFRS 16 (Leases), which the Group expects to adopt on 1 January 2019.
IFRS 16, the new leasing standard, is not effective until 1 January 2019. The main impact on the Group will be on its property leases which will move ‘on-balance sheet’. The Group will recognise a right of use asset and a corresponding liability. The Committee has discussed the Group’s progress on its implementation plans for the standard during 2017 and will continue to discuss the Group’s plans and the impact of the standard on the Group during 2018.
The total amount of fees paid to the auditor for both audit and non-audit related services in 2017 is disclosed in note 11 to the financial statements on page 187.
Statutory Audit Services compliance The Company and the Group confirm compliance with the provisions of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 for the year to 31 December 2017.
Committee composition, skills, experience and operation Alan Dickinson, Chairman of the Committee, is a highly regarded retail and commercial banker, having spent 37 years with the Royal Bank of Scotland, most notably as Chief Executive of RBS UK, overseeing the group’s Retail and Commercial operations in the UK. The Committee is composed of independent Non-Executive Directors, who provide core banking and risk knowledge, together with breadth of experience which brings knowledge from other sectors, and a clear awareness of the importance of putting the customer at the centre of all that the Group does.
All Non-Executive Directors are members of the Board Risk Committee. The Chief Risk Officer has full access to the Committee and attends all meetings. The Chief Internal Auditor and members of the Executive also attend meetings, as appropriate.
During the year the Committee met its key objectives and carried out its responsibilities effectively. Details of Committee membership and meeting attendance can be found on page 58.
Given the dynamic nature and significance of IT and cyber risks, the Board Risk Committee sub-committee on IT resilience and cyber continues to enable more in depth consideration of these risks to the Group. During the year, the sub-committee gave consideration to a wide range of issues including enhanced assurance for cyber critical third parties, cyber and IT controls, Technology Resilience and Cyber Programme updates, Cyber Strategy, and roles and responsibilities of the Chief Security Officer. Alongside this an advisory panel comprised of external industry experts provides the sub-committee with an external view of current and evolving industry wide cyber security threats, challenges and developments.
Conclusion: Whilst there have been significant improvements in cyber capability and the Group is within Board risk appetite in relation to its industry benchmark, the Committee will continue to challenge the Group to further improve its ability to mitigate and respond to cyber risk. Technology resilience will also remain a key focus for 2018 as the Group continues to invest in its infrastructure.
Conclusion: Whilst initial planning has been undertaken to satisfy the Board that the Group can deliver against its planned change objectives, new metrics are being introduced to enable effective performance monitoring, risk management and the assessment of delivery challenges including subject matter capacity and capability. These risk metrics will be managed across the Group but reported to Board on a regular basis.
Managing regulatory risk continues to be a key focus within the Group due to the significant amount of highly complex and interdependent regulatory reform that we have had to manage.
Managing operational risk continues to be a key focus within the Group due to the complexity and volume of change, the Group’s IT infrastructure, cyber risk, and reliance on third party suppliers.
Conclusion: Regular monitoring continues to assist the Committee in its assessment of indebtedness of the consumer lending portfolios, with management continuing to take action to mitigate potential risks associated with increased indebtedness and to continue to review the appropriate treatment of vulnerable customers.
Given the increase in data regulation, data remains a key risk for the Group and remains a critical area of focus for the Group’s regulators. The Committee has monitored and reviewed the risks associated with the introduction of PSD2, including the need to ensure there is appropriate control and ownership of data as the use of Third Party Providers (TPPs) becomes more prevalent. With the introduction of GDPR, the Committee has overseen actions within the Group to ensure clear control and management of customer data, including assessing its accuracy and how it’s used. It is increasingly important for the Committee to ensure the Group has effective controls in place to manage any potential data breaches, including a defined escalation route to the FCA and the ICO.
The Group’s participation in the buy-to-let segment was also reviewed, including the design and implementation of underwriting changes in response to taxation changes and new supervisory standards for portfolio landlords.
Open banking and PSD2 present strategic and operational challenges as well as opportunities and is a central area of focus for the Group.
The key risks for the Group include adverse movements and volatility in Financial Markets, impact on our customer credit profiles and the ability to operate cross border. When reviewing the possible impacts of the EU exit, the Committee has given consideration to the Group’s strong UK focus and UK-centric strategy. The Committee continues to review the effectiveness of risk management across the Group and the actions taken to better understand the impact on our customers, as well as close monitoring of positions in Financial Markets. These actions not only include continued support to all our customers, but in addition the Group has ensured our Commercial Banking customers consider their relevant trading and financial impacts.
The Committee discussed, during the year, the current model landscape, trends in performance and actions being taken to resolve material model issues. The Committee considered regulatory impacts and the action being taken by the Group as well as benchmarking the Group’s approach to the industry.
Corporate governance report continued responsible business report and Helping Britain Prosper Plan, which the Committee recommends to the Board for approval.
Doing business responsibly is at the heart of strengthening trust in our Group and the industry.
In August 2017, Sara Weller visited the Elizabeth Fry Charity in Reading, which has received a grant of around £70,000 from the Lloyds Bank Foundation for England and Wales. The charity runs one of only six approved premises for women released from prison on bail, on license or as part of a community order. The charity supports residents to deal with some challenging issues, such as substance abuse or mental health problems and equips them with the skills to live (and hopefully work) more independently within 3-6 months. After the visit Sara Weller commented: ‘my visit reinforced the message that the Foundations actively seek out and make a difference for the most disadvantaged people in our society. Supporting them is something in which we, as a Group, take great pride.’
Committee purpose The purpose of the Committee is to oversee the Group’s strategy and plans for becoming a leader in responsible business as part of the objective to help Britain prosper; the activities which have an impact on the Group’s behaviour and reputation as a trusted, responsible business; and the development of the Group’s
The final dividend in respect of 2016 of 1.7 pence per ordinary share was paid to shareholders on 16 May 2017, a special dividend in respect of 2016 of 0.5 pence per ordinary share was paid to shareholders on 16 May 2017 and an interim dividend for 2017 of 1 pence per ordinary share was paid on 27 September 2017; these dividends totalled £2,284 million, net of a credit in respect of unclaimed dividends written-back in accordance with the Company’s Articles of Association. Further information on dividends is shown in note 44 on page 220 and is incorporated by reference.
Biographies of current Directors are set out on pages 54–55. Details of the Directors seeking election or re-election at the AGM are set out in the Notice of Meeting.
The Company has also granted deeds of indemnity by deed poll and by way of entering into individual deeds, which constitute ‘qualifying third party indemnity provisions’ to the Directors of the Group’s subsidiary companies, including to former Directors who retired during the year and since the year end. Such deeds were in force during the financial year ended 31 December 2017 and remain in force as at the date of this report.
As at 31 December 2017, the Company had been notified by its substantial shareholders under Rule 5 of the DTR of the following interests in the Company’s shares: Interest in shares
Greenhouse gas emissions The Group has voluntarily reported greenhouse gas emissions and environmental performance since 2009, and since 2013 this has been reported in line with the requirements of the Companies Act 2006. Our total emissions, in tonnes of CO2 equivalent, are reported in the strategic report on page 26.
Deloitte LLP has provided limited level ISAE 3000 (Revised) assurance over selected non-financial indicators as noted by . Their full, independent assurance statement is available online at www.lloydsbankinggroup.com/rbdownloads
Simplification We made changes in 2017 in a drive towards further simplification of remuneration structures, removing complexity, and ensuring a focus on rewarding longer-term, sustainable performance. The Group Performance Share plan was introduced in 2017. The plan outcome is determined on a ‘top down’ basis, as a percentage of the Group’s underlying profit, replacing the previous complex bonus pool methodology driven by aggregated divisional and functional bonus outcomes. There are enhancements to the levels of disclosure within this report, with the aim to provide additional clarity and transparency, particularly relating to the performance assessments that underpin the Group Performance Share outcome both at Group level, and for individual Executive Directors.
Share plan. Approximately 28,000 customerfacing colleagues have transitioned plans during 2017.
I have set a broad agenda for the Committee in 2017, further details of which can be found on page 99. The Committee remit is dynamic and extends beyond executive remuneration, believing that all colleagues should be represented in its consideration. It is our aim to ensure that the remuneration policy framework and guiding principles can be applied consistently to all colleagues. This recognises the importance of colleagues working together, sharing collectively in the Group’s success and building a culture of acting as stewards of the long-term interests of the Group.
Risk m anag em ent and Unite) who represent the interests of around 30,000 colleagues. Feedback from the unions is provided to the Committee on specific matters under consultation, for example, in setting the annual pay budget for colleagues and any changes to benefits arrangements. I have also actively engaged with the Group’s customers, regulators and my other Board members (including directly with the Responsible Business Committee). In addition, our independent advisers have provided regular updates on market context and emerging topics in remuneration.
In discussions with the Group’s recognised unions, a 2018 pay budget of 2.7 per cent was agreed, including additional funding to ensure a minimum pay award of £600 for eligible colleagues. Colleagues in lower pay ranges receive higher awards to support pay progression, together with colleagues who receive stronger performance ratings in recognition of their contribution to the Group. The majority of colleagues’ pay is determined consistently using fixed pay matrices aligned to the external market and designed to help recruit and retain colleagues with the skills, behaviours and motivation to deliver the Group’s strategic aims. This approach supports the Group’s commitment to the Living Wage Foundation.
Summary of 2017 remuneration outcomes The ‘Remuneration at a glance’ section on the following pages provides a summary of the remuneration outcomes for Executive Directors and the key measures against which the Committee determined these outcomes.
Increases to base salary for Directors below the Group pay budget.
Actual3 1 Excludes MBNA. 2 The underlying profit of £8,493 million has been adjusted by the £74 million incremental difference between the Prudential Value Adjustment (PVA) at year-end 2016 to year-end 2017, in line with regulatory requirements.
LTIP awards made in 2015 are vesting at 66.3 per cent, as detailed in the table below. This reflects the Group’s strong performance over the three financial years ended 31 December 2017, balanced against uncertainty in the economic and political environment. In particular, this has impacted negatively on absolute share price performance, resulting in no vesting for the Total Shareholder Return component. Executive Directors are required to retain any vested shares for a further two years after vesting.
GPS £m Dividend £m Dividend includes ordinary and special dividend (2016) and intended share buyback (2017)
Defined benefit pension arrangements (audited) António Horta-Osório has a conditional unfunded pension commitment, subject to share price performance. This was a partial buy-out of a pension forfeited on joining from Santander Group. It is an Employer-Financed Retirement Benefits Scheme (EFRBS). The EFRBS provides benefits on a defined benefit basis at a normal retirement age of 65. The benefit in the EFRBS accrued during the six years following commencement of employment, therefore ceasing to accrue as of 31 December 2016.
The Balanced Scorecard (BSC) is not intended to be a purely mechanical approach to performance assessment, but designed to support the Committee in exercising judgement. It was noted that while there were a diverse range of outcomes, on balance despite challenging economic and external market conditions, the Group had delivered outperformance against 10 of the 20 BSC metrics, with only two falling below the target level; the progress on the creation of the non ringfenced bank and return on required equity. The Committee discussed a number of key performance factors, noting in particular the Group’s outperformance in customer complaints management, colleague engagement despite the significant structural changes during 2017, and strong balance sheet management and capital generation.
Consideration was given to items not factored into the Group underlying profit or the Group BSC. The Committee considered adjustments reflecting 2017 conduct-related provisions, including the additional PPI provision of £1.65 billion and other non-PPI provisions of £865 million. In arriving at the adjustment, the Committee considered factors such as customer impact and reputation.
As a result of these items, the Committee approved an overall collective adjustment of £109.6 million (or approximately 21 per cent of the modified GPS outcome) which reduced the total GPS outcome.
The Group has exceeded expectations in terms of customer perception of brand, service, products and complaints.
< 50% of Helping Britain Prosper Plan metrics are Green 90%+ of Helping Britain Prosper Plan metrics are Green and none of the Helping Britain Prosper metrics are Red.
In reaching their decision on individual awards for Executive Directors, the Committee considered formulaic payout ranges set around the expected outcome for each performance rating, based on a percentage of base salary (see graphs below for each Executive Director). The percentage of base salary applied within the relevant range was determined by reference to the individual performance rating for each Executive Director.
Continued strong underlying financial performance with continued improvement in profit (£8.5 billion, up 8 per cent) and returns (RoTE of 15.6 per cent). Market leading cost:income ratio improving to 46.8 per cent.
Credit and asset quality remain strong. CET1 ratio of 15.5 per cent pre capital return comfortably above requirements. Moody’s upgraded Lloyds Bank’s credit rating to Aa3 and S&P improved outlook to ‘positive’.
Effectively managed development of the next phase of the Group’s strategy whilst successfully completing delivery of the second Group Strategic Review.
Percentage change in remuneration levels Figures for ‘All employees’ are calculated using figures for UK-based colleagues subject to the GPS plan. This population is considered to be the most appropriate group of employees for these purposes because its remuneration structure is consistent with that of the GCE. For 2017, 45,696 colleagues were included in this category.
3 Average awards for colleagues participating in the Group annual GPS increased by 9.3 per cent.
Relative importance of spend on pay (£m) The graphs illustrate the total remuneration of all Group employees compared with distributions to shareholders in the form of dividends and share buyback. 2 In addition to the annual bonus of £414.7 million awarded in respect of 2017 performance, the Group made Group Ownership Share awards of £46.7 million and paid approximately £64.1 million under variable pay arrangements used to incentivise customer-facing colleagues, primarily in the Community Banking and Commercial Banking divisions.
António Horta-Osório – – 1,765 3,398 7,475 11,540 8,704 5,791 6,422
J E Daniels Waived 62% 0% – – – – – –
António Horta-Osório – – Waived 62% 71% 54% 57% 77% 77%
António Horta-Osório – – 0% 0% 54% 97% 94.18% 55% 66.3%
3 Shareholdings held by Deborah McWhinney are either wholly or partially in the form of ADRs.
2 2014 LTIP award was eligible to receive an amount equal in value to any dividends paid during the performance period. Dividend equivalents have been paid based on the number of shares vested and have been paid in shares. The dividend equivalent shares were paid on 6 March 2017. The closing market price of the Group’s ordinary shares on that date was 67.51 pence. The dividend equivalent shares are not subject to any holding period.
5 GPS is deferred into shares. The face value of the share awards in respect of GPS granted in March 2017 was £975,630 (1,417,778 shares) for António Horta-Osório; £459,461 (667,685 shares) for George Culmer; and £462,141 (671,579 shares) for Juan Colombás. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to 3 March 2017), which was 68.814 pence.
Implementation of the policy in 2018 It is proposed to operate the policy in the following way in 2018: Base salary
For the 2018 performance year, the Group Performance Share opportunity will be awarded in March 2019 in a combination of cash (up to 50 per cent) and shares. 40 per cent will be released in the first year following award, 40 per cent will be released in the second year and the remaining 20 per cent will be released in the third year. Any shares released are subject to a further 12-month holding period in line with regulatory requirements.
Cost:income ratio Set relative to 2019 targets Threshold: 47.2% Maximum: 45.7%
Statutory economic profit Set relative to 2020 targets Threshold: £2,300m Maximum: £3,451m 25%
Cost:income ratio Set relative to 2020 targets Threshold: 46.4% Maximum: 43.9% 10%
Building the best team Employee engagement index Set relative to 2020 markets norms
Awards in 2018 are being made as follows: GCE: 300 per cent of base salary CFO: 275 per cent of base salary COO: 275 per cent of base salary
As regulations prohibit the payment of dividend equivalents on awards in 2018 and subsequent years, the number of shares subject to the award has been determined by applying a discount factor to the share price on grant, as previously disclosed. The Committee approved an adjustment of 25 per cent for colleagues who are senior managers, including the Executive Directors.
In line with shareholder views, changes to strategic measures have been minimised to provide consistency with the 2017 plan, while aligning to the key strategic priorities as set out in the third Group Strategic Review. A new measure is proposed for the 2018 plan. The new measure will be Digital Net Promoter Score, to ensure that there is focus on maintaining customer satisfaction and quality of service. To provide alignment to the 2016 and 2017 plans, the Committee will also take into account other factors, for example the number of digitally active customers, when making its overall assessment of performance. Economic profit has been based on statutory profit after tax, not underlying profit, to align more closely with shareholder experience, while maintaining focus on capital efficiency. The targets for this revised measure are considered stretching. For reference, the equivalent outcome in 2017 would be £798 million (including PPI), compared to the 2020 threshold of £2.3 billion. The cost: income ratio measure is inclusive of conduct-related provisions (excluding PPI). The Committee believes that these measures appropriately capture risk management and long-term sustainable growth, aligning management and shareholder interests.
The application of malus will generally be considered when: – there is reasonable evidence of employee misbehaviour or material error or that they participated in conduct which resulted in losses for the Group or failed to meet appropriate standards of fitness and propriety; – there is material failure of risk management at a Group, business area, division and/or business unit level; – the Committee determines that the financial results for a given year do not support the level of variable remuneration awarded; and/or
Judgement on individual performance adjustment is informed by taking into account the severity of the issue, the individual’s proximity to the issue and the individual’s behaviour in relation to the issue. Individual adjustment may be applied through adjustments to BSC assessments and/or through reducing the GPS and/or GOS outcome.
Chairman and Non-Executive Director fees in 2018 The annual fee for the Chairman was increased by 2 per cent to £742,845, in line with the overall salary budget for the executive population.
Additional disclosures Total remuneration of the eight highest paid senior executives1
2 Pension costs based on a percentage of salary according to level.
– Approval of the 2017 and 2018 Group Ownership Shares plan performance measures
Senior Executives: – Review of performance and remuneration arrangements for Executive Directors and key senior managers
Directors’ remuneration policy (binding vote) 47,673 98.03% 959 1.97% 535 2016 annual report on remuneration (advisory vote) 48,113 97.92% 1,023 2.08% 31
Measures consist of both financial and non-financial measures and the weighting of these measures will be determined annually by the Committee. The weightings of the performance measures for the 2018 financial year are set out on page 96. All assessments of performance are ultimately subject to the Committee’s judgement, but no award will be made if threshold performance (as determined by the Committee) is not met for financial measures or the individual is rated ‘Developing performer’ or below. The expected value of the Group Performance Share is 30 per cent of maximum opportunity.
25 per cent will vest for threshold performance, 50 per cent for ontarget performance and 100 per cent for maximum performance.
Operation The Group Performance Share and Group Ownership Share plans are both considered variable remuneration for the purpose of regulatory payment and deferral requirements. The payment of variable remuneration and deferral levels are determined at the time of award and in compliance with regulatory requirements (which currently require that at least 60 per cent of total variable remuneration is deferred for seven years with pro rata vesting between the third and seventh year, and at least 50 per cent of total variable remuneration is paid in shares or other equity linked instruments subject to a holding period in line with current regulatory requirements).
Remuneration policy table for Chairman and Non-Executive Directors Chairman and Non-Executive Director fees
The overarching purpose of the Remuneration Committee is to consider, agree and recommend to the Board an overall remuneration policy and philosophy for the Group that is defined by, supports and is closely aligned to its long-term business strategy, business objectives, risk appetite and values and recognises the interests of relevant stakeholders. The remuneration policy governs all aspects of remuneration and applies in its entirety to all divisions, business units and companies in the Group, including wholly-owned overseas businesses and all colleagues, contractors and temporary staff. The Committee reviews the policy annually. In 2017, it was updated to reflect changes to the Reward Principles and new reward supporting policies. The Committee pays particular attention to the top management population, including the highest paid colleagues in each division, those colleagues who perform senior management functions for the Group and MRTs. Further details on the operation of the Remuneration Committee can be found on page 99 of the DRR.
Applies to: Senior Management, Executive Directors, members/attendees of the GEC and their respective direct reports Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function Other MRTs Non-MRTs
Non-Executive Director fees are reviewed periodically by the Board. Further information on fees can be found on page 102 of the DRR.
Core benefits for UK-based colleagues include pension, private medical insurance, life insurance, car or car allowance (eligibility dependent on grade) and other benefits that may be selected through the Group’s flexible benefits plan. Further information on benefits and all-employee share plans can be found on pages 100–101 of the DRR. Benefits can be amended or withdrawn in the following circumstances: – to reflect a change to colleague contractual terms; – to reflect a change of grade; – termination of employment with the Group; – to reflect a change of Reward Strategy/benefit provision; – if the award would be inconsistent with any statutory or tax requirements.
Details of NEDs’ benefits are set out on page 102 of the DRR.
Retention awards may be made to existing colleagues in limited circumstances and are subject to prior regulatory approval in line with applicable regulatory requirements.
Applies to: Senior Management, Executive Directors, members/attendees of the GEC and their respective direct reports Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function** Other MRTs** Non-MRTs**
Applies to: Senior Management, Executive Directors, members/attendees of the GEC and their respective direct reports Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function Other MRTs Non-MRTs * Eligibility based on seniority, grade and role ** Requirement based on seniority and grade
Material Risk Takers 1 Converted to Euros using the exchange rate €1 = £0.88293 (average exchange rate 1 December 2017 – 31 December 2017 based on the European Commission Budget exchange rates). The exchange rate used for 2016 was €1 = £0.84815.
2 Comprises previous Customer Products & Marketing and Consumer Finance divisions, and includes the ‘Community Banking’ division 3 Comprises Global Payments, Group Services, Group Sourcing, Group Property, Group & Cyber Security, Group Transformation and all supporting functions (Risk, Finance, People, Legal, Group Corporate Affairs, Group Internal Audit, Company Secretariat)
Table 5 Other payments awarded in relation to the 2017 performance year
Total amount of amendment during the year due to ex-post explicit adjustments
Further information on risk management can be found: Risk overview 32 Note 51: Financial risk management 240 Pillar 3 report: www.lloydsbankinggroup.com
The Group supports the recommendations made in the report ‘Enhancing the Risk Disclosures of Banks’ issued by the Enhanced Disclosure Task Force of the Financial Stability Board in October 2012.
Risk management is at the heart of our strategy to become the best bank for customers. Our mission is to support the business in delivering sustainable growth in targeted segments. This is achieved through informed risk decision making and superior risk and capital management, supported by a consistent risk‑focused culture. The risk overview (pages 32–37) provides a summary of risk management within the Group. It highlights the important role of risk as a strategic differentiator, along with a brief overview of the Group’s Risk Management Framework, the potential risks and impacts arising from the external environment, and the principal risks faced by the Group and key mitigating actions.
An aggregate view of the Group’s overall risk profile, key risks and management actions, and performance against risk appetite, is reported to and discussed monthly at the Group Risk Committee (and a subset at the Group Asset and Liability Committee), with regular reporting to the Board Risk Committee and the Board.
There remains uncertainty as to the impact of EU exit on the regulatory and legal landscape; for example, the ability that the UK can continue to share data under the new data protection regime (both with other European countries and internationally) after EU exit.
Further, high levels of credit market liquidity have reduced spreads and weakened terms in some sectors, creating a potential under-pricing of risk.
– The Group is transforming the business to improve customer experience by digitising customer journeys and leveraging branches for complex needs, in response to customers’ evolving needs and expectations. – The Group will deepen insight into customer segments, their perception of brands and what they value. – Agility will be increased by consolidating platforms and building new architecture aligned with customer journeys.
Strategic use of customer data: The implementation of open banking introduces data sharing with third parties, potentially increasing the risks of fraud and data loss. There is a continued need to defend against dynamic external challengers and meet consumer expectations. Failure to address growth in data movement or understand the supply chain/third party controls may increase exposure to cyber and fraud leading to conduct and reputational issues.
– The Group has implemented open banking and is actively monitoring the implications for our customers, including protecting them from fraud. – The Group is making a significant investment to improve data privacy, including the security of data and oversight of third parties. – The Group’s strategy is to introduce advanced data management practices, based on Group-wide standards, data-first culture and modern enterprise data platforms, supported by a simplified modern IT architecture.
Capital stress testing Overview Stress testing is recognised as a key risk management tool within the Group by the Board, senior management, the businesses and the Risk and Finance functions. It is fully embedded in the planning process of the Group as a key activity in medium term planning, and senior management is actively involved in stress testing activities via a strict governance process.
Regulatory stress tests The concurrent UK stress test run by the Bank of England was also undertaken in 2017. As announced in November, despite the severity of the stress scenario, the Group exceeded the capital and leverage thresholds set out for the purpose of the stress test and was not required to take any capital action as a result.
Methodology The stress tests at all levels must comply with all regulatory requirements, achieved through comprehensive construction of macroeconomic scenarios and a rigorous divisional, functional, risk and executive review and challenge process, supported by analysis and insight into impacts on customers and business drivers.
The Group Financial Risk Committee (GFRC), chaired by the Chief Risk Officer and attended by the Chief Financial Officer and other senior Risk and Finance colleagues, is the Committee that has primary responsibility for overseeing the development and execution of the Group’s stress tests.
The Chief Risk Officer is accountable for developing and leading an industry-wide recognised Risk function that adds value to the Group by: – providing a regular comprehensive view of the Group’s risk profile, both current and emerging key risks, and management actions; – (with input from the business areas and Risk division) proposing Group risk appetite to the Board for approval, and overseeing performance of the Group against risk appetite; – developing an effective RMF which meets regulatory requirements for approval by the Board, and overseeing execution and compliance; and – challenging management on emerging risks and providing expert risk and control advice to help management maintain an effective risk and control framework.
Risk and control cycle from identification to reporting To allow senior management to make informed risk decisions, the business follows a continuous risk management approach which includes producing appropriate, accurate and focused risk reporting and risk management. The risk and control cycle sets out how this should be approached and produced with the appropriate controls and processes in place. This cycle, from identification to reporting, ensures consistency and is intended to manage and mitigate the risks impacting the Group.
Identified risks are reported on a monthly basis or as frequently as necessary to the appropriate committee. The extent of the risk is compared to the overall risk appetite as well as specific limits or triggers. When thresholds are breached, committee minutes are clear on the actions and timeframes required to resolve the breach and bring risk within given tolerances. There is a clear process for escalation of risks and risk events.
Risk Division Committees and Governance Credit risk − Executive Credit Approval Committee − Commercial Banking Credit Risk Committees − Retail Credit Risk Committees
Responsible for providing recommendations regarding performance adjustment, including the individual risk adjustment process and risk adjusted performance assessment, and making final decisions on behalf of the Group on the appropriate course of action relating to conduct breaches, under the formal scope of the SM&CR.
Group Capital Risk Committee Responsible for providing oversight of all relevant capital matters within the Group including the Group’s capital position, Pillar 2 requirements, regulatory reform and accounting developments specific to capital, as well as other areas such as stress testing and modelling activity. It also reviews regulatory submissions including the ICAAP and recovery plan prior to submission to Group Financial Risk Committee.
Group Model Governance Committee Responsible for setting the framework and standards for model governance across the Group, including establishing appropriate levels of delegated authority and principles underlying the Group’s modelling framework, specifically regarding consistency of approach across business units and risk types. It approves banking models other than those material at Group level, which are approved by GRC, and meets the PRA requirements regarding the governance and approval for Internal Ratings Based (IRB) methodologies. An equivalent committee exists in the Insurance division for approval of insurance models.
Definition Credit risk is defined as the risk that parties with whom the Group has contracted fail to meet their financial obligations (both on and off balance sheet).
Exposures The principal sources of credit risk within the Group arise from loans and advances, contingent liabilities, commitments, debt securities and derivatives to customers, financial institutions and sovereigns. The credit risk exposures of the Group are set out in note 51 on page 240. Credit risk exposures are categorised as ‘retail’, arising primarily in the Retail and Run-off divisions, and some small and medium sized enterprises (SMEs) and ‘corporate’ (including larger SMEs, corporates, banks, financial institutions and sovereigns) arising primarily in the Commercial Banking, Run-off and Insurance and Wealth divisions and Group Corporate Treasury (GCT).
Additionally, credit risk arises from leasing arrangements where the Group is the lessor. Note 2(J) on page 177 provides details on the Group’s approach to the treatment of leases.
Measurement In measuring the credit risk of loans and advances to customers and to banks at a counterparty level, the Group reflects three components: (i) the ‘probability of default’ (PD) by the counterparty on its contractual obligations; (ii) current exposures to the counterparty and their likely future development, from which the Group derives the ‘exposure at default’; and (iii) the likely loss ratio on the defaulted obligations (the ‘loss given default’).
The models vary, inter alia, in the extent to which they are ‘point in time’ versus ‘through the cycle’. The models are subject to rigorous validation and oversight and governance including, where appropriate, benchmarking to external information.
In the principal retail portfolios, exposure at default and loss given default models are in use. For regulatory reporting purposes, counterparties are segmented into a number of rating grades, each representing a defined range of default probabilities and exposures migrate between rating grades if the assessment of the counterparty PD changes. The retail master scale comprises 13 non-default ratings and one default rating.
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 regulatory EL models. Note 2(H) on page 176 provides details of the Group’s approach to the impairment of financial assets.
Strong models and controls: The independent Risk division has established a set of model risk management principles, designed to ensure models and associated rating systems are developed consistently and are of sufficient quality to support business decisions and meet regulatory requirements. Internal rating models are developed and owned by the Risk division. The designated model owner takes responsibility for ensuring the fitness for purpose of the rating systems, supported and challenged by the independent specialist Group function.
Stress testing and scenario analysis: The Group’s credit portfolios are also subjected to regular stress testing, with stress scenario assessments run at various levels of the organisation. Exercises focused on individual divisions and portfolios are performed in addition to the Group led and regulatory stress tests. For further information on stress testing process, methodology and governance, see page 111.
The Group also assesses the affordability and sustainability of lending for each borrower; for secured lending this includes use of an appropriate stressed interest rate scenario. Affordability assessments are compliant with relevant regulatory conduct guidelines. The Group takes reasonable steps to validate information used in the assessment of a customer’s income and expenditure.
For UK Secured, the Group’s policy permits owner occupier applications with a loan to value (LTV) maximum of 95 per cent. Applications with an LTV above 90 per cent are subject to enhanced underwriting criteria, including higher scorecard cut-offs.
Buy-to-let mortgages are limited to a maximum loan size of £1,000,000 and 75 per cent LTV. Buy-to-let applications must pass a minimum rental cover ratio of 125 per cent under stressed interest rates, after applicable tax liabilities. Since September 2017, Portfolio Landlords (customers with four or more mortgaged buy-to-let properties) have been subject to additional controls including evaluation of overall portfolio resilience.
The Group’s policy is to reject any application for a lending product where a customer is registered as bankrupt or insolvent, or has a recent County Court Judgment or financial default registered at a CRA used by the Group above de minimis thresholds. In addition, the Group rejects applicants where total unsecured debt, debt-to-income ratios, or other indicators of financial difficulty exceed policy limits.
Collateral The principal collateral types acceptable for loans and advances, contingent liabilities and derivatives with commercial and bank counterparties and customers are: – residential and commercial properties; – charges over business assets such as premises, inventory and accounts receivable; – financial instruments such as debt securities; – vehicles; – cash; and – guarantees received from third parties.
Risk management continued debenture over one or more of the assets of a company or limited liability partnership, personal guarantees, limited in amount, from the directors of a company or limited liability partnership and key man insurance. The Group maintains policies setting out acceptable collateral bases for valuation, maximum LTV ratios and other criteria to be considered when reviewing an application. Other than for project finance, object finance and income producing real estate where charges over the subject assets are required, the provision of collateral will not determine the outcome of an application. Notwithstanding this, the fundamental business proposition must evidence the ability of the business to generate funds from normal business sources to repay a customer or counterparty’s financial commitment.
The Group seeks to avoid correlation or wrong way risk where possible. Under repurchase (repo) policy, the issuer of the collateral and the repo counterparty should be neither the same nor connected. The same rule applies for derivatives. The Risk division has the necessary discretion to extend this rule to other cases where there is significant correlation. Countries with a rating equivalent to AA- and above may be considered to have no adverse correlation between the counterparty domiciled in the country and that country of risk (issuer of securities).
The performance of all rating models is monitored on a regular basis, in order to ensure that they provide appropriate risk differentiation capability, the generated ratings remain as accurate and robust as practical, and the models assign appropriate risk estimates to grades and pools. All models are monitored against a series of agreed key performance indicators. In the event that the monitoring identifies material exceptions or deviations from expected outcomes, these will be escalated in accordance with the governance framework set by the Group Model Governance 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.
Risk m anagem ent detailed in note 2(H) on page 176. The Group’s approach is to ensure that provisioning models, supported by management judgement, appropriately reflect the underlying loss risk of exposures. The performance and output of models are monitored and challenged on an ongoing basis, in line with the Group’s model governance policies.
The Group measures the success of a forbearance scheme for secured customers based upon the proportion of customers performing (less than or equal to three months in arrears) over the 24 months following the exit from a forbearance treatment. For temporary treatments, 80.7 per cent of customers accepting reduced payment arrangements are performing. For permanent treatments, 83.4 per cent of customers who have accepted capitalisations of arrears and 84.3 per cent of customers who have accepted term extensions are performing.
For both categories, all decisions regarding an individual’s eligibility and any amounts payable under the scheme rest solely with the government. Payments are made directly to the Group by the Department of Work and Pensions. The Group estimates that customers representing approximately £1.6 billion of its mortgage exposures are receiving this benefit, including those who are also receiving other treatments for financial difficulty.
With the exception of small exposures (<£50,000) in SME, BSU case officers manage stressed and doubtful assets in Commercial Banking and are part of the independent Risk division. They are highly experienced and operate in a closely controlled and monitored environment, including regular oversight and close scrutiny by senior management. Distressed run-off assets are managed to the same standards by Client Asset Management (CAM).
The level of Commercial Banking BSU gross loans and advances to customers reduced from £3.4 billion to £2.6 billion between 31 December 2016 and 31 December 2017. The net reduction of £0.8 billion in BSU managed lending in Commercial Banking was driven by returns to mainstream, disposals, write-offs and repayments.
Types of forbearance The Group’s strategy and offer of forbearance is largely dependent on each customer’s individual situation. Early identification, control and monitoring are key to supporting the customer and protecting the Group. Concessions are often provided to help the customer with their day-to-day liquidity and working capital. A number of options are available to the Group where a customer is facing financial difficulty and each case is treated depending on its own specific circumstances.
All reviews performed in the good book, BSU within Commercial Banking or in the Run-off division include analysis of latest financial information, a consideration of the market and sector the customer operates in, performance against plan and revised terms and conditions granted as part of any forbearance concession that may have been provided.
The exception to this 12 month minimum period is where a permanent structural cure is made (for example, an injection of new collateral security or a partial repayment of debt to restore an LTV to within a covenant). In this case, the customer may exit forbearance once the permanent cure has been made.
Notwithstanding this, the overriding requirement for exit from forbearance in all cases is that the customer is not impaired and the reason for the forbearance event is no longer present.
– The Group expects an asset quality ratio of around 35 basis points through the cycle and less than 30 basis points through the plan period and in 2018.
– Sector concentrations within the lending portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes. In particular: – The average indexed LTV of the UK Retail mortgage portfolio improved to 43.6 per cent (31 December 2016: 44.0 per cent) and the percentage of Secured loans and advances with an indexed LTV greater than 100 per cent was 0.6 per cent (31 December 2016: 0.7 per cent). The average LTV for new UK Retail mortgages written in 2017 was 63.0 per cent (31 December 2016: 64.4 per cent). – The value of UK Retail mortgage lending with an indexed LTV of greater than 80 per cent fell to £30,680 million (31 December 2016: £32,395 million). – Total UK Direct Real Estate gross lending across the Group was £17.9 billion at 31 December 2017 (31 December 2016: £19.9 billion) and includes Commercial Banking lending of £17.3 billion, and £0.2 billion within Retail Business Banking (within Retail). The Group’s legacy run-off direct real estate portfolio has continued to fall and was £0.4 billion at 31 December 2017.
Transferred to not impaired during the year (783) (132) (8) (67) (990) (1,047)
The total notional principal amount of interest rate, exchange rate, credit derivative and equity and other contracts outstanding at 31 December 2017 and 31 December 2016 is shown in the table above. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 51 on page 240.
Retail – Asset quality remains strong across all portfolios, with stable new business quality and flow of loans entering arrears. – The impairment charge increased by £63 million to £717 million. Excluding MBNA, impairments were £55 million lower driven by a net release on the Secured portfolio, due to reduced impaired loans and rising house prices, which was offset by higher impairment charges on the Loans and UK Motor Finance portfolios. – Impairment provisions as a percentage of impaired loans increased to 46.1 per cent from 42.9 per cent at the end of 2016.
Asset quality ratio 0.21% 0.20% 1bp 1 Restated. See page 181.
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries for Credit cards (31 December 2017: £91 million; 31 December 2016: £115 million), Loans (31 December 2017: £120 million; 31 December 2016: £164 million), Overdrafts (31 December 2017: £66 million; 31 December 2016: £70 million) and Retail Business Banking (31 December 2017: £14 million; 31 December 2016: £16 million).
Table 1.12: Period end and average LTVs across the Retail mortgage portfolios
Average loan to value (%) 33.4 31.5 1 2016 values have been restated to include Scottish Widows Bank Mortgages and certain other interest only balances of £3,578 million.
Classified as forborne during the year 744 159 44 85 24 1,056
Commercial Banking – Net impairment charge was £115 million in 2017 (2016: £17 million) with the increase due to a lower level of write-backs and provision releases rather than a deterioration in the underlying portfolio. – Both 2016 and 2017 included material charges against a single customer (2016: oil & gas sector, 2017: construction sector), but otherwise gross charges have remained relatively low. – The portfolio continues to benefit from effective risk management, a resilient economic environment and continued low interest rates.
– Impairment provisions were broadly flat at £830 million at 31 December 2017 (31 December 2016: £828 million) and includes collective unidentified impairment provisions of £183 million (31 December 2016: £183 million). Provisions as a percentage of impaired loans increased from 37.7 per cent to 43.1 per cent during 2017, driven by a number of isolated cases. – An uncertain UK and global economic outlook and uncertainty relating to EU exit negotiations have the ability to impact the Commercial Banking portfolios. – Internal and external key performance indicators continue to be monitored closely to help identify early signs of any deterioration and portfolios remain subject to ongoing risk mitigation actions as appropriate. – Despite the uncertain economic outlook, the portfolios are well positioned and the Group’s through the cycle risk appetite approach is unchanged. Monitoring indicates no material deterioration in the credit quality of our portfolios. Notwithstanding this, impairments are likely to increase from their historic low levels, driven mainly by lower levels of releases and write-backs and an element of credit normalisation.
– The commercial real estate business within the Group’s Mid Markets and Global Corporate portfolio is focused on clients operating in the UK commercial property market ranging in size from medium-sized private real estate entities up to publicly listed property companies. The market for UK real estate has continued to be resilient, with appetite from a range of investors. UK real estate continues to offer attractive yields compared to other asset classes and the fall in Sterling has boosted the attractiveness to foreign investors. Credit quality remains good with minimal impairments/stressed loans. Recognising this is a cyclical sector, appropriate caps are in place to control exposure and business propositions continue to be written in line with a prudent, through the cycle risk appetite with conservative LTVs, strong quality of income and proven management teams. – Through clearly defined sector strategies Financial Institutions serves predominantly investment grade counterparties with whom relationships are either client focused or held to support the Group’s funding,
– Commercial Banking UK Direct Real Estate gross lending stood at £17.3 billion at 31 December 2017. – Approximately 70 per cent of loans and advances to UK Direct Real Estate relate to commercial real estate with the remainder relating to residential real estate. The portfolio continues to be heavily weighted towards investment real estate (c.90 per cent) over development. – The LTV profile of the UK Direct Real Estate portfolio in Commercial Banking continues to improve.
Impaired loans and advances The movements in Commercial Banking impaired forborne loans and advances were as follows: Table 1.20: Movement in Commercial Banking impaired forborne loans and advances (audited)
Table 1.22: Movement in Commercial Banking unimpaired forborne loans and advances >£5m1 (audited)
Corporate real estate and other corporate 815 692 84.9 287 41.5
Corporate real estate and other corporate 1,190 896 75.3 399 44.5
The Chief Security Office (formerly the Group Financial Stability Forum) monitors developments within the Eurozone, carries out stress testing through detailed scenario analysis and completes appropriate due diligence on the Group’s exposures. The Group has pre-determined action plans that would be executed in certain scenarios which set out governance requirements and responsibilities for the key actions which would be carried out and cover risk areas such as payments, liquidity and capital, communications, suppliers and systems, legal, credit, delivery channels and products, employees and the impact on customers.
In addition to the exposures detailed above, the Group has exposures in the following Eurozone countries: Table 1.26: Other Eurozone exposures
Regulatory and legal risk Definition Regulatory and legal risk is defined as the risk that the Group is exposed to fines, censure, or legal or enforcement action; or to civil or criminal proceedings in the courts (or equivalent) and/or the Group is unable to enforce its rights due to failing to comply with applicable laws (including codes of practice which could have legal implications), regulations, codes of conduct or legal obligations.
Monitoring Business unit risk exposure is reported to Risk division where it is aggregated at Group level and a report prepared. The report forms the basis of challenge to the business at the monthly Group Conduct, Compliance and Operational Risk Committee. This committee may escalate matters to the Chief Risk Officer, or higher committees. The report also forms the basis of the regulatory and legal sections in the Group’s consolidated risk reporting.
We provide colleague training on environmental risk management as part of the standard suite of Commercial Banking credit risk courses. To support this training, a range of online resource is available to colleagues and includes environmental risk theory, procedural guidance, and information on environmental legislation and sector-specific environmental impacts.
GCFC has responsibility for monitoring and reviewing integrated measurement of enhanced outcomes and customer views, including challenging divisions to make changes based on key learnings to support the delivery of the Group’s vision and foster a customer centric culture.
The Group maintains a formal approach to operational risk event escalation, whereby material events are identified, captured and escalated. Root causes of events are determined, where possible, and action plans put in place to ensure an optimum level of control to keep customers and the business safe, reduce costs, and improve efficiency.
Exposures The Group’s management of material people risks is critical to its capacity to deliver against its strategic objectives and to be the best bank for customers. Over the coming year the Group anticipates the following key people risk exposures: – Maintaining organisational skills, capability, resilience and capacity levels in response to increasing volumes of organisational, political and external market change; – Senior Managers and Certification Regime (SM&CR) and additional regulatory constraints on remuneration structures may impact the Group’s ability to attract and retain talent; – The increasing digitisation of the business is changing the capability mix required and may impact our ability to attract and retain talent; and – Colleague engagement may continue to be challenged by ongoing media attention on banking sector culture, sales practices and ethical conduct.
Monitoring People risks from across the Group are monitored and reported through Board and Group Governance Committees in accordance with the Group’s Risk Management Framework and people risk sub-framework. Risk exposures are discussed monthly via the Group People Risk Committee with upwards reporting to Group Risk and Executive Committees. In addition, oversight, challenge and reporting is completed at Risk division level and, combined with risk assurance, Risk division reviews and assesses the effectiveness of controls, recommending follow up remedial action if relevant. All material people risk events are escalated in accordance with the formal Group Operational Risk Policy and People Policies to the respective divisional Managing Directors and the Group Director, Conduct, Compliance and Operational Risk.
Mitigation Insurance underwriting risk in the Insurance business is mitigated in a number of ways: – General Insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements broadly spread over different reinsurers. Detailed modelling, including that of the potential losses under various catastrophe scenarios, supports the choice of reinsurance arrangements; – Insurance processes on underwriting, claims management, pricing and product design; – Longevity risk transfer and hedging solutions are considered on a regular basis and in 2017 we reinsured £1.3 billion of annuitant longevity. A team of longevity and bulk pricing experts has been built to support the new bulk annuity proposition; and – Exposure limits by risk type are assessed through the business planning process and used as a control mechanism to ensure risks are taken within risk appetite.
Definition Capital risk is defined as the risk that the Group has a sub-optimal quantity or quality of capital or that capital is inefficiently deployed across the Group.
The minimum amount of total capital, under Pillar 1 of the regulatory framework, is determined as 8 per cent of aggregate risk-weighted assets. At least 4.5 per cent of risk-weighted assets are required to be covered by common equity tier 1 (CET1) capital and at least 6 per cent of risk-weighted assets are required to be covered by tier 1 capital. These minimum Pillar 1 requirements are supplemented by additional minimum requirements under Pillar 2A of the regulatory framework, the aggregate of which is to be referred to as the Group’s Total Capital Requirement (TCR) from 1 January 2018, and a number of regulatory capital buffers as described below.
Additional minimum requirements under Pillar 2A are currently set by the PRA through the issuance of bank specific Individual Capital Guidance (ICG). This reflects a point in time estimate by the PRA, which may change over time, of the minimum amount of capital that is needed by the bank to cover risks that are not fully covered by Pillar 1, such as credit concentration and operational risk, and those risks not covered at all by Pillar 1, such as pensions and interest rate risk in the banking book (IRRBB). From 1 January 2018, Pillar 2A will be set as a firm specific capital requirement (Pillar 2R) rather than as individual capital guidance.
The countercyclical capital buffer (CCyB) is time-varying and is designed to require banks to hold additional capital to remove or reduce the build-up of systemic risk in times of credit boom, providing additional loss absorbing capacity and acting as an incentive for banks to constrain further credit growth. The amount of the buffer is determined by reference to buffer rates set by the (FPC) for the individual countries where the Group has relevant credit risk exposures. The CCyB rate for the UK is currently set at zero but will increase to 0.5 per cent on 27 June 2018 and to 1.0 per cent on 28 November 2018. The FPC will reconsider the adequacy of a 1.0 per cent UK CCyB rate during the first half of 2018 in light of the evolution of the overall risk environment. Non-zero buffer rates currently apply for Norway, Sweden, Hong Kong, Iceland, Slovakia and the Czech Republic. Given that the Group has minimal exposures to these jurisdictions, the overall countercyclical capital buffer requirement at 31 December 2017 is considered to be negligible.
The minimum leverage ratio requirement under the UK Leverage Ratio Framework is 3.25 per cent. In addition the framework requires two buffers to be maintained: an Additional Leverage Ratio Buffer (ALRB), which is calculated as 35 per cent of the Systemic Risk Buffer (applicable from 2019) and a time-varying Countercyclical Leverage Buffer (CCLB) which is calculated as 35 per cent of the countercyclical capital buffer rate (currently set at 0 per cent). At least 75 per cent of the minimum 3.25 per cent requirement and the entirety of any buffers that may apply must be met by CET1 capital.
Monitoring Capital is actively managed and monitoring capital ratios is a key factor in the Group’s planning processes and stress analyses. Multi-year forecasts of the Group’s capital position, based upon the Group’s operating plan, are produced at least annually to inform the Group’s capital plan whilst shorter term forecasts are more frequently undertaken to understand and respond to variations of the Group’s actual performance against the plan. The capital plans are tested for capital adequacy using a range of stress scenarios covering adverse economic conditions as well as other adverse factors that could impact the Group and the Group maintains a recovery plan which sets out a range of potential mitigating actions that could be taken in response to a stress.
Regular reporting of actual and projected ratios, including those in stressed scenarios, is undertaken, including submissions to the Group Capital Risk Committee (GCRC), Group Financial Risk Committee (GFRC), Group Asset and Liability Committee (GALCO), Group Risk Committee (GRC), Board Risk Committee (BRC) and the Board. Capital policies and procedures are subject to independent oversight.
The regulatory framework within which the Group operates continues to evolve and further detail on this will be provided in the Group’s Pillar 3 report. The Group continues to monitor these developments very closely, analysing the potential capital impacts to ensure that, through organic capital generation, the Group continues to maintain a strong capital position that exceeds both minimum regulatory requirements and the Group’s risk appetite and is consistent with market expectations.
Dividend policy The Group intends to maintain an ordinary dividend policy that is both progressive and sustainable. The rate of growth of the ordinary dividend will be decided by the Board in light of the circumstances at the time.
During 2017, the Group issued £8.5 billion (sterling equivalent as at 31 December 2017) of senior unsecured securities from Lloyds Banking Group plc which, while not included in total capital, are eligible to meet MREL. Combined with previous issuances made during 2016 the Group remains comfortably positioned to meet MREL requirements from 2020 and, as at 31 December 2017, had a transitional MREL ratio of 25.7 per cent of risk-weighted assets.
Adjustment to retained earnings for foreseeable dividends (1,475) (1,568) (1,475) (1,568)
Deconsolidation of instruments issued by insurance entities1 (1,786) (1,810) (1,786) (1,810)
Adjustments for transitional limit and non-eligible instruments 1,617 1,351 (1,252) (1,694)
The key difference between the transitional capital calculation as at 31 December 2017 and the fully loaded equivalent is primarily related to capital securities that previously qualified as tier 1 or tier 2 capital, but that do not fully qualify under CRD IV, which can be included in additional tier 1 (AT1) or tier 2 capital (as applicable) up to specified limits which reduce by 10 per cent per annum until 2022.
Dividends paid out on ordinary shares during the year (2,284) – – (2,284)
Movement in treasury shares and employee share schemes 3 – – 3
Pension movements: Removal of defined benefit pension surplus (274) – – (274)
2 Counterparty credit risk includes movements in contributions to the default fund of central counterparties and movements in credit valuation adjustment risk.
The risk-weighted assets movement tables provide analyses of the movement in risk-weighted assets in the period by risk type and an insight into the key drivers of the movements. The key driver analysis is compiled on a monthly basis through the identification and categorisation of riskweighted asset movements and is subject to management judgment.
2 Calculated in accordance with the UK Leverage Ratio Framework which requires qualifying central bank claims to be excluded from the leverage exposure measure.
The Group can monetise liquid assets quickly, either through the repurchase agreements (repo) market or through outright sale. In addition, the Group has pre-positioned a substantial amount of assets at the Bank of England’s Discount Window Facility which can be used to access additional liquidity in a time of stress. The Group considers diversification across geography, currency, markets and tenor when assessing appropriate holdings of liquid assets. The liquid asset buffer is managed under the control of Group Corporate Treasury and is available for deployment at immediate notice, subject to complying with regulatory requirements.
Monitoring Daily monitoring and control processes are in place to address internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a daily basis for early signs of liquidity risk in the market or specific to the Group. This captures regulatory metrics as well as metrics the Group considers relevant for its liquidity profile. These are a mixture of quantitative and qualitative measures, including: daily variation of customer balances; changes in maturity profiles; cash outflows; funding concentration; changes in LCR eligible liquidity portfolio; credit default swap (CDS) spreads; and changing funding costs.
The Group’s strong balance sheet and funding and liquidity position has been reflected in positive movements in the Group’s credit ratings in 2017. During the second half of the year, Moody’s upgraded Lloyds Bank plc’s long-term rating by one notch to ‘Aa3’. In addition, S&P improved Lloyds Bank plc’s outlook to ‘positive’ to reflect the Group’s improved bail-in capital position following recent Lloyds Banking Group plc issuance.
1 Excludes £16.8 billion (31 December 2016: £8.3 billion) of reverse repurchase agreements.
Table 1.36: Reconciliation of Group funding to the balance sheet (audited)
Debt securities in issue: Of which issued by Lloyds Banking Group plc3 – – – – – – 4.4 11.0 15.4 7.4
The Group continues to maintain a diversified approach to funding markets with trades in public and private format, secured and unsecured products and a wide range of currencies and markets. For 2018, the Group will continue to maintain this diversified approach to funding, including capital and funding from the holding company, Lloyds Banking Group plc, as needed to transition towards final UK Minimum Requirements for Own Funds and Eligible Liabilities (MREL). The contractual maturities for the FLS and TFS are fully factored into the Group’s funding plan.
Stress testing results Internal stress testing results at 31 December 2017 showed that the banking business had liquidity resources representing 142 per cent of modelled outflows from all wholesale funding sources, retail and corporate deposits, intraday requirements and rating dependent contracts under the Group’s most severe liquidity stress scenario.
A hypothetical idiosyncratic two notch downgrade of the Group’s current long-term debt rating and accompanying short-term downgrade implemented instantaneously by all major rating agencies, could result in a contractual outflow of £1.1 billion of cash over a period of up to one year, £2.0 billion of collateral posting related to customer financial contracts and £5.9 billion of collateral posting associated with secured funding.
The Board and the Group Asset and Liability Committee (GALCO) monitor and manage total balance sheet encumbrance via a number of risk appetite metrics. At 31 December 2017, the Group had £64.6 billion (31 December 2016: £83.5 billion) of externally encumbered on balance sheet assets with counterparties other than central banks. The decrease in encumbered assets was primarily driven by maturities of covered bond and securitisation issuances. The Group also had £587.5 billion (31 December 2016: £580.9 billion) of unencumbered on balance sheet assets, and £160.1 billion (31 December 2016: £153.5 billion) of pre-positioned and encumbered assets held with central banks. Primarily the Group encumbers mortgages, unsecured lending and credit card receivables through the issuance programmes and tradable securities through securities financing activity. The Group mainly positions mortgage assets at central banks.
Cash and balances at central banks – – – – – 53,887 – 4,634 58,521 58,521
Derivative financial instruments – – – – – – – 25,834 25,834 25,834
Trading and other financial assets at fair value through profit or loss – – 4,806 4,806 – 9,175 22 137,171 146,368 151,174
Derivative financial instruments – – – – – – – 36,138 36,138 36,138
Trading and other financial assets at fair value through profit or loss 162,878 42,230 3,325 117,323 Interest rate, foreign exchange, credit spread
Loans and advances to banks 6,611 – 4,274 2,337 Interest rate
Loans and advances to customers1 472,498 – 472,498 – Interest rate
Derivative financial instruments 26,124 21,699 1,613 2,812 Interest rate, foreign exchange, credit spread
Derivative assets and liabilities are held by the Group for three main purposes; to provide risk management solutions for clients, to manage portfolio risks arising from client business and to manage and hedge the Group’s own risks. The majority of derivatives exposure arises within CB Markets. Insurance business assets and liabilities relate to policyholder funds, as well as shareholder invested assets, including annuity funds. The Group recognises the value of in-force business in respect of Insurance’s long-term life assurance contracts as an asset in the balance sheet (see note 24, page 198).
Table 1.44: Key material market risks for the Group by individual business activity (profit before tax impact measured against Group single stress scenarios)
Risk Type 2017 Interest rate Basis risk FX Credit spread Equity Inflation
Profit before tax Loss Gain > £500m £250m – £500m £50m – <£250m
Measurement In addition to measuring single factors, Group risk appetite is calibrated primarily to five multi-risk Group economic scenarios, and is supplemented with sensitivity based measures. The scenarios assess the impact of unlikely, but plausible adverse stresses on income, with the worst case for banking activities, defined benefit pensions, insurance and trading portfolios reported against independently, and across the Group as a whole.
Monitoring GALCO and the GMRC regularly review high level market risk exposure, as part of the wider risk management framework. They also make recommendations to the Group Chief Executive concerning overall market risk appetite and Group Market Risk Policy. Exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. Levels of exposures compared to approved limits and triggers are monitored by Risk and where appropriate, escalation procedures are in place.
Foreign exchange risk Economic foreign exchange exposure arises from the Group’s investment in its overseas operations (net investment exposures are disclosed in note 51 on page 240). In addition, the Group incurs foreign exchange risk through non-functional currency flows from services provided by customer facing divisions and the Group’s debt and capital management programmes.
(iii) Market value limit: this caps the amount of conventional and inflation-linked government bonds held by the Group for liquidity purposes.
Table 1.45 below shows, split by material currency, the Group’s market value sensitivities to an instantaneous parallel up and down 25 and 100 basis points change to all interest rates.
Table 1.46: Banking activities: market value sensitivity to a steepening and flattening of the yield curve
– Equity risk arises indirectly through the value of future management charges on policyholder funds. These management charges form part of the value of in-force business (see note 24 on page 198). Equity risk also arises in the with-profits funds but is less material. – Credit spread risk mainly arises from annuities where policyholders’ future cashflows are guaranteed at retirement. Exposure arises if the market value of the assets which are held to back these liabilities, mainly corporate bonds and loans, do not perform in line with expectations. Within the Group accounts a large amount of the exposure to market value movements, but not actual default losses, is removed as accounting rules require that assets which the Insurance division has acquired from Group are maintained at the original amortised book value. – Interest rate risk arises through holding credit and interest assets mainly in the annuity book and also to cover general insurance liabilities, capital requirements and risk appetite. – Inflation exposure arises from a combination of inflation linked policyholder benefits and inflation assumptions used to project future expenses.
Measurement Current and potential future market risk exposures within Insurance are assessed using a range of stress testing exercises and scenario analyses.
Table 1.48 demonstrates the impact of the Group’s Eurozone Credit Crunch scenario on Insurance's porfolio (with no diversification benefit, but after the impact of Group consolidation on interest rate and spread widening). This is the most onerous scenario for Insurance out of the Group scenarios. The amounts include movements in assets, liabilities and the value of in-force business in respect of insurance contracts and participating investment contracts.
Table 1.49: Trading portfolios: VaR (1-day 95 per cent confidence level) (audited)
Monitoring The Group Model Governance Committee is the primary body for overseeing model risk. Policy requires that Key Performance Indicators are monitored for every model and all issues are escalated appropriately. Material model issues are reported to Group and Board Risk Committees monthly with more detailed papers as necessary to focus on key issues.
We have audited the financial statements, included within the Annual Report and Accounts (the ‘Annual Report’), which comprise: the consolidated and parent company balance sheets as at 31 December 2017; the consolidated income statement and the consolidated statement of comprehensive income for the year then ended; the consolidated and parent company statements of changes in equity for the year then ended; and the consolidated and parent company cash flow statements for the year then ended; and the notes to the financial statements, which include a description of the significant accounting policies.
These items were discussed with the Audit Committee as part of our audit plan communicated in April 2017 and updated in October 2017. These were the key audit matters for discussion at the conclusion of our audit.
Any components which were considered individually financially significant in the context of the Group’s consolidated financial statements (defined as components which that represent more than or equal to 10% of the total assets of the consolidated Group) were considered full scope components. We considered the individual financial significance of other components in relation to primary statement account balances. We considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). Any component which was not already included as a full scope audit component but was identified as being individually financially significant in respect of one of more account balances was subject to specific audit procedures over those account balances. Inconsequential components (defined as components which did not represent a reasonable possibility of a risk of material misstatement either individually or in aggregate) were eliminated from further consideration for specific audit procedures although they were subject to Group level analytical review procedures. All remaining components which were neither inconsequential nor
Refer to page 73 (Audit Committee Report), page 173 (Accounting Policies) and page 195 (Note 20 and Critical Accounting Estimates and Judgements).
The determination of impairment provisions is complex, and significant judgements are required around both the timing of recognition of impairment provisions and estimation of the amount of provisions required in relation to loss events which have occurred at the balance sheet date.
We critically assessed the completeness of overlays proposed by management, including challenging whether risk concentrations (e.g. past-term interest only loans, forborne loans, personal contract purchase loans) have been appropriately provided for. We also performed testing over the measurement of the overlays in place, including challenging the appropriateness of the calculation, the reasonableness of the assumptions used and the reliability of the underlying data.
Based on the evidence obtained, we found that the methodologies, modelled assumptions, data used within the models and overlays to modelled outputs are appropriate.
Refer to page 73 (Audit Committee Report), page 173 (Accounting Policies) and page 213 (Note 37 and Critical Accounting Estimates and Judgements).
For the known issues that have been provided for, we focused on the use of several management assumptions including volume of future complaints and related redress costs that are key judgmental inputs into the measurement of provisions.
We found these controls were designed, implemented and operated effectively and therefore we determined that we could place reliance on these controls for the purposes of our audit.
Given the inherent uncertainty in the calculation of conduct provisions and their judgemental nature, we evaluated the disclosures made in the financial statements. In particular, we focused on challenging management around whether the disclosures were sufficiently clear in highlighting the exposures that remain, significant uncertainties that exist in respect of the provisions and the sensitivity of the provisions to changes in the underlying assumptions.
We read the minutes of key governance meetings including those of the Board, and of various management committees, as well as attending all Audit Committee and Board Risk Committee meetings.
We read and assessed the disclosures made in the financial statements, including disclosures of the assumptions, and found them to be appropriate.
Refer to page 73 (Audit Committee Report), page 173 (Accounting Policies), and page 240 (Note 51).
The application of hedge accounting and ensuring hedge effectiveness can be highly judgemental and operationally cumbersome, and requires close monitoring from management.
We understood and tested key controls which require that one-off transactions are referred to Group Financial Reporting and that an accounting paper is produced outlining the treatment of the transaction in the financial statements. Further to this, we ensured that the accounting paper is appropriately reviewed and approved. We found the key controls were designed, implemented and operated effectively.
We made our own assessment as to the most appropriate accounting treatment, using this as a basis to challenge the key judgements made by management, including the assessment of any potential management bias.
As part of our audit work in prior periods, we identified recurring control matters in relation to the management of IT privileged access to IT systems and therefore have relied on compensating controls and performed additional procedures.
While there is an ongoing programme of activities to address such control matters, the fact that these were open control matters during the period meant there was an increased risk that the data and reports from the affected systems were not reliable.
We noted the controls were designed and operated effectively, in all material respects.
As part of our audit we have concluded that the directors’ use of the going concern basis is appropriate. In drawing our conclusion, we critically assessed the going concern assessment undertaken by management and approved by the Board of Directors. As part of our assessment we have: – evaluated the appropriateness of the stress scenarios used and their impact on the Group’s and parent company’s capital and liquidity positions; – evaluated the key economic and other assumptions used in both the capital and liquidity plans and the Group’s operating plan; and – substantiated the Group’s and parent company’s access to unencumbered collateral placed with, and liquidity facilities available from, the central bank.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006, (CA06), ISAs (UK) and the Listing Rules of the Financial Conduct Authority (FCA) require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).
Other code provisions We have nothing to report in respect of our responsibility to report when: – The statement given by the directors, on page 83, that they consider the Annual Report taken as a whole to be fair, balanced and understandable, and provides the information necessary for the members to assess the Group’s and parent company’s position and performance, business model and strategy is materially inconsistent with our knowledge of the Group and parent company obtained in the course of performing our audit. – The section of the Annual Report on page 73 describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee. – The directors’ statement relating to the parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified, under the Listing Rules, for review by the auditors.
Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or – certain disclosures of directors’ remuneration specified by law are not made; or – the parent company financial statements and the part of the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns.
Mark Hannam (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 20 February 2018
Other comprehensive income for the year, net of tax (395) 1,574 (1,040)
Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax
Redemption of preference shares 131 (131) – – – – –
Movement in treasury shares – – (816) (816) – – (816)
Proceeds from sale and maturity of financial assets 18,675 6,335 22,000
Effects of exchange rate changes on cash and cash equivalents – 21 2
Cash and cash equivalents at end of year 52(D) 60,982 62,388 71,953
(F) Derivative financial instruments and hedge accounting Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS 39. All derivatives are recognised at their fair value. 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 48(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models.
(H) Impairment of financial assets (1) Assets accounted for at amortised cost At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition of the financial asset and prior to the balance sheet date, there is objective evidence that a financial asset or group of financial assets has become impaired.
A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that forbearance is no longer appropriate. For commercial lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
Current tax includes amounts provided in respect of uncertain tax positions when management expects that, upon examination of the uncertainty by Her Majesty’s Revenue and Customs (HMRC) or other relevant tax authority, it is more likely than not that an economic outflow will occur. Provisions reflect management’s best estimate of the ultimate liability based on their interpretation of tax law, precedent and guidance, informed by external tax advice as necessary. Changes in facts and circumstances underlying these provisions are reassessed at each balance sheet date, and the provisions are re-measured as required to reflect current information.
Notes to the consolidated financial statements continued the reinsurance contract transfers financial risk on those contracts to the reinsurer, the assets arising from reinsurance contracts held are classified as nonparticipating investment contracts.
The segmental results and comparatives are presented on an underlying basis, the basis reviewed by the chief operating decision maker. The effects of the following are excluded in arriving at underlying profit: – losses on redemption of the Enhanced Capital Notes and the volatility in the value of the embedded equity conversion feature; – market volatility and asset sales, which includes the effects of certain asset sales, the volatility relating to the Group’s own debt and hedging arrangements and that arising in the insurance businesses and insurance gross up; – the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets; – restructuring costs, comprising costs relating to the Simplification programme and the costs of implementing regulatory reform and ring-fencing, the rationalisation of the non-branch property portfolio and the integration of MBNA; – TSB build and dual running costs and the loss relating to the TSB sale in 2015; and – payment protection insurance and other conduct provisions.
For the purposes of the underlying income statement, operating lease depreciation (net of gains on disposal of operating lease assets) is shown as an adjustment to total income. As part of a Group restructuring during 2017: – the Consumer Finance division has now become part of Retail; – the Group’s UK wealth business, previously part of Retail, has been transferred to the Insurance division, now renamed Insurance and Wealth; – the Group’s International wealth business, previously part of Retail, has been transferred to the Commercial Banking division; and – the Group’s venture capital business, previously part of Commercial Banking, has been transferred to Other.
Total underlying income, net of insurance claims 10,923 4,847 1,979 776 18,525
Other income, net of insurance claims 2,162 1,756 1,939 208 6,065
Total underlying income, net of insurance claims 10,235 4,690 2,019 556 17,500
Other segment items: Investments in joint ventures and associates at end of year 6 – – 53 59 1 Restated – see page 181. 2 Net of profits on disposal of operating lease assets of £58 million.
Total underlying income, net of insurance claims 10,516 4,616 2,045 460 17,637
Other income, net of insurance claims 7,747 (186) (1,356) – – 6,205
Total income, net of insurance claims 18,659 42 (176) – – 18,525
Other income, net of insurance claims 7,993 121 (2,110) – 61 6,065
Other income, net of insurance claims 6,103 209 (31) (126) – – 6,155
Total income, net of insurance claims 17,421 527 (223) (88) – – 17,637
1 In the year ended 31 December 2017 this comprises the effects of asset sales (gain of £30 million); volatile items (gain of £263 million); liability management (loss of £14 million); the amortisation of purchased intangibles (£91 million); restructuring costs (£621 million, principally comprising costs relating to the Simplification programme; the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA); and the fair value unwind and other items (loss of £270 million).
4 Comprises the write-off of the ECN embedded derivative and premium paid on redemption of the remaining notes in the first quarter (loss of £790 million); the effects of asset sales (gain of £217 million); volatile items (gain of £99 million); liability management (gain of £123 million); the amortisation of purchased intangibles (£340 million); restructuring costs (£622 million, principally comprising the severance related costs related to phase II of the Simplification programme); and the fair value unwind and other items (loss of £231 million).
2 The impact of the Group’s hedging arrangements is included on this line; excluding this impact the weighted average effective interest rate in respect of debt securities in issue would be 2.43 per cent (2016: 2.70 per cent; 2015: 2.76 per cent).
Included within interest and similar income is £179 million (2016: £205 million; 2015: £248 million) in respect of impaired financial assets. Net interest income also includes a credit of £651 million (2016: credit of £557 million; 2015: credit of £956 million) transferred from the cash flow hedging reserve (see note 41).
Fee and commission income: Credit and debit card fees 953 875 918
Net gains (losses) on financial instruments held for trading 404 (428) 194
Note 9: Other operating income 2017 £m 2016 £m 2015 £m
Share of results of joint ventures and associates 6 (1) (3)
Regulatory provisions: Payment protection insurance provision (note 37) 1,650 1,000 4,000
Note 11: Operating expenses continued Performance-based compensation The table below analyses the Group’s performance-based compensation costs between those relating to the current performance year and those relating to earlier years.
Foreign tax: Current tax on profit for the year (40) (20) (24)
Recognition of losses that arose in prior years – 59 42
Remeasurement of deferred tax due to rate changes (9) (201) (27)
Tax effect of share of results of joint ventures (1) (1) (1)
Note 14: Earnings per share 2017 £m 2016 £m 2015 £m
Weighted average number of ordinary shares in issue – basic 71,710 71,234 71,272
Weighted average number of ordinary shares in issue – diluted 72,393 72,024 72,340
Loans and advances to customers 29,976 – 29,976 30,473 – 30,473
Loans and advances to banks 1,614 – 1,614 2,606 – 2,606
Debt securities: Other public sector securities – 1,527 1,527 – 1,325 1,325
The Group holds derivatives as part of the following strategies: – Customer driven, where derivatives are held as part of the provision of risk management products to Group customers; – To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the Group is to utilise a combination of fair value and cash flow hedge approaches as described in note 51; and – Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
The principal derivatives used by the Group are as follows: – Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date. – Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date. – 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. – Equity derivatives are also used by the Group as part of its equity-based retail product activity to eliminate the Group’s exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date.
Total loans and advances to customers before allowance for impairment losses 474,699 460,370
Later than 1 year and not later than 5 years 1,106 1,618
Total securitisation and covered bond programmes 29,792 37,774 1 Includes securitisations utilising a combination of external funding and credit default swaps.
The Group has a number of covered bond programmes, for which Limited Liability Partnerships have been established to ring-fence asset pools and guarantee the covered bonds issued by the Group. At the reporting date the Group had over-collateralised these programmes as set out in the table above to meet the terms of the programmes, to secure the rating of the covered bonds and to provide operational flexibility. From time-to-time, the obligations of the Group to provide collateral may increase due to the formal requirements of the programmes. The Group may also voluntarily contribute collateral to support the ratings of the covered bonds.
The Group’s maximum exposure to loss is equal to the carrying value of the investment. However, the Group’s investments in these entities are primarily held to match policyholder liabilities in the Insurance division and the majority of the risk from a change in the value of the Group’s investment is matched by a change in policyholder liabilities. The collective investment vehicles are primarily financed by investments from investors in the vehicles.
Note 20: Allowance for impairment losses on loans and receivables Critical accounting estimates and judgements The allowance for impairment losses on loans and receivables is management’s best estimate of losses incurred in the portfolio at the balance sheet date. In determining the required level of impairment provisions, the Group uses the output from various statistical models. Management judgement is required to assess the robustness of the outputs from these models and, where necessary, make appropriate adjustments. Impairment allowances are made up of two components, those determined individually and those determined collectively.
Total consideration 2,016 1 Upon acquisition, the funding of MBNA was assumed by Lloyds Bank plc.
As a result of an indemnity guaranteed by Bank of America, N.A., the Group’s exposure to MBNA’s PPI liability is capped at £240 million. Acquisition-related costs of £21 million have been included in operating expenses for the year ended 31 December 2017.
Risk-free rate (value of in-force annuity business)1 1.14 to 5.34 1.38 to 5.58
Expense inflation 3.67 3.73 1 All risk-free rates are quoted as the range of rates implied by the relevant forward swap curve.
The movement in the value of in-force insurance and participating investment contracts over the year is as follows: 2017 £m 2016 £m
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 makes 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. 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.
Cost: Acquisition of businesses (note 22) – – 702 – – 702
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 48 for details of levels in the fair value hierarchy.
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2016 and 2017 no contingent rentals in respect of operating leases were recognised in the income statement.
Liabilities in respect of securities sold under repurchase agreements 2,638 2,462
Guaranteed annuity option take-up rates Certain pension contracts contain guaranteed annuity options that allow the policyholder to take an annuity benefit on retirement at annuity rates that were guaranteed at the outset of the contract. For contracts that contain such options, key assumptions in determining the cost of options are economic conditions in which the option has value, mortality rates and take up rates of other options. The financial impact is dependent on the value of corresponding investments, interest rates and longevity at the time of the claim.
For those policies written in Scottish Widows pre-demutualisation containing potentially valuable options and guarantees, under the terms of the Scheme a separate memorandum account was set up, within the With-Profit Fund originally held in Scottish Widows plc and subsequently transferred into Scottish Widows Limited, called the Additional Account which is available, inter alia, to meet any additional costs of providing guaranteed benefits in respect of those policies. The Additional Account had a value at 31 December 2017 of £2.8 billion (2016: £2.7 billion). The eventual cost of providing benefits on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values, demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be known for many years.
As noted above, the liabilities of the With-Profit Funds are valued using a market-consistent stochastic simulation model which places a value on the options and guarantees which captures both their intrinsic value and their time value.
Net claims outstanding at 31 December 225 209 1 Of which an increase of £350 million (2016: £363 million) was in respect of current year claims and a decrease of £13 million (2016: an increase of £3 million) was in respect of prior year claims.
Guaranteed annuity option take up6 5% addition (6) (5) (12) (10)
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases. 1 This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.
Note 35: Retirement benefit obligations continued The Group has also established three private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final Salary Pension Scheme, a section of the Lloyds Bank Pension Scheme No 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2017 these held assets of approximately £4.8 billion in aggregate. The private limited companies are consolidated fully in the Group’s balance sheet. The terms of these arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed to the relevant Group pension schemes. The Group has satisfied this requirement during 2017.
Return on plan assets excluding amounts included in interest income 1,267 7,455
Corporate and other debt securities 6,903 – 6,903 7,464 – 7,464
Money market instruments, cash, derivatives and other assets and liabilities 1,501 (5,190) (3,689) 1,462 (1,636) (174)
The life expectancy assumption has been applied by allowing for an increase/decrease in life expectation from age 60 of one year, based upon the approximate weighted average age for each scheme. Whilst this is an approximate approach and will not give the same result as a one year increase in life expectancy at every age, it provides an appropriate indication of the potential impact on the schemes from changes in life expectancy.
At 31 December 2017 the asset-liability matching strategy mitigated 98 per cent of the liability sensitivity to interest rate movements and 102 per cent of the liability sensitivity to inflation movements. Much of the residual interest rate sensitivity is mitigated through holdings of corporate and other debt securities.
Duration of the defined benefit obligation 19 20 2017 £m 2016 £m
Benefits expected to be paid between 2 and 5 years 4,089 3,971
Defined contribution schemes The Group operates a number of defined contribution pension schemes in the UK and overseas, principally Your Tomorrow and the defined contribution sections of the Lloyds Bank Pension Scheme No. 1.
During the year ended 31 December 2017 the charge to the income statement in respect of defined contribution schemes was £256 million (2016: £268 million; 2015: £233 million), representing the contributions payable by the employer in accordance with each scheme’s rules.
Asset at 31 December 2,284 2,706 Asset at 31 December 2,284 2,706
(Charge) credit to the income statement (592) (120) (1,981) 12 (17) (357) (3,055)
(Charge) credit to other comprehensive income – – 2,107 – – – 2,107
(Charge) credit to the income statement (264) (226) (287) (7) 7 (28) (805)
(Charge) credit to other comprehensive income – – 149 25 – – 174
(Charge) credit to other comprehensive income – – (295) 283 67 – 55
Note 36: Deferred tax continued Deferred tax not recognised No deferred tax has been recognised in respect of the future tax benefit of expenses of the life assurance business carried forward. The deferred tax asset not recognised in respect of these expenses is approximately £470 million (2016: £636 million). These expenses can be carried forward indefinitely.
Packaged bank accounts In 2017 the Group provided an additional £245 million in respect of complaints relating to alleged mis-selling of packaged bank accounts raising the total amount provided to £750 million. A number of risks and uncertainties remain in particular with respect to future volumes.
Other provisions also includes those arising in the normal course of business, whether from certain customer rectifications or provisions for dilapidation and refurbishment of properties. Provisions also include a matter arising out of the insolvency of a third party insurer, which remains exposed to asbestos and pollution claims in the US. The ultimate cost and timing of payments are uncertain. The provision held of £32 million at 31 December 2017 represents management’s current best estimate of the cost after having regard to actuarial estimates of future losses.
1 The repurchases and redemptions resulted in cash outflows of £1,008 million.
Preferred securities £m 7.627% Fixed to Floating Rate Guaranteed Non-voting Non-cumulative Preferred Securities 4.385% Step-up Perpetual Capital Securities callable 2017 (€750 million) 74
4 Comprising notes with the following coupon rates: 13% (£244 million), 10.125% (£233 million), 11.875% (£960 million), 10.75% (£466 million), 9.875% (£456 million).
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 (ECNs) ranked 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 2017 (2016: none).
Issued under employee share schemes 518,293,181 – – 51 – –
Share issuances No shares were issued in 2015 or 2016; in 2017, 518 million shares were issued in respect of employee share schemes.
Revaluation reserve in respect of available-for-sale financial assets 685 759 (438)
The foreign currency translation reserve represents the cumulative after-tax gains and losses on the translation of foreign operations and exchange differences arising on financial instruments designated as hedges of the Group’s net investment in foreign operations.
Change in fair value of available-for-sale financial assets 303 356 (318)
Change in fair value of hedging derivatives (363) 2,432 537 2017 £m 2016 £m 2015 £m
2 During 2017 the Group derecognised, on redemption, financial liabilities on which cumulative fair value movements relating to own credit of £3 million (net of tax) had been recognised directly in retained profits.
The cash cost of the dividends paid in the year was £2,284 million (2016: £2,014 million; 2015: £1,070 million), net of a credit in respect of unclaimed dividends written-back in accordance with the Company's Articles of Association.
Note 45: Share-based payments Charge to the income statement The charge to the income statement is set out below: 2016 £m 2015 £m
The weighted average fair value of SAYE options granted during 2017 was £0.15 (2016: £0.13). The fair values of the SAYE options have been determined using a standard Black-Scholes model.
Options granted on 27 March 2014 under the Commercial Banking Transformation Plan (CBTP), became exercisable in March 2017 and vested at a factor of 2.1 from the original ‘on-target’ award, due to the degree to which the performance conditions were exceeded. The award was based upon the underlying profit and return on risk-weighted assets (‘RoRWA’) of Commercial Banking as at 31 December 2016.
The fair value calculations at 31 December 2017 for grants made in the year, using Black-Scholes models and Monte Carlo simulation, are based on the following assumptions: Save-As-You-Earn
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.05 million (2016: £0.1 million; 2015: £0.1 million).
Advanced (includes loans of appointed key management personnel) 1 3 4
Placed (includes deposits of appointed key management personnel) 41 41 58
Withdrawn (includes deposits of former key management personnel) (33) (42) (61)
Joint ventures and associates At 31 December 2017 there were loans and advances to customers of £123 million (2016: £173 million) outstanding and balances within customer deposits of £9 million (2016: £15 million) relating to joint ventures and associates.
Note 47: Contingent liabilities and commitments Interchange fees With respect to multi-lateral interchange fees (MIFs), the Group is not directly involved in the ongoing investigations and litigation (as described below) which involve card schemes such as Visa and MasterCard. However, the Group is a member of Visa and MasterCard and other card schemes.
– The European Commission continues to pursue competition investigations against MasterCard and Visa probing, amongst other things, MIFs paid in respect of cards issued outside the EEA. – Litigation brought by retailers continues in the English Courts against both Visa and MasterCard. – Any ultimate impact on the Group of the above investigations and litigation against Visa and MasterCard remains uncertain at this time.
UK shareholder litigation In August 2014, the Group and a number of former directors were named as defendants in a claim by a number of claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of duties in relation to information provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. The defendants refute all claims made. A trial commenced in the English High Court on 18 October 2017 and is scheduled to conclude in the first quarter of 2018 with judgment to follow. It is currently not possible to determine the ultimate impact on the Group (if any).
Note 47: Contingent liabilities and commitments continued Financial Services Compensation Scheme Following the default of a number of deposit takers in 2008, the Financial Services Compensation Scheme (FSCS) borrowed funds from HM Treasury to meet the compensation costs for customers of those firms. In June 2017, the FSCS announced that following the sale of certain Bradford & Bingley mortgage assets, the principal balance outstanding on the HM Treasury loan was £4,678 million (31 December 2016: £15,655 million). Although it is anticipated that the substantial majority of this loan will be repaid from funds the FSCS receives from asset sales, surplus cash flow or other recoveries in relation to the assets of the firms that defaulted, any shortfall will be funded by deposit-taking participants, including the Group, of the FSCS. The amount of future levies payable by the Group depends on a number of factors, principally, the amounts recovered by the FSCS from asset sales.
Later than 1 year and not later than 5 years 845 855
Loans and receivables: Loans and advances to banks – – – – 6,611 – – 6,611
Loans and advances to customers – – – – 472,498 – – 472,498
Available-for-sale financial assets – – – 42,098 – – – 42,098
Deposits from banks – – – – – 29,804 – 29,804
Derivative financial instruments 1,613 24,511 – – – – – 26,124
Items in the course of collection from banks – – – – – 706 – 706
Loans and advances to customers – – – – 457,958 – – 457,958
Deposits from banks – – – – – 16,384 – 16,384
Notes in circulation – – – – – 1,402 – 1,402
The carrying amount of the following financial instruments is a reasonable approximation of fair value: cash and balances at central banks, items in the course of collection from banks, items in course of transmission to banks, notes in circulation and liabilities arising from non-participating investment contracts.
Transfers out of the level 3 portfolio arise when inputs that could have a significant impact on the instrument’s valuation become market observable after previously having been non-market observable. In the case of asset-backed securities this can arise if more than one consistent independent source of data becomes available. Conversely transfers into the portfolio arise when consistent sources of data cease to be available.
Trading and other financial assets at fair value through profit or loss £m
Transfers into the level 3 portfolio 152 2 154 186 155 341
Transfers out of the level 3 portfolio (242) (39) (281) (177) – (177)
Note 48: Financial instruments continued Valuation methodology for financial assets, excluding derivatives
(B) Financial liabilities, excluding derivatives Valuation hierarchy At 31 December 2017, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its trading and other financial liabilities at fair value through profit or loss and totalled £50,877 million (31 December 2016: £54,504 million). (Financial guarantees are also recognised at fair value, on initial recognition, and are classified as level 3; but the balance is not material). The table below analyses these financial liabilities by balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 228). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
Total financial liabilities carried at fair value, excluding derivatives 2,417 52,085 2 54,504
The table below analyses movements in the level 3 financial liabilities portfolio, excluding derivatives. There were no transfers into or out of level 3 during 2016 or 2017.
Losses (gains) recognised in the income statement within other income (2) 1
Note 48: Financial instruments continued The table below analyses movements in level 3 derivative assets and liabilities carried at fair value.
Gains (losses) recognised in the income statement, within other income, relating to the change in fair value of those assets or liabilities held at 31 December (208) 213 284 (262)
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 £186 million fall in the overall valuation adjustment to £185 million. The CVA model used by the Group does not assume any correlation between the level of interest rates and default rates.
At 31 December 2017, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £74 million (2016: £96 million).
Note 48: Financial instruments continued Unobservable inputs Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows: – Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends on the behaviour of those underlying references through time. – Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality; higher spreads lead to a lower fair value. – Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes. – Earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a higher fair value.
Reverse repos included in above amounts: Loans and advances to customers 16,832 16,832 – 16,832 –
The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.
Trading and other financial assets at fair value through profit or loss 9,946 3,257 10,256 3,380
Loans and receivables: Loans and advances to customers1 35,475 3,660 52,184 7,253 1 The carrying value of associated liabilities excludes securitisation notes held by the Group of £21,582 million (31 December 2016: £26,435 million).
Note 50: Offsetting of financial assets and liabilities continued Related amounts where set off in the balance sheet not permitted3 Potential net amounts if offset of related amounts permitted £mAt 31 December 2016
Note 51: Financial risk management As a bancassurer, financial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with financial instruments represent a significant component of the risks faced by the Group.
The Group hedges part of the currency translation risk of the net investment in certain foreign operations using currency borrowings. At 31 December 2017 the aggregate principal of these currency borrowings was £41 million (2016: £695 million). In 2017, an ineffectiveness loss of £11 million before tax and £8 million after tax (2016: ineffectiveness loss of £2 million before tax and £1 million after tax) was recognised in the income statement arising from net investment hedges.
A. Maximum credit exposure The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral held and the maximum exposure to loss, which includes amounts held to cover unit-linked and With Profits funds liabilities, is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.
Debt securities, treasury and other bills 45,198 – 45,198 50,398 – 50,398
Assets arising from reinsurance contracts held 602 – 602 714 – 714
Off-balance sheet items: Other items serving as direct credit substitutes 740 – 740 779 – 779
B. Concentrations of exposure The Group’s management of concentration risk includes single name, industry sector and country limits as well as controls over the Group’s overall exposure to certain products. Further information on the Group’s management of this risk is included within Credit risk mitigation, Risk management on page 116.
Past due but not impaired 6 5,934 585 336 6,855 –
Neither past due nor impaired 26,888 296,303 39,478 109,364 445,145 33,079
Impaired – no provision required – 784 392 689 1,865 –
Allowance for impairment losses on loans and advances to customers 2,201 2,412
Amounts subsequently written off, net of foreign exchange and other movements (22,389) (22,263)
Note 51: Financial risk management continued Loans and advances which are neither past due nor impaired
Asset-backed securities: Corporate and other debt securities 4,250 365 4,615 6,030 – 6,030
Total held as available-for-sale financial assets 40,516 385 40,901 55,306 5 55,311 1 Credit ratings equal to or better than ‘BBB’.
Total held as trading assets 10,481 159 10,640 12,165 3 12,168
Treasury bills and other bills 18 – 18 20 – 20
Investment grade1 £m Other2 £m Total £m 1 Credit ratings equal to or better than ‘BBB’.
The Group credit risk disclosures for unimpaired non-mortgage retail lending report assets gross of collateral and therefore disclose the maximum loss exposure. The Group believes that this approach is appropriate. The value of collateral is reassessed if there is observable evidence of distress of the borrower. Unimpaired non-mortgage retail lending, including any associated collateral, is managed on a customer-by-customer basis rather than a portfolio basis. No aggregated collateral information for the entire unimpaired non-mortgage retail lending portfolio is provided to key management personnel.
At 31 December 2017, impaired secured commercial lending amounted to £698 million, net of an impairment allowance of £242 million (2016: £204 million, net of an impairment allowance of £401 million). The fair value of the collateral held in respect of impaired secured commercial lending was £797 million (2016: £1,160 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 commercial 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.
Customer deposits Included in customer deposits are balances arising from repurchase transactions of £2,638 million (2016: £2,462 million); the fair value of the collateral provided under these agreements at 31 December 2017 was £2,640 million (2016: £2,277 million).
Securities lending transactions The following on balance sheet financial assets have been lent to counterparties under securities lending transactions: 2017 £m 2016 £m
Securitisations and covered bonds In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group’s asset-backed conduits and its securitisation and covered bond programmes. Further details of these assets are provided in notes 18 and 19.
Trading and other financial assets at fair value through profit or loss 11,473 13,345 4,858 2,781 1,056 2,655 5,341 121,369 162,878
Debt securities held as loans and receivables 8 – – 242 – – 34 3,113 3,397
The principal amount for undated subordinated liabilities with no redemption option is included within the over five years column; interest of approximately £24 million (2016: £23 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond five years.
Change in derivative financial instruments, trading and other liabilities at fair value through profit or loss
Write-off of allowance for loan losses, net of recoveries (1,061) (1,272) (3,467)
Net charge (credit) in respect of defined benefit schemes 369 287 315
Payments in respect of payment protection insurance provision (1,657) (2,200) (3,091)
Less: amounts with a maturity of three months or more (3,193) (11,052) (10,640)
Total cash and cash equivalents 60,982 62,388 71,953 1 Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s day-to-day operations.
Loans and receivables: Loans and advances to customers 7,811 – –
Acquisition of and additional investment in joint ventures 30 20 5
Note 53: Events since the balance sheet date The Group intends to implement a share buyback of up to £1 billion. This represents the return to shareholders of capital surplus to that required to provide capacity for growth, meet regulatory requirements and cover uncertainties. The share buyback programme will commence in March 2018 and is expected to be completed during the next 12 months.
With the exception of IFRS 17 ‘Insurance Contracts’, the amendment to IFRS 9 ‘Prepayment Features with Negative Compensation‘ and certain other minor amendments as at 20 February 2018 these pronouncements have been endorsed by the EU.
The ECL model has three stages. Entities are required to recognise a 12 month expected loss allowance on initial recognition (stage 1) and a lifetime expected loss allowance when there has been a significant increase in credit risk since initial recognition (stage 2). Stage 3 requires objective evidence that an asset is credit-impaired, which is similar to the guidance on incurred losses in IAS 39, and then a lifetime expected loss allowance is recognised.
Impact on 31 December 2017 balance sheet It is estimated that the new impairment methodology will result in higher impairment provisions of approximately £1.3 billion, predominantly for loans and advances to customers, recognised on the Group’s balance sheet. The re-classification and measurement of assets under IFRS 9 also results in a reduction to the carrying value of financial assets of approximately £0.2 billion gross of tax, mainly as a result of transferring assets managed by the Insurance division to fair value through profit or loss. The total net of tax impact on shareholders’ equity is a reduction of approximately £1.2 billion.
In nearly all cases the Group’s current accounting policy is consistent with the requirements of IFRS 15, however, certain income streams within the Group’s car leasing business will be deferred with effect from 1 January 2018. This results in an additional £14 million being recognised as deferred income at 1 January 2018 and a corresponding debit of £11 million, net of tax, to shareholders’ equity; as permitted by the transition options under IFRS 15 comparative figures for the prior year have not been restated.
IFRS 16 Leases IFRS 16 replaces IAS 17 ‘Leases’ and is effective for annual periods beginning on or after 1 January 2019.
IFRS 17 requires insurance contracts and participating investment contracts to be measured on the balance sheet as the total of the fulfilment cash flows and the contractual service margin. Changes to estimates of future cash flows from one reporting date to another are recognised either as an amount in profit or loss or as an adjustment to the expected profit for providing insurance coverage, depending on the type of change and the reason for it. The effects of some changes in discount rates can either be recognised in profit or loss or in other comprehensive income as an accounting policy choice. The risk adjustment is released to profit and loss as an insurer’s risk reduces. Profits which are currently recognised through a Value in Force asset, will no longer be recognised at inception of an insurance contract. Instead, the expected profit for providing insurance coverage is recognised in profit or loss over time as the insurance coverage is provided.
Total equity and liabilities 61,533 53,132 1 The parent company recorded a profit after tax for the year of £2,399 million (2016: £3,135 million).
Other employee award schemes – – – 332 332 – 332 1 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.
Net cash (used in) provided by investing activities (5,058) 9,481 1,856
Cash and cash equivalents at beginning of year 42 24 195
Issued during the year: 4.65% Subordinated Fixed Rate Notes 2026 (US$1,500 million) – – 1,061 1,061
Financial assets: Cash and cash equivalents – – – 42 42
Note 48 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair value are categorised.
Derecognised following completion of the Group’s ECN tender offers and redemptions – (476)
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £1 million (2016: £1 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years.
Note 10: Other information Lloyds Banking Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on 21 October 1985 with the registered number 95000. Lloyds Banking Group plc’s registered office is The Mound, Edinburgh EH1 1YZ, Scotland, and its principal executive offices in the UK are located at 25 Gresham Street, London EC2V 7HN.
Shareholder information 263 Five year financial summary 265 Forward looking statements 266 Abbreviations 267 Alternative performance measures 267 Subsidiaries and related undertakings 268
Annual general meeting (AGM) The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 24 May 2018 at 11am. Further details about the meeting, including the proposed resolutions and where shareholders can stream the meeting live, can be found in our Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com
2 To be published on the Group’s website by 1 July 2018 in accordance with the Capital Requirements (country analysis) Regulations 2013.
5 Total dividend for the year divided by earnings attributable to ordinary shareholders adjusted for tax relief on distributions to other equity holders.
Examples of such forward looking statements include, but are not limited to: projections or expectations of the Group’s future financial position including profit attributable to shareholders, provisions, economic profit, dividends, capital structure, portfolios, net interest margin, capital ratios, liquidity, risk‑weighted assets (RWAs), expenditures or any other financial items or ratios; litigation, regulatory and governmental investigations; the Group’s future financial performance; the level and extent of future impairments and write‑downs; statements of plans, objectives or goals of Lloyds Banking Group or its management including in respect of statements about the future business and economic environments in the UK and elsewhere including, but not limited to, future trends in interest rates, foreign exchange rates, credit and equity market levels and demographic developments; statements about competition, regulation, disposals and consolidation or technological developments in the financial services industry; and statements of assumptions underlying such statements.
Banking net interest margin Banking net interest income on customer and product balances in the banking businesses as a percentage of average banking gross interest‑earning assets for the period.
Return on risk-weighted assets Underlying profit before tax divided by average risk‑weighted assets.
Return on tangible equity Statutory profit after tax adjusted to add back amortisation of intangible assets, and to deduct profit attributable to non‑controlling interests and other equity holders, divided by average tangible net assets.
Underlying profit Statutory profit adjusted for certain items as detailed on page 40.
A G Finance Ltd 7 ii # A.C.L. Ltd 1 ACL Autolease Holdings Ltd 1 ADF No.1 Pty Ltd 8 Alex Lawrie Factors Ltd 9 Alex. Lawrie Receivables Financing Ltd 9 Alexanderplatz 2017 GmbH 92 Amberdate Ltd 1 iv AN Vehicle Finance Ltd (In liquidation) 13 Anglo Scottish Utilities Partnership 1 + * Aquilus Ltd 1 Automobile Association Personal Finance Ltd 4 Bank of Scotland (B G S) London Nominees Ltd 5 * Bank of Scotland (Stanlife) London Nominees Ltd 5 * Bank of Scotland Branch Nominees Ltd 5 Bank of Scotland Capital Funding (Jersey) Ltd 10 Bank of Scotland Central Nominees Ltd 5 * Bank of Scotland Edinburgh Nominees Ltd 5 * Bank of Scotland Equipment Finance Ltd 2 Bank of Scotland Hong Kong Nominees Ltd 11 * Bank of Scotland Insurance Services Ltd
Clerical Medical Properties Ltd 20 Cloak Lane Funding Ltd 6 iv Cloak Lane Investments Ltd 6 CM Venture Investments Ltd 23 iv CMI Insurance (Luxembourg) S.A. (In liquidation) 24 Conquest Securities Ltd 1 iv vi Corbiere Asset Investments Ltd 1 i ii Create Services Ltd 1 Dalkeith Corporation 25 Delancey Rolls UK Ltd (In liquidation) 26 i Direct LB Ltd (In liquidation) 13 Dunstan Investments (UK) Ltd 1 Enterprise Car Finance Ltd 7 ii # Eurolead Services Holdings Ltd 9 Exclusive Finance No. 1 Ltd (In liquidation) 13 i Financial Consultants LB Ltd 1 First Retail Finance (Chester) Ltd 4 Flexifly Ltd (In liquidation) 88 Fontview Ltd 20 Forthright Finance Ltd 2 France Industrial Premises Holding Company 28 Freeway Ltd (In liquidation) 2 General Leasing (No. 4) Ltd 1 General Leasing (No. 12) Ltd 1 General Reversionary and Investment Company 20 Glosstrips Ltd (In liquidation) 88 Godfrey Davis (Contract Hire) Ltd 2 Gresham Nominee 1 Ltd 1 Gresham Nominee 2 Ltd 1 Halifax Credit Card Ltd 4 i ii vii
HBOS Investment Fund Managers Ltd 4 HBOS Management (Jersey) Ltd 10 HBOS plc 5 iv vi
HBOS Social Housing Covered Bonds LLP 2 * HBOS Treasury Services Ltd (In liquidation) 13 HBOS UK Ltd 5 Heidi Finance Holdings (UK) Ltd 1 Hill Samuel (USA), Inc. 14 Hill Samuel Bank Ltd 1 Hill Samuel Finance Ltd 1 iv xi Hill Samuel Leasing (No 2) Ltd (In liquidation) 13 Hill Samuel Leasing Co. Ltd 1 Hill Samuel Nominees Asia Private Ltd 31 HL Group (Holdings) Ltd (In liquidation) 13 Home Shopping Personal Finance Ltd 4 Horizon Capital 2000 Ltd 5 Horizon Capital Ltd (In liquidation) 88 Horizon Resources Ltd (In liquidation) 88 Horsham Investments Ltd 6 Housing Growth Partnership GP LLP 1 * Housing Growth Partnership LP 1 * # Housing Growth Partnership Ltd 1 i ii Housing Growth Partnership Manager Ltd 1 HSDL Nominees Ltd 4 HVF Ltd 2 Hyundai Car Finance Ltd 7 i ii IAI International Ltd (In liquidation) 1 IBOS Finance Ltd 2 ICC Enterprise Partners Ltd (In liquidation) 32 ICC Equity Partners Ltd (In liquidation) 32 ICC ESOP Trustee Ltd (In liquidation) 33 ICC Holdings Unlimited Company 16 ICC Software Partners Ltd (In liquidation) 32 IF Covered Bonds Limited Liability Partnership
Inchcape Financial Services Ltd 2 i # Industrial Real Estate LP 34 Industrial Real Estate (General Partner) Ltd 34 Industrial Real Estate (Nominee) Ltd 34 Intelligent Finance Financial Services Ltd 4 Intelligent Finance Software Ltd 4 International Motors Finance Ltd 2 i # Kanaalstraat Funding C.V. 35 * Kanto Leasing Ltd (In liquidation) 13 Katrine Leasing Ltd 36 LB Comhold Ltd (In liquidation) 13 LB Healthcare Trustee Ltd 1 LB Leasing L.P 38 * LB Motorent Ltd 1 LB Quest Ltd 1 LB Share Schemes Trustees Ltd 1 LBCF Ltd 9 LBG Brasil Administração LTDA 49 LBG Capital Holdings Ltd 1 ̂ LBG Capital No. 2 Ltd (In liquidation) 13 LBG Capital No. 1 Ltd (In liquidation) 13 LBG Equity Investments Limited 1 ̂ LBI Leasing Ltd 1 LBPB (21 Hill Street) Limited (In liquidation) 1 LDC (Asia) Ltd (In liquidation) 39 LDC (General Partner) Ltd 40 LDC (Managers) Ltd 40 LDC (Nominees) Ltd 40 LDC Carry VII LP 41* LDC Equity VII LP 41* LDC GP LLP 41 *
Scottish Widows Industrial Properties Europe B.V. 56 Scottish Widows Ltd 1 Scottish Widows Pension Trustees Ltd 3 Scottish Widows Property Management Ltd 54 Scottish Widows Services Ltd 3 Scottish Widows Trustees Ltd 54 Scottish Widows Unit Funds Ltd 3 Scottish Widows Unit Trust Managers Ltd 45 Seabreeze Leasing Ltd 1 Seaforth Maritime (Highlander) Ltd (In liquidation) 88 Seaforth Maritime (Jarl) Ltd (In liquidation) 88 Seaspirit Leasing Ltd 1 Seaspray Leasing Ltd (In liquidation) 13 Services LB (No. 2) Ltd (In liquidation) 13 iv Share Dealing Nominees Ltd 4 Shogun Finance Ltd 7 ii # Silentdale Ltd 1 iv vi vi
Uberior Trustees Ltd 5 * Uberior Ventures Australia Pty Ltd 8 Uberior Ventures Ltd 5 UDT Autolease Ltd 1 UDT Budget Leasing Ltd 1 UDT Ltd 1 UDT Sales Finance Ltd 1 United Dominions Leasing Ltd 1 United Dominions Trust Ltd 1 Universe, The CMI Global Network Fund 92 * Upsaala Ltd 16 Vehicle Leasing (1) Ltd (In liquidation) 13 Vehicle Leasing (2) Ltd (In liquidation) 13 Vehicle Leasing (3) Ltd (In liquidation) 13 Vehicle Leasing (4) Ltd (In liquidation) 13 Ward Nominees (Abingdon) Ltd 1 Ward Nominees (Birmingham) Ltd 1 Ward Nominees (Bristol) Ltd 1 Ward Nominees Ltd 1 Warwick Leasing Ltd (In liquidation) 13 Waverley – Fund II Investor LLC 25 Waverley – Fund III Investor LLC 25 Waymark Asset Investments Ltd 1 i ii WCS Ltd 60 West Craigs Ltd 5 Western Trust & Savings Holdings Ltd
Celsius European Lux 2 SARL 91 Cheltenham Securities 2017 Limited 61 Chepstow Blue Holdings Ltd 44 Chepstow Blue plc 44 Chester Asset Options No.2 Limited 69 Chester Asset Options No.3 Limited 87 Chester Asset Receivables Dealings Issuer Limited 63 Chester Asset Securitisation Holdings Limited 69
LCP Baby Investors LP (in process of disposal) n/a International Corporation Services Ltd, Harbour Place, 2nd Floor, 103 South Church Street, George Town,
Pertemps Network Group Ltd 96.28% Meriden Hall, Main Road, Meriden, Coventry ii & PIHL Equity Administration Ltd 100% Cavendish House, 18 Cavendish Square, London, W1G 0PJ ii & PIMCO (Holdings) Ltd 82.5% Dearing House, 1 Young Street, Sheffield, S1 4UP i & 42.8% ii 30.58% vii
ABERDEEN LIQUIDITY FUND (LUX) 7 Aberdeen Liquidity Fund (Lux) ‑ Sterling Fund 52.49% Aberdeen Liquidity Fund (Lux) ‑ Euro Fund 20.88% Aberdeen Liquidity Fund (Lux) ‑ Ultra Short Duration
INSIGHT INVESTMENT FUND OF FUNDS II ICVC 11 Absolute Insight Fund 61.29%
RUSSELL INVESTMENT COMPANY PLC 15 Russell Euro Fixed Income Fund 29.73% Russell Sterling Bond Fund 38.48% Russell U.S. Bond Fund 48.73%
Balanced Solution 45.76% Cautious Solution 37.40% Discovery Solution 45.42% Strategic Solution 55.13% Dynamic Solution 57.85% Defensive Solution 68.08% Adventurous Solution 76.79% European (ex UK) Equity Fund 96.77% Asia Pacific (ex Japan) Equity Fund 95.74% Japan Equities Fund 94.71% US Equities Fund 99.71% Fundamental Index UK Equity Fund 85.30% Fundamental Index Global Equity Fund 96.68% Fundamental Index Emerging Markets Equity Fund 95.50% Fundamental Low Volatility Index Global Equity 98.39% Fundamental Low Volatility Index Emerging Markets