The Group has pledged £5 million over five years to support more than 500 skilled apprentices at the Lloyds Banking Advanced Manufacturing Training Centre in Coventry. One of these apprentices is Kerry Smith, a young woman with aspirations to become a research engineer working in advanced automation and robotics.
By becoming the best bank for customers we believe we can help Britain prosper and deliver superior and sustainable returns for our shareholders.
Statutory profit before tax £1.6bn Statutory profit before tax of £1.6 billion, despite £4.0 billion of PPI charges
Strong balance sheet and liquidity position. Strong capital generation with pro forma CET1 ratio of
Celebrating 250 years of helping the people, businesses and communities of Britain
Ordinary dividend per share 2.25p with an additional special dividend of 0.5p per share
Creating the best customer experience We are improving customer experience with our multi-brand, multi-channel approach, combining digital capabilities with face-to-face services. We are transforming our digital presence, providing simpler, seamless interactions across online and mobile while sustaining extensive customer reach through our leading branch network.
Our Retail division is a leading provider of current accounts, savings, loans and mortgages to personal and small business customers in the UK.
Overview 2015 was another year of significant progress in our drive to restore the Group’s financial strength and deliver our goal of becoming the best bank for customers − and a year in which I felt a renewed sense of pride across the organisation for what we do and what we stand for. While legacy issues still impact on our results, we have increased underlying profit, further strengthened our balance sheet, continued to improve the efficiency of the business and enabled the government to substantially reduce its remaining stake in the Group at a profit. We have taken further steps to reinforce a customer focused culture and our staff surveys show continued strong engagement and commitment.
As a result of our business performance and strong capital position, I am pleased to announce that the Board has recommended a final ordinary dividend of 1.5 pence per share. The total ordinary dividend per share for 2015 of 2.25 pence has increased from 0.75 pence in 2014. In addition, the Board has recommended a capital distribution in the form of a special dividend of 0.5 pence per share. This is in line with the Group’s policy that aims to provide a progressive and sustainable dividend whilst distributing surplus capital when appropriate to do so.
Corporate culture, operating responsibly One of my goals as Chairman is to ensure we build a business which everyone feels proud of. Not only should we be a commercially successful business, but we should also be seen as having a noble purpose in helping our millions of customers manage their financial needs whilst playing a core and highly valued role in funding enterprise and supporting Britain’s long-term economic growth.
Our Foundations are at the heart of our purpose to help Britain prosper and to bring communities closer together. In 2015, we provided £17 million to the Foundations and since their establishment, they have distributed almost £600 million to charities and projects tackling disadvantage in communities across the UK.
Regulation The regulatory landscape in which we operate continues to evolve. Competition, conduct and capital remain central to reform and the regulators are continuing to undertake reviews into products and markets. We are however now starting to see greater clarity on a number of key areas. In particular, the Bank of England has provided more certainty on industry capital levels, the FCA announced a consultation on PPI time barring and we continue to make progress towards a final plan on ring-fencing and resolution. With regards to the ongoing Competition and Markets Authority (CMA) review, while believing there is already strong competition in UK markets, we welcome any proposals that help competition provide better choice and more transparency for customers and are committed to working with the CMA to ensure better account comparability and easier switching.
COMMITTED TO GOOD GOVERNANCE One of the principal tasks of the Board is to develop a strategy which can achieve long-term success and generate sustainable returns for shareholders. This needs to be underpinned by the high standards of corporate governance which are critical to the success of any business today and should be driven by the Board (led by the Chairman) and embedded in the thinking and processes of the business. We are confident we have a proven, strong and skilled management team, a well balanced, experienced Board and a commitment to good governance, enabling us to build a business that we believe will deliver sustainable success in the future.
Strategy and customer focus In 2015, the Board reviewed progress in implementing the Group’s customer focused strategy whilst ensuring conduct, culture and values were at the forefront of how the business is run. You can read more in the strategic report.
Outlook One of my primary roles as Chairman is to ensure we build a business which is commercially successful, helps our customers with their financial needs and plays a valued role in Britain’s long-term economic success. Despite our progress we cannot be complacent. As I have described, we have to be increasingly focused on the scope and pace of change – in particular the speed of the digital revolution and the impact of new markets and technologies – if we are to remain well placed to serve customer needs in years to come. Managing that pace of change carefully is a major priority.
I would like to thank all my colleagues across the Group for their hard work and commitment in addressing these challenges and helping secure that future success.
The progress we have made in successfully executing our differentiated, simple and low risk business model is now being increasingly recognised, with the major credit rating agencies of Fitch, Moody’s and Standard & Poor’s having all either strengthened or reaffirmed the Bank’s credit ratings during the course of the year. The transformation of the Group’s risk profile has also been reflected in our credit default swap spread, which remains the lowest of our major UK banking peers. This and our cost:income ratio, which, at 49.3 per cent, is also the lowest of our major UK peers, remain ongoing sources of competitive advantage in line with the strategic plan presented to the market in June 2011.
Becoming simpler and more efficient Our cost leadership position remains a key source of competitive advantage and strategic priority for the Group. We continue to invest significantly in IT with a focus on ensuring that our systems and processes are both efficient and resilient and that our customers’ experiences are improved through the end-to-end automation of key customer journeys. In addition, we achieved over £150 million of run-rate savings in third party spend in the year by managing demand more efficiently and negotiating better rates with our suppliers. Through these and other efficiency initiatives, we have to date delivered total run rate savings of £373 million in the second phase of our Simplification programme, and we remain ahead of target in achieving total run-rate savings of £1 billion by the end of 2017. In addition, we are actively responding to prolonged lower interest rates and have accelerated our cost savings delivery while also targeting further efficiency initiatives. The combination of this absolute focus on cost management and the resilience of our income generation has enabled us to improve our market-leading cost:income ratio to 49.3 per cent from 49.8 per cent in 2014.
In our Retail division we continue to be a lead supporter of the UK government’s Help to Buy scheme and have exceeded our lending target to small businesses within the Helping Britain Prosper Plan by supporting over 1 in 5 new business start-ups. In Commercial Banking we continue to play a lead role in supporting the UK economy and remain the largest net lender to SMEs in the UK government’s Funding for Lending scheme.
Our Consumer Finance business also continues to deliver strong growth within our low risk appetite, increasing its market share, with the division also making a number of improvements to our customer propositions across motor finance and credit cards. In Insurance, following the completion of our first bulk annuity transaction with the Scottish Widows With-Profits fund in the first half, we have also successfully completed our first open market transaction in the fourth quarter and will continue to participate in this attractive market.
Summary In our milestone year we made a strong start to the next phase of our strategy and have delivered a robust financial performance. The combination of this strategic and financial performance with our simple, low risk business model positions us well in the face of uncertainties regarding the global economic, political, competitive and regulatory environment and underpins our confidence in the Group’s future prospects. From these firm foundations, we believe we are well placed to support the UK economy and become the best bank for customers, while delivering superior and sustainable returns for our shareholders.
As a result of strategic progress in 2015, we have reported improvements in underlying profits, strengthened our capital position despite conduct charges and announced increased dividend payments.
Our common equity tier 1 ratio continued to improve in 2015 despite increased dividends; this is a strong position in absolute and relative terms compared to our major UK banking peers. 1 Pro forma.
An increased ordinary dividend of 2.25 pence per share, in line with our progressive and sustainable dividend policy. In addition, the Board has recommended a special dividend of 0.5 pence per share.
The underlying return on required equity improved in 2015, reflecting the growth in underlying profit.
Earnings per share reduced in the year, largely due to additional provisions for PPI.
1 We’ll help more customers get on the housing ladder – and more customers climb up it 3 l 2 We’ll help our customers plan and save for later life 1 l
Read more about our 2015 performance and our new 2016 Prosper Plan targets at www.lloydsbankinggroup.com/ProsperPlan
Particular highlights include providing 1 in 4 first-time buyer mortgages, supporting 1 in 5 start-up businesses, delivering 320,000 hours of colleague volunteering and achieving 31 per cent of senior roles held by women. Full details of our performance are available online.
We’ve therefore developed a new metric for 2016 to help consumers plan for later life through our retirement planning website. This reflects rapidly changing market conditions and our goal of helping more customers save for the long-term.
We need to adapt to the changes in financial services brought about by technology, changing customer behaviour and increasing regulatory requirements at a time when traditional competitors’ strategies converge and new entrants compete for customers. This change is being achieved through three strategic priorities which run to 2017. These priorities are: – Creating the best customer experience – Becoming simpler and more efficient – Delivering sustainable growth
We have an effective top-to-bottom governance structure, providing an environment in which colleagues are encouraged and supported to do the right thing and to work responsibly. This governance structure includes our Group Board and Board-level Responsible Business Committee and cascades to every part of our business, through our Group Executive Committee and Group Customer First Committee.
TO BECOME THE BEST BANK FOR CUSTOMERS WHILST DELIVERING SUPERIOR AND SUSTAINABLE RETURNS FOR SHAREHOLDERS
2016 Prosper Plan The 2016 Plan is focused on helping people, businesses and communities to prosper, and has 24 metrics. It includes four new targets: – Number of high value manufacturing apprenticeships as a result of our £1 million per year funding – Number of customers helped to plan for later life through our retirement planning website – Amount raised by colleagues and communities for our Charity of the Year – Arrange and provide new funding support for social housing
Britain doesn’t stand still and our Plan needs to evolve to stay relevant. Consequently, we are refocusing our goals, targeting where we can make the biggest positive difference and setting even more stretching and measurable targets. Sara Weller Chairman, Responsible Business Committee
Lloyds Banking Group and the UK government launched the Housing Growth Partnership in 2015 to diversify house building. As a result, small house building firms are benefiting from a £100 million cash boost, recognising and supporting their key role in keeping the UK building. We have pledged £50 million of the fund to provide smaller building firms with capital to allow them to recruit and train skilled workers and become more competitive. We have also pledged £1 million over four years to support the development of construction skills in London.
11,000 colleagues helping people and businesses improve their digital skills in 2015. We are on track to achieve our target of 20,000 by the end of 2017
Given our UK focus, our financial performance is inextricably linked to the performance of the UK economy and its regulatory and competitive environment
Low inflation and risks from the slowdown in emerging markets are complicating central banks’ setting of interest rates. The US increased rates in December 2015 for the first time since 2006, much later than had been expected at the start of the year. And the UK hasn’t yet raised rates, contrary to consensus expectations at the start of 2015 of two increases during that year. Low interest rates, along with limited supply, have boosted property prices with UK house prices up 10 per cent during 2015, surpassing their 2007 peak, and commercial property prices up 7.8 per cent.
Margin pressure Competition and the delay in Bank Rate increases are keeping banks’ margins under pressure. The spread between average lending and deposit rates has held fairly flat in 2015 close to its pre-crisis level, having improved from the very low level of 2011-12 when wholesale funding costs were exceptionally high. Lending rates have fallen to a record low in 2015, and whilst deposit rates have fallen during the year they are still higher than short term financial-market rates, opposite to pre-crisis. Mortgage pricing has been particularly aggressive in 2015, with spreads on new loans over market funding costs falling around 50 basis points through the year.
Regulation The regulatory landscape in which we operate continues to evolve with the key areas of focus now protecting consumers and small business customers, ensuring competitive markets and strengthening the prudential framework.
Alongside its December 2015 Financial Stability Report, the Bank of England issued its new capital framework, finalising its view on capital requirements for UK banks. This framework sets out the minimum requirements as well as the approach for setting capital buffers and the levels of debt required for resolution purposes. The framework will be implemented on a transitional basis, reaching an end-state by 2019. Also in December 2015, the Bank of England approved Scottish Widows Group’s internal model for calculating its capital requirements under the Solvency II regime. We remain comfortably in excess of minimum requirements on our key capital ratios and are well positioned for implementation. The resilience of our capital position was demonstrated again in 2015 when we comfortably exceeded the threshold for the latest PRA stress test. In addition, from October 2015 the Liquidity Coverage Ratio (LCR) became the key ratio for the amount of cash and liquid assets a bank must hold, with the bank comfortably meeting its requirements.
Our strategy, which focuses on our multi-brand, multi-channel distribution model, simpler processes, customer-driven product range and expertise across insurance and banking, puts us in a unique position to respond to these market conditions and meet the needs of individual and corporate customers.
Multi-brand proposition: Offering our services through a number of recognised brands enables us to address the needs of different customer segments more effectively.
Our business model is influenced by external factors which continue to evolve, in particular: Customer needs We are adapting to changing customer behaviour such as the increased adoption of digital product offerings.
PRODUCTS Our product range is driven by the needs of our retail and commercial customers and informed through comprehensive customer analysis and insight.
Society: Helping Britain prosper As the largest retail and commercial bank in the UK, helping Britain prosper is our central purpose. We have a number of public targets in areas where we can make the biggest difference for people, businesses and communities which are outlined in our Helping Britain Prosper Plan.
– Cost leadership with continued reductions in cost:income ratio to 49.3 per cent – Actively responding to lower rates through accelerated cost delivery and targeting further efficiency savings – Ahead of target in delivery of £1 billion Simplification savings: £0.4 billion achieved to date – Increased automation of key end-to-end customer journeys
– Largest digital bank: - 11.5 million online users/6.6 million mobile users - Increasing market share – Enhanced digital offering: - UK’s no 1 rated banking app - Direct to consumer car financing proposition – Further investment in market leading branch network, rolling out Wi-fi and automated solutions to the majority of branches – Net promoter score >50 per cent higher than at the end of 2011 – Customer complaints (excluding PPI) remain lower than our peers
Initiatives – Maintain market leading position in key retail business lines – Leverage Group strengths to capture growth in underrepresented areas
As recent signatories to the UN Global Compact, we operate in line with its ten principles and support the UN’s wider development agenda, including the Guiding Principles and Sustainable Development Goals. We welcome the Modern Slavery Act and will issue our first statement in 2017.
Our Code of Business Responsibility affirms that we do not finance any activities prohibited by international conventions supported by the UK government, such as the Oslo Convention on Cluster Munitions and the Ottawa Treaty on Anti-Personnel Landmines. Consequently, we will not enter into credit or investment relationships with businesses believed to be in breach of these conventions.
A clear purpose and strong values We have set out our corporate purpose, to help Britain prosper and our ambition to do so as the best bank for customers. In 2012, we launched our three Group Values: putting customers first, keeping it simple, and making a difference together. These values and our Codes of Responsibility are embedded across the business, from recruitment through to performance management and training and development. The results of our colleague engagement surveys suggest that colleagues are increasingly guided and inspired by our Values.
Doing business responsibly, sustainably and ethically, is the way to rebuild trust with people, businesses and communities across Britain, whilst also strengthening colleagues’ pride in our Group.
Sara Weller Chairman, Responsible Business Committee 1 Total sample size was 2,030 adults, of which 1,950 have a bank account. Fieldwork was undertaken by YouGov Plc between 8-9 October 2015. The survey was carried out online. The figures were weighted to be representative of all GB adults (aged 18+).
A clearly defined business model and strategy We are a simple, low risk, UK focused retail and commercial bank. A responsible approach is integral to our business model and our approach to value creation. You can read about this on page 18.
We are a leading supporter of the UK government’s Help to Buy scheme. We have advanced £3.5 billion of new lending to customers under the mortgage guarantee element of the scheme, since it was launched in the second half of 2013 up to the end of 2015.
Opening a basic bank account can be the first step towards financial inclusion for many customers. In 2015, we provided over 300,000 new basic bank accounts and also helped 55,000 customers upgrade from basic to more mainstream products.
Digital technology offers an important opportunity to make financial services more accessible. Today, almost 6 million adults in the UK have never used the internet and over 50 per cent of charities and more than 1 million small and medium-sized businesses lack basic digital skills. Increasing digital capability is one of the most important factors that will drive financial inclusion over the coming years, so we aim to use our expertise and reach to promote wider understanding and access, as shown in our Lloyds Bank Consumer Digital Index.
We are committed to supporting the manufacturing sector in the UK. In 2015, we announced a £5 million investment over five years to support over 500 skilled apprentices at the Lloyds Bank Advanced Manufacturing Training Centre in Coventry. This will help address the skills gap in the sector and help improve productivity and innovation in the sector.
Agile working In 2015 we launched our Agile Working programme initiative, evolving our working approach to meet the ever-changing needs of our colleagues and customers. All colleagues can apply to work flexibly to support their preferred work-life balance, whether they’re parents, carers, or have other priorities. In addition, they can buy extra holiday time and purchase other family benefits through our Flexible Benefits scheme. The Group was named a Top Ten Employer for Working Families in 2015.
Following the success of the Group’s first Environmental, Social and Governance (ESG) bond in 2014, and in response to increased investor demand, it launched another £250 million bond in 2015. Lloyds Bank became the first UK bank to develop an ESG deposit scheme in response to client demand to invest in products that create positive impacts.
Investors and ratings agencies We held more than 1,000 meetings with investors in 2015. We regularly engage SRI/ESG investors as well as mainstream investors and investment analysts to provide them with information on our performance, strategic plans and how we do business responsibly. In 2015 we held a number of responsible business webinars and roadshows with investors and analysts. We also briefed ratings agencies about our performance against our Conduct Risk Appetite Metrics.
Effective risk analysis, management and reporting Close monitoring and stringent reporting to all levels of management and the Board ensures appetite limits are maintained and are subject to stressed analysis at a risk type and portfolio level.
Capital strength We have maintained our strong capital position through a combination of increased underlying profit and lower risk-weighted assets, partially offset by PPI and other conduct charges, which enabled the Group to pay both an interim dividend at half year and to recommend the payment of both a full year ordinary dividend and a special dividend whilst maintaining strong capital ratios. In 2015 the Group participated in the UK-wide concurrent stress testing run by the Bank of England, comfortably exceeding both the capital and leverage minimum thresholds set.
Setting risk appetite and strategy. Approval of the risk management framework and Groupwide risk principles
Supporting a consistent approach to Groupwide behaviour and risk decision making. Consistency is delivered through the policy framework and risk committee structures
Maintains a robust control framework, identifying and escalating emerging risks and supporting sustainable growth
– The Legal, Regulatory and Mandatory Change Committee ensures we develop plans for delivery of all legal and regulatory changes and tracks their progress. Groupwide projects implemented to address significant impacts. – Continued investment in people, processes, training and IT to assess impact and help meet our legal and regulatory commitments. – Engage with regulatory authorities and relevant industry bodies on forthcoming regulatory changes, market reviews and Competition and Markets Authority investigations.
Delivering sustainable growth We are committed to operating sustainably and responsibly, and commit significant resource and expense to ensure we meet our legal and regulatory obligations.
Example: – The most significant conduct cost in recent years has been PPI mis-selling.
Examples: – A resilient IT environment is critical to providing reliable services to customers and enabling sustainable growth. – The dynamic threat posed by cyber risk and the potential for external attacks on the integrity of electronic data or the availability of systems.
Our Cyber Programme continues to focus on improving the Groupwide cyber security controls and we regularly assess our cyber control environment, through both internal and third party testing.
Example: – Lack of colleague capacity and capability could impact the achievement of business objectives. Additional colleague stretch (including increased dependency on key staff) could result in a loss of expertise.
Delivering sustainable growth 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 delivering sustainable growth.
– Holding a large portfolio of unencumbered LCR eligible liquid assets to meet cash and collateral outflows and regulatory requirements and maintaining a further large pool of secondary assets that can be used to access central bank liquidity facilities. – Undertaking daily monitoring against a number of market and Group-specific early warning indicators and regular stress tests. – Maintaining a contingency funding plan detailing management actions and strategies available in stressed conditions.
N/A Becoming simpler and more efficient Ring-fencing requirements ensure we become simpler and continue to create the best customer experience, through providing further protection to core Retail and SME deposits, provide transparency on our operations and facilitate the options available in resolution.
– Structural hedge programmes have been implemented to manage liability margins and margin compression, and the Group’s exposure to Bank Base Rate. – Equity and credit spread risks are inherent within Insurance products and are closely monitored to ensure they remain within risk appetite. Where appropriate, asset liability matching is undertaken to mitigate risk. – The allocation to credit assets has been increased and equity holdings reduced within the Group’s Defined Benefit Pension Schemes. A hedging programme is also in place to minimise exposure to nominal rates/inflation. – Stress and scenario testing of Group risk exposures.
Leverage ratio 1 This key risk indicator is also a key performance indicator (KPI).
Looking ahead, the Basel Committee is continuing to review aspects of the regulatory capital framework, and the Bank of England has consulted on its approach for setting minimum requirements for own funds and eligible liabilities. There is a risk that these could lead to higher capital requirements than we have anticipated in our strategic plans. 2 Ratios are post interim and recommended full year dividends and pro forma, reflecting dividend paid by Insurance in February 2016 in respect of 2015 earnings.
Delivering sustainable growth We maintain a strong funding position in line with our low risk strategy. Our funding position has been significantly strengthened in recent years and our loan to deposit ratio remains within the target range.
Operating costs of £8,311 million were lower than in 2014 despite now including costs relating to the next phase of Simplification, with a £466 million increase in investment (including strategic initiatives and Simplification), and £143 million for pay, inflation and other costs, offset by £491 million of incremental savings from the Simplification programmes and £129 million of reductions from business disposals.
Phase II of the Simplification programme has delivered £373 million of annual run-rate savings to date and we are ahead of target in achieving £1 billion of Simplification savings by the end of 2017. The Group has a proven track record in cost management and given the lower interest rate environment, is responding through the accelerated delivery of cost initiatives and targeting further efficiency savings.
The cost:income ratio improved to 49.3 per cent from 49.8 per cent in 2014 and remains one of the lowest of our major UK banking peers. We remain committed to achieving annual improvements in the cost:income ratio with a target ratio of around 45 per cent and based on current interest rate assumptions we now expect to achieve this target as we exit 2019.
Impaired loans as a percentage of closing advances reduced to 2.1 per cent from 2.9 per cent at the end of December 2014, driven by reductions within both the continuing and the run-off portfolios including the impact of the sale of Irish commercial loans in the third quarter. Provisions as a percentage of impaired loans reduced from 56.4 per cent to 46.1 per cent reflecting the disposal of highly covered run-off assets during the year. The continuing business coverage ratio reduced slightly to 43.0 per cent (31 December 2014: 44.6 per cent) but remains strong.
Other conduct provisions In 2015, the Group incurred a charge of £837 million, of which £302 million was recognised in the fourth quarter relating to a number of non-material items including packaged bank accounts and a number of other product rectifications primarily in Retail, Insurance and Commercial Banking. Within the full year charge, £720 million of provisions related to potential claims and remediation in respect of products sold through the branch network and continuing investigation of matters highlighted through industry wide regulatory reviews, as well as legacy product sales and historical systems and controls such as those governing legacy incentive schemes. This includes a full year charge of £225 million in respect of complaints relating to packaged bank accounts. The full year charge also included the previously announced settlement of £117 million that the Group reached with the FCA with regard to aspects of its PPI complaint handling process during the period March 2012 to May 2013.
The effective tax rate was higher than the UK corporation tax rate largely due to the introduction in 2015 of restrictions on the deductibility of conduct related provisions which resulted in an additional tax charge of £459 million. Adjusting for this charge, the effective tax rate would have been 14 per cent reflecting a number of positive one-off items including non-taxable and relieved gains and a small prior year adjustment. Going forward we do not expect these positive one-off items to continue and now expect a medium-term effective tax rate of around 27 per cent, including the forthcoming 8 per cent surcharge on banking profits. This is lower than our previous guidance of around 30 per cent, reflecting actions on PPI.
The remaining issued Enhanced Capital Notes (ECNs) were not taken into account for the purposes of core capital in the PRA stress tests and the Group has determined that a Capital Disqualification Event (CDE), as defined in the conditions of the ECNs, has occurred. This determination was confirmed by a unanimous decision by the Court of Appeal on 10 December 2015 and on 29 January 2016 the Group announced the redemption of certain series of ECNs using the Regulatory Call Right. The Group also launched Tender Offers for the remaining series of ECNs on 29 January 2016 and subsequent to completion of such offers, the Group has announced that it will redeem those ECNs not validly tendered using the Regulatory Call Right. The Tender Offers and process for redemption of the ECNs not validly tendered by the noteholders will be completed before the end of the first quarter with an estimated cost of £0.7 billion.
Progress against strategic initiatives – Continued development of our digital capability. Our online user base has increased to over 11.5 million customers, with over 6.6 million active users on mobile and 2.9 million on tablets. – Enhanced proposition for investment customers, becoming one of the first UK banks to offer investment advice through video conferencing and screen sharing. – Invested in the branch network with 230 refurbishments in 2015, 70 per cent of branches are now Wi-fi enabled with an additional 470 self-service devices, giving customers flexibility to choose how they do their banking. – Continued to attract new customers through positive switching activity, particularly through the Halifax challenger brand which has attracted more than 1 in 5 customers switching in 2015. – Continued product developments including improvements to the Club Lloyds proposition and consolidation of savings products reducing portfolio complexity and aligning rates and features to create a simpler, more transparent product range for customers. – Leading the way on the government’s drive for improved financial inclusion by providing over 1 in 4 basic bank accounts to disadvantaged and low income customers in 2015. – Provided 1 in 4 mortgages to first-time buyers. Retail continues to be a leading supporter of the UK government’s Help to Buy scheme, with lending of £3.5 billion under the mortgage guarantee element of the scheme since launch and the launch of a market-leading ‘Help to Buy ISA’ in December. – Supported more than 1 in 5 new business start-ups. Improved our proposition to small business customers, launching a range of new to market products and services.
Commercial Banking has been supporting British business for 250 years. It has a client-led, low risk, capital efficient strategy, helping UK-based clients and international clients with a link to the UK. Through our four customer facing divisions − SME, Mid Markets, Global Corporates and Financial Institutions – we provide clients with a range of products and services such as lending, transactional banking, working capital management, risk management, debt capital markets services, as well as access to private equity through Lloyds Development Capital.
Focus on new business in a competitive market: – Leading issuer of new credit cards in 2015, with a 22 per cent increase in average advances to new customers and a 20 per cent increase in the number of existing customers transferring balances in from competitors. – Black Horse grew its market share through an 18 per cent increase in new lending, through improved dealer motor finance penetration and the Jaguar Land Rover (JLR) partnership. – Lex Autolease fleet size up 7 per cent with leads from existing bank relationships up 13 per cent.
Growing balances in under-represented markets: – Credit Cards balances increased 4 per cent compared with market growth of less than 2 per cent. – Black Horse loans up 34 per cent outperforming a strong market and benefiting from the continued strength of the JLR relationship, while leading the industry in embedding significant Consumer Credit regulatory change. – Lex Autolease operating lease assets grew 13 per cent driven by new SME customer activity.
The Insurance division is committed to providing a range of trusted and value for money products to meet the needs of our customers. Scottish Widows, in its 200th year, is helping almost six million customers protect what they value most and plan financially for the future. In addition, the general insurance business is protecting the homes, belongings, cars and businesses of over three million customers.
New business income increased by £58 million, with the primary driver being the new bulk annuity business. This was offset by a reduction in Protection income, following the removal of face-to-face advice in branch standalone protection sales and reduced annuity income following the introduction of Pensions Freedoms in 2015. Corporate pension income remained robust despite lower sales following the auto enrolment driven increases in 2014.
Long-term investment strategy includes the benefit from the successful acquisition of a further £1.4 billion of higher yielding assets to match the long duration annuity liabilities.
Cash generated from existing business 531 166 110 − 28 835 751
Cash generated from General Insurance − − − 178 − 178 274
– The reduction in income and costs largely reflects the impact of disposals made in 2014 including the sale of Scottish Widows Investment Partnership. – The reduction in the impairment charge reflects the continued success in managing down the run-off portfolios. – Run-off now represents 2 per cent of total loans and advances to customers and less than 5 per cent of the Group’s risk-weighted assets.
Insurance volatility The Group’s insurance business has policyholder liabilities that are supported by substantial holdings of investments. IFRS requires that the changes in both the value of the liabilities and investments are reflected within the income statement. The value of the liabilities does not move exactly in line with changes in the value of the investments. As the investments are substantial, movements in their value can have a significant impact on the profitability of the Group. Management believes that it is appropriate to disclose the division’s results on the basis of an expected return in addition to results based on the actual return. The impact of the actual return on these investments differing from the expected return is included within insurance volatility.
Insurance hedging arrangements The Group purchased put option contracts in 2015 to protect against deterioration in equity market conditions and the consequent negative impact on the value of in-force business on the Group balance sheet. These were financed by selling some upside potential from equity market movements. On a mark-to-market basis a gain of £111 million was recognised in relation to these contracts in 2015.
Return on required equity Underlying return on required equity is the underlying profit after tax at the standard UK corporation tax rate less the post-tax profit attributable to other equity holders divided by the average required equity for the period. Required equity comprises shareholders’ equity and non-controlling interests and is the amount required to achieve a common equity tier 1 ratio of 12.0 per cent after allowing for regulatory adjustments and deductions. An adjustment is also made to reflect the notional earnings on any excess or shortfall in equity.
Number of ordinary shares in issue (millions)4 71,374 71,374 71,368 70,343 68,727 2015 2014 2013 20121 20111
7 The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims).
8 Capital ratios for 2014 reflected CRD IV transitional rules as implemented by the PRA on 1 January 2014. Capital ratios for 2013 and earlier years have not been restated to reflect the implementation of CRD IV.
12 António Horta-Osório Executive Director and Group Chief Executive Appointed: January 2011 (Board), March 2011 (Group Chief Executive)
14 Juan Colombás Executive Director and Chief Risk Officer Appointed: January 2011 (Chief Risk Officer), November 2013 (Board)
of Group Investor Relations. External appointments: Chief Financial Officer and an Executive Director of Royal Dutch Shell plc with responsibility for Shell’s Finance, IT, Strategy and Planning functions. Chair of the European Round Table CFO Taskforce, Member of the Main Committee of the 100 Group of UK FTSE CFOs, the Advisory Panel of CIMA and of the Advisory Board of the Centre for European Reform.
Skills and experience: Dyfrig has spent his career in banking, principally at HSBC where he worked for 37 years. During that time he held a number of senior management and Board positions in the UK and overseas including Chief Executive Officer of HSBC Bank PLC. He has the knowledge and experience to provide valuable insight and contribute effectively as a Non-Executive Director and Member of the Remuneration Committee and Risk Committee. He was formerly Chairman of Principality Building Society and a Board member of the Wales Millennium Centre. External appointments: Member of the Welsh Rugby Union’s Audit Committee.
Skills and experience: Nick has significant financial services experience, particularly in insurance where he has served as Chief Executive of Lloyd’s of London and Prudential UK and Europe as well as Chairman of Brit Insurance. He has the knowledge and experience to provide valuable insight and contribute effectively as a Non-Executive Director and Member of the Audit Committee and Risk Committee. He is a former Non-Executive Director of the Prudential Regulation
Authority and of Legal and General Plc as well as Chairman of the Financial Services Practitioner Panel. External appointments: Member of the BBC Trust, Chairman of the Britten-Pears Foundation and of the Royal Northern College of Music.
David started his career with Lloyds Bank 31 years ago on the graduate entrant programme and has held a number of key leadership roles across all Divisions of the Group since that time. Immediately prior to this role he was appointed to Group Executive Committee in May 2014 as Group Director, Operations.
Succession planning Our approach to succession planning ensures the desired mix of skills and experience of Board members, now and in the future. Just as importantly, talent needs to be recognised and nurtured within executive and management levels and across the Group as a whole.
Responsible business Our approach to culture and values is led by the Board. The creation of a board-level Responsible Business Committee during the year underlines the Group’s commitment to being a responsible business.
Deputy Chairman – Anita Frew – Ensures continuity of Chairmanship during any change of chairmanship – Supports the Chairman in representing the Board and acting as a spokesperson – Deputises for the Chairman – Available to the Board for consultation and advice – Represents the Group’s interests to official enquiries and review bodies
Executive Directors – Under the leadership of the Group Chief Executive, make and implement decisions in all matters affecting the operations, performance and strategy of the Group’s business – Provide specialist knowledge and experience to the Board – Responsible for the successful leadership and management of the Risk and Finance divisions – Design, develop and implement strategic plans – Deal with day-to-day operations of the Group
Group Chief Executive Responsibility for day-to-day management of the business is delegated to the Group Chief Executive. The Group Chief Executive delegates aspects of his own authority, as permitted under the Corporate Governance Framework, to members of the Group Executive Committee (GEC). The names and biographies of current GEC members and GEC attendee, the Group Audit Director, are set out on pages 58 and 59. The GEC meets weekly to scrutinise the Group’s business. The Group Audit Director, the Group HR Director (until October 2015) and the Company Secretary attend the weekly GEC meetings to ensure that there is appropriate internal audit oversight, that employee interests and people strategy matters are considered and that the highest standards of corporate governance are maintained, including the escalation of matters to the Board and its Committees. In January 2016, a new role of Chief People, Legal and Strategy Officer was created to lead the HR, Legal and Strategy functions. The Chief People, Legal and Strategy Officer is a member of the GEC and reports to the Group Chief Executive.
Reports from the Nomination & Governance Committee, the Audit Committee, the Board Risk Committee and the Responsible Business Committee can be found on pages 72 to 81. Information about the work of the Remuneration Committee is included in the Directors’ remuneration report on pages 82 to 106. Please see pages 118 to 119 for a list of the Group Chief Executive Committees and their purpose.
The Board of the Group’s insurance subsidiary, Scottish Widows Group Limited, which also sits as the Board of its major subsidiaries, is chaired by a Non-Executive member of the Lloyds Banking Group Board and contains a balance of independent Non-Executive Directors, Group executives and Insurance Division executives. This composition supports its legal and regulatory requirements for independent decision making within the overall framework of Group policies and controls.
The process provides GEC members with additional oversight of subsidiary entities within their respective business area, including an escalation process for any matters of non-compliance. In addition, the process provides continued focus on simplification of the Group’s legal entity structure through consideration of the lifecycle of each entity.
A number of other Board Committee meetings were held during the year, including meetings in relation to the disposal of the Group’s remaining interest in TSB Bank, the regulatory par call of Enhanced Capital Notes, stress testing results and PPI complaint handling.
3 Joined the Board on 1 December 2015. 4 Retired on 31 October 2015.
Setting the Board agenda and Board paper content There is a comprehensive and continuous process in place for ensuring the Board has the right information at the right time and in the right format to enable the Directors to make the right decisions. The Chairman sets the Board agenda, assisted by the Group Chief Executive and Company Secretary. A yearly planner is prepared by the Company Secretary to map out the flow of key items of business to the Board and to ensure that sufficient time is being set aside for strategic discussions and material issues.
Secretary’s end-to-end Corporate Governance Review. Accordingly a number of enhancements were made to the process during the year. A key recommendation was the introduction of quarterly reviews of topics for Board presentations and ‘deep dives’ as described on pages 68 and 69.
Directors are sent papers for the Board meeting up to seven days in advance of the meeting in order that they may have the time to consider the proposals put forward and seek clarification or further information as required. The Board makes full use of technology such as video conferencing, teleconferencing, a Board portal and tablets in its meeting arrangements. This leads to greater flexibility, security and efficiency in Board paper distribution.
Dividends The Board met on several occasions during 2015 to consider the appropriate level of dividend payment and to set the dividend policy. The Group’s dividend policy aims to provide a progressive and sustainable dividend whilst distributing surplus capital when appropriate to do so. In reaching the decision to pay a dividend, the Board has to take into account a number of legal, financial and capital constraints. Further information on capital management and the Group’s dividend policy can be found on pages 161 and 162.
– Budget for 2015 and Group operating plan – Draft results and presentation to analysts
The deep dive sessions, strategy offsite meeting and site visit to Bristol are described on page 65.
Chairman’s office The Chairman maintains an office with support to help manage his programme of activities, obtain briefings and deal with external contacts.
The agenda was structured to allow plenty of opportunity for discussion and concluded with a group discussion on strategy, culture and rebuilding trust.
Site visit to Bristol In November 2015, the Board held an offsite meeting in Bristol, attended by GEC members, at which it reviewed the Group operating plan in detail. The November Committee meetings also took place at the Group’s Bristol offices. During the visit, Board and GEC members took the opportunity to meet colleagues based in Bristol and the South West over dinner and at an informal breakfast hosted by the Chairman and Non-Executive Directors. Some Board members also visited the Bristol City Centre branch to meet the local director and branch based colleagues.
Chairman’s Town Hall sessions In October 2015, as part of his engagement programme, the Chairman visited two of the Group’s IT sites near Manchester, where he was joined by 275 colleagues.
The Chairman spoke to colleagues on the progress the Group is making with the next stage of its strategy to become the best bank for customers, how it had strengthened its balance sheet, and the importance of continuing to restore the trust and confidence of customers and other key stakeholders. The visit included a question and answer session, where colleagues asked questions on such topics as how the Group is remediating risk, the impact of new challenger banks and emerging new technologies on the landscape.
EFFECTIVENESS Board size and composition The Board should be of sufficient size to reflect a broad range of views and perspectives whilst allowing all Directors to participate effectively in meetings. The Board currently comprises three Executive Directors, ten independent Non-Executive Directors and the Chairman who was independent on appointment. The size of the Board is within the optimal range set by the Nomination & Governance Committee. Further details on the composition of the Board and independence of the Non-Executive Directors are provided in the Nomination & Governance Committee report.
The Chairman leads the learning and development of Directors and the Board generally and regularly reviews and agrees with each Director their training and development needs.
At the time of the 2016 AGM, Anthony Watson will have been on the Board for more than seven years. Therefore, in compliance with the Code, his review was particularly rigorous.
The creation of a new Board Committee to provide oversight of the strategy and plans for delivering the Group’s aspirations to be a leader in responsible business, as part of the Group’s objective of helping Britain prosper
Strategy – Continue to focus on strategy, with particular attention to the longer term horizon and the impact of the changing technology and competitive landscape
Election and re-election All Directors appointed to the Board since the AGM in 2015 will stand for election at the 2016 AGM. All other Directors will retire and those wishing to serve again will submit themselves for re-election at the AGM. Dyfrig John, an independent Non-Executive Director, has notified the Board that he does not intend to seek re-election at the 2016 AGM. Biographies of current Directors are set out on pages 56 and 57. Details of the Directors seeking election or re-election at the AGM are set out in the Notice of Meeting.
Corporate Governance Review In November 2014, the Chairman commissioned the Company Secretary to examine the corporate governance of the Group.
Recruitment for the Secretariat is ongoing. All other recommendations from the governance review have been implemented in full.
Senior Managers and Certification Regime (SM&CR) The Company Secretary carried out a further review of the Corporate Governance Framework in preparation for the introduction in March 2016 of the SM&CR and, as relevant to the Scottish Widows Group, the Senior Insurance Managers Regime (SIMR).
Control effectiveness review An annual control effectiveness review (CER) is undertaken to evaluate the effectiveness of the Group’s control framework with regard to its material risks, and to ensure management actions are in place to address key gaps or weaknesses in the control framework. Business areas and head office functions assess the controls in place to address all material risk exposures across all risk types. The CER considers all material controls, including financial, operational and compliance controls. Senior management complete an attestation to confirm the CER findings which are reviewed and independently challenged by the Risk Division and Group Audit and reported to the Board. Action plans are implemented to address any control deficiencies.
Relationships with retail shareholders The Company Secretary has a team dedicated to engage with retail shareholders who, with support from our registrar Equiniti Limited, deliver the Group’s shareholder service strategy, including the AGM.
The Annual General Meeting The AGM is an opportunity for shareholders to engage directly with the Board. All Board members attended the Group’s AGM in 2015. The AGM in 2016 will again be held in Scotland in accordance with the articles of association. At the AGM in 2015, over 70 per cent of total voting rights were voted by shareholders. The lowest vote ‘in favour’ across all resolutions was 93.26 per cent. All resolutions are voted on by way of a poll.
SHAREHOLDER RELATIONSHIPS The Board recognises and values greatly the need to deliver a programme of engagement that offers all shareholders the opportunity to receive company communication and to share their views with the Board. Accordingly, the Group has dedicated teams with responsibility for engaging with institutional investors, retail shareholders and the market using a comprehensive communication programme. This includes investor meetings in the UK and overseas, analyst briefings, market announcements and the AGM. The Group’s website is a key tool in ensuring shareholders can access communications and documents as soon as they are published, including a live webcast of the AGM. Recordings of webcasts and other analyst presentations are also available.
Governance and executive remuneration Lord Blackwell (Chairman), Anthony Watson (Senior Independent Director) and Anita Frew (Deputy Chairman and Chairman of the Remuneration Committee), have participated in numerous meetings and discussions with investors and other stakeholders, including the Group’s regulators, regarding governance and the strategic direction of the Group. They also engaged extensively with proxy advisors, regulators and larger shareholders on issues relating specifically to executive remuneration.
Our Corporate Governance Framework is reviewed at least annually by the Board to ensure it remains effective. The review is overseen by the Committee and this year the framework was subject to an additional end-to-end review by the Company Secretary and a further review in preparation for the Senior Managers and Certification Regime (SM&CR). Full details of the Company Secretary’s findings and the Board’s response are set out on page 69.
Anthony Watson 7 63 1 Joined the Committee on 17 July 2015. 2 Joined the Committee on 1 December 2015. No Committee meeting was held in
The Committee reports to the Board on how it discharges its responsibilities and makes recommendations to the Board, all of which have been accepted during the year. The Committee’s terms of reference can be found at www.lloydsbankinggroup. com/our-group/corporate-governance
Matters considered by the Committee During the year the Committee considered a number of issues relating to the Group’s governance arrangements, both internal and external. It assisted the Chairman in keeping the composition of the Board and its Committees under review and to lead the appointment process for nominations to the Board. These issues are summarised on the next page.
SUCCESSION PLANNING – A STRATEGIC APPROACH Approach The Committee recognises that good succession planning contributes to the delivery of the Group’s strategy by ensuring the desired mix of skills and experience of Board members now and in the future.
The Board is kept informed of senior executive succession planning with the leadership approach visible to all Non-Executive Directors.
Board well placed to address future technology and market risks across the full range of business areas in which the Group operates
– Search commenced for two Non-Executive Directors – Executive search firm Russell Reynolds, who have no other connection with the Group, appointed to support the search – Role specification drawn up, taking into account the Board skills audit and current and future Board requirements and to give due weight to diversity objectives – Search focused on candidates who would bring a combination of core retail and/or commercial banking experience and in technology/operations – Candidates considered from North America and other overseas locations as well as the UK
– Deborah McWhinney joined the Board on 1 December 2015 and brings an extensive executive background in managing technology, operations and new digital innovations across banking, payments and institutional investment. She also broadens Board diversity with a global market perspective – Stuart Sinclair joined the Board on 4 January 2016 and in addition to his retail banking experience, also brings wider experience of consumer and asset finance as well as insurance
Effectiveness During 2015, the Committee oversaw the annual evaluations of the performance of the Board and its Committees. In January 2015, the Committee reviewed the findings of the 2014 Board Effectiveness Review and recommended actions to the Board to address the areas identified for improvement. Progress against the plan was reviewed during the year. For the 2015 Board Effectiveness Review, the Committee made recommendations to the Board on the process and timing of the review including the appointment of an external facilitator. Full details of the 2015 Board Effectiveness Review together with details of the progress against the 2014 review actions are set out on pages 67 and 68.
Corporate governance The Committee continued its role of overseeing the Board’s governance arrangements to ensure that they paid due regard to best practice principles and remain appropriate. In 2015, in addition to the annual review of the Corporate Governance Framework, the Committee oversaw an additional end-to-end review by the Company Secretary and a further review in preparation for the SM&CR. The Company Secretary’s findings and the Board’s response are set out on page 69.
Independence and time commitments The independence of Non-Executive Directors, the election or re-election of Directors and their suitability to continue in office were reviewed. In assessing independence, the Committee did not rely solely on the Code criteria but considered whether, in fact, the Non-Executive Director was demonstrably independent and free of relationships and other circumstances that could affect their judgement. It did this with reference to the individual performance and conduct in reaching decisions. It also took account of any relationships that had been disclosed and authorised by the Board. Based on its assessment for 2015, the Committee is satisfied that, throughout the year, all Non-Executive Directors remained independent as to both character and judgement.
The quality of external and internal audit services continues to be of central importance to the Group, and the Committee has played a key role in safeguarding these essential assurance activities.
Assessing the appropriate provisioning for the costs of redress relating to Payment Protection Insurance (PPI) remains the most significant area of judgment in the Group’s financial reporting. There have been major developments in this area during 2015, including the consultation by the FCA on a potential time bar for claims.
Committee purpose and responsibilities The purpose of the Committee is to monitor and review the Group’s financial and narrative reporting arrangements, the effectiveness of the internal controls over financial reporting and the risk management framework, whistleblowing arrangements and each of the internal and external audit processes.
All members of the Committee are independent Non-Executive Directors, the majority with recent and relevant experience in finance and/or banking. Nick Luff is a chartered accountant and has significant financial experience in the UK listed environment enabling him to fulfill the role of Audit Committee Chair, and for SEC purposes the role of Audit Committee Financial Expert. In addition, Simon Henry is a certified accountant and has extensive knowledge of financial markets, treasury and risk management, and also qualifies as an Audit Committee Financial Expert under SEC rules.
During the course of the year, the Committee held separate sessions with the internal and external audit teams, without members of the executive management present. During
Other conduct provisions During 2015 the Group has made provisions for a number of other conduct related matters, including potential redress in respect of Packaged Bank Accounts which required assumptions to be made, based on management judgement.
Allowance for impairment losses on loans and receivables Determining the appropriateness of impairment losses is judgemental and requires the Group to make assumptions.
Matters considered by the Committee During the year the Committee considered a number of issues relating to the Group’s financial reporting, these issues are summarised below, including discussion of the conclusions the Committee reached, and the key factors considered by the Committee in reaching its conclusions.
Adjustment to derivative valuations Determining the credit, debit and funding valuation adjustments for uncollateralised derivative transactions requires management to make appropriate judgements on matters such as the creditworthiness of the derivative counterparty.
– The Committee reviewed the methodologies for the Group’s derivative valuation adjustments, including management’s proposal to base future funding valuation adjustments on executed trades, rather than average interbank rates, and to include the adjustment in the valuation of all of the Group’s uncollateralised derivatives. – The Committee is satisfied that the proposed change and the disclosures set out in note 50 to the financial statements on page 249 are appropriate.
Hedge accounting Determining the appropriateness of hedge accounting adjustments is a complex process requiring the identification and on-going monitoring of a large number of accounting hedge relationships.
– The Committee received periodic reports on the Group’s hedge accounting strategies, and challenged management on the reasons for any proposed change to existing practices and the appropriateness of any new strategy. – The Committee was satisfied that the changes proposed by management to the Group’s hedging strategies were appropriate.
The Committee concluded that it was satisfied with the auditor’s performance and recommended to the Board a proposal for the reappointment of the auditor, to be approved at the Company’s AGM.
I am pleased to have this first opportunity to write to you as Chairman of the Board Risk Committee, with our report on how the Committee discharged its responsibilities in 2015.
We have continued to take a dynamic approach to the review of existing and emerging risks, balancing our agenda to include standing areas of risk management, whilst ensuring key risks which have emerged during the course of year are escalated for the Committee’s consideration. Considerable time has been spent by the Committee in making sure that satisfactory action is taken in the management of risk arising from the Group’s material lending portfolios, notably our Mortgage and Commercial lending. Good progress has been made during the year in further understanding the underlying risks and enhancing risk management.
As in previous years, the Committee has regularly considered in detail the Consolidated Risk Report, discussed further on page 80, which provides a comprehensive overview of the various categories of risk management, including an assessment of adherence to risk appetite limits set by the Board.
2 Joined the Committee on 1 December 2015. No Committee meeting was held in December.
Conclusion: Whilst a great deal has been achieved as a result of the Group’s conduct strategy initiatives, which continue to transition into business as usual management, improving the Group’s conduct risk profile remains a priority for the Group in 2016 and will continue to be a subject of focus for the Committee.
Material lending portfolios Review was undertaken of the risks associated with the Group’s material lending portfolios, including the key Retail mortgage portfolio and the Commercial portfolio.
In assessing progress during the year in achieving this important objective, a number of factors were considered, including financial, operational and credit risk metrics, with particular attention given to assessing progress in delivering the Group’s conduct strategy. Review of the Group’s progress and risk profile in these areas was also considered relative to its financial services peer group. Delivering greater customer focus is a core requirement of the low risk strategy, and was a further important consideration in the Committee’s assessment of the steps taken during the year.
The Consolidated Risk Report enables review of all core areas of risk management, including Capital, Credit, Operational, Regulatory and Conduct risk amongst others, providing further analysis of key component areas of risk management under each of these headings. Consideration was given not only to the risk management position on a ‘point in time’ basis, but also on a ‘look forward’ basis, with rolling 12 month forecasts , including review of proposed management action to address key risks as they develop.
Focus was given to unique areas of risk management within each division, in addition to review of divisional performance in areas of risk management common across the business, including conduct risk management, portfolio concentrations, market conditions, and the overall quality of both new and existing business.
Banking reform Review was undertaken of the Group’s implementation of Banking Reform, including Senior Managers and Certification Regime and Ring Fenced Banking.
Conclusion: Despite the impact of wider macro-economic uncertainty, and the potential impact on underlying investments, the levels of risk in relation to the Group’s pension schemes continue to be well managed and remain within risk appetite for the Group.
Establishment of the Committee An executive level Committee to oversee the Group’s responsible business activities was established in 2013, chaired by a NonExecutive Director, with membership drawn from senior leaders across the Group. The Committee played a key role in the development of the initial HBPP and the Group’s focus on operating as a responsible business.
Consideration of stakeholder views The Group is committed to consulting key stakeholders to ensure their view is taken into consideration when determining remuneration. During 2015, the Group has consulted with major shareholders to gather their feedback and views on the Group’s approach to remuneration, in particular the proposed changes to base salary for Executive Directors and the Group’s forward-looking approach to variable remuneration in 2016. The Group has also met regularly with its main regulators, the PRA and FCA. The Group is grateful for the support and ongoing dialogue with key stakeholders.
The Committee reviews an annual report from the Group HR Director on the operation of the Group’s remuneration policy and its effectiveness. In 2015, the report concluded that effective systems and controls are in place for all requirements of the Policy and that it continues to deliver outcomes in line with the Group’s values, reward principles and the requirements of the PRA and FCA remuneration rules and guidance issued by the European Banking Authority.
The Board places great emphasis on ensuring that remuneration policy and practices align to the Group’s strategy and the continued focus on delivering superior and sustainable shareholder returns. I hope you will support the resolutions relating to remuneration at the 2016 AGM.
The Group believes in offering fair reward. It is embedding a performance-driven and meritocratic culture where colleagues are rewarded for behaviours aligned to the long-term sustainable success of the business, the commitment to rebuilding trust and changing the culture of the Group.
Key performance measures The table below illustrates outcomes against the Group’s key performance measures relevant to remuneration. The annual bonus outcome is driven by a combination of Group underlying profit and Balanced Scorecard performance. The LTIP measures Group performance over a three year period, using a range of financial and strategic measures.
Discretionary annual bonus awards of £353.7 million will be made for 2015 (4 per cent down from £369.5 million in 2014). The total bonus awards as a percentage of pre-bonus underlying profit before tax declined from 4.5 per cent in 2014 to 4.2 per cent in 2015. This compares favourably to shareholder return from dividend payments over the same period.
SINGLE TOTAL REMUNERATION FIGURE £000 VARIABLE REMUNERATION OUTCOME (% of maximum) £000 1 In June 2015, the Group reached a settlement with the Financial Conduct Authority (FCA) with regard to aspects of its Payment Protection Insurance (PPI) complaint handling process during the period March 2012 to May 2013. As a result, the Committee decided to make adjustments in respect of bonuses awarded in 2012 and 2013 to the Group Executive Committee and some other senior executives given their ultimate oversight of the PPI operations. The number of shares adjusted was 409,039 for the GCE, 109,464 for the CFO and 376,055 for the CRO.
3 2013 LTIP vesting and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 16 February 2016. The average share price between 1 October 2015 and 31 December 2015 (73.72 pence) has been used to calculate the value. The shares were awarded in 2013 based on a share price of 49.29 pence.
Directors’ remuneration: policy implementation overview for 2016 The detailed policy implementation table containing all elements of remuneration can be found on page 103.
Salaries will be as follows, effective date shown below: Group Chief Executive (GCE): £1,125,000 (1 January 2016) Chief Financial Officer (CFO): £749,088 (1 April 2016) Chief Risk Officer (CRO): £738,684 (1 January 2016)
The maximum annual bonus opportunity is 140 per cent of base salary for the GCE and 100 per cent of base salary for other Executive Directors.
Operation Executive Directors are entitled to participate in the Group’s defined contribution scheme with company contributions set as a percentage of salary.
Maximum potential The maximum allowance for the GCE is 50 per cent of reference salary less any flexible benefit allowance.
Maximum potential The Committee will make no increase in the benefits currently provided which it believes is inconsistent with the two parameters above. The Group’s flexible benefits allowance is capped at 4 per cent of base salary.
Purpose and link to strategy Executive Directors are eligible to participate in HMRC approved all-employee schemes which encourage share ownership.
Purpose and link to strategy Incentivise and reward the achievement of the Group’s annual financial and strategic targets.
The Committee retains the right to change the measures and weighting of those measures, including following feedback from regulators, shareholders and/or other stakeholders. The Committee is, however, committed to providing transparency in its decision making in respect of bonus awards and will disclose historic target and measure information together with information relating to how the Group has performed against those targets in the annual report on remuneration for the relevant year unless this information is deemed to be commercially sensitive.
The Committee retains full discretion to amend the payout levels should the award not reflect business and/or individual performance. The Committee may reduce (including to zero) the level of the award, apply additional conditions to the vesting, or delay the vesting of awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate as a result of an event occurring before vesting. Executive Directors are required to hold the shares which vest for a further two years. LTIP awards may be subject to clawback for a period of up to seven years after the date of award. This period may be extended to ten years where there is an ongoing internal or regulatory investigation.
Maximum potential The maximum annual award for Executive Directors will normally be 300 per cent of salary excluding dividend equivalents (this being the reference salary in the case of the GCE). Under the plan rules, awards can be made up to 400 per cent of salary in exceptional circumstances excluding dividend equivalents.
The measures are chosen to support the ‘best bank for customers’ strategy and to align management and shareholder interests. Targets are set by the Committee to be stretching within the context of the strategic business plan. Measures are selected to balance profitability, achievement of strategic goals and to ensure the incentive does not encourage inappropriate risk taking.
Anthony Watson (until 30 September 2015 and member thereafter) 11 11 Anita Frew (member to 30 September 2015 and Chairman thereafter) 11 102
Carolyn Fairbairn4 10 10 1 The number of meetings includes ad hoc meetings. 2 Ad hoc meeting arranged at short notice. 3 Appointed as member of the Committee on 17 July 2015. 4 Retired on 31 October 2015.
Committee composition, skills and experience The Committee comprises Non-Executive Directors from a wide background to provide a balanced and independent view on remuneration matters. From 1 October 2015, Anita Frew succeeded Anthony Watson as Chairman, with Anthony Watson remaining as a member of the Committee. The change was made to bring about the separation of the roles of Senior Independent Director – also held by Anthony Watson – and Chairman of the Remuneration Committee in line with best practice. Carolyn Fairbairn retired as a Director of the Board and as a member of the Committee with effect from 31 October 2015. Dyfrig John has notified the Board that he wishes to reduce his workload and therefore does not intend to seek re-election at the 2016 Annual General Meeting. Stuart Sinclair was appointed as an independent Non-Executive Director and as a member of the Committee on 4 January 2016.
Remuneration outcome for 2015 Executive directors (audited) The following table summarises the total remuneration delivered during 2015 in relation to service as an Executive Director.
1 Following changes to the amount of tax relief available on pension contributions in each year, Executive Directors may elect to receive some or all of their allowances as cash. The breakdown of payments made in cash and contributions into the pension scheme are shown below.
5 The GCE has a conditional unfunded pension commitment, subject to share price performance. This was a partial buyout 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 EFRBS applies for a maximum of six years following the commencement of employment and the maximum allowance over that period is 26.5 per cent of the higher of the GCE’s base salary and reference salary in the 12 months before retirement or leaving, subject to performance conditions. No additional benefit is due in the event of early retirement. The rate of pension accrual in each year depends on share price conditions being met. Accrual at 31 December 2015 is a pension of 6 per cent of the reference salary or £73,200. No new pension entitlement was accrued in 2015.
There are no other Executive Directors with defined benefit pension commitments.
Cash allowance in lieu of pension contribution 556,890 164,624 160,276 Car or car allowance 12,000 11,168 12,000 Flexible benefits payments 42,440 28,800 28,400 Private medical insurance 28,928 760 13,149 Tax preparation 24,829 – 15,766 2013 LTIP vesting (audited)
Annual bonus (audited) In line with 2014, the Group’s total bonus outcome is the sum of the divisional and functional bonus outcomes. The bonus outcome for each division and function is driven by two performance indicators of equal weighting: Group underlying profit and division/function Balanced Scorecard (BSC) performance. Each performance indicator is used as a modifier to increase or decrease the target bonus outcome in the range of 0 per cent – 145 per cent, subject to an overall funding limit as outlined below.
For 2015, the Group adopted a new approach whereby each measure in the BSC is assigned targets aligned to the five-point rating scale. Performance against these targets has been subject to detailed review and calibration by Management and the Committee advisor (Deloitte LLP). This detailed review is intended to support the Committee in exercising judgement.
The Committee reviewed performance in depth to determine ratings for the Group and each division, including consideration of risk matters arising in 2015.
The ratings for each division and function are communicated to colleagues within the business area to ensure bonus outcomes are transparent. The ratings are considered commercially sensitive; however, as an indication of performance, the overall rating for the Group (as determined by the Committee) was Strong and the average modifier applied was 1.21.
– Collective performance adjustment: consideration was given to items not factored into the Group underlying profit or divisional balanced scorecards. These included the provisions for legacy conduct-related matters relevant to the year and regulatory settlements in relation to PPI handling. It also considered positive factors, such as the sale of the remaining holding in TSB (at a premium of c.£200 million). As a result of these items, the Committee approved an overall adjustment of approximately 26 per cent, resulting in a final bonus outcome of £353.7 million as shown in the table below.
Based on a full assessment of performance, the Committee agreed an individual rating for 2015 of Strong for the GCE.
– Well managed relationships with key risk external stakeholders, e.g. investors, regulators and CRAs.
Following the Committee’s assessment of performance against the underlying profit target and the Finance division’s BSC objectives, and taking into account the collective performance adjustment of 26 per cent and the individual rating of Strong Plus, the Committee determined a 2015 bonus award to the CFO of £461,846 (63 per cent of maximum).
– Effective risk management leading to a reduction in the impairment charge to £568 million.
Customer satisfaction (FCA reportable complaints per 1,000 accounts over 3 years)1 10% of award 1.05 0.95 25% 100% 1.02 4.18%
Payments within the reporting year to past directors (audited) As part of arrangements on leaving the Group, a deferred bonus was released to Tim Tookey (£68,713).
Loss of office payments (audited) There were no payments for the loss of office made to former Directors during 2015.
David Roberts (retired May 2014) – 95 – – – 95 1 Fees reflect the period of service prior to becoming Chairman of the Board.
3 Fees reflect the period in role on a pro-rata basis.
Dec 2009 Dec 2010 Dec 2011 Dec 2012 Dec 2013 Dec 2014 Dec 2015
Breakdown of shares interests (audited) Long-term incentive plan awarded in 2015 Awards (in the form of conditional rights to free shares) in 2015 were made over shares with a value of 300 per cent of reference salary for the GCE (4,579,006 shares with a face value of £3,660,000); 275 per cent for the CFO (2,477,167 shares with a face value of £1,980,000); and 275 per cent for the CRO (2,442,762 shares with a face value of £1,952,500). The share price used to calculate face value is the average price over the five days prior to grant (6 March to 11 March 2015), which was 79.93 pence. This was the average share price used to determine the number of shares awarded.
Threshold: 1.15 complaints per 1,000 accounts and 32% FOS uphold rate Maximum: 1.05 complaints per 1,000 accounts and 28% FOS uphold rate
2 Executive share award granted on 6 August 2012 for the loss of deferred share awards forfeited on leaving RSA Insurance Group plc.
The market price for a share in the Group at 1 January 2015 and 31 December 2015 was 75.82 pence and 73.07 pence, respectively. The range of prices between 1 January 2015 and 31 December 2015 was 68.68 pence to 89.00 pence.
Nick Luff 200,000 20/03/2015 100,000 Purchase 300,000 Deborah McWhinney1 200,000 200,000
Sara Weller 200,000 200,000 1 Held in 50,000 ADRs with one ADR being equivalent to four ordinary shares.
Benefits For 2016, the benefits provided to Executive Directors include a car allowance, transportation, private medical insurance, life assurance and other benefits selected through the flexible benefits allowance which is capped at 4 per cent of base salary.
All employee plans Executive Directors are eligible to participate in the Group’s Sharesave and Sharematch plans on the same basis as other employees.
Opportunity The maximum annual bonus opportunity is 140 per cent of base salary for the GCE and 100 per cent of base salary for other Executive Directors. All assessments of performance are ultimately subject to the Committee’s judgement, but no award will be made if threshold performance for the financial measure is not met and/or the individual is rated ‘Developing performer’ or below. The expected value of the bonus is 30 per cent of the maximum opportunity.
For 2016 the annual bonus will be based on: – Underlying profit – 50 per cent
– there is material failure of risk management at a Group, business area, division and/or business unit level.
Opportunity The maximum annual long-term incentive award for Executive Directors is 300 per cent of salary. Awards in 2016 are being made as follows: GCE: 300 per cent of reference salary
Chairman and Non-Executive Director fees in 2016 The annual fee for the Chairman was increased by 2 per cent to £714,000, in line with the overall salary budget for the general colleague population.
Profit and dividends The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2015 of £1,644 million (2014: £1,762 million).
The dividend in respect of 2014 of 0.75 pence per ordinary share was paid to shareholders on 19 May 2015 and an interim dividend for 2015 of 0.75 pence per ordinary share was paid on 28 September 2015; these dividends totalled £1,070 million. Further information on dividend is shown in note 46 on page 241 and is incorporated by reference.
Board composition changes Changes to the composition of the Board since 1 January 2015 up to the date of this report are shown in the table below: Joined the Board Retired from the Board
The Group’s planning process comprises the following key stages: – Each year, the Board revises the strategy, risk appetite and objectives of the Group in the context of the operating environment and external market commitments. This information is used to produce Group and divisional targets used by divisional teams to support development of their operating plans. – The financial projections, expected market and business changes, and future expected legal, accounting and regulatory changes are subject to rigorous review and challenge from both divisional and Group executives. Risk Division provide an independent assessment to the Board on alignment of the plan with Group strategy and Board risk appetite, highlighting key risks to delivery of the plan. – The planning process is also underpinned by a robust stress testing framework to assess compliance with the Group risk appetite. Further information on stress testing and reverse stress testing is provided on page 115. The stress testing scenarios are designed to be severe but plausible; and take full account of the availability and likely effectiveness of the mitigating actions that could be taken to avoid or reduce the impact or occurrence of the underlying risks. In considering the likely effectiveness of such actions, the conclusions of the Board’s regular monitoring and review of risk and internal control systems, as discussed on page 70, is taken into account.
The Company did not repurchase any of its shares during the year (2014: none).
As at 31 December 2015, 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
Engaging colleagues We provide colleagues with information on the Group’s performance and matters that concern their role, for example changes in the economic or regulatory environment, management changes and reward and remuneration. Colleagues are regularly consulted and share their views twice a year through our ‘best bank for customers’ and ‘building the best team’ colleague surveys. More information on these is available on page 22. The results of these surveys were shared across the organisation, with over 4,000 line managers holding survey results conversations with their teams to agree actions to deliver our vision of becoming the best bank for customers. Colleagues are offered share schemes as part of wider incentive arrangements, and to encourage their financial involvement.
Further information on risk management can be found: Risk overview 28
Other information for an analysis of where Enhanced Disclosure Task Force (EDTF) recommendations are disclosed 298
– Clear responsibilities and accountabilities for risk are defined across the Group through a Three Lines of Defence model which ensures effective independent oversight and assurance in respect of key decisions.
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. This is achieved through informed risk decision making and superior risk and capital management, supported by a consistent risk-focused culture.
Risk appetite – Defined as ‘the amount and type of risk that the Group is prepared to seek, accept or tolerate.’ – The Group’s strategy operates in tandem with its high level risk appetite which is supported by more detailed metrics and limits. An updated Risk Appetite Statement was approved by the Board in 2015. This incorporated challenge and recommendations from the Board Risk Committee and is fully aligned with Group strategy.
– Counterparty credit risk3 – 9.1 – – 0.6 – 9.7 1 Central items include assets held outside the main operating divisions, including exposures relating to Group Corporate Treasury which holds the Group’s liquidity portfolio, and Group Operations.
Regulatory and legal change: The pace and volume of regulatory and legal change and developments including: competition; pensions; capital requirements; payments; accounting standards changes; Senior Managers and Certification Regime (SM&CR); and consumer protection laws, all have the potential to impact the delivery of our strategic objectives.
Low interest rate environment: Continuation of the present low interest rate environment has the potential to negatively impact the delivery of the Group’s strategic and operational objectives. As a result there may be a requirement to review our cost and investment priorities.
Response to market changes (agility): The dynamic nature of external influences has the potential to impact the delivery of the strategy and risk profile of the Group. As technology advances, the typical banking model is evolving, and as such, operational complexity has the potential to restrict the Group’s speed of response.
– Rigorous implementation of our conduct strategy with customer needs at the centre rather than a product driven model. – Programmes in place to deliver redress to customers with Groupwide rectification governance in place to enhance effectiveness.
– Market liquidity is reviewed on a regular basis through specific committees which approve funding plans, based on detailed analysis to ensure regulatory compliance and future liquidity requirements are satisfied.
– Engagement with relevant governmental and regulatory bodies and other agencies to deliver compliance by January 2019. – Business model design will optimise delivery of the full range of services to ring-fenced Bank customers through the provision of certain propositions from Group entities outside the ring-fence.
UK political uncertainty: An EU in-out referendum has been called for the 23 June 2016. In the event that the referendum outcome determines an exit from the EU, there may be an impact on UK trade, the domestic economy and inward investment and, in the short term, the potential for market volatility.
– The Group will monitor and assess the potential impacts on an on-going basis, manage exposures according to its current risk appetite and continue to review our existing contingency plans for market volatility before and after the referendum.
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 and executive review and challenge process, supported by analysis and insight into impacts on customers and business drivers.
– The Central Finance and Tax teams consolidate the Group position and assess the tax and regulatory capital impacts. – The Group Financial Risk team provides oversight of the Finance and Risk stress submissions as well as the consolidated Group position and capital ratios, and produces analysis packs for the Group’s senior committees.
Governance Clear accountabilities and responsibilities for stress testing are assigned to senior management and the Risk and Finance functions throughout the Group. This is formalised through the Group Business Planning and Stress Testing Policy and Procedures, which are reviewed at least annually.
Reverse stress testing Reverse stress testing is used to explore the vulnerabilities of the Group’s strategies and plans to extreme adverse events that would cause the business to fail, in order to facilitate contingency planning. The scenarios used are those that would cause the Group to be unable to carry on its business activities. Where reverse stress testing reveals plausible scenarios with an unacceptably high risk when considered against the Group’s risk appetite, the Group will adopt measures to prevent or mitigate that risk, which are then reflected in strategic plans.
Accountabilities under the Risk Appetite Framework are apportioned as follows: Board: – Approves the type and level of risk the Group is prepared to accept and the boundaries within which management must operate when setting strategy and executing the business plan. – Holds the Group Chief Executive and other Senior Executives accountable for the integrity of the Board Risk Appetite Statement. – Reviews and approves reporting against the Board Risk Appetite Statement. – Ensure executive remuneration is aligned with risk appetite adherence.
Governance frameworks – the Policy framework is founded on Board-approved key principles for the overall management of risk in the organisation, which are aligned with Group strategy and risk appetite and based on a current and comprehensive risk profile that identifies all material risks to the organisation. The principles are underpinned by a hierarchy of policies which define mandatory requirements for risk management and control which are consistently implemented across the Group. The risk committee governance framework is outlined below.
– lead regulatory liaison on behalf of the Group including horizon scanning and regulatory development for their risk type; and – propose risk appetite and oversight of the associated risk profile across the Group.
Risk monitoring, aggregation and reporting – identified risks are logged and reported on a monthly basis or as frequently as necessary to the appropriate committee. The extent of the risk is compared to the overall risk appetite as well as specific limits or triggers. When thresholds are breached, committee minutes are clear on the actions and timeframes required to resolve the breach and bring risk within given tolerances. There is a clear process for escalation of risks and risk events.
The Risk Directors: – provide independent advice, oversight and challenge to the business; – design, develop and maintain policies, specific functional risk type frameworks and guidance to ensure alignment with business imperatives and regulatory requirements; – establish and maintain appropriate governance structures, culture, oversight and monitoring arrangements which ensure robust and efficient compliance with relevant risk-type risk appetites and policies;
Group Executive Committee (GEC) Supports the Group Chief Executive in exercising his authority in relation to material matters having strategic, cross-business area or Groupwide implications.
Provides a Groupwide perspective on the progress of Group’s, Divisions’ and Functions’ implementation of initiatives which enhance the delivery of customer outcomes and customer trust, and set and promote the appropriate tone from the top to fulfil the Group’s vision to become the Best Bank for Customers and Help Britain Prosper.
Executive Compensation Committee Provides governance and oversight for Groupwide remuneration matters and policies.
CREDIT RISK Definition The risk that customers to whom we have lent money or other counterparties with whom we have contracted, fail to meet their financial obligations (both on and off balance sheet), resulting in loss to the Group.
Credit risk appetite statements and credit policies are regularly reviewed to ensure that the metrics continue to reflect the Group’s risk appetite appropriately. For further information on risk appetite, refer to page 112.
The investments held in the Group’s defined benefit pension schemes also expose the Group to credit risk. Note 31 on page 226 provides further information on the defined benefit schemes’ assets and liabilities.
Loans and advances, contingent liabilities, commitments, debt securities and derivatives also expose the Group to refinance risk. Refinance risk is the possibility that an outstanding exposure cannot be repaid at its contractual maturity date. If the Group does not wish to refinance the exposure then there is refinance risk if the obligor is unable to repay by securing alternative finance. This may be because the borrower is in financial difficulty, or because the terms required to refinance are outside acceptable appetite at the time. Refinance risk exposures are managed in accordance with the Group’s existing credit risk policies, processes and controls, and are not considered to be material given the Group’s prudent and through the cycle credit risk appetite. Where heightened refinance risk exists (such as in Commercial Banking’s Business Support Unit (BSU) or the Run-off book) exposures are minimised through intensive account management and would be impaired and/or forborne where appropriate.
For regulatory capital purposes the Group’s rating systems assess probability of default and if appropriate, exposure at default and loss given default, in order to derive an expected loss. If not appropriate, regulatory prescribed exposure at default and loss given default values are used in order to derive Risk-Weighted Assets (RWAs) and regulatory Expected Loss (EL). In contrast, impairment allowances are recognised for financial reporting purposes only for loss events that have occurred at the balance sheet date, based on objective evidence of impairment. Due to the different methodologies applied, the amount of incurred credit losses provided for in the financial statements differs from the amount determined from the regulatory expected loss models. Note 2(H) on page 191 provides details of the Group’s approach to the impairment of financial assets.
Frequent and robust credit risk oversight and assurance: Undertaken by independent Credit Risk Assurance functions operating within Retail and Consumer Credit Risk and Commercial Banking which are part of the Group’s second line of defence. Its primary objective is to provide reasonable and independent oversight that credit risk is being managed with appropriate and effective controls.
Where credit acceptance scorecards are used, Risk Division reviews model effectiveness, while new models and model changes are referred by them to the appropriate Model Governance Committees for approval. All changes are approved in accordance with the governance framework set by the Group Model Governance Committee.
Risk management reduce the credit risk to the extent that, if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period, since this is the net position of all trades under the master netting agreement.
The performance of all rating models is monitored on a regular basis, in order to seek to ensure that models provide appropriate risk differentiation capability, the generated ratings remain as accurate and robust as practical, and the models assign appropriate risk estimates to grades/ 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.
The Group’s accounting policy for loan renegotiations is set out in note 2(H) on page 191. Income statement information set out in the credit risk tables is on an underlying basis (see page 40).
The Group recognises that forbearance alone is not necessarily an indicator of impaired status, but it is a trigger for the review of the customer’s credit profile. If there is any concern over the future cash flows and/or the Group incurring a loss, then forborne loans will be classified as impaired in accordance with the Group’s impairment policy. All impaired loans, including recoveries portfolios, are reported as forborne.
Whilst the material portfolios have been reviewed for forbearance, some non-retail loans and advances in Commercial Banking and Run-Off divisions have not been reviewed on the basis that the level of unimpaired forbearance is relatively immaterial, or because the concept of forbearance is not relevant.
The Group credit risk portfolio in 2015 Significant reduction in impairments and impaired assets – Excluding TSB, the impairment charge decreased by 48 per cent to £568 million in 2015 compared to £1,102 million in 2014. The impairment charge is lower across all divisions and benefited from provision releases, but at lower levels than seen during 2014.
Low risk culture and prudent risk appetite – The Group is delivering sustainable lending growth by maintaining its lower risk origination discipline and underwriting standards despite terms and conditions in some of the Group’s markets being impacted by increased competition. The overall quality of the portfolio has improved over the last 12 months. – Credit performance of the UK Retail secured portfolio has been good, with improvements in LTVs, arrears, impaired loans and impairment charge on both Mainstream and Buy-to-let portfolios. Loans and advances to mainstream customers were broadly flat during the year at £227.3 billion with the Buy-to-let portfolio growing by 4 per cent to £55.6 billion. The closed specialist portfolio has continued to run-off, reducing by 10 per cent to £19.5 billion. – The Group’s UK Direct Real Estate gross lending (defined internally as exposure which is directly supported by cash flows from property activities) at 31 December 2015 in Commercial Banking, Wealth (within Retail division) and Run-off divisions was £19.5 billion (31 December 2014: gross £21.6 billion). The portfolio continues to reduce significantly, and the higher risk Run-off element of the book has reduced from gross £3.3 billion to gross £1.1 billion during 2015. The remaining gross lending of £18.4 billion (31 December 2014: £18.3 billion) is the lower risk element in Commercial Banking and Wealth, where the Group continues to write new business within conservative risk appetite parameters. – Our Commercial Banking portfolios continue to benefit from our robust focus on credit at origination and our through the cycle risk appetite. – Sector concentrations within the lending portfolios are closely monitored and controlled, with mitigating actions taken. Sector and product caps limit exposure to certain higher risk sectors and asset classes. – The Group’s extensive and thorough credit processes and controls ensure effective risk management, including early identification and management of potential concern customers and counterparties.
Re-shaping of the Group is substantially complete – The run-off portfolio has materially reduced through de-risking and the strategic desire to exit the residual portfolio still remains. There was a 38 per cent reduction in gross loans and advances in 2015 to £11,422 million (31 December 2014: £18,316 million). – Run-off net external assets have reduced from £16,857 million to £12,154 million during 2015. The portfolio now represents only 2.3 per cent of the overall Group’s loans and advances (31 December 2014: 3.0 per cent).
Classified as impaired during the year 2,008 631 179 583 – 3,401 4,825
Transferred to not impaired during the year (1,080) (146) (72) (60) – (1,358) (4,526)
Impact of disposal of business and asset sales (3) (48) (55) (3,092) (205) (3,403) (7,288)
3 Includes £5.7 billion (31 December 2014: £4.4 billion) of lower risk loans sold by Commercial Banking and Retail to Insurance to back annuitant liabilities.
Impairment charge as a % of average advances 0.14% 0.19% (5)bps
3 Recoveries assets are written down to the present value of future expected cash flows on these assets.
Secured – The impairment charge was £98 million, a decrease of 65 per cent against 2014. The impairment charge as a percentage of average loans and advances to customers, improved to 3 basis points from 9 basis points in 2014. – Loans and advances to Mainstream customers were broadly flat during the year at £227.3 billion with the Buy-to-let portfolio growing by 4 per cent to £55.6 billion. The closed Specialist portfolio has continued to run-off, reducing by 10 per cent to £19.5 billion. – Impaired loans reduced by £93 million in 2015 to £3,818 million at 31 December 2015 with reductions in both the Mainstream and Buy-to-let portfolios. Impairment provisions as a percentage of impaired loans increased to 37.5 per cent from 37.0 per cent at 31 December 2014. – The value of mortgages greater than three months in arrears (excluding repossessions) decreased by £439 million to £5,905 million at 31 December 2015 (31 December 2014: £6,344 million), with reductions in both the Mainstream and Buy-to-let portfolios. – The average indexed loan to value (LTV) of the residential mortgage portfolio at 31 December 2015 decreased to 46.1 per cent compared with 49.2 per cent at 31 December 2014. The percentage of closing loans and advances with an indexed LTV in excess of 100 per cent decreased to 1.1 per cent at 31 December 2015, compared with 2.2 per cent at 31 December 2014. – The average LTV for new residential mortgages written in 2015 was 64.7 per cent compared with 64.8 per cent for 2014.
Loans and overdrafts – The impairment charge was £311 million, an increase of 11 per cent against 2014. – The impairment charge as a percentage of average loans and advances to customers, increased to 3.0 per cent in 2015 from 2.6 per cent in 2014. – Impaired loans reduced by £117 million in 2015 to £578 million representing 5.8 per cent of closing loans and advances to customers, compared with 6.7 per cent at 31 December 2014.
Table 1.11: Retail secured and unsecured loans and advances to customers At £m
Total gross lending 316,036 317,347 1 Specialist lending has been closed to new business since 2009.
Table 1.12: Mortgages greater than three months in arrears (excluding repossessions) Number of cases Total mortgage accounts % Value of loans1 Total mortgage balances %
Table 1.13: Period end and average LTVs across the Retail mortgage portfolios Mainstream
For existing interest only mortgages, a contact strategy is in place throughout the term of the mortgage to ensure that customers are aware of their obligations to repay the principal upon maturity of the loan. The weighted average term to maturity of the interest only balances included in the table above is 11 years; the profile of owner occupier interest only maturities is shown below.
4 Includes capitalisation of arrears and term extensions which commenced during the previous 24 months and where the borrowers remain as customers at 31 December.
Further analysis of the movements in UK retail lending forborne loans and advances during the year is as follows: Table 1.17: Movement in UK retail forborne loans and advances (audited)
Other Commercial Banking – Other Commercial Banking comprises £73,042 million of gross loans and advances to customers in Mid Markets, Global Corporates and Financial Institutions.
Table 1.24: Movement in Commercial Banking unimpaired forborne loans and advances >£5m1 (audited)
2 Impairment provisions as a percentage of impaired loans are calculated excluding unsecured loans in recoveries.
Corporate real estate and other corporate 3,947 1,548 39.2 911 58.9
1 2014 included £475 million in respect of two loans classified as impaired during the year and subsequently transferred to Commercial Banking.
The GFSF has carried out a number of scenario analyses and rehearsals to test the Group’s resilience in the event of further instability in certain Eurozone countries. The Group has developed and refined pre-determined action plans that would be executed in such scenarios. The plans 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.
Exposures to selected Eurozone countries The Group continues to have minimal exposure, in aggregate, which could be considered to be direct recourse to the sovereign risk of the selected countries.
At 31 December 2014 1 Excludes reverse repurchase exposure to Institutional funds secured by UK gilts of £1,955 million (2014: £1,455 million) on a gross basis.
Risk appetite The Group’s conduct risk appetite is designed to safeguard customers from systemic unfair outcomes and is monitored through a number of key metrics with defined limits and triggers which are reviewed and approved by the Board annually. The metrics and their outputs are regularly assessed by Executive and Board Risk committees to ensure that the Group operates within appetite policies, processes and standards. These are in place to provide a framework for businesses and colleagues to operate in accordance with the laws, regulations and voluntary codes, which apply to the Group and its activities.
Exposures Conduct risk affects all aspects of the Group’s operations, all types of customers and other stakeholders. The Group faces significant conduct risks, for example, through products or services not meeting the needs of its customers; sales processes resulting in poor advice; failure to deal with a customer’s complaint effectively where the Group has not met customer expectations, which may lead to a referral to the Financial Ombudsman Service; or engaging in conduct which disrupts the fair and effective operation of a market in which it is active. Given the high level of scrutiny regarding financial institutions’ treatment of customers and business conduct from regulatory bodies, the media, politicians and consumer groups, there is a risk that certain aspects of the Group’s current or legacy business may be determined by the Financial Conduct Authority and other regulatory bodies or the courts as not being conducted in accordance with applicable laws or regulations, or in a manner that fails to deliver fair and reasonable treatment. The Group may also be liable for damages to third parties harmed by the conduct of its business.
Measurement To articulate its conduct risk appetite, the Group has sought more granularity through the use of suitable conduct risk metrics and tolerances that indicate where it may potentially be operating outside its conduct appetite. Conduct Risk Appetite Metrics (CRAMs) have been designed for all product families offered by the Group; a set of common metrics have been agreed for all products to support a consistent approach. These contain a range of product, sales and post-sales metrics to provide a more holistic view of conduct risks; each product also has additional bespoke metrics. The common metrics are sales volume, product governance adherence, target market, outcome testing: meets customer needs, outcome testing: information disclosure, outcome testing: regulatory compliance, retention, usage, claims (decline rates), complaints, Financial Ombudsman Service uphold rate and complaints outcome testing. Each of the tolerances for the metrics are agreed for the individual product and are tracked month by month. At a consolidated level these metrics are part of the Board approved risk appetite. The Group also continues to measure how effectively the overall Conduct Strategy is embedded across all divisions and functions and its impact on customer outcomes through the Group Customer First Committee (GCFC). In relation to market conduct, metrics have also been generated, covering, for example, the way in which confidential information and potential conflicts of interest are managed.
Monitoring Monitoring and reporting is undertaken at Board, Group and business area committees. As part of the reporting of CRAMs, a robust outcomes testing regime is in place to test performance of customer critical activities. The GCFC has responsibility for monitoring and reviewing integrated measurement of enhanced outcomes, customer views and cultural transformation, 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. There is also focus on the enhancement of preventative and detective controls to encourage and demonstrate the Group’s support for the fair and effective operation of relevant markets.
Risk appetite Risk appetite is defined within the Group as the amount and type of risk that the Group is prepared to seek, accept or tolerate. The Group’s Risk Management Framework and Market Risk Principle, reviewed and approved annually by the Board, articulate accountabilities for the management of market risk across the Group, and how this is discharged through a robust governance structure with the objective of seeking an optimal risk profile which supports sustainable business growth and minimises losses. The Group Asset and Liability Committee (GALCO), chaired by the Chief Financial Officer, is responsible for approving and monitoring group market risks, management techniques, market risk measures, behavioural assumptions, and the market risk policy.
The market risk policy defines the framework and mandatory requirements for market risk management and oversight adopted by the Group. The policy is owned by Group Corporate Treasury (GCT) and refreshed annually. The policy is underpinned by supplementary market risk procedures, which define specific market risk management and oversight requirements.
Items in the course of collection from banks 697 – 697 – Interest rate
Trading and other financial assets at fair value through profit or loss 140,536 42,661 2,181 95,694
The Group’s trading book assets and liabilities are originated by Financial Markets within the Commercial Banking division. Within the Group’s balance sheet these fall under the trading assets and liabilities and derivative financial instruments. The assets and liabilities are classified as trading books if they have been acquired or incurred for the purpose of selling or repurchasing in the near future. These consist of government, corporate and financial institution bonds and loans/deposits and repos.
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 25, page 218).
The Group ensures that it has adequate cash and balances at central banks and stocks of high quality liquid assets (e.g. Gilts or US Treasury Securities) that can be converted easily into cash to meet liquidity requirements. The majority of these assets are held as available-for-sale with the remainder held as financial assets at fair value through profit and loss. Further information on these balances can be found under the Funding and Liquidity Risk on page 155. Interest rate risk in the asset portfolios is swapped into floating.
The majority of debt issuance originates from the Issuance, Capital Vehicles and Medium Term Notes desks and the interest rate risk of the debt issued is hedged by swapping them into a floating rate.
Key Profit before tax: Loss Gain >£500m l n £250m – £500m l n
Mitigation Various mitigation activities are undertaken across the Group to manage portfolios and seek to ensure they remain within approved limits.
Banking activities Exposures The Group’s banking activities expose it to the risk of adverse movements in interest rates, credit spreads, exchange rates and equity prices, with little or no exposure to commodity risk. The volatility of market values can be affected by both the transparency of prices and the amount of liquidity in the market for the relevant asset or liability.
Prepayment risk arises, predominantly in the Retail division, as customer balances amortise more quickly or slowly than anticipated due to economic conditions or customer’s response to changes in economic conditions. Pipeline and pre hedge risk arises where new business volumes are higher or lower than forecasted.
(ii) Interest income sensitivity: this measures the impact on future net interest income arising from an instantaneous 25, 100 and 200 basis points parallel rise or fall in all the yield curves over a rolling 12 month basis (subject to an appropriate floor). Unlike the market value sensitivities, the interest income sensitivities incorporate additional behavioural assumptions as to how and when individual products would reprice in response to such change.
Table 1.38 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 rate.
Table 1.39: Banking activities: market value sensitivity to a steepening and flattening of the yield curve
The interest income sensitivity continues to reflect structural hedging against margin compression. The increased sensitivity reflects both the timing of margin management, and the level of floors giving rise to increased compression risk in the Group.
Monitoring The Risk Management Framework, Policy and Procedures document articulate the monitoring of Banking book market risk through the committee structure. The Group’s Three Lines of Defence ensure risk is identified, and appropriately measured, reported and understood. The appropriate limits and triggers are monitored by senior executive Committees within the Banking divisions. Banking assets, liabilities and associated hedging are actively monitored and if necessary rebalanced to be within agreed tolerances.
For further information on defined benefit pension scheme assets and liabilities please refer to note 37 on page 226.
Mitigation The Group takes an active involvement in agreeing risk management and mitigation strategies with the Trustees of the schemes through whom any such activity must be conducted. An interest rate and inflation hedging programme is in place to reduce liability risk. The schemes have also reduced equity allocation and are investing the proceeds in credit assets as part of a programme to de-risk the portfolio.
Table 1.41 demonstrates the impact of the Group’s Fiscal Solvency stress scenario (with no diversification benefit) on Insurance’s portfolio; 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 1.41: Insurance business: profit before tax sensitivities Increase (reduction) in profit before tax 2015 £m 2014 £m
Credit spread exposure increased in 2015 reflecting the Insurance business entry into the bulk annuity market, with a £0.4 billion deal in the fourth quarter, building on the £2.4 billion Scottish Widows with-profits deal earlier in the year.
All trading activities are performed within the Commercial Banking division. While the trading positions taken are generally small, any extreme moves in the main risk factors and other related risk factors could cause significant losses in the trading book depending on the positions at the time. The average 95 per cent 1-day trading VaR (diversified across risk factors) was £1.4 million for year end 2015 compared to £3.0 million for year end 2014. This decrease was due to the significant de-risking activities that took place at the portfolio level.
The risk of loss measured by the VaR model is the minimum expected loss in earnings given the 95 per cent confidence. The total and average trading VaR numbers reported below have been obtained after the application of the diversification benefits across the five risk types. The maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum and minimum VaR reported at Group level.
Mitigation Active management of the Group portfolio is necessary such that the level of exposure is strictly controlled and managed within the approved risk limits.
OPERATIONAL RISK Definition Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.
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.
3 Non LCR eligible liquidity assets comprise a diversified pool of highly rated unencumbered collateral (including retained issuance).
7 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
Table 1.46: Reconciliation of Group funding to the balance sheet (audited) At 31 December 2015 At 31 December 2014
Table 1.47: Analysis of 2015 total wholesale funding by residual maturity
Debt securities in issue: Of which is issued by Lloyds Banking Group plc3 – – – – 0.3 – – 3.1 3.4 2.6 1 Medium-term notes include funding from the National Loan Guarantee Scheme (31 December 2015: £1.4 billion; 31 December 2014: £1.4 billion).
3 Comprises £3.4 billion of subordinated liabilities (31 December 2014: £2.0 billion) and £nil of medium term notes (31 December 2014: £0.6 billion) issued by the holding company, Lloyds Banking Group plc.
Term issuance for 2015 totalled £21.5 billion. The Group continued to maintain a diversified approach to markets with trades in public and private format, secured and unsecured products and a wide range of currencies and markets. For 2016, 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 optimise the capital and funding position to transition towards final UK Minimum Requirements for Own Funds and Eligible Liabilities (MREL) which is still being consulted on in the UK. Continued use of the UK government’s Funding for Lending Scheme (FLS) has further underlined the Group’s support to the UK economic recovery and the Group remains committed to passing the benefits of this low cost funding on to its customers. In 2015 the Group drew down £12.1 billion under the FLS, bringing total drawings under the FLS to £32.1 billion. The maturities for the FLS are fully factored into the Group’s funding plan.
Liquidity portfolio The UK regulator adopted the EU delegated Act on 1 October 2015. Prior to this, liquidity was managed on an Individual Liquidity Adequacy Standards (ILAS) basis where liquid assets were divided into Primary and Secondary categories. Post 1 October 2015, liquid assets are classed as LCR eligible or non-LCR eligible.
The liquidity stress testing assumes that further credit rating downgrades may reduce investor appetite for some of the Group’s liability classes and therefore funding capacity. 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 an outflow of £1.5 billion of cash over a period of up to one year, £2.1 billion of collateral posting related to customer financial contracts and £5.6 billion of collateral posting associated with secured funding. The Group’s internal liquidity risk appetite includes such a stress scenario. The stress scenario modelling demonstrates the Group has available liquidity resources to manage such an event.
Cash and balances at central banks – – – – – 48,302 – 2,190 50,492 50,492
Loans and receivables: Loans and advances to banks – – 26 26 – 424 712 24,993 26,129 26,155
Risk appetite Capital risk appetite is set by the Group Board, reflecting the Group’s strategic plans, regulatory capital constraints and market expectations. It is defined by a number of minimum capital ratios, a minimum leverage ratio and a minimum buffer over regulatory solvency requirements for the Insurance business set by the Insurance Board. The Group monitors its actual and forecast capital positions aiming to remain within its appetite at all times.
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 2 of the regulatory framework and a number of regulatory capital buffers as described below.
Systemic risk buffers are designed to hold systemically important banks to higher capital standards. The Group is not currently categorised as a global systemically important bank (G-SIB) for which the Financial Stability Board (FSB) has set buffer rates. The Financial Policy Committee (FPC) has recently issued a consultation on the UK systemic risk buffer requirements for ring-fenced banks and large building societies proposing a rate of up to 2.5 per cent. The requirements will come into force from 2019 and the Group awaits finalisation of these later in 2016.
Regular reporting of actual and projected ratios, including those in stressed scenarios, is undertaken, including submissions to the 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.
Dividends The Group has established a dividend policy that is both progressive and sustainable. We expect ordinary dividends to increase over the medium term to a dividend payout ratio of at least 50 per cent of sustainable earnings. The Board interprets progressive to indicate a dividend per share that is expected to increase over the medium term. Sustainable earnings represents the long term earnings generation of the business. Sustainable earnings are defined as earnings after tax attributable to ordinary shareholders adjusted to remove the effects of market volatility, exceptional conduct or litigation events, major liability management or restructuring and other one off items such as the sale of businesses, and exceptional underlying business performance.
The Board also gives due consideration to the distribution of surplus capital through the use of special dividends or share buy-backs. Surplus capital represents capital over and above the amount management wish to retain to grow the business, meet regulatory requirements and cover uncertainties. The amount of required capital may vary from time to time depending on circumstances and the Board will continue to give due consideration, subject to the situation at the time, to the distribution of any surplus capital. By its nature, there can be no guarantee that this level of special dividends or any surplus capital distribution will be appropriate in future years.
The Group remains strongly capitalised, increasing its CET1 capital ratio from 12.8 per cent at 31 December 2014 to 13.7 per cent (pre 2015 dividends) at 31 December 2015. The interim and recommended final dividends totalling 2.25 pence per ordinary share and the special dividend of 0.5 pence per ordinary share reduce the Group’s CET1 ratio to 12.8 per cent. Recognising the 2015 insurance dividend, paid in February 2016 following the implementation of Solvency II, this rises to13.0 per cent on a pro forma basis.
Fully loaded risk-weighted assets 222,747 1 Credit risk includes movements in contributions to the default fund of central counterparties and counterparty credit risk includes the movements in credit valuation adjustment risk.
Risk-weighted assets related to market risk reduced by £1.0 billion primarily due to active portfolio management and model and methodology refinements.
Risk appetite The Group has a zero risk appetite for material regulatory breaches or material legal incidents. This appetite is reviewed and approved annually by the Board. To achieve this, the Group has policies, processes and standards which provide the framework for businesses and colleagues to operate in accordance with applicable laws (including Codes of Practice), regulations, codes of conduct and legal obligations.
Exposures The Group periodically experiences material regulatory breaches and material legal incidents outside its risk appetite. Exposure is also driven by significant ongoing and new legislation, regulation and court proceedings within the UK and overseas with which the Group has to comply, which in each case needs to be interpreted, implemented and embedded into day-to-day operational and business practices across the Group. The industry continues to witness increased levels of government and regulatory intervention in the financial sector with increasing regulatory rules and laws from both the UK and overseas affecting the Group’s operations.
– Group policies and procedures set out the principles and key controls that should apply across the business which are aligned to the group risk appetite. Mandated policies and processes require appropriate control frameworks, management information, standards and colleague training to be implemented to identify and manage regulatory and legal risk. – Business units assess and implement policy and regulatory requirements and establish local controls to assure compliance.
– Risk Division and Legal provide oversight and proactive support and constructive challenge to the business in identifying and managing regulatory and legal issues. – When appropriate Risk Division will conduct thematic reviews of regulatory compliance across businesses and divisions. – Business units with the support of divisional and Group-Level bodies conduct ongoing horizon scanning to identify and address changes in regulatory and legal requirements.
Property insurance risk is a key risk within the general insurance business, through Home Insurance, and exposures can arise, for example, in extreme weather conditions, such as flooding, when property damage claims are higher than expected.
Monitoring Insurance risks in the Insurance business are monitored by Insurance senior executive Committees and ultimately the Insurance Board. Governance of the Group’s defined benefit pension schemes includes two specialist pension committees (one Group executive sub-committee and a supporting management committee). Significant risks from the Insurance business and the defined benefit pension schemes are reviewed by the Group executive and Group Risk Committees and/or Board.
Progress against risk appetite metrics in respect of longevity risk in the Group’s defined benefit pension schemes is regularly reported and reviewed by the relevant committees.
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: – The new Senior Managers and Certification Regime (SM&CR), which brings a statutory duty of responsibility and increased accountability may impact the Group’s ability to attract and retain talent; – Attracting and retaining talent may be impacted by a more active external market alongside increasing regulatory constraints around remuneration structures; – The increasing digitisation of the business is changing the capability mix required and may impact our ability to attract and retain talent; – Colleague engagement may continue to be challenged by ongoing media attention on banking sector culture, sales practices and ethical conduct; and – Maintaining organisational people capability and capacity levels in response to increasing volumes of organisational and external market change.
Monitoring Financial reporting risk is actively monitored at business unit and Group levels. There are specific programmes of work undertaken across the Group to support: – annual assessments of (i) the effectiveness of internal controls over financial reporting; and (ii) the effectiveness of the Group’s disclosure controls and procedures, both in accordance with the requirements of the US Sarbanes Oxley Act; and – annual certifications by the Senior Accounting Officer with respect to the maintenance of appropriate tax accounting arrangements, in accordance with the requirements of the 2009 Finance Act.
– Uncertain tax positions – Recognition of deferred tax assets – Valuation of pension obligations – Fair value adjustments applied to uncollateralised derivative financial instruments – Sale of TSB Banking Group plc
Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), page 197 (Critical Accounting Estimates and Judgements) and page 226 (notes).
Impairment is calculated using models. We therefore tested the completeness and accuracy of data from underlying systems and data warehouses that is used in those models.
We understood and evaluated the processes for identifying impairment events within the loan portfolios, as well as the impairment assessment processes for loans within the business support unit and run-off portfolio.
For the collective unidentified impaired provision, which reflects losses incurred but not yet identified, we tested the completeness and accuracy of the underlying loan information used in the impairment models by agreeing details to the Group’s source systems as well as re-performing the calculation of the modelled provision. For the key assumptions in the model, we challenged management to provide objective evidence that they were appropriate. Further, we used our industry experience and knowledge to consider the appropriateness of the provision.
(Significant Accounting Policies), page 197 (Critical Accounting Estimates and Judgements) and page 234 (notes).
The majority of our detailed audit work was on the significant conduct provisions in relation to past sales of Payment Protection Insurance (PPI) policies, interest rate hedging products to small and medium-sized businesses, insurance products in the German branch of Clerical Medical Investment Group Limited (now Scottish Widows Limited) and packaged bank accounts. We also examined other areas of compensation payments made to customers.
For those assumptions based on historic information, we challenged whether this was appropriate for future experience and challenged the appropriateness of any adjustments made by management. We also independently performed sensitivity analysis on the key assumptions.
Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), and page 246 (notes).
Small changes in assumptions can result in material impacts to the net pension liability or asset.
We engaged our actuarial specialists and met with management and their actuary to understand the judgements made in determining key economic assumptions used in the calculation of the liability. We assessed the reasonableness of those assumptions by comparing to our own independently determined benchmarks and concluded that the assumptions used by management were appropriate.
Refer to page 74 (Audit Committee Report), page 187 (Significant Accounting Policies), and page 257 (notes).
We read the analysis prepared by management for the accounting treatment for the sale of TSB Banking Group plc to Banco Sabadell, and challenged the appropriateness of assumptions and whether all the relevant accounting implications had been considered relating to the staged disposal of the shareholding. We read the relevant legal contracts to ensure the analysis prepared by management considered all accounting and disclosure impacts. We agreed the receipt of the cash consideration. No issues were noted with the accounting treatments adopted.
We examined relevant disposal cost estimates and analysis regarding the early exit of support arrangements for TSB Banking Group plc and related provisions made in the year.
Any business reporting units which were considered individually financially significant in the context of the Group’s consolidated financial statements were considered full scope components. We then considered the individual financial significance of other business reporting units in relation to primary statement account balances. We also considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). Any business reporting unit 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 business reporting units 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 business reporting units which were neither inconsequential nor individually financially significant were within our audit scope, with the risk of material misstatement mitigated through audit procedures including testing of entity level controls, information technology general controls and Group and component level analytical review procedures.
Some account balances were audited centrally by the Group engagement team.
Business reporting units within the scope of our audit contributed 99 per cent of Group total assets. Audit coverage on account balances in the consolidated income statement ranged between 60 per cent and 94 per cent.
Materiality The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual account balances and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.
As noted in the directors’ statement, the directors have concluded that it is appropriate to adopt the going concern basis in preparing the financial statements. The going concern basis presumes that the Group and parent company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. In drawing this conclusion the directors have considered: – the regulatory capital position of the Group which is critical to the market maintaining confidence in the Group’s ability to absorb losses that it may incur in a market stress; and – the funding and liquidity position of the Group to be able to meet its liabilities as they fall due, including in a market stress.
Adequacy of accounting records and information and explanations received 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 – 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.
The profit after tax attributable to other equity holders of £394 million (2014: £287 million; 2013: £nil) is partly offset in reserves by a tax credit attributable to ordinary shareholders of £80 million (2014: £62 million; 2013: £nil).
Other comprehensive income for the year, net of tax (1,040) 3,278 (2,533)
Trading and other financial liabilities at fair value through profit or loss 31 51,863 62,102
Issue of other equity instruments (note 45) – – (21) (21) 5,355 – 5,334
Cash and cash equivalents at end of year 54(D) 71,953 65,147 66,797
The Group consolidates collective investment vehicles if its beneficial ownership interests give it substantive rights to remove the external fund manager over the investment activities of the fund. Where a subsidiary of the Group is the fund manager of a collective investment vehicle, the Group considers a number of factors in determining whether it acts as principal, and therefore controls the collective investment vehicle, including: an assessment of the scope of the Group’s decision making authority over the investment vehicle; the rights held by other parties including substantive removal rights without cause over the Group acting as fund manager; the remuneration to which the Group is entitled in its capacity as decision maker; and the Group’s exposure to variable returns from the beneficial interest it holds in the investment vehicle. Consolidation may be appropriate in circumstances where the Group has less than a majority beneficial interest. Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in other liabilities.
(2) Joint ventures and associates Joint ventures are joint arrangements over which the Group has joint control with other parties and has rights to the net assets of the arrangements. Associates are entities over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the entity, but is not control or joint control of those policies, and is generally achieved through holding between 20 per cent and 50 per cent of the voting share capital of the entity.
(D) Revenue recognition Interest income and expense are recognised in the income statement for all interest-bearing financial instruments using the effective interest method, except for those classified at fair value through profit or loss. The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.
NOTE 2: ACCOUNTING POLICIES continued (1) Financial instruments at fair value through profit or loss Financial instruments are classified at fair value through profit or loss where they are trading securities or where they are designated at fair value through profit or loss by management. Derivatives are carried at fair value (see (F) below).
Securities borrowing and lending transactions are typically secured; collateral takes the form of securities or cash advanced or received. Securities lent to counterparties are retained on the balance sheet. Securities borrowed are not recognised on the balance sheet, unless these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability. Cash collateral given or received is treated as a loan and receivable or customer deposit.
(2) Available-for-sale financial assets The Group assesses, at each balance sheet date, whether there is objective evidence that an available-for-sale financial asset is impaired. In addition to the criteria for financial assets accounted for at amortised cost set out above, this assessment involves reviewing the current financial circumstances (including creditworthiness) and future prospects of the issuer, assessing the future cash flows expected to be realised and, in the case of equity shares, considering whether there has been a significant or prolonged decline in the fair value of the asset below its cost. If an impairment loss has been incurred, the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and the
(2) General insurance business The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the balance sheet within liabilities arising from insurance contracts and participating investment contracts and only credited to the income
(O) Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in sterling, which is the Company’s functional and presentation currency.
The Group recognises provisions in respect of vacant leasehold property where the unavoidable costs of the present obligations exceed anticipated rental income.
Given the relative size of the mortgage portfolio, a key variable is house prices which determine the collateral value supporting loans in such portfolios. The value of this collateral is estimated by applying changes in house price indices to the original assessed value of the property. If average house prices were ten per cent lower than those estimated at 31 December 2015, the impairment charge would increase by approximately £228 million in respect of UK mortgages.
(R) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts due from banks with a maturity of less than three months.
The Group’s total deferred tax asset includes £4,890 million (2014: £5,758 million) in respect of trading losses carried forward. The tax losses have arisen in individual legal entities and will be used as future taxable profits arise in those legal entities, though substantially all of the unused tax losses for which a deferred tax asset has been recognised arise in Bank of Scotland plc and Lloyds Bank plc.
Valuation of assets and liabilities arising from insurance business At 31 December 2015, the Group recognised a value of in-force business asset of £4,219 million (2014: £4,446 million) and an acquired value of in-force business asset of £377 million (2014: £418 million). The value of in-force business asset represents the present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts. The acquired value of in-force business asset represents the contractual rights to benefits from providing investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers. The methodology used to value these assets is set out in note 25. The valuation or recoverability of these assets requires assumptions to be made about future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to these assets. The key assumptions that have been made in determining the carrying value of the value of in-force business assets at 31 December 2015 are set out in note 25.
Insurance is a core part of Lloyds Banking Group and is focused on five key markets: Corporate Pensions, Protection, Retirement, Bulk Annuities and Home Insurance, to enable customers to protect themselves today and prepare for a secure financial future.
Other segment items: Investments in joint ventures and associates at end of year 7 – – – 40 47
Other income (net of insurance claims) 1,212 1,956 1,364 1,725 210 6,467
Other segment items: Investments in joint ventures and associates at end of year 12 – – – 62 74
Other segment items: Investments in joint ventures and associates at end of year 23 – 1 – 77 101
2 Comprises the payment protection insurance provision (£4,000 million) and other regulatory provisions (£837 million). 3 Comprises the underlying results of TSB, dual running and build costs and the charge related to the disposal of TSB.
Total income, net of insurance claims 18,478 471 – (778) (144) – 18,027 1 Comprises the effects of asset sales (gain of £100 million), volatile items (loss of £10 million), liability management (loss of £142 million), the fair value unwind (loss of £228 million), the amortisation of purchased intangibles (£395 million) and the past service pensions charge (£104 million, see note 11).
Interest and similar expense: Deposits from banks, excluding liabilities under sale and repurchase transactions 0.41 0.74 0.65 (43) (86) (129)
Interest payable on liabilities held at amortised cost 1.19 1.45 1.88 (6,053) (7,949) (10,734)
Fee and commission income: Credit and debit card fees 918 1,050 984
Total net income arising on assets held at fair value through profit or loss 2,835 8,621 15,868
Net income (expense) arising on liabilities held at fair value through profit or loss – debt securities in issue 14 (75) (93)
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows: Total life insurance gross claims and surrenders (7,983) (7,506) (8,495)
Performance-based compensation expense comprises: Awards made in respect of the year ended 31 December 280 324 394
Performance-based awards expensed in 2015 include cash awards amounting to £96 million (2014: £104 million; 2013: £126 million).
Average headcount The average number of persons on a headcount basis employed by the Group during the year was as follows: Fees payable to the auditors Fees payable to the Company’s auditors by the Group are as follows: 2015 £m 2014 £m 2013 £m
Fees payable for other services: Audit of the Company’s subsidiaries pursuant to legislation 14.9 15.5 17.4
The charge for tax on the profit for 2015 is based on a UK corporation tax rate of 20.25 per cent (2014: 21.5 per cent; 2013: 23.25 per cent).
Tax charge thereon at UK corporation tax rate of 20.25 per cent (2014: 21.5 per cent; 2013: 23.25 per cent) (333) (379) (96)
1 The Finance (No. 2) Act 2015 introduced restrictions on the tax deductibility of provisions for conduct charges arising on or after 8 July 2015. This has resulted in an additional income statement tax charge of £459 million.
Bank and building society certificates of deposit – 135 135 554 – 554
Other financial assets at fair value through profit or loss include the following assets designated into that category: (i) financial assets backing insurance contracts and investment contracts of £90,492 million (2014: £94,314 million) which are so designated because the related liabilities either have cash flows that are contractually based on the performance of the assets or are contracts whose measurement takes account of current market conditions and where significant measurement inconsistencies would otherwise arise. Included within these assets are investments in unconsolidated structured entities of £13,282 million (2014: £27,255 million), see note 20; and
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS 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 53; and – Derivatives held in policyholder funds as permitted by the investment strategies of those funds.
Profit (loss) attributable to equity shareholders – basic and diluted 466 1,125 (838)
NOTE 15: TRADING AND OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS continued The fair values and notional amounts of derivative instruments are set out in the following table: Contract/ notional amount £m
Exchange rate contracts: Interest rate contracts: Embedded equity conversion feature – 545 – – 646 –
Total derivative assets/liabilities – trading and other 4,083,962 26,781 23,864 6,507,429 31,895 29,571
The fair values and notional amounts of derivative instruments are set out in the following table: Contract/ notional amount £m
Total loans and advances to banks before allowance for impairment losses 25,117 26,155
The net investment in finance leases represents amounts recoverable as follows: 2015 £m 2014 £m
(C) Unconsolidated collective investment vehicles and limited partnerships The Group’s direct interests in unconsolidated structured entities comprise investments in collective investment vehicles, such as Open-Ended Investment Companies, and limited partnerships with a total carrying value of £13,282 million at 31 December 2015 (2014: £27,255 million), included within financial assets designated at fair value through profit and loss (see note 15). These investments include both those entities managed by third parties and those managed by the Group. At 31 December 2015, the total asset value of these unconsolidated structured entities, including the portion in which the Group has no interest, was £603 billion (2014: £620 billion).
Of the total allowance in respect of loans and advances to customers, £2,425 million (2014: £5,551 million) related to lending that had been determined to be impaired (either individually or on a collective basis) at the reporting date.
Debt securities: Bank and building society certificates of deposit – 186 186 – 298 298
The recoverable amount of the goodwill relating to Scottish Widows has been based on a value-in-use calculation. The calculation uses pre-tax projections of future cash flows based upon budgets and plans approved by management covering a five-year period, and a discount rate of 10 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. Cash flows beyond the five-year period have been extrapolated using a steady 3 per cent growth rate which does not exceed the long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.
Asset-backed securities: Corporate and other debt securities – 5,808 5,808 – 5,529 5,529
The recoverable amount of the goodwill relating to Asset Finance has also been based on a value-in-use calculation using pre-tax cash flow projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 14 per cent. The cash flows beyond the five-year period are extrapolated using a growth rate of 0.5 per cent which does not exceed the long-term average growth rates for the markets in which Asset Finance participates. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Asset Finance to fall below the balance sheet carrying value.
A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. Further information on options and guarantees can be found in note 33.
Risk-free rate (value of in-force annuity business)1 0.85 to 5.64 1.02 to 4.56
All risk-free rates are quoted as the range of rates implied by the relevant swap curve.
Non-economic assumptions Future mortality, morbidity, expenses, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience. Further information on these assumptions is given in note 33 and the effect of changes in key assumptions is given in note 34.
Included within brands above are assets of £380 million (31 December 2014: £380 million) that have been determined to have indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These brands are well established financial services brands and there are no indications that they should not have an indefinite useful life.
The core deposit intangible is the benefit derived from a large stable deposit base that has low interest rates, and the balance sheet amount at 31 December 2015 shown above will be amortised, in accordance with the Group’s accounting policy, on a straight line basis over its remaining useful life of one year.
Accumulated depreciation and impairment: Exchange and other adjustments – – 1 7 8
Expenditure on investment properties is comprised as follows: 2015 £m 2014 £m
Assets arising from reinsurance contracts held (notes 33 and 35) 675 682
For amounts included above which are subject to repurchase agreements see note 53.
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements 38,431 50,007
The realistic assessment is carried out using a stochastic simulation model which values liabilities on a market-consistent basis. The calculation of realistic liabilities uses best estimate assumptions for mortality, persistency rates and expenses. These are calculated in a similar manner to those used for the value of in-force business as discussed in note 25.
Mortality The mortality assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual experience where this is significant, and relevant industry data otherwise.
Maintenance expenses Allowance is made for future policy costs explicitly. Expenses are determined by reference to an internal analysis of current and expected future costs plus a margin for adverse deviation. Explicit allowance is made for future expense inflation.
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 2015 of £2.5 billion (2014: £2.6 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, under the realistic capital regime of the PRA, 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.
Key changes in assumptions A detailed review of the Group’s assumptions in 2015 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£196 million decrease).
(iv) Options and guarantees outside the With-Profit Funds A number of typical guarantees are provided outside the With-Profit Funds such as guaranteed payments on death (e.g. term assurance) or guaranteed income for life (e.g. annuities). In addition, certain personal pension policyholders in Scottish Widows, for whom reinstatement to their occupational pension scheme was not an option, have been given a guarantee that their pension and other benefits will correspond in value to the benefits of the relevant occupational pension scheme. The key assumptions affecting the ultimate value of the guarantee are future salary growth, gilt yields at retirement, annuitant mortality at retirement, marital status at retirement and future investment returns. There is currently a provision, calculated on a deterministic basis, of £68 million (2014: £61 million) in respect of those guarantees.
Future maintenance and investment expenses4 10% reduction 231 190 259 208
NOTE 33: LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued
The latest full valuations of the three main schemes were carried out as at 30 June 2014; the results have been updated to 31 December 2015 by qualified independent actuaries. The last full valuations of other Group schemes were carried out on a number of different dates; these have been updated to 31 December 2015 by qualified independent actuaries.
Total charge (credit) to the income statement (note 11) 548 (226) 758
The Group currently expects to pay contributions of approximately £600 million to its defined benefit schemes in 2016.
Return on plan assets excluding amounts included in interest income (879) 4,928
Past service credits and curtailments (see page 206) – (822) 104
Duration of defined benefit obligation The weighted average duration of the defined benefit pension obligation was 19 years (31 December 2014: 19 years).
Income statement charge (note 13): Due to change in UK corporation tax rate and related impacts (27) (24)
In addition, the Government announced that from 1 January 2016 banking profits will be subject to an additional surcharge of 8 per cent.
Deferred tax assets Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable profits is probable. Group companies have recognised deferred tax assets of £4,890 million (2014: £5,758 million) in relation to trading tax losses carried forward. After reviews of medium-term profit forecasts, the Group considers that there will be sufficient profits in the future against which these losses will be offset (see note 3).
Deferred tax assets of £893 million (2014: £614 million) have not been recognised in respect of trading losses carried forward, mainly in certain overseas companies and in respect of other temporary differences in the insurance businesses. Trading losses can be carried forward indefinitely, except for losses in the USA which expire after 20 years.
Provisions for commitments Provisions are held in cases where the Group is irrevocably committed to advance additional funds, but where there is doubt as to the customer’s ability to meet its repayment obligations.
The Group has completed its Past Business Review (PBR) where it has been identified that there was a risk of potential mis-sale for certain customers, albeit active monitoring continues. No further change has been made to the amount provided.
Sensitivities The Group estimates that it has sold approximately 16 million policies since 2000. These include policies that were not mis-sold. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided for almost 49 per cent of the policies sold since 2000, covering both customer-initiated complaints and actual and PBR mailings undertaken by the Group.
Customer initiated complaints since origination (m)2 3.4 1.3 0.1 = £200m
During 2015, the Group has charged a further £40 million in respect of redress and related administration costs, increasing the total amount provided for redress and related administration costs for in-scope customers to £720 million (31 December 2014: £680 million). As at 31 December 2015, the Group has utilised £652 million (31 December 2014: £571 million), with £68 million (31 December 2014: £109 million) of the provision remaining.
FCA review of complaint handling On 5 June 2015 the FCA announced a settlement with the Group totalling £117 million following its investigation into aspects of the Group’s PPI complaint handling process during the period March 2012 to May 2013. The FCA did not find that the Group acted deliberately. The Group has reviewed all customer complaints fully defended during the Relevant Period. The remediation costs of reviewing these affected cases are not materially in excess of existing provisions.
6.0884% Non-Cumulative Fixed to Floating Rate Preference Shares callable 2015 (10) – – – – (10)
5.125% Step-up Perpetual Subordinated Notes callable 2015 (Scottish Widows plc) – – (560) – – (560)
5.92% Non-cumulative Fixed to Floating Rate Preference shares callable 2015 (140) – – – – (140)
Other repurchases and redemptions during the year: Retail tender offer in respect of Enhanced Capital Notes – – – (58) – (58)
6.35% Step-up Perpetual Capital Securities callable 2013 – (215) – – – (215)
6.071% Non-cumulative Perpetual Preferred Securities – (439) – – – (439)
Floating Rate Undated Subordinated Notes – – (50) – – (50)
Subordinated Step-up Floating Rate Notes 2016 – – – – (179) (179)
4.375% Callable Fixed to Floating Rate Subordinated Notes 2019 – – – – (591) (591)
Share issuances No shares were issued in 2015 in respect of employee share schemes (2014: 5 million shares; 2013: 312 million shares). In 2013 the Group issued 713 million new ordinary shares in relation to payment of coupons in the year on certain hybrid capital securities that are non-cumulative.
Information regarding significant direct or indirect holdings of shares in the Company can be found on page 108.
Ordinary shares The holders of ordinary shares (excluding the limited voting ordinary shares), who held 99.9 per cent of the total ordinary share capital at 31 December 2015, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions of the Company’s articles of association) and on a winding up may share in the assets of the Company.
Limited voting ordinary shares The limited voting ordinary shares are held by the Lloyds Bank Foundations (the Foundations). The holders of the limited voting ordinary shares, who held 0.1 per cent of the total ordinary share capital at 31 December 2015, are entitled to receive copies of every circular or other document sent out by the Company to the holders of other ordinary shares. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a variation in the class rights of the limited voting ordinary shares. In the event of an offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting ordinary share will convert into an ordinary share and shall rank equally with the ordinary shares in all respects from the date of conversion.
The Company has entered into deeds of covenant with the Foundations under the terms of which the Company makes annual donations. The deeds of covenant can be cancelled by the Company at nine years’ notice, at which point the limited voting ordinary share capital would convert into ordinary shares. Such notice has been given to the Lloyds Bank Foundation for Scotland.
Issued in relation to the settlement of coupons on certain hybrid capital securities – – 279
The merger reserve primarily comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16 January 2009 on the acquisition of HBOS plc.
Change in fair value of available-for-sale financial assets (318) 690 (680)
Adjustment on sale of non-controlling interest in TSB (note 55) – (171) –
Retained profits are stated after deducting £740 million (2014: £565 million; 2013: £480 million) representing 943 million (2014: 648 million; 2013: 578 million) treasury shares held.
NOTE 46: DIVIDENDS ON ORDINARY SHARES The directors have recommended a final dividend, which is subject to approval by the shareholders at the Annual General Meeting, of 1.5 pence per share (2014: 0.75 pence per share; 2013: nil pence per share) representing a total dividend of £1,070 million (2014: £535 million; 2013: £nil), which will be paid on 17 May 2016. The directors have also recommended a special dividend of 0.5 pence per share (2014: nil; 2013: nil) representing a total dividend of £357 million (2014: nil; 2013: nil). These financial statements do not reflect these recommended dividends.
Recommended by directors at previous year end 0.75 − – 535 − –
The trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but have chosen to waive their entitlement to the dividends on those shares as indicated: the Lloyds Banking Group Share Incentive Plan (holding at 31 December 2015: 24,275,824 shares, 31 December 2014: 21,158,651 shares, waived rights to all dividends), the HBOS Share Incentive Plan Trust (holding at 31 December 2015: 446,169 shares, 31 December 2014: 433,252 shares, waived rights to all dividends) the Lloyds Banking Group Employee Share Ownership Trust (holding at 31 December 2015: 164,141,179 shares, 31 December 2014: 18,704,412 shares, on which it waived rights to all dividends), Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2015: 42,846 shares, 31 December 2014: 42,846 shares, waived rights to all but a nominal amount of one penny in total) and the Lloyds Banking Group Qualifying Employee Share Ownership Trust (holding at 31 December 2015: 1,398 shares, 31 December 2014: 1,398 shares, waived rights to all but a nominal amount of one penny in total).
Other share plans Lloyds Banking Group Long-Term Incentive Plan The Long-Term Incentive Plan (LTIP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the Plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary.
Awards in respect of the 2013 grant will vest in 2016 at a rate of 94.18 per cent.
Weighted average expected life 3.3 years 1.4 years 3.0 years 1.7 years
The table below details, on an aggregated basis, key management personnel compensation: 2015 £m 2014 £m 2013 £m
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.1 million (2014: £0.1 million; 2013: £0.2 million).
Advanced (includes loans of appointed key management personnel) 4 2 2
Placed (includes deposits of appointed key management personnel) 58 32 29
Withdrawn (includes deposits of former key management personnel) (61) (29) (26)
UK government In January 2009, the UK government through HM Treasury became a related party of the Company following its subscription for ordinary shares issued under a placing and open offer. As at 31 December 2015, HM Treasury held an interest of 9.14 per cent in the Company’s ordinary share capital, with its interest having fallen below 20 per cent on 11 May 2015. As a consequence of HM Treasury no longer being considered to have a significant influence, it ceased to be a related party of the Company for IAS 24 purposes at that date.
In accordance with IAS 24, UK government-controlled entities were related parties of the Group until 11 May 2015. The Group regarded the Bank of England and entities controlled by the UK government, including The Royal Bank of Scotland Group plc (RBS), NRAM plc and Bradford & Bingley plc, as related parties.
Big Society Capital The Group has invested £36 million (31 December 2014: £31 million) in the Big Society Capital Fund under which an agreement was entered into with RBS amongst others.
Housing Growth Partnership The Group has committed to invest up to £50 million into the Housing Growth Partnership under which an agreement was entered into with the Homes and Communities Agency.
Central bank facilities In the ordinary course of business, the Group may from time to time access market-wide facilities provided by central banks.
The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2015, customer deposits of £145 million (2014: £129 million) and investment and insurance contract liabilities of £694 million (2014: £3,278 million) related to the Group’s pension funds.
In addition to the above balances, the Group has a number of other associates held by its venture capital business that it accounts for at fair value through profit or loss. At 31 December 2015, these companies had total assets of approximately £3,911 million (2014: £5,553 million), total liabilities of approximately £4,104 million (2014: £6,312 million) and for the year ended 31 December 2015 had turnover of approximately £4,660 million (2014: £5,634 million) and made a loss of approximately £181 million (2014: net loss of £272 million). In addition, the Group has provided £1,710 million (2014: £2,364 million) of financing to these companies on which it received £125 million (2014: £149 million) of interest income in the year.
In July 2014, the Group announced that it had reached settlements totalling £217 million (at 30 June 2014 exchange rates) to resolve with UK and US federal authorities legacy issues regarding the manipulation several years ago of Group companies’ submissions to the British Bankers’ Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Group continues to cooperate with various other government and regulatory authorities, including the Serious Fraud Office, the Swiss Competition Commission, and a number of US State Attorneys General, in conjunction with their investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank offered rates.
UK shareholder litigation In August 2014, the Group and a number of former directors were named as defendants in a claim filed in the English High Court by a number of claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of fiduciary and tortious duties in relation to information provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. It is currently not possible to determine the ultimate impact on the Group (if any), but the Group intends to defend the claim vigorously.
Residential mortgage repossessions In August 2014, the Northern Ireland High Court handed down judgment in favour of the borrowers in relation to three residential mortgage test cases, concerning certain aspects of the Group’s practice with respect to the recalculation of contractual monthly instalments of customers in arrears. The FCA has indicated that it will issue a Consultation Paper in relation to industry practice in this area in February 2016. The Group will respond as appropriate to this and any investigations, proceedings, or regulatory action that may in due course be instigated as a result of these issues.
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £63,086 million (2014: £55,029 million) was irrevocable.
Operating lease commitments Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows: 2015 £m 2014 £m
Later than 1 year and not later than 5 years 885 945
NOTE 50: FINANCIAL INSTRUMENTS (1) Measurement basis of financial assets and liabilities The accounting policies in note 2 describe how different classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and liabilities by category and by balance sheet heading.
Loans and receivables: Loans and advances to banks – – – – 25,117 – – 25,117
Available-for-sale financial assets – – – 56,493 – – – 56,493
Formal committees, consisting of senior risk, finance and business management, meet at least quarterly to discuss and approve valuations in more judgemental areas, in particular for unquoted equities, structured credit, over-the-counter options and the Credit Valuation Adjustment (CVA) reserve.
Level 3 Level 3 portfolios are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation techniques that require significant management judgement in determining appropriate assumptions, including earnings multiples and estimated future cash flows. Certain of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also classified as level 3.
Treasury and other bills 74 – – 74 Total trading and other financial assets at fair value through profit or loss 79,450 55,970 5,116 140,536 Available-for-sale financial assets
Total trading and other financial assets at fair value through profit or loss 85,296 61,531 5,104 151,931
Loans and advances to customers and banks These assets are principally reverse repurchase agreements. The fair value of these assets is determined using discounted cash flow techniques. The discount rates are derived from observable repo curves specific to the type of security purchased under the reverse repurchase agreement.
At 31 December 2015, the own credit adjustment arising from the fair valuation of £7,878 million (2014: £6,739 million) of the Group’s debt securities in issue designated at fair value through profit or loss resulted in a gain of £114 million (2014: gain of £33 million).
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 (95) (12) 755 (376)
At 31 December 2015, the Group’s derivative trading business held mid to bid-offer valuation adjustments of £76 million (2014: £74 million).
Where the exposure to an unobservable input is managed on a net basis, only the net impact is shown in the table.
(5) Reclassification of financial assets In 2015 the Group reviewed its approach to managing a portfolio of government securities held as a separately identifiable component of the Group’s liquidity portfolio. Given the long-term nature of this portfolio, the Group concluded that certain of these securities will be able to be held until they reach maturity. Consequently, on 1 May 2015, government securities with a fair value of £19,938 million were reclassified from available-for-sale financial assets to held-to-maturity investments reflecting the Group’s positive intent and ability to hold them until maturity.
Trading and other financial assets at fair value through profit or loss 13,711 7,460 16,803 6,673
Trading and other financial assets at fair value through profit or loss: Loans and advances to banks: Loans and advances to customers: Available-for-sale financial assets 56,493 – 56,493 – (10,299) 46,194
NOTE 53: 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.
Total structural foreign currency exposures, after net investment hedges (8) 32 31
Debt securities, treasury and other bills 46,886 – 46,886 53,630 – 53,630
Assets arising from reinsurance contracts held 675 – 675 682 – 682
2 Offset items comprise deposit amounts available for offset and amounts available for offset under master netting arrangements that do not meet the criteria under IAS 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 2(H). Included in loans and receivables are advances which are individually determined to be impaired with a gross amount before impairment allowances of £4,406 million (31 December 2014: £8,522 million).
Asset-backed securities: Corporate and other debt securities 417 109 526 – 164 164
Government securities 19,808 – 19,808 1 Credit ratings equal to or better than ‘BBB’.
The Group did not carry any held-to-maturity investments at 31 December 2014.
Asset-backed securities: Corporate and other debt securities 582 30 612 1,288 198 1,486
Other assets held at fair value through profit or loss: Bank and building society certificates of deposit 135 – 135 – – –
Total debt securities held at fair value through profit or loss 34,940 2,390 37,330 39,329 2,510 41,839
Total other assets held at fair value through profit or loss 35,014 2,390 37,404 39,351 2,510 41,861
Loans and advances to banks There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying value of £963 million (2014: £1,899 million), against which the Group held collateral with a fair value of £1,009 million (2014: £1,886 million).
Other The majority of non-mortgage retail lending is unsecured. At 31 December 2015, impaired non-mortgage lending amounted to £1,153 million, net of an impairment allowance of £448 million (2014: £1,470 million, net of an impairment allowance of £577 million). The fair value of the collateral held in respect of this lending was £107 million (2014: £110 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation and the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
Unimpaired secured lending Unimpaired secured commercial lending amounted to £51,298 million (2014: £57,647 million).
For unimpaired secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of collateral if the obligor enters a distressed state.
In addition, securities held as collateral in the form of stock borrowed amounted to £58,621 million (2014: £33,721 million). Of this amount, £29,859 million (2014: £32,686 million) had been resold or repledged as collateral for the Group’s own transactions.
Trading and other financial liabilities at fair value through profit or loss The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowing, where the secured party is permitted by contract or custom to repledge was £44,655 million (2014: £56,696 million).
Trading and other financial assets at fair value through profit or loss 6,478 9,955
Liabilities arising from non-participating investment contracts 17,136 – – – – 17,136
Change in derivative financial instruments, trading and other liabilities at fair value through profit or loss (16,924) 24,020 (8,376)
Further information on the Group’s liquidity exposures is provided on pages 153 to 157.
(D) Analysis of cash and cash equivalents as shown in the balance sheet 2015 £m 2014 £m 2013 £m
Trading and other assets at fair value through profit or loss 3,420 11 35,159
Cash consideration received on losing control of group undertakings and businesses 972 548 2,398
NOTE 55: DISPOSAL OF INTEREST IN TSB BANKING GROUP PLC On 20 March 2015 the Group announced that it had agreed to sell a 9.99 per cent interest in TSB Banking Group plc (TSB) to Banco de Sabadell S.A. (Banco Sabadell) and that it had entered into an irrevocable undertaking to accept Banco Sabadell’s recommended cash offer in respect of its remaining 40.01 per cent interest in TSB. The offer by Banco Sabadell was conditional upon, amongst other things, regulatory approval.
The sale of the 9.99 per cent interest completed on 24 March 2015, reducing the Group’s holding in TSB to 40.01 per cent; this sale led to a loss of control and the deconsolidation of TSB. The Group’s residual investment in 40.01 per cent of TSB was then recorded at fair value, as an asset held for sale. The Group recognised a loss of £660 million reflecting the net costs of the Transitional Service Agreement between Lloyds and TSB, the contribution to be provided by Lloyds to TSB in moving to alternative IT provision and the net result on sale of the 9.99 per cent interest and fair valuation of the residual investment.
NOTE 56: EVENTS SINCE THE BALANCE SHEET DATE In 2015, the Group participated in the UK-wide concurrent stress testing run by the Bank of England; the Enhanced Capital Notes (ECNs) in issue were not taken into account for the purposes of core capital in the PRA stress tests and the Group has determined that a Capital Disqualification Event (CDE), as defined in the conditions of the ECNs, has occurred. This determination was confirmed by a unanimous decision by the Court of Appeal on 10 December 2015 and on 29 January 2016 the Group announced the redemption of certain series of ECNs using the Regulatory Call Right. The Group also launched tender offers for the remaining series of ECNs on 29 January 2016 and has announced that, subsequent to completion of such offers, it will redeem those ECNs not validly tendered using the Regulatory Call Right. The offers and redemptions will be completed before the end of the first quarter, resulting in a net loss to the Group currently estimated to be approximately £700 million, principally comprising the write-off of the embedded equity conversion feature and premiums paid under the terms of the transaction.
NOTE 57: FUTURE ACCOUNTING DEVELOPMENTS The following pronouncements are not applicable for the year ending 31 December 2015 and have not been applied in preparing these financial statements. Save as disclosed below, the full impact of these accounting changes is being assessed by the Group. As at 24 February 2016, these pronouncements are awaiting EU endorsement.
IFRS 9 Financial Instruments IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 requires financial assets to be classified into one of three measurement categories, fair value through profit or loss, fair value through other comprehensive income and amortised cost, on the basis of the objectives of the entity’s business model for managing its financial assets and the contractual cash flow characteristics of the instruments. These changes are not expected to have a significant impact on the Group.
IFRS 9 also replaces the existing ‘incurred loss’ impairment approach with an expected credit loss approach, resulting in earlier recognition of credit losses. The IFRS 9 impairment 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 (stage 2). The assessment of whether a significant increase in credit risk has occurred is a key aspect of the IFRS 9 methodology and involves quantitative measures, such as forward looking probabilities of default, and qualitative factors and therefore requires considerable management judgement. Stage 3 requires objective evidence of impairment which is similar to the guidance on incurred losses in IAS 39. IFRS 9 requires the use of more forward looking information including reasonable and supportable forecasts of future economic conditions. The need to consider multiple economic scenarios and how they could impact the loss allowance is a very subjective feature of the IFRS 9 impairment model. Loan commitments and financial guarantees not measured at fair value through profit or loss are also in scope.
The IFRS 9 expected credit loss model differs from the regulatory models in a number of ways, for example stage 2 assets under IFRS 9 carry a lifetime expected loss amount whereas regulatory models generate 12 month expected losses for non defaulted loans. In addition, different assets are in scope of each reporting base and therefore the size of the regulatory expected losses should not be taken as a proxy to the size of the loss allowance under IFRS 9.
In 2015, the Basel Committee on Banking Supervision published finalised guidance on credit risk and accounting for expected credit losses. The paper sets out supervisory guidance on how expected credit loss accounting models should interact with a bank’s credit risk practices. The existing impairment processes, controls and governance will be reviewed and changed where necessary to reflect the increased demands of an expected credit loss impairment model.
The hedge accounting requirements of IFRS 9 are more closely aligned with risk management practices and follow a more principle-based approach than IAS 39. The accounting policy choice to continue with IAS 39 hedge accounting is still being considered by the Group.
Fair value and exchange adjustments and other non-cash items (594) 1,118 137
NOTE 3: SHARE CAPITAL, SHARE PREMIUM AND OTHER EQUITY INSTRUMENTS Details of the Company’s share capital, share premium account and other equity instruments are as set out in notes 41, 42 and 45 to the consolidated financial statements.
Movements in the merger reserve were as follows: 2015 £m 2014 £m 2013 £m
There were no movements in the capital redemption reserve in 2015, 2014 or 2013.
Issued during the year: 4.5% Fixed Rate Subordinated Debt Securities due 2024 (US$1,000 million) – – 629 629
Repurchases and redemptions during the year: 6.0884% Non-cumulative Fixed to Floating Rate Preference Shares1 (10) – – (10)
Debt securities in issue – – – – 561 580 580 –
Lloyds Banking Group may also make or disclose written and/or oral forward looking statements in reports filed with or furnished to the US Securities and Exchange Commission, Lloyds Banking Group annual reviews, half-year announcements, proxy statements, offering circulars, prospectuses, press releases and other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group to third parties, including financial analysts. Except as required by any applicable law or regulation, the forward looking statements contained in this Annual report are made as of the date hereof, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this Annual Report to reflect any change in Lloyds Banking Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Commercial Real Estate Includes office buildings, industrial property, medical centres, hotels, malls, retail stores, shopping centres, farm land, multifamily housing buildings, warehouses, garages, and industrial properties.
Credit valuation adjustments These are adjustments to the fair values of derivative assets to reflect the creditworthiness of the counterparty. Further details are given in note 51.
Exposure at default An estimate of the amount expected to be owed by a customer at the time of the customer’s default.
A standardised contract developed by the ISDA which is used as an umbrella contract for bilateral derivative contracts.
Regulatory capital The amount of capital that the Group holds, determined in accordance with rules established by the PRA for the consolidated Group and by local regulators for individual Group companies.
Risk appetite The amount and type of risk that the Group is prepared to seek, accept or tolerate.
Standardised Approach In relation to credit risk, a method for calculating credit risk capital requirements using External Credit Assessment Institutions (ECAI) ratings of obligors (where available) and supervisory risk weights. In relation to operational risk, a method of calculating the operational risk capital requirement by the application of a supervisory defined percentage charge to the gross income of specified business lines.
Structured entities (SEs) SEs are entities that have been designed so that voting or similar rights are not the dominant factor in determining who controls the entity, such as when voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs often have specific restrictions around their ongoing activities and are created to accomplish a narrow and well-defined objective.
Attendance at board and committee meetings 63, 72, 74, 78, 81, 91
General commentary 1 Present all related risk information together or provide an index or an aid to navigation. 111 2 Define the bank’s risk terminology and risk measures and present key parameter values used. 112-169 3 Describe and discuss top and emerging risks. 30-33, 114 4 Outline plans to meet each new key regulatory ratio. 154, 160
Funding 19 Tabulate encumbered and unencumbered assets by balance sheet categories 158-159 20 Tabulate consolidated total assets, liabilities and off-balance sheet commitments by remaining contractual maturity at the balance sheet date. 156, 274-276 21 Discuss the bank’s funding strategy, including key sources and any funding concentrations. 154-156 Market risk 22 Describe linkages between line items in the balance sheet with positions included in the traded and non-traded market risk disclosures.
28 A reconciliation of the opening and closing balances of non-performing or impaired loans in the period and the allowance for loan losses.
Other 31 Describe ‘other risk’ types and discuss how each one is identified, governed, measured and managed. 143-144, 151-152, 32 Discuss publicly known risk events related to other risks. 143-144, 151-152,
In compliance with Section 409 of the Companies Act 2006, the following comprises a list of all related undertakings of the Group, as at 31 December 2015. The list includes each undertaking’s country of incorporation (UK unless otherwise stated) and the percentage of class(es) of shares held by the immediate parent company. Where different, the ultimate percentage held by the Group is given in brackets. All shares are ordinary shares indirectly held by Lloyds Banking Group plc unless indicated otherwise.
Lloyds Group Holdings (Jersey) Limited, (Jersey) 99.4% i 100% ii 100% vii
(i) The Group has determined that it has the power to exercise control without having the majority of the voting rights of the undertakings. Unless otherwise stated, the undertakings do not have a share capital or the Group does not have any shares.
Zog Brownfield Ventures Limited (In Administration) 50% * The undertaking does not have share capital
Aberdeen World Government Bond Fund 49% ABERDEEN PRIVATE EQUITY FUND OF FUNDS (2007) PLC, (Ireland) iv 97%
The Boston Company UK Opportunities Fund 21% CLERICAL MEDICAL OEIC ICVC ii
Multi Manager UK Equity Income Fund 20% NORDEA 1 Diversified Return Fund, (Luxembourg) xviii 91%
Progressive Portfolio Fund 74% SCOTTISH WIDOWS OVERSEAS GROWTH INVESTMENT FUNDS ICVC iii