View our report online Our Annual Report and Accounts and other information about lloyds Banking Group can be found at www.lloydsbankinggroup.com
£415m Returned to statutory profit before tax £85m We are one of the largest community investors in the uK, providing £85 million per annum to worthy causes.
+6% We grew net SME lending in a market that is contracting.
Significantly improved our financial performance, with Group underlying profit more than doubled to £6.2 billion, and a statutory profit before tax of £415 million
As a result, the uK government began reducing its stake in the Group in September looking ahead, we expect to make further progress on the execution of our strategic plan. We expect to: Increase lending to core customers: for retail customers, mortgage market net lending in 2014 expected to grow, supported by our target to lend around £10 billion to approximately 80,000 first-time buyers in 2014; for commercial customers, above market lending growth led by strong momentum in SMe lending
Generate, prior to any dividends, fully loaded common equity tier 1 capital of around 2.5 percentage points over the next two years, and thereafter 1.5-2 percentage points per annum
Continued reduction in FCA reportable banking complaints (excluding PPI) to 1.0 per 1,000 accounts, the lowest of any major uK bank; Halifax now at 0.8 per 1,000 accounts
Group underlying profit1 and returns substantially increased; core profit and returns further improved underlying profit increased by 140 per cent to £6,166 million in 2013
Credit quality continues to improve: impairment charge reduced by 47 per cent to £3,004 million; impairment charge as a percentage of average advances improved to 0.57 per cent (2012: 1.02 per cent)
Output measures Delivering sustainable returns to shareholders We have made significant progress against our strategic priorities in 2013. This is reflected in our improved underlying profit and stronger capital position as well as the improvement in statutory performance, despite legacy charges.
Group performance 4 Group key performance indicators (KPIs) 6 Chairman’s statement 8 Group Chief Executive’s review 12 Market overview 16 Business model and strategy 18 Delivering our action plan 20 Divisional overview 24 Relationships and responsibility 28 Risk overview 40
As Simplification benefits materialise we are increasing the strategic investment in the business and have committed to invest approximately £500 million per annum by 2014 in addition to our business as usual investment programme.
Progress in 2013 In 2013, we accelerated the delivery of our strategy and made substantial progress in creating a simple, customer focused, low risk retail and commercial bank. We more than doubled our Group underlying profit to £6.2 billion and returned to modest statutory profitability at the pre-tax level, while further reducing the risk in the business and strengthening the balance sheet. Our pro forma fully loaded common equity tier 1 ratio is now 10.3 per cent.
The significant progress enabled the uK government to sell a 6 per cent stake in the Group in September 2013, thereby reducing its holding to 32.7 per cent. This was a major milestone in our recovery, and marks the start of the journey to full re-privatisation, a key priority for the Group. We have also commenced preparatory work including the preparation of certain documents required for a possible future sale of shares in lloyds Banking Group to the public.
One of the principal tasks of the Board is to develop a strategy which achieves long-term success and generates sustainable returns for shareholders. In turn, this needs to be underpinned by the high standards of corporate governance which are critical to the success of any business today. They must be driven by the Board, led by the Chairman, and be embedded in the thinking and processes of the business. As a Board, we are confident we have an excellent management team, and strong governance, to enable us to build a business that will deliver sustainable success in the future.
Corporate and social responsibility now more than ever, it is clear that doing business responsibly creates a more stable and successful future for the bank and for everyone it interacts with. During my years as Chairman, we have done a great deal to rebuild customer trust and colleague pride. not only have we introduced more rigorous responsible business practices, but our renewed focus on helping Britain prosper has helped us to articulate how we contribute to the uK’s long-term financial wellbeing.
I am pleased to note that after many years of not meeting the performance conditions under the long Term Incentive Plan (lTIP), the strong performance on strategic and financial targets since 2011 resulted in the vesting of a portion of awards under the Plan. The lTIP remains a core part of our reward strategy and the alignment of performance conditions with the Group’s strategic objectives ensures payouts, when they do occur as in this year, are aligned to shareholders’ objectives.
Board oversight – key topics Throughout 2013 the Board continued to review the Group’s corporate strategy, the operation of the business and our results within a framework of prudent and effective controls, including the assessment and management of risks. This framework allowed us to deal with key topics arising throughout the year, including: the establishment of a committee to oversee the search and selection of a new Chairman of the Board, which is explained on page 82 the ongoing review of Board composition, including a number of new appointments which are explained on page 90 a full analysis of the Group’s performance against the 34 Salz Review recommendations, which is explained on page 90 the ongoing review and challenge of the Group’s strategy and long term objectives, and the approval of the five year operating plan and annual budget the ongoing review of the regulatory framework and the implementation of changes to achieve a strong capital, liquidity and funding position the launch of TSB bank, an independent banking operation with approximately 600 branches across Britain ongoing oversight of conduct issues with an emphasis on embedding a culture of ‘doing the right thing’
Legacy Our results and capital position reflect further provisions for legacy issues taken in 2013 totalling £3,455 million which had a material effect on our statutory performance. We remain committed to resolving these issues, while treating our customers fairly. Of these provisions, £3,050 million related to PPI and £130 million related to the sales of interest rate hedging products to certain small and medium-sized businesses.
We continue to refresh our operating structure and from the beginning of 2014 our unified Wealth business will be integrated into the Retail division. This will allow us to sharpen our focus on delivering value-added Wealth services to eligible retail customers and will represent a key growth opportunity. We have also moved our Business Banking unit, which services approximately one million small business customers with less complex needs, into Retail, allowing us to draw on the collective expertise of Retail and Commercial Banking colleagues to manage these customer relationships in a way which leverages existing Retail infrastructure, via branch, telephony and digital channels.
Investing in the business We are reinvesting a significant proportion of the savings realised from Simplification to further improve processes and the quality of customer interaction through branches, via the telephone and digital channels.
In the second half of the year, we relaunched the lloyds Bank brand, building on its 250-year heritage of serving the people and businesses of Britain, to take its place alongside our key high street banking brands, Halifax and Bank of Scotland. The relaunch of lloyds Bank followed the separation of TSB, which has brought another new challenger to the high street. The Group has received an agreement in principle from the european Commission to pursue an Initial Public Offering of TSB as planned in 2014 and to extend the deadline for the completion of the TSB divestment to the end of 2015.
For the ninth year running we were awarded the title of ‘Business Bank of the Year’ at the FDs’ excellence Awards, which are supported by the Confederation of British Industry and the Institute of Chartered Accountants in england and Wales.
Outlook We have made further substantial progress in 2013 on our strategy to be the best bank for customers. We delivered a significantly improved financial performance while increasing investment in our core franchise and people, strengthening our balance sheet and capital position, reducing costs and risk, and addressing legacy issues.
Given our uK focus, our financial performance is inextricably linked to the performance of the uK economy, its regulatory environment and the competitive environment.
Recovery has so far been weak early estimates suggest that the uK economy grew by 1.8 per cent in 2013 compared to 0.3 per cent in 2012. However, given how much the economy shrank during the 2008-9 recession, recovery so far has been weak in a historical uK context and is only now outperforming the eurozone. The weak eurozone economy continues to drag on the uK – the uK’s overseas trade balance remained close to 1.5 per cent of GDP in 2013, as in 2012, with export growth estimated at below 1 per cent in 2013. Further improvement in external trade is necessary if the economy is to make up some of the gap between current output and the pre-crisis trend, without increasing debt again.
Growth expected to improve The most likely outlook is for continued recovery in 2014, with faster growth than in 2013. But the recovery will still be held back by consumers’ subdued appetite to borrow and government deficit reduction in the uK and across much of the eurozone. The current consensus for 2014 GDP growth is 2.7 per cent, close to the long-term average, and unemployment should continue to fall. However, with growth in wages and companies’ unit labour costs remaining subdued, Bank Rate is expected to remain unchanged at 0.5 per cent through 2014.
Regulation The regulatory landscape is now clearer but significant change is still expected. In particular, within the uK over the next few years we will need to implement the recommendations relating to ring-fencing and culture established within the Banking Reform Act (2013). Key regulatory developments in 2013 are outlined below.
In the current low interest rate environment, many customers are motivated by their desire to achieve better value for money, but security and reputation remain important factors. Customers want clear and transparent products delivered with good service and access to helpful, relevant, expert advice when they need it. Product innovation is also important for some, whereas long-standing relationships remain important for others.
We want to meet our customers’ financial needs, help them succeed and create value for them. We do this using our distinctive strengths, in particular our superior customer insight, simpler tailored products and relationship focus, whether that be through banking, insurance, investment, debt financing or risk management products.
How we create value A simple, low risk, customer focused uK banking model, delivering the right products with good service at a fair price.
St ra te g ic re p or t Group at a glance 2
Customers are at the heart of everything we do, whether that be through our distribution network, our brands or our people. This commitment is supported by our Group values of putting customers first, keeping it simple and making a difference together.
Priorities for 2014 Continue to reduce our non-core assets in a capital accretive manner with particular focus on non-retail non-core assets.
Continue to improve our asset quality ratio towards our new Group target of around 50 basis points.
Dealing with our non-core assets prudently and efficiently allows us to focus energy and resource on our core business. The accelerated reduction of our non-core assets has enabled us to accelerate the reduction in our wholesale funding to reshape the business portfolio to fit our assets and capabilities.
Due to the excellent progress in this area we will now report on a run-off portfolio comprising our non-core non-retail assets (c.£25 billion) and certain non-core retail assets including Ireland and Hong Kong (c.£8 billion).
A prudent appetite for risk We have a conservative approach to risk across the business and disciplined controls are in place over the risk profile of all new business. We are comfortable that our existing portfolios are adequately provisioned.
The impairment charge continues to fall, and the overall quality of our portfolio continues to improve. As a result, our asset quality ratio at 57 basis points is now within our target range of 50-60 basis points, and we have now upgraded our target to around 50 basis points.
The benefits of the Simplification programme extend far beyond cost reduction. The changes we are making help to put us firmly on the path to being the best bank for customers, enabling better service by making day-to-day tasks easier and freeing up colleague time to focus on our customers’ needs.
Operations and processes We have delivered over 300 process, policy and system improvements as part of our Simplification journey, improving the customer experience, increasing productivity, and reducing risk, errors, complexity and costs. Particular achievements in 2013 included automating our ISA transfer process so that 80 per cent of transfers are now completed at ‘first point of contact’, a reduction of 85 per cent in the time taken to process fixed rate deposit maturities, and the redesign of our General Insurance claims process with the majority of claims now being settled 30 per cent faster. We also completed the transfer of 1.7 million mortgage accounts so that all accounts for our core brands are now managed on a single mortgage system.
Sourcing Simplification in sourcing means transforming how we acquire goods and services to achieve cost savings across the Group, as well as providing a more straightforward experience for colleagues. Since the programme began we have halved our total number of suppliers, and almost 82 per cent of spend is now concentrated with our top 100 suppliers.
Aim As part of the strategic review we outlined our intention to increase our strategic investment by approximately £500 million annually by 2014, equivalent to approximately one third of the savings from our Simplification initiatives, to grow our core income.
Priorities for 2014 Continued investment in our digital proposition to optimise service capability for individual and business customers.
Key initiatives and progress in 2013 During 2013, we were able to invest a further £342 million due to the Simplification savings already made. This investment in the core franchise is allowing us to provide greater levels of service and support to customers.
Core loan book returned to growth in the third quarter supported by strong performance in our mortgage portfolio.
Reshaped our SMe and Mid Markets segments to better serve clients and improved relationship returns in Global Corporates and Financial Institutions through continued focus on capital optimisation.
Continued to invest in our core infrastructure, with ongoing benefits from the Simplification programme and tight cost management enabling significant upgrades to deliver scalability and functionality in our Transaction Banking and Markets businesses.
Awarded Business Bank of the Year at the FD’s excellence Awards for the ninth year in a row.
Asset Finance continued to invest in infrastructure and growth initiatives, resulting in a 3.2 per cent fleet growth for lex Autolease and a 28.6 per cent increase in new business volumes for Black Horse motor finance.
Total cost reductions of 13 per cent driven by simplification initiatives and run-down of non core business.
Progress against strategic initiatives We focus on four key markets: Pensions, Protection, Annuities and Home Insurance, where we believe the division can leverage its position as part of the Group with over 30 million retail customers, rich customer transaction data, centres of best practice and top quality brands.
In Pensions, where we have over 1 million individual and a significant number of corporate customers, we supported almost 300 major employers, through auto enrolment, including many of the 17 per cent of FTSe 350 companies who have their corporate pension arrangements with Scottish Widows.
In Protection, we continued to progress development of our intermediary proposition, leveraging our platform and capabilities to extend this to our wealthier customers.
We relaunched the Scottish Widows brand, demonstrating our continued commitment to being a leader in the life planning and retirement market.
Being responsible enables us to build colleagues’ pride in a business that does the right thing and helps to rebuild public trust in the banking industry. We recognise that the biggest shift we need to make is cultural; we need responsible business to become business as usual for colleagues. The shift in culture is already underway. We can only achieve our customer focused strategy by building a sound reputation founded on the highest standards of behaviour.
Being a responsible business Our approach to responsible business is governed by our Responsible Business Committee (RBC). Chaired by Anita Frew, one of our non-executive Directors, who, in this capacity reports directly to the Group Board, the RBC develops our principles, sets priorities and ensures responsible business is embedded throughout our operations. The Group Responsible Business team manages our day-to-day responsible business activities. To help us decide what information to include in our responsible business reporting, we have engaged with a representative cross-section of our stakeholders (including colleagues and external parties) to review our approach to materiality and prioritise the issues. For 2013, we have reported against our five pillars of responsible business covering customers, colleagues, communities, other stakeholders and the environment. These five pillars encompass all of our most important relationships and are integral to our strategy to be the best bank for customers. We report here on our recent success and priorities in each of these areas.
To ensure the highest standards of responsible behaviour, all colleagues are required to work in accordance with our Code of Personal Responsibility and Code of Business Responsibility. These codes set out how we do business and what customers and stakeholders can expect. They are governed by the RBC. They cover the full breadth of our responsibilities, under the five pillars of responsible business and are aligned to our Group Values.
Our Responsible Business Report provides an update on our responsible business activities in 2013. You can read the full report on our website at www.lloydsbankinggroup-cr.com.
>80,000 2 We’ll help our customers plan and save for later life 2.1 number of customers we help to plan for later life through company pension schemes 2.2 number of customers we help post-retirement through providing a continuing annuity income 1.1m (cumulative)
3 We’ll take a lead in financial inclusion to enable all individuals to access, and benefit from, the products and services they need to make the most of their money 3.1 Amount of additional funding provided to support Credit unions per year 3.2 Share of social banking accounts we will support 3.3 number of community support workers accredited to deliver financial education on the front line1 3.4 Maintain a category gold award with the Business Disability Forum (BDF) by achieving a high score across the 10 areas2 that lead to a disability confident organisation £1m 1,830 (cumulative)
>705 >705 >705 1 Through Money for life’s Teach Others and Money Mentors programmes 2 Includes Commitment; Know-how; Adjustments; Recruitment; Retention; Products and Services; Suppliers and Partners; Communication; Premises; Information and Communication Technology 3 This % is based on the number of Scholars who are actively seeking employment 4 Senior roles refers to top 8,000 individuals 5 uK High Performing norm – target will change if High Performing norm changes
We focus on doing the best we can for all our customers, in branches, on the phone and via digital channels and living up to our values of putting customers first, keeping it simple and making a difference together.
We are a leading supporter of the government’s Help to Buy scheme. lloyds Banking Group accounted for approximately 60 per cent of new Help to Buy mortgage lending under both the equity loan and mortgage guarantee elements of the scheme.
Supporting Britain’s businesses We serve hundreds of thousands of business customers. SMes and Mid-market businesses are the life-blood of the British economy so we focus our attention on their needs, and we also serve many larger businesses and organisations.
We also met our pledge to respond to 90 per cent of lending appeals within 15 working days (rather than the industry standard of 30 working days).
Providing basic bank accounts and support to SMEs This year, we provided over 280,000 new basic bank accounts and helped over 110,000 customers upgrade from basic to more mainstream accounts. As of December 2013 we had over 22,000 active small business customers in the most deprived areas of the uK. We increased the loan facilities available to SMes in these prioritised areas from £524 million in 2012 to £633 million in 2013.
Helping customers in financial difficulty Many of our customers need our help to get their finances back on track. This year we issued 60,000 credit cards to help customers who have very limited credit history gain access to credit facilities. Our Credit Operations team tailors solutions for customers to get their finances back on track. In 2013 they had 5.5 million customer conversations.
We also simplified our telephone banking services, making it easier for colleagues to access customers’ information and action their requests quickly. As a result, we reduced call times by up to three minutes. We also improved our service for general insurance customers by assigning a dedicated advisor to every claim. To date, 130,000 claims have been handled this way, delivering a 40 per cent reduction in follow up calls and on average, 30 per cent faster settlement times.
Supporting our customers In September 2013 we launched the revitalised lloyds Bank across almost 1,300 high street branches, marking another milestone in its 250 year history. The launch of the brand reinforces our commitment to better serve our customers and deliver a stronger more competitive banking industry in the uK.
Welcome back to local banking In September 2013 we launched TSB across 631 branches, bringing a credible, new competitor to the market. The flotation of TSB will further strengthen competition. At its launch TSB had around 4.5 million customers and will have 8,000 employees, including 4,500 branch staff.
Aim Our ambition is to be a bank where our colleagues give their best and want to build their career. Our people are at the heart of our business and are critical in ensuring that we deliver our strategy to be the best bank for customers and through this, help Britain prosper. each colleague has access to the training and development opportunities that enable them to do their role well. This grows talent internally, to drive our business in a sustainable way.
More than 51,000 customer facing colleagues have now attained the Foundation Standard for Professional Bankers – the highest of any bank in Britain.
Embedding our values In 2013, around 97 per cent of colleagues completed training on our Codes of Responsibility and we completed the first phase of a Group-wide cultural assessment.
% of colleagues who disclose they are lesbian, gay, bisexual or transgender 1% 1%
Support for colleagues from ethnic minority backgrounds This year we ran 10 Career Development Programme courses to support the career development of more than 100 talented colleagues from ethnic minority backgrounds. This year, 28 per cent of our new graduates joining us were from ethnic minorities.
Parents and carers We provide one of the best packages for working parents and carers in the uK. This includes guidance for colleagues and line managers, e-learning modules for new parents and a parent’s forum.
Wellbeing We work closely with BuPA, Health Management limited, Validium and other partners to promote and enable colleagues’ general health and wellbeing. For example, Validium runs our successful employee Assistance Programme.
Health and safety in the workplace We have policies and standards in place to help colleagues work safely and responsibly at all times. Health and safety training is mandatory for all colleagues and we complete regular audits, inspections and maintenance programmes to help improve safety standards.
Maintain momentum in colleague involvement in community volunteering with more emphasis on skills-based support.
In 2013, the Group supported over 34,000 colleagues in volunteering for charities and community groups. The Foundations also provided Matched Giving to some of these organisations for colleagues’ time spent volunteering outside of working hours.
Developing our community investment programmes Our community programmes are focused on the ways in which we believe we can make the greatest difference to local people and local communities. All of our programmes involve colleagues, offering them the opportunity to use their skills and expertise for the benefit of the local communities in which they work and live.
Our Money for Life programme In 2009, we launched Money for life, our financial capability and personal money skills programme, aimed at improving the knowledge, confidence and skills of uK communities. Designed for people and adults in further education, and the work-based learning and community learning sectors, the programme enables and empowers participants to manage their money more effectively. We’ve invested £8 million in this award-winning programme since its launch.
Supporting local communities We invest in a number of local charities and community groups that work to bring communities closer together. We also use the Group’s resources and colleagues’ skills and expertise to help communities prosper.
Fundraising and community events Colleagues support and raise funds for local organisations in many different ways. They participate in national and local community events. They raise thousands of pounds for charities across Britain.
liaised with the Treasury Select Committee prior to the launch of TSB.
Government and regulators We engage regularly with the uK government, the european Commission, the european Parliament and other bodies to assist in the formulation of public policy around consumer issues, financial inclusion, financial education and finance for the green economy. We also produce economic and social research that champions consumer interests, for example the Halifax House Price Index, which is frequently used to inform government policy.
Suppliers We want to source goods and services in ways that are responsible, sustainable and constitute best value for our customers and shareholders. We can also use our influence to help suppliers to match the same high standards.
Our ability to help Britain prosper in a sustainable way is inextricably linked to wider environmental issues. Man-made climate change and global trends such as resource scarcity, extreme weather and rising energy and commodity prices have an impact on our stakeholders and our own operations.
Achieved a reduction in water consumption of 18 per cent against our 2009 baseline.
Worked for positive environmental change through many different external bodies, including the Corporate leaders Group for Climate Change, Climatewise, AIM4C and the Banking & environment Initiative (BeI).
Managing our carbon emissions Despite our continuing efforts throughout 2013 to move closer to our environmental Action Plan (eAP) targets, our overall carbon emissions have increased slightly compared to 2012 by 1.2% (on a like-for-like basis). This has mainly been down to increased gas use during cold winter conditions, increased electricity use as a result of the hot conditions in summer 2013 and increased business travel. The underlying trend is that we continue to improve our efficiency and we remain committed to delivering our eAP.
Please refer to page 75 in the Director’s report for a comprehensive overview of our emissions reporting.
2020 target Progress to 2020 target 2012 2013 energy 30% reduction in energy consumption* 42% 657Gwh 678Gwh
We believe effective risk management can be a strategic differentiator, in particular: Sustainable growth The role of risk is to support the business in delivering sustainable growth, which is achieved through informed risk decision making and superior risk and capital management, supported by a consistent risk-focused culture across the Group.
Business focus and accountability Managing risk effectively is a key focus and is one of the five criteria within the Group Balanced Scorecard on which business areas and individual performance are judged. Our approach to risk means that businesses remain accountable for risk but a strong and independent risk function also helps ensure adherence to the Group’s risk and control frameworks. Continued investment in risk systems and processes will also help differentiate our risk management approach.
Complaints During 2013 banking complaints fell to 1.0 per 1,000 accounts (excluding PPI), compared with 1.5 at the end of 2011, and 2.4 at the start of 2010. Our 2014 reduction target was met and exceeded by September 2013.
Loan to deposit ratio Our funding position remains strong with an improved loan to deposit ratio of 113 per cent, from 121 per cent at 31 December 2012. The core loan to deposit ratio fell to 100 per cent from 101 per cent at 31 December 2012.
Non-core asset reduction We made substantial capital accretive non-core asset reductions during the year and, together with additional sales announced in October, our full year 2014 target of less than £70 billion of non-core assets was achieved by Q3 2013. Our year end position of £63.5 billion is ahead of plan.
State aid commitments In line with strengthening the balance sheet, we continued our commitment to reduce our assets and met our target in December 2012, two years ahead of the mandated completion date. In May 2013, we received formal confirmation from the european Commission that we were released from this commitment.
Risk transformation The Risk Transformation Programme has driven the clarity on where risk allocates transformational investment funding in order to deliver the most efficient and effective returns for the Group. This has ensured that the investments made deliver the benefits required and underpin the Group's targeted objective of sustainable growth.
The framework outlines the key risk management activities undertaken consistently across the Group for all types of risk.
Credit risk As a provider of credit facilities to personal and commercial customers, together with financial institutions and sovereigns, any adverse changes in the economic and market environment we operate in, or the credit quality and/or behaviour of our borrowers and counterparties would reduce the value of our assets and increase our write-downs and allowances for impairment losses, adversely impacting profitability.
Market risk We face a number of key market risks including interest rate risk across the Banking and Insurance businesses. However, our most significant market risk is from the Defined Benefit Pension Schemes where asset and liability movements impact on our capital position.
Implement actions from IT resilience review conducted in 2013 to reflect enhanced demands on IT, both in terms of customer and regulator expectations.
Hold a large pool of liquid primary assets to meet cash and collateral outflows.
Maintain a further large pool of secondary assets which can be used to access Central Bank liquidity facilities.
Capital risk Our future capital position is potentially at risk from adverse financial performance and the introduction of higher capital requirements for distinct risks, sectors or as a consequence of a specific uK regulatory requirement. For example in 2013, the PRA introduced significant additional capital requirements on an adjusted basis that major uK banks are required to meet.
Most eu State aid commitments now met with the divestment of the rebranded (TSB) retail banking business outstanding.
The most significant risks faced by the Group which could impact on the success of delivering against the Group’s strategic objectives together with key mitigating actions are outlined below.
Credit policy incorporating prudent lending criteria aligned with the Board approved risk appetite to effectively manage credit risk.
Internal stress testing results to evidence sufficient levels of capital adequacy for the Group under various scenarios.
expect, prior to any dividend, to generate fully loaded CeT1 capital of around 2.5 percentage points over the next 2 years.
Government shareholding Commentary We continue to work closely with the european Commission, HM Treasury, PRA, FCA and the Monitoring Trustee appointed by the european Commission to ensure the successful implementation of the Restructuring Plan and mitigate customer impact.
More on regulatory risk192 1These key risk indicators are also key performance indicators (KPIs). 2Pro forma basis.
Significantly improved Group underlying and statutory profitability Group underlying profit more than doubled, increasing by £3,601 million to £6,166 million compared to 2012. The return on risk-weighted assets improved to 2.14 per cent from 0.77 per cent, driven by increased earnings and by risk-weighted asset reductions, predominantly in the non-core business. Core underlying profit before tax grew 24 per cent to £7,574 million, primarily reflecting reduced impairment charges and stronger net interest income.
Core underlying profit improved to £7,574 million from £6,112 million and the return on risk-weighted assets increased to 3.26 per cent from 2.54 per cent. excluding St. James’s Place effects, the return on risk-weighted assets was 3.00 per cent. Core underlying income increased 6 per cent to £18,244 million, and by 4 per cent excluding St. James’s Place effects given improved net interest income from core loan growth and higher margins. The core net interest margin increased by 17 basis points to 2.49 per cent, driven mainly by improved deposit margins. Core other income increased 3 per cent to £7,606 million but excluding St. James’s Place effects was down 2 per cent reflecting current economic conditions and the regulatory environment.
The improvement in Group net interest margin to 2.12 per cent for the full year, and to 2.29 per cent in the fourth quarter, was principally driven by a strong performance in deposit margin, which more than offset a small decline in asset margin and an 8 basis points reduction from repositioning our government bond portfolio. The net interest margin also benefited, relative to our expectations at the beginning of the year, from the effect of repositioning our structural hedge. This repositioning is now largely complete and provides the Group with a greater level of protection from changes in net interest income from movements in interest rates.
Impaired loans as a percentage of closing advances reduced substantially to 6.3 per cent, from 8.6 per cent at 31 December 2012, driven by the reduced non-core portfolio and improvements in both the Retail and Commercial Banking portfolios. Provisions as a percentage of impaired loans increased from 48.2 per cent at 31 December 2012 to 50.1 per cent.
Simplification and Verde costs Simplification programme costs in 2013 were £830 million and the total spent on the programme to the end of 2013 was £1,691 million. This had delivered annual run-rate cost savings of £1,457 million by December 2013. Our expectations for annual run-rate cost savings by the end of 2014 have now increased from £1.9 billion to £2.0 billion. We now expect the total costs to be around £2.5 billion by the end of 2014, of which £2.4 billion is anticipated to be directly expensed through the profit and loss account.
The Group continues to progress the european Commission (eC) mandated business disposal (Verde), with an Initial Public Offering (IPO) planned for 2014. Subject to meeting a number of criteria, this plan has been agreed in principle by the eC but remains subject to final regulatory and eC approval. The Project Verde branches were rebranded in September 2013, and now operate as TSB as a separate business within the lloyds Banking Group. The costs of building TSB were £687 million in the year and, from inception to the end of December 2013, have totalled £1,468 million. We expect to complete the build of TSB at a cost in 2014 of around £200 million with further dual running and transaction costs of around £150 million.
PPI The Group made a further provision in the fourth quarter for expected PPI costs of £1,800 million, which brought the amount provided in 2013 for PPI to £3,050 million, and the total amount provided to £9,825 million. Total costs incurred in the three months to 31 December 2013 were £687 million, including £165 million of administration costs, and as at 31 December 2013, £2,807 million of the total provision remained unutilised.
Other provisions A further provision of £130 million was made in the fourth quarter relating to the sale of interest rate hedging products to certain small and medium-sized businesses. This brings the amount provided to £530 million, of which £218 million relates to administration costs. As at 31 December 2013, £368 million of the total provision remained unutilised.
In the course of its business, the Group is engaged in discussions with the PRA, FCA and other uK and overseas regulators and governmental authorities in relation to a range of matters; a provision is held against the costs expected to be incurred. In 2013 these provisions were increased by a further £200 million, in respect of matters affecting the Retail, Commercial and Wealth and Asset Finance businesses, bringing the total amount to £300 million, of which £75 million had been utilised at 31 December 2013. This includes a fine of £28 million from the FCA following an investigation into its historic systems and controls governing legacy incentive schemes for branch advisors.
Other items The Group recognised a charge for other statutory items of £499 million in the period, compared to a charge of £232 million in 2012. This comprises a charge for the amortisation of intangible assets of £395 million, and a charge of £104 million as a result of changes to early retirement and commutation factors in two of the Group’s principal defined benefit schemes (2012: £250 million gain related to a change in policy in respect of discretionary pension increases).
During 2013, lending to core customers increased by £11.6 billion to £436.9 billion with all banking divisions returning to growth. Customer deposits grew by £15.8 billion to £438.3 billion, with the core loan to deposit ratio improving to 100 per cent. The Group loan to deposit ratio also improved, falling to 113 per cent, reflecting the reduction in the non-core asset portfolio and associated wholesale funding.
The Group’s liquidity position remains strong, with primary liquid assets of £89.3 billion at 31 December 2013 (31 December 2012: £87.6 billion). Primary liquid assets represent approximately 4.2 times our money-market funding with a maturity of less than one year, and are approximately 2.0 times our short-term wholesale funding, providing a substantial buffer in the event of market dislocation. In addition to primary liquid assets, the Group has significant secondary liquidity holdings of £105.4 billion (31 December 2012: £117.1 billion). Total liquid assets represent approximately 4.4 times our wholesale funding with a maturity of less than one year.
Customer deposits increased 3 per cent to £269.0 billion. Relationship balances (including lloyds, Halifax, Bank of Scotland and TSB branded Personal Current Accounts and Savings Accounts) increased 6 per cent in 2013, ahead of market growth, driven by the effect of our strong product offerings, particularly in the lloyds Bank brand.
Returned to profitability with underlying profit of £1,575 million driven by the significant reduction in impairments as a result of lower charges across the core and non-core portfolios, increased core income partially offset by lower non-core income from our capital accretive asset reduction strategy.
Core net interest margin increased 31 basis points through disciplined pricing of new business, in addition to reduced funding costs driven by increased high quality deposits which contributed to a reduction in the Group’s requirement for wholesale funding.
Core asset quality ratio improved 28 basis points reflecting better quality origination with the low interest rate environment helping to maintain defaults at a lower level. non-core asset quality ratio decreased 196 basis points reflecting disciplined management and deleveraging of the portfolio.
non-core loans and advances to customers decreased by £15.8 billion, as a result of the Group’s capital accretive asset reduction strategy.
Key balance sheet items loans and advances to customers2 126.4 134.7 (6)
Core other income (excluding St. James’s Place and other disposals from the International portfolio) was broadly flat with growth in Asset Finance and new Wealth revenue streams offset by a reduction in trail income following implementation of the Retail Distribution Review.
£m 20121 £m Change underlying profit (loss) by business: Banking net interest margin 2.20% 1.65% 55bp 2.20% 1.65% 55bp
The gain relating to the sales of shares in St. James’s Place is included in Central Items.
Insurance 2013 financial highlights underlying profit down 2 per cent to £1,090 million, due to changes in intra group commission arrangements and the continued run-off legacy creditor books within General Insurance, net of lower costs and increased profit in uK life and Pensions existing business reflecting the net benefit from a number of assumption changes. Return on equity up from 12 per cent to 13 per cent.
General Insurance Gross Written Premiums down by 8 per cent to £1,307 million reflecting the effect of the closed creditor book and as a result of our focus on value rather than volume on the home insurance portfolio.
The estimated capital surplus for Pillar 1 is £2.9 billion (Scottish Widows plc, £3.9 billion in 2012) and for IGD is £2.7 billion (Insurance Group, £3.7 billion in 2012) with the decrease reflecting dividends paid during the year.
uK life IFRS new business margin 2.6% 3.2% (60)bp uK life, pensions and investment sales (PVnBP) 9,934 10,005 (1)
‘Return on equity’ is the underlying profit less tax at the prevailing uK Corporation tax rate divided by the average amount of the Group’s equity attributable to the Insurance business.
existing business income increased by £32 million largely due to increased income from protection and annuities which benefited from the increased returns on higher yielding assets. Pensions and investments existing business income increased slightly with increased income in pensions being largely offset by reduced income on the declining savings and investments portfolio.
underlying profit in the protection and annuities business included a benefit of £302 million largely as a result of changes to long-term mortality and investment return assumptions which included the benefits of investing in higher yielding assets to match long duration liabilities. This was partly offset by a charge of £158 million in the pensions and investments business driven primarily by a revision of pensions lapse assumptions and allowance for the impact of the Office of Fair Trading review on fairness of legacy pension charges.
General Insurance income reduced by £115 million to £457 million primarily due to a £77 million impact of a revised commission arrangement with Retail on the home insurance portfolio in addition to the continued run off of legacy books.
Operating cash generation In line with emerging industry practice we have introduced an operating cash generation reporting metric. Operating cash is used to fund new business generating future cash, to pay dividends to Group, or is retained within the business to provide security for policyholders and achieve our strategic objectives. For the majority of products writing new business results in an outflow of cash for new business origination and set up costs (including commission). This cash outflow is recouped in subsequent years. However some products, where the policyholder’s initial investment covers the cost of setting up the policy, do not require new business funding.
The expected gross investment returns used to determine the normalised profit of the business, which are based on prevailing market rates and published research into historical investment return differentials, are set out below: united Kingdom
A review of investment strategy in the Group’s Insurance business has resulted in investment being made in a wider range of assets. expected investment returns in 2013 include appropriate returns for these assets. The 2013 rates also reflect the move to swap rates as the basis for calculations.
In 2013, the statutory results before tax included a credit to other income which relates to policyholder interests volatility totalling £564 million (2012: £143 million) relating to the rise in equity markets in the period.
net asset value per ordinary share 55p 60p 66p 67p 64p loans and advances to customers 495,281 517,225 565,638 592,597 626,969
number of ordinary shares in issue (millions)3 71,368 70,343 68,727 68,074 63,775
Annual dividends comprise both interim and estimated final dividend payments. under IFRS, the total dividend for the year represents the interim dividend paid during the year and the final dividend which will be paid and accounted for during the following year.
Former appointments: Anita was an executive Director of Abbott Mead Vickers, Director of Corporate Development at WPP Group and a non-executive Director of northumbrian Water. She has held various investment and marketing roles at Scottish Provident and the Royal Bank of Scotland.
Former appointments: Sir Winfried was appointed Chairman of Citigroup europe in 2000. He became the acting Chief executive Officer of Citigroup Inc. in 2007 and was subsequently appointed as Chairman in the same year until his retirement in February 2009. Prior to this, he was the Group Chief executive and then Chairman of Schroders.
Chairman of the Remuneration Committee Member of the Audit Committee, the Risk Committee and the nomination & Governance Committee
Skills and experience: Tony is Senior Independent Director and Chair of the Remuneration Committee. He maintains close dialogue with shareholders with the aim of aligning executive reward with shareholder interests. With over 40 years of experience in the investment management industry and related sectors, he is well placed to carry out these roles. Tony is a Barrister at law. He has a BSc (Hons) in economics from the Queen’s university Belfast, a Diploma in Security Analysis from the new York Institute of Finance and was called to the Bar of england and Wales.
External appointments: Sara is a non-executive Director of united utilities Group and Chair of their Remuneration Committee.
Former appointments: Sara is the former Managing Director of Argos. She held various senior positions at J Sainsbury including Deputy Managing Director and served on its Board between January 2002 and May 2004. She was a non-executive Director of Mitchells & Butler and also held senior management roles for Abbey national and Mars Confectionery.
António Horta-Osório executive Director and Group Chief executive Joined the Board in January 2011
Former appointments: António joined Grupo Santander in 1993, having previously worked for Goldman Sachs and for Citibank, and held various senior management positions culminating in becoming executive Vice President of Grupo Santander and a member of its Management Committee. In november 2004, he was appointed as a non-executive Director of Santander uK and, from August 2006 until november 2010, served as its Chief executive. António is also a former non-executive Director of the Court of the Bank of england.
George Culmer executive Director and Chief Financial Officer Joined the Board in May 2012
Andrew Bester Chief executive Officer, Commercial Banking Andrew was appointed as a Group Director on 1 July 2012. He is also the Chairman of lloyds Development Capital. Prior to joining lloyds Banking Group, Andrew worked at Standard Chartered Bank in a variety of senior roles including Global COO of Consumer Banking, Chief Financial Officer of Consumer Banking and Co-Head of Wholesale Banking for Greater China and the Africa region. Before joining Standard Chartered, Andrew was the Group Finance Director for Xchanging. Prior to this, he worked at Deutsche Bank.
David Nicholson Group Director, Halifax Community Bank David is Group Director of the Halifax Community Bank. He has specific responsibility for the Halifax business, its branch network and 10,500 colleagues. Halifax is playing a key role in the Group’s strategy as a challenger brand, with a focus on making customers better off.
David has over 25 years experience in retail financial services. He is Chairman of the ‘Your Tomorrow’ pension fund trustees and is a member of the Institute of Financial Services School of Finance Board of Governors. He is also community ambassador for Yorkshire and Humberside and chairs the Group Regional Ambassador programme.
Antonio has over 20 years of experience in the financial services industry. He worked for Arthur Andersen for over nine years before joining Santander in 1998. During his time at Santander, he worked in a number of different finance and business roles. Antonio was part of the management team in 2004 that took over Abbey national whilst also becoming Chief Financial Officer of Santander uK.
Directors The names and biographical details of the Directors are shown on pages 70 and 71. Particulars of their emoluments and interests in shares in the Company are given on pages 100 to 122. Changes to the composition of the Board since 1 January 2013 up to the date of this report are shown in the table below: Joined the Board Retired from the Board nick luff 5 March 2013
The Company has also granted a deed of indemnity through deed poll which constituted ‘qualifying third party indemnity provisions’ to the Directors of the Group’s subsidiary companies, including to former Directors who retired during the year and since the year end. Qualifying pension scheme indemnities were also granted to the Trustees of the Group’s Pension Schemes.
Change of control The Company is not party to any significant contracts that are subject to change of control provisions in the event of a takeover bid. There are no agreements between the Company and its Directors or employees providing compensation for loss of office or employment that occurs because of a takeover bid.
The Company is party to a deed of covenant with each of the four lloyds TSB Foundations (the Foundations) which hold limited voting shares in the Company (the limited voting shares are further described in note 45 on page 289). under the terms of the deeds of covenant, the Company makes an annual payment to each of the Foundations. In the event of a successful offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting share would convert to an ordinary share under the terms of the Company’s articles of association. The payment obligation under the deeds of covenant would come to an end one year following the conversion of the limited voting shares.
Reporting period The reporting period for emissions (October 2012 – September 2013) differs to that of the Directors’ report (January 2013 – December 2013). However, in line with the new regulations the majority of emission reporting year falls within the period of the Directors’ report.
The Group follows the principles of the Greenhouse Gas (GHG) Protocol Corporate Standard and Department for environment, Food and Rural Affairs (Defra) Voluntary Reporting 2012 Guidelines to calculate its emissions in scope 1, 2 and 3.
Omissions The Group does not have available data or estimates for business travel undertaken by colleagues based outside the uK when using company vehicles, or for fugitive emissions arising from the use of air-conditioning and chiller/refrigerant plant to service its non-uK property portfolio. under the new regulation this activity would be part of the Group’s scope 1 emissions.
Compliance with the regulations The Group understands the principles of the regulations to report all emissions or explain where data has been unavailable for the first year of reporting. Rather than omit material elements the Group has included estimated emissions, where actual data is not available. These are listed below. each of these sources of emissions is being reported for the first time.
Energy consumed on non-UK sites, shadow sites and fugitive emissions non-uK sites – lloyds Banking Group is a uK based retail bank with 97 per cent of employees based in the uK (2012 headcount data). The Group continues the strategic reshaping of its international footprint and intends to further reduce its presence outside the uK. As lessees the Group does not usually have access to consumption data for non-uK sites. estimates have been based on a GHG emission value per full time equivalent colleague (FTe) for uK based operations.
The Group has applied the principles of the new regulations to its previous reporting period. Please note the totals include all GHG gases and the totals are CO2e. In previous years the Group has only reported on CO2. The Group has restated the emissions data for the October 2011 – September 2012 reporting period, replacing estimates with actual billed data. The Group has applied the emissions factors from the 2012 Defra guidelines to both reporting periods.
Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in lloyds Banking Group.
Further information on employees can be found on pages 34 to 35.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements and the directors’ remuneration report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
– the management report contained in the strategic report and the directors’ report includes a fair review of the development and performance of the business and the position of the Company and Group, together with a description of the principal risks and uncertainties that they face.
The Directors consider that the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy. The Directors have also separately reviewed and approved the new Strategic Report.
Resolutions concerning the re-appointment of PricewaterhouseCoopers llP as auditor and authorising the Audit Committee to set its remuneration will be proposed at the annual general meeting.
The role of the Directors The roles of the Chairman and other Board members are set out below. There is a clear division of responsibility at the head of the Company. The Chairman has overall responsibility for the leadership of the Board while the Group Chief executive manages and leads the business.
Sets the Board meeting agendas to ensure that the Board devotes its time and attention to the right matters.
Coordinates all activities to implement the strategy and for managing the business in accordance with the Group’s risk appetite and business plan set by the Board.
In addition the Group has an insurance subsidiary, Scottish Widows Group limited, which itself also has a number of separate operating subsidiaries. The Board of Scottish Widows Group limited, which also sits as the Board of the 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.
To help manage the legal, regulatory and reputational risks associated with the Group’s subsidiary entities, the Group requires that subsidiary boards and their directors meet minimum governance standards, as laid down in the legal entity management standards and directors’ handbook as approved by the Board of lloyds Banking Group plc.
Approves the basis for allocation of capital, investments, acquisitions, mergers or disposals.
– On 29 november 2013, Juan Colombás, the Chief Risk Officer, was appointed as an executive Director.
The Group has also sponsored the First Women Awards for eight years running and has been awarded a place in The Times Top 50 employers for Women in 2012 and 2013.
These initiatives, amongst others, will help the Group improve diversity. More information on the Group’s diversity programmes, including details of the Group’s commitment to raise the percentage of women employed in senior management roles to 40 per cent by 2020, is set out in the 2013 Responsible Business Report, which can be found on our website at www.lloydsbankinggroup-cr.com.
Training Board induction All Directors are expected to make an informed contribution based on an understanding of the Group’s business model and the key challenges facing the Group and its businesses. The Chairman ensures that all Directors receive a full, formal and tailored induction on joining the Board comprising: – a corporate induction, including an introduction to the Board and a detailed overview of the Group, its strategy, operational structures and main business activities. non-executive Directors are also afforded opportunities to meet with major shareholders; – the roles and responsibilities of a Director, including statutory duties and responsibilities of an FCA approved person; – a bespoke induction programme tailored by the Chairman to the individual needs of the Director with regard to their specific role and their skills and experience to date. This takes the form of reading materials and meetings with senior executives across the Group and sessions on the Group’s business divisions; and – a detailed induction programme across Risk, focusing on: risk appetite and the Group’s risk profile; compliance and conduct risk; capital, stress testing, analytics and modelling; liquidity risk; Retail and Wealth credit risk; Commercial Banking credit risk; operational risk and financial crime; eu State aid, risk transformation, ring-fence banking, recovery and resolution planning; global non-core; and the separation of TSB Bank.
These sessions also allow the executive Directors an opportunity to consider business areas outside their direct responsibilities.
In addition, the Audit Committee hosted a series of ‘deep dives’ in early 2013 to which all Board members were invited, and which provided an in-depth review of the operations of each of the business divisions and of the latest accounting standards and operating methodologies. During the year the Audit Committee deep dives were replaced by business and technical updates. The Board Risk Committee also received reviews from each division. All of the Directors attend the Board Risk Committee.
Directors are also invited to attend courses, management meetings and one to one meetings with key executives. For instance, some of the non-executive Directors attended meetings of the Product Pricing Governance Committee, others spent a day at a PPI call centre.
Group strategy In addition to routine strategic discussion at Board meetings throughout the year, the Directors spent two days offsite in 2013 focusing entirely on the Group’s broader strategic plan and the setting of the Group’s five year operating plan.
Attended Held1 Attended2 Held1 Attended Held1 Attended Held1 Attended Held1 Attended Held1
Former Directors who served during 2013 number of meetings held during the period that the Director held office.
There were no Board meetings in 2013 following the appointed of Juan Colombás on 29 november 2013.
The agenda has been re-ordered to ensure greater focus on key strategic matters. The length and timing of reports from the Group Chief executive, Chief Financial Officer and each of the Board Committee Chairman have also been reviewed, to maximise the time available during the meeting for discussion on strategic, rather than operational, matters.
The outcome of the Board effectiveness review has been discussed by the Board. The outcome of the evaluation of the Chairman was discussed by the non-executive Directors at an arranged Board dinner and at the Board meeting the following day, each in the absence of the Chairmen. If Directors have concerns about the Company or a proposed action which cannot be resolved, it is recorded in the Board minutes. no such concerns were raised in 2013.
Targeted training to senior management to ensure that papers focus on the areas most likely to lead to discussion.
The Group will report on the progress of the above action plan in the 2014 annual report.
Internal control The Board is responsible for the Group’s system of internal control, which is designed to facilitate effective and efficient operations and to ensure the quality of internal and external reporting and compliance with applicable laws and regulations. In establishing and reviewing the system of internal control, the Directors consider the nature and extent of the risks facing the Group, the likelihood of a risk event occurring and the costs of control. A system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve business objectives, and can therefore only provide reasonable but not absolute assurance against the risk of material mis-statement or loss.
The process for risk identification, measurement and control is integrated into the Group’s overall framework for risk governance. The Group is forward-looking in its risk identification processes to ensure emerging risks are identified. The risk identification, measurement and control process also identifies whether the controls in place result in an acceptable level of risk. At Group level, a consolidated risk report and risk appetite dashboard are reviewed and regularly debated by the Group Risk Committee, Board Risk Committee and the Board to ensure that they are satisfied with the overall risk profile, risk accountabilities and mitigating actions. The report and dashboard provide a monthly view of the Group’s overall risk profile, key risks and management actions, together with performance against risk appetite and an assessment of emerging risks which could affect the Group’s performance over the life of the operating plan. This process has been in place for the year under review and up to the date of the approval of the annual report and is regularly reviewed by the Board. Information regarding the main features of the internal control and risk management systems in relation to the financial reporting process is provided within the risk management report on pages 123 to 196.
The British Bankers’ Association Code for Financial Reporting Disclosure In September 2010, the British Bankers’ Association published a Code for Financial Reporting Disclosure (the ‘Disclosure Code’). The Disclosure Code sets out five disclosure principles together with supporting guidance. The principles are that uK banks: commit to providing high quality, meaningful and decision-useful disclosures; commit to ongoing review of, and enhancement to, their financial instrument disclosures for key areas of interest; will assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; will seek to enhance the comparability of financial statement disclosures across the uK banking sector; and will clearly differentiate in their annual reports between information that is audited and information that is unaudited.
Chairman of TSB Bank – the Committee oversaw a comprehensive search for the appointment of a suitable chairman for TSB Bank plc, which culminated in the appointment of Will Samuel in February 2014. Will brings a wealth of experience to the role and is well-regarded by the market and across the financial services industry. He is a key hire and will be instrumental in building TSB Bank’s independent future as a challenger to the other high street banks. The Group has previously stated its intention to float TSB Bank through an initial public offering in 2014. JCA Group assisted with the search for Will Samuel. JCA Group is not connected with the Group.
Monitors developing trends, initiatives or proposals in relation to board governance issues in the uK and elsewhere.
Effectiveness and succession planning Oversees the annual evaluation of the performance of the Board and its Committees, recommending actions for addressing any findings.
Conducts an annual review of the adequacy of succession arrangements for executive Directors, members of the Group executive Committee and their direct reports.
Succession planning The nomination & Governance Committee oversees the Board’s arrangements for the longer term succession of Board and Committee members. non-executive Director succession planning is addressed as part of the ongoing review of Board composition. The policy takes account of the need to regularly refresh the intake of non-executives to bring new, diverse perspectives to the Board and its deliberations, to ensure appropriate representation on each of the Board’s Committees and to plan for longer term succession. The Chairman is responsible for developing and maintaining a succession plan in relation to the Group Chief executive who is in turn, primarily responsible for developing and maintaining a succession plan for key leadership positions in the senior executive team. For information on diversity, please refer to page 83.
In november 2013, the Group announced the appointment of Juan Colombás to the Board. Mr Colombás has been the Group’s Chief Risk Officer and a member of the Group executive Committee since January 2011. The appointment of Mr Colombás increases the number of executive Directors on the Board from two to three and demonstrates the Board’s desire to elevate the importance of risk management in the Group. It also reflects the significant work that Mr Colombás has done to reshape the risk function within lloyds Banking Group over the past three years. As part of Mr Colombás’ development, he attended Board meetings from February 2013 onwards prior to his appointment to the Board in november 2013.
In addition to PPI, in the context of financial reporting, the Committee maintained a focus on loan impairments and other conduct related provisions, deferred tax assets and valuation of assets and liabilities arising in the insurance business. The Committee reviewed the Annual Report and Accounts as well as the Interim Reports prior to approval by the Board.
The key responsibilities of the Committee are set out in the table on the next page. A full list of responsibilities is detailed in the Committee’s terms of reference, which can be found on our website at www.lloydsbankinggroup.com.
All members of the Committee are independent non-executive Directors with recent and relevant experience in finance and/or banking. During 2013, nick luff succeeded Martin Scicluna as the Chairman of the Audit Committee. nick is a chartered accountant and has significant financial experience in the uK listed environment which enables him to fulfil the role of Audit Committee Chair and, for SeC purposes, the role of Audit Committee Financial expert.
Internal control and risk management Reviews the effectiveness of systems for internal control, financial reporting and risk management.
Reviews the qualifications, expertise and resources of the external auditor and the effectiveness of the audit process.
Approves the annual audit plan, to ensure that it is consistent with the scope of the audit engagement and coordinated with the activities of Group Audit.
Financial reporting During the year, the Committee considered the following significant financial issues/judgements in relation to the Group’s financial statements and disclosures, with input from management, Group Audit and the external auditor: Key issues/judgements in financial reporting Audit Committee review and conclusions
Payment Protection Insurance (PPI) Determining the adequacy of the provision for redress payments in connection with mis-selling of PPI is highly judgemental and requires the Group to make a number of assumptions, including the number of complaints that will be received in the future, response rates to proactive mailings, uphold rates for complaints received, average redress payments and related administrative costs.
The Audit Committee considered the appropriateness of disclosures in the news Release and this Annual Report and Accounts. The Audit Committee oversaw enhancements made to the PPI disclosure to ensure that they reflected the continuing uncertainty that remains around the ultimate actual cost of PPI, that appropriate sensitivities are provided to allow an understanding of the key assumptions underlying the provision and that changes in the provision were appropriately explained.
The Audit Committee was satisfied that the PPI provision and disclosures were appropriate. The disclosures relating to PPI are set out in note 43: ‘Other provisions’ on page 281 of the financial statements.
The Audit Committee spent time understanding and assessing the provision for other conduct related matters.
More broadly, the Audit Committee challenged management on their processes and controls for ensuring that all conduct related matters were identified and that exposures and associated provisions were appropriately quantified where necessary.
The Audit Committee was satisfied that the provisions for other conduct matters were appropriate. The disclosures relating to other conduct provisions are set out in note 43: ‘Other provisions’ on page 281 of the financial statements.
The Audit Committee received regular reports in relation to impairment provisioning from management during 2013, presented by the Credit Risk Officers responsible for determining provisions in each of the divisions.
The Audit Committee agreed with management’s judgement that the deferred tax assets were appropriately supported by forecast taxable profits, taking into account the Group’s long-term financial and strategic plans. The disclosures relating to deferred tax are set out in note 3: Critical accounting estimates and judgements on page 225 and note 42: ‘Deferred tax’ on pages 279 and 280 of the financial statements.
The Audit Committee understood the uncertain tax positions of the Group, including the respective views of the Group and the relevant tax authorities. The Audit Committee also understood the external advice obtained by management to support the views taken by the Group.
The Audit Committee considered the assumptions underlying the calculation of defined benefit liabilities, in particular the discount rate applied to future cash flows and the rate of pension increases.
The Audit Committee was satisfied that the value of the VIF asset and insurance liabilities were appropriate. The disclosures are set out in note 28: ‘Value of in-force business’ and note 36: ‘liabilities arising from insurance contracts and participating investment contracts’, on pages 257 to 258 and 262 to 268, respectively, of the financial statements.
In some cases, PwC are selected over another service provider due to their detailed knowledge and understanding of the business. Any allowable non-audit services with a value above a defined fee limit requires prior approval from the Audit Committee Chairman. The total amount paid to the auditor in 2013 is shown in note 11 to the financial statements on pages 238 to 240.
Juan Colombás, Chief Risk Officer, and a member of the Group executive Committee since January 2011, was appointed to the Board in november 2013. His appointment reflects the importance of risk management within the Group and the significant work he has done to reshape the risk function, including driving the conduct strategy.
Risk management Oversees the development, implementation and maintenance of the Group’s overall risk management framework and its risk appetite, strategy, principles and policies.
Reviews the adequacy of the Risk Division’s resources, its authorities and standing within the Company.
Consolidated risks At each meeting, the Committee considered and challenged management’s assessment and future projected status of all of the major and emerging risks and tracks the risks against appetite.
Conduct risk The Committee received a presentation on conduct risk at each of its meetings with particular focus on learning from past failings, the Group’s conduct strategy, meeting customer needs and outcome testing.
IT resilience The Committee set the framework for, and oversaw, an external review of IT resilience and considered the Group’s exposure to cyber risk.
examples of how the Board Risk Committee discharged its responsibilities in 2013 are set out below.
Risk appetite lloyds Banking Group defines risk appetite as ‘the amount and type of risk that our organisation is prepared to seek, accept or tolerate’. The risk appetite evolves in tandem with the Group’s strategy and is embedded within policies, authorities and limits across the Group. Further details on the Group’s risk appetite can be found in the risk report on pages 123 to 196.
Performance against each of the risk appetite metrics is considered by the Committee at each of its meetings. Debate also takes place on emerging risks and reputational risks, and where appropriate management are asked to review, revise, or subsequently present proposals or further information.
Quality of risk reporting The consolidated risk report has been significantly enhanced to provide the Board Risk Committee and the Board with a deep understanding of the current and emerging risks on a Group and divisional basis. The summary risk appetite dashboard tracks the movement over time of the risk assessment for each category of risk and a separate dashboard has been created to track the reputational and financial impact of key risks. These dashboards allow the Committee to isolate key risks quickly and, given the quality of supporting information provided, challenge management on their assessment of the risks.
IT resilience IT resilience received particular regulatory focus and media attention during the year due to the much publicised IT failings within the industry. The Board Risk Committee oversaw a review of IT resilience to ensure a rapid and robust identification of residual risks across the IT architecture and supporting IT capabilities. A review was conducted with the findings and proposed remedial actions reported to the Board. As part of the review, the Group defined critical economic functions and IT capabilities in order that key IT systems were identified and a detailed plan was developed. The high level risk appetite was defined in consultation with key stakeholders and approved by the Board. The Board Risk Committee set the framework for the review which will be conducted annually and reported independently to the Board who are now responsible for oversight.
The 2013 review concluded that the Group’s risk management framework is effective in design, its corporate governance arrangements are stable and the policy framework is also stable following a substantive review and refresh in 2011/12.
The Remuneration Committee was responsive to, and dealt effectively with, the quickening pace of regulatory change and uncertain market conditions during 2013. Anthony Watson Chairman, Remuneration Committee
Committee purpose and responsibilities The purpose of the Remuneration Committee is to consider, agree and recommend to the Board an overall remuneration policy and philosophy for the Group that is aligned with its long term business strategy, its business objectives, its risk appetite, values and the long term interests of the Group that recognises the interests of relevant stakeholders. The key responsibilities of the Remuneration Committee are set out in the table below and examples of how it discharged its responsibilities follow. A full list of responsibilities is detailed in the Committee’s terms of reference, which can be found on our website at www.lloydsbankinggroup.com.
Sets the policy and principles to be applied by the Group executive Committee in relation to any performance related pay schemes for individuals who are considered to be in a significant influence function or have material impact on the risk profile of the Group including all Code Staff.
Strategic reward review A key pillar of the Group’s People Strategy is to ensure our reward approach supports the Group’s strategic goals. In late 2012, the Committee commissioned a strategic reward review. The objective was to optimise the current total remuneration spend across the Group in order to create a compelling, affordable and integrated reward proposition that aligns with our vision of being the best bank for customers. A broad range of proposals were considered culminating in a number of specific Committee recommendations, which were evolutionary in nature and address a number of key strategic issues.
Remuneration Governance Policy The purpose of the remuneration governance policy is to provide a framework to support robust governance in line with the Group’s risk appetite and aligned with the Group’s business strategy, objectives, values and long-term interests.
We are proposing to introduce an additional fixed element in the remuneration package. This will take the form of a fixed share award, made annually, which will deliver shares over a period of five years. This will enable us to comply with the regulations and maintain the competitiveness of the package and, in particular, the alignment with shareholders.
Therefore, whilst we have increased the fixed element of the package for executive Directors, over 75 per cent will remain aligned with shareholders’ interests.
– Fixed share awards will be introduced for 2014 to ensure an appropriate balance of fixed and variable pay. These shares will be delivered over five years to support the alignment of executive and shareholder interests. The level of award will be set initially at 85 per cent of base salary for the Group Chief executive and 70 per cent for other executive Directors, but will be kept under review and may be amended in future years.
We are committed to managing executive reward through the strict application of challenging performance targets. Performance against the financial measures of the annual bonus plan for executive Directors exceeded the maximum targets, and performance against balanced scorecard objectives was also strong. Taking into account the legacy issues noted above, the Committee determined that bonus awards of between 63 per cent and 72 per cent of maximum opportunity should be made to executive Directors. For long-term incentive plan (lTIP) awards made in 2011, the performance to the end of 2013 was creditable, but targets have not been fully met and therefore these awards will vest at a rate of 54 per cent for members of the Group executive Committee, including executive Directors. These are the first lTIP awards to vest for some years and reflect the Group’s return to profitability under the current management.
Directors’ Remuneration Policy Our policy is intended to ensure that our remuneration proposition is both cost effective and enables us to attract and retain executives of the highest calibre. Our objective is to align individual reward with the Group’s performance, the interests of its shareholders and a prudent approach to risk management. In this way, we balance the requirements of our major stakeholders: our customers, shareholders, employees, and regulators.
The policy is based on principles which are applicable to all employees within the Group and in particular the principle that the reward package should support the delivery of our strategic goal to be the ‘Best Bank for Customers’. It embeds a performance-driven and meritocratic culture, encourages effective risk disciplines and is in line with relevant regulations and codes of best practice. There is no significant difference between the policy for executive Directors and that for other senior employees. If a significant difference for any individual were proposed, this would be subject to approval by the Remuneration Committee (within regulatory requirements).
As disclosed in previous reports, since his appointment, the Group Chief executive (GCe) has a reference salary of £1.22 million which is used to calculate certain elements of long-term remuneration and the pension allowance.
To ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for executive Directors with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements.
Purpose and link to strategy executive Directors are eligible to participate in HMRC approved all-employee schemes which encourage share ownership.
At the time of the release, executive Directors receive an amount (in cash or shares) equal to the interest that would have accrued on the deferred component, if deferral is made in notes or debt instruments, or dividends paid or payable if deferred in shares, between the date of grant and the vesting of the award on the number of shares which have vested.
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 Implementation Report for the relevant year unless this information is deemed to be commercially sensitive.
Operation Awards are made in the form of conditional shares or nil cost options. Award levels are set at the time of grant, in compliance with regulatory requirements, and may be subject to a discount in determining total variable remuneration under the rules set by the european Banking Authority (eBA).
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.
Legacy awards and restrictions on payments The Committee reserves the right to make any remuneration payments/awards and any payments/awards for loss of office, notwithstanding that they are not in line with the policy set out above where the terms of the payment/award were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was not a Director of the Group and, in the opinion of the Committee, the payment/award was not in consideration for the individual becoming a Director of the Group. Such payments/awards are set out in the Implementation Report for the relevant year. They include payments in relation to deferred bonus awards and long-term incentive awards granted in 2012 and 2013.
under terms agreed when joining the Group, Juan Colombás is entitled to a conditional lump sum benefit, payable either (i) on reaching normal retirement age unless he voluntarily resigns or is dismissed for cause, or (ii) on leaving due to long-term sickness or death, as described further in the Implementation Report.
Termination payments It is the Group’s policy that where compensation on termination is due, it should be paid on a phased basis, mitigated in the event that alternative employment is secured. Where it is appropriate to make a bonus payment to the individual, this should relate to the period of actual service, rather than the full notice period. Any bonus will be determined on the basis of performance as for all continuing employees and will remain subject to performance adjustment (malus). Generally, on termination of employment, bonus awards, long-term incentive awards and other rights to payments will lapse except where termination falls within one of the reasons set out below. In the event of redundancy, the individual may receive a payment in line with statutory entitlements at that time. If an executive Director is dismissed for gross misconduct, the executive Director will receive normal contractual entitlements until the date of termination and all deferred bonus awards and long-term incentive awards will lapse.
Awards will normally continue and be released at the normal time and the number of shares subject to the award in the current year will be reduced to reflect the fact that the executive Director has left early unless, in the case of mutual agreement, the Committee determines that exceptional circumstances apply in which case shares may be released on termination.
Awards will normally continue and be released at the normal time and the number of shares subject to the award in the current year will be reduced to reflect the fact that the executive Director has left early except for death where shares are released on termination, or unless, in the case of permanent disability, the Committee determines that exceptional circumstances apply in which case shares may be released on termination.
Change of control or merger n/A unless the Committee decides otherwise, awards will be released on the date of the corporate event and the number of shares subject to the award in the current year will be reduced to reflect the fact that the executive Director has left early unless the Committee determines that awards will be exchanged for awards over shares in the acquiring company or such other company as the Committee determines.
Accrued up until date of termination (current year). Deferred bonus vests to the extent determined by the Committee.
Pro-rated award (for months worked in performance period) released on date of change in control, subject to performance objectives being met at the time of the transaction. Instead of vesting, awards may be exchanged for equivalent awards over the shares or acquiring company or another company.
Accrued up until date of termination (current year). Deferred bonus paid in line with normal timeframes and subject to performance adjustment. The Committee may allow awards to vest early if it considers it appropriate.
Pro-rated award (for months worked in performance period) released at end of period, subject to performance objectives being met. The Committee may allow awards to vest early if it considers it appropriate.
On termination, the executive Director will be entitled to payment for any accrued but untaken holiday calculated by reference to base salary and fixed share award.
Additional payments may be made where required to settle legal disputes, or as consideration for new or amended post-employment restrictions.
Chairman and Non-Executive Directors The table below sets out the remuneration policy that will apply, subject to shareholder approval, to non-executive Directors (neDs) from the date of the Annual General Meeting in 2014.
– Comparable fees at FTSe companies of a similar size to lloyds Banking Group, including the major uK banks.
The Chairman receives an all inclusive fee, which is reviewed periodically plus benefits including life assurance, car allowance, medical insurance and transportation. The Committee retains the right to provide additional benefits depending on individual circumstances.
When determining and reviewing fee and benefit levels, the Committee ensures that decisions are made within the following two parameters: – An objective assessment of the individual’s responsibilities and the size and scope of their role, using objective sizing methodologies.
The Chairman and the neDs are not entitled to receive any payment for loss of office (other than in the case of the Chairman’s fees for the six month notice period) and are not entitled to participate in the Group’s bonus, share plan or pension arrangements.
neDs are reimbursed for expenses and any tax arising from these expenses. Where appropriate, the Group will also meet the costs and any tax arising from travel for business purposes.
– Approval of remuneration and terms of service that fall within the Committee’s terms of reference, including new hires
– Feedback from the Committee Chairman on his meetings with the PRA and shareholders
During 2013, Deloitte provided information on behalf of the Committee for the testing of Total Shareholder Return (TSR) performance conditions for the Group’s long-term incentive plans (calculated by reference to both dividends and growth in share price). In addition, Deloitte llP provided the Group with advice on taxation and other consulting services, and assurance services. Deloitte’s fees for 2013 amounted to £324,300.
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 the individual is rated ‘Developing performer’ or below. The expected value of the bonus is 30 per cent of the maximum opportunity.
During 2013, the Committee consulted widely with various shareholders on appropriate performance measures and, in particular, on how management can be incentivised through the long-term incentive plan to successfully deliver the Group’s overall strategic objective of delivering long-term sustainable returns to shareholders. Based on the feedback, the awards made in 2014 will vest based on lloyds Banking Group’s performance against the following key measures: – economic Profit (30 per cent)
Total remuneration less buy-outs 6,571 3,227 1,954 1,168 206 – 8,731 4,395
Following changes to the amount of tax relief available on pension contributions in each year, 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. note that the amount for 2012 in respect of António Horta-Osório has been restated from £549,000 to include £18,170 of employer contributions to pension scheme. note that the amount for 2013 in respect of George Culmer includes £106,000 carried over from 2012 and delivered in 2013.
Other remuneration payments comprise contractual cash payments to António Horta-Osório, George Culmer and Juan Colombás as part of the buyout of their benefits from their previous employers in addition to income from all employee share plans of £960.
In addition to deferral and performance adjustment, the GCe’s bonus will only vest if the Group’s share price remains above 73.6 pence on average for any 126 consecutive trading days in the five years following grant or the uK government sells at least 50 per cent of its shareholding (as at February 2014) in the Group at any time during the three years following grant. If either condition is met earlier than the third anniversary of grant, vesting will still only occur on the third anniversary. In this event, the award will be subject to a further two year holding period following vesting up to a maximum of five years in total.
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. It is an unfunded unapproved retirement benefit scheme (uuRBS). The uuRBS provides benefits on a defined benefit basis at a normal retirement date of 65. The uuRBS 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. An annual pension entitlement of £36,600 was accrued in 2013.
George Culmer joined the Group as an executive Director on 16 May 2012. The 2012 figures therefore reflect a part-year.
Annual bonus for 2013 The Group’s performance against 2013 targets for the two financial measures is shown below.
– The first phase of the european Commission mandated business disposal, Project Verde, was successfully completed in September 2013, with TSB Bank launched onto the uK high streets. An Initial Public Offering (IPO) of TSB Bank in 2014 remains a target.
– The Group has so far committed over £37 billion of gross new lending to British customers under the Funding for lending Scheme (FlS) with drawings under the scheme amounting to £8 billion as at the end of 2013.
– Good progress in delivering the Finance transformation, including changes to core accounting systems.
– Core underlying profit before tax grew 24 per cent to £7,574 million, primarily reflecting reduced impairment charges and stronger net interest income.
The Committee agreed a balanced scorecard rating for 2013 of ‘Strong plus’ for the CRO.
As with the bonus pool determination for the wider Group, the Committee has applied its judgement to adjust for other considerations in determining individual awards, such as affordability, market positioning, year on year performance and the impact of one-off items on the statutory financial out-turn. The Committee considered that using a purely mechanical approach to determining the 2013 bonus pool and individual awards was not appropriate and therefore applied its judgement to reduce awards for the executive Directors, Group executive Committee and for the Group pool overall.
Accordingly, the Committee determined that a bonus of £1,700,000 (71 per cent of maximum) was appropriate for the GCe, £910,000 (63 per cent of maximum) for the CFO and £860,000 (67 per cent of maximum) for the CRO taking into consideration affordability, the need for consistency with the members of the Group executive Committee and overall Group performance during 2013. This judgement-based reduction was also in line with the reduction applied to the overall pool for discretionary awards across the Group.
Consistent with the aim of ensuring that short-term financial results are only rewarded if they promote sustainable growth, the 2013 annual bonus is subject to deferral in shares until at least 2015. This deferred amount is subject to performance adjustment (malus).
In this respect, the Committee has recommended to the Board that it should exercise its discretion to adjust the value of certain 2010 and 2011 bonus awards, on a basis equivalent to that applied in the previous year.
Annualised absolute total shareholder return 33.33% of award 8% 14% 25% 100% 8% 25.3%
Percentage change in remuneration of GCE versus the wider employee population Figures for ‘All employees’ are calculated using figures for uK-based colleagues subject to the Group Annual Bonus Plan, which is considered to be the most appropriate group of employees for these purposes.
Underlying Profit Dividend Salaries + performance based compensation underlying Profit has been used for comparison on the basis that it reflects performance, excluding legacy issues and one-off events.
Taxable benefits are made up of car allowance of £12,000, private medical benefit of £566, and transportation of £4,864.
notes: J e Daniels served as Group Chief executive until 28 February 2011; António Horta-Osório was appointed Group Chief executive from 1 March 2011. J e Daniels declined to take a bonus in 2008 and 2009 and António Horta-Osório declined to take a bonus in 2011.
Current shareholding percentage of base salary shareholding figure is calculated using the 31/12/13 closing price of 78.88 pence.
long-term incentive plan awarded in 2013 Awards in 2013 were made over shares with a value of 300 per cent of reference salary for the GCe (7,425,441 shares with a face value of £3,660,000), 275 per cent for the CFO (4,017,041 shares with a face value of £1,980,000) and 275 per cent for the CRO (3,576,283 shares with a face value of £1,762,750). The share price used to calculate face value is the average price over the five days prior to grant (18 March to 22 March 2013), which was 49.29 pence.
The performance conditions attached to these awards are set out in the table below. The performance period ends on 31 December 2015.
Measure Basis of payout range Metric Weighting economic Profit Payout range set relative to 2015 targets Threshold: £1,254m Maximum: £1,881m
SMe lending Payout range set relative to performance against market in lending to SMes over 3 year period
executive share award granted on 6 August 2012 for the loss of deferred share awards forfeited on leaving RSA Insurance Group plc.
nil cost options granted in March 2011 lapsed as the performance conditions (relative TSR against a bespoke comparator group) were not met.
Sir Winfried Bischoff 1,300,000 none – – 1,300,000 lord Blackwell 50,000 none – – 50,000
Anita Frew 300,000 none – – 300,000 nick luff 80,000 none – – 80,000
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 across the Group.
The Group has a conservative business model embodied by a risk culture founded on a prudent approach to managing risk. The Group refreshed its Codes of Business and Personal Responsibility in 2013 reinforcing its approach where colleagues are accountable for the risks they take and the needs of customers are paramount.
– The Group’s approach to risk is founded on a robust control framework and a strong risk management culture which ensures that business units remain accountable for risk and therefore guides the way all employees approach their work, behave and make decisions.
– Risk analysis and reporting supports the identification of opportunities as well as risks.
The Retail division is a leading provider of current accounts, savings, personal loans, credit cards and mortgages
The Commercial Banking division supports business clients from small businesses to large corporates, with a range of propositions fully segmented according to client needs
The Insurance division is one of the uK’s largest insurers and provides long-term savings, protection and investment products and general insurance products to customers in the uK and europe
Competition Interventions by the competition authorities in response to a return to profitability or to perceived or actual market inefficiencies could change the competition landscape and possibly impact market structures and margins. This risk is underlined by the creation of the new Competition and Markets Authority and the introduction of a competition mandate for the FCA. Key mitigating actions – Implementation of the Group’s Conduct Strategy, applying value for money principles, and ensuring that the customer is at the heart of the Group’s business planning. – The Group is working with the FCA on using behavioural economics and customer trials to improve customer outcomes. – Application of the risk management framework to competition risks across the Group.
In addition to the running of macroeconomic scenarios, the Group’s stress testing programme involves undertaking assessment of operational risk scenarios, liquidity scenarios, financial market disruption scenarios, market risk sensitivities, reverse stress testing and business specific scenarios (see relevant risk section for further information on risk specific level stress testing). This provides a comprehensive view of the potential impacts arising from the risks to which the Group is exposed and reflects the nature, scale and complexity of the Group.
The stress tests at all levels must comply with all legal and regulatory requirements, and are put through a rigorous review and challenge process. This is supported by analysis and insight into impacts on customers and business drivers. The engagement of all required risk and control areas is built into the preparation process, so that the appropriate analysis of each risk drivers’ impact upon the business plans are understood and documented.
The risk governance structure below is integral to implementing the RMF across the Group and by ensuring risk is appropriately represented on key committees ensures that risk management is discussed in these meetings. This structure outlines the flow and escalation of risk information and reporting from business areas and Risk Division to the Group executive Committee (GeC) and Board. Conversely, strategic direction and guidance is cascaded down from the Board and GeC.
Responsible for setting the framework and standards for model governance across the Group, including establishing appropriate levels of delegated authority and principles underlying the Group’s risk modelling framework, specifically regarding consistency of approach across business units and risk types. It approves risk models other than material models which are approved by the Group Risk Committee. This also meets PRA requirements regarding the governance and approval for Internal Ratings Based models.
All business areas complete a control effectiveness review annually, reviewing the effectiveness of their internal controls and putting in place a programme of enhancements where appropriate. executives from each business area and each Group executive Committee member challenge and certify the accuracy of their assessment.
Three Lines of Defence model – the RMF is implemented through a ‘Three lines of Defence’ model which defines clear responsibilities and accountabilities and ensures effective independent assurance activities take place covering key decisions.
Risk Division, headed by the Chief Risk Officer, consists of nine risk directors and their specialist teams. These teams provide oversight and independent challenge to business management and support senior management and the Board with independent reporting on risks and opportunities. Risk directors, responsible for each risk type, meet on a regular basis under the chairmanship of the Chief Risk Officer to review and challenge the risk profile of the Group and to ensure that mitigating actions are appropriate.
Independent challenge Group Audit provides independent assurance to the Audit Committee and the Board that risks within the Group are recognised, monitored and managed within acceptable parameters. Group Audit is fully independent of the Risk Division, and seeks to ensure objective challenge to the effectiveness of the risk governance framework.
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Credit risk Definition Credit risk is defined as the risk that parties with whom the Group has contracted fail to meet their obligations (both on and off-balance sheet).
With the support of the Group Risk Committee, the Group Chief executive allocates this risk appetite across the Group.
In terms of loans and advances, credit risk arises both from amounts lent and commitments to extend credit to a customer as required. These commitments can take the form of loans and overdrafts or credit instruments such as guarantees and standby, documentary and commercial letters of credit. With respect to commitments to extend credit, the Group is potentially also exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most retail commitments to extend credit can be cancelled without notice and the creditworthiness of customers is monitored frequently. Most commercial term commitments to extend credit are contingent upon customers maintaining specific credit standards, which are monitored regularly.
Credit risk exposures in the Insurance business largely result from holding fixed income assets in the shareholder funds (including the annuity portfolio) and from exposure to reinsurers. Second order credit risk exposure exists within the unit-linked funds, through the value of future fee income, and with-profits funds, through any guarantees.
The models vary, inter alia, in the extent to which they are point in time versus through the cycle. The models are subject to rigorous validation and oversight/governance including, where appropriate, benchmarking to external information.
Concentration risk: Credit risk management includes portfolio controls on certain industries, sectors and product lines to reflect risk appetite as well as individual limit guidelines. Credit policy is aligned to the Group’s risk appetite and restricts exposure to higher risk countries and more vulnerable sectors and segments. note 20 on page 250, provides an analysis of loans and advances to customers by industry (for commercial customers) and product (for retail customers). exposures are monitored to prevent an excessive concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a maximum limit on lending, but may instead require new business in concentrated sectors to fulfil additional certain minimum policy and/or guideline requirements. The Group’s large exposures are reported in accordance with regulatory reporting requirements.
Stress testing and scenario analysis: The Group’s credit portfolios are also subjected to regular stress testing, with stress scenario assessments run at various levels of the organisation from Group led exercises to individual divisions/portfolios exercises. For further information on the stress testing process, methodology and governance refer to page 127.
The Group’s lending practices within Retail have changed since 2009 in several ways: the Group has lowered its maximum loan-to-value (lTV) thresholds, which have been reduced across all mortgage product types; the Group has withdrawn from ‘specialist’ secured lending since early 2009 (self-certificated and sub-prime lending) and increased credit scorecard cut-offs for both secured and unsecured lending; and the Group has tightened its assessments and the maximum limit for affordability of borrowings for both secured and unsecured lending. In addition, the number of properties permitted in buy-to-let portfolios has been reduced.
The Group’s approach to underwriting applications for unsecured products in Retail takes into account the total unsecured debt held by a customer and their affordability. The Group rejects any application for an unsecured product where a customer is registered as bankrupt or insolvent, or has a County Court Judgment registered at a CRA used by the Group. In addition, for credit cards the Group rejects any applicant with total unsecured debt greater than £50,000 registered at the CRA; revolving debt-to-income ratio greater than 75 per cent; or total unsecured debt-to-income ratio greater than 100 per cent. For unsecured personal loan applications, the Group rejects any applicant with total unsecured debt greater than £50,000 registered at the CRA. Rules around refinancing of debt have also been made more stringent since 2009 as a result of the application of rules relating to the total unsecured debt held by a customer and the Group’s approach in assessing affordability. This has resulted in fewer customers being eligible to refinance unsecured debt.
Counterparty limits: limits are set against all types of exposure in a counterparty name, in accordance with an agreed methodology for each exposure type. This includes credit risk exposure on individual derivative transactions, which incorporates potential future exposures from market movements. Aggregate facility levels by counterparty are set and limit breaches are subject to escalation procedures.
Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other bills are generally unsecured, with the exception of asset-backed securities and similar instruments such as covered bonds, which are secured by portfolios of financial assets. Collateral is generally not held against loans and advances to financial institutions, except where securities are held as part of reverse repurchase or securities borrowing transactions or where a collateral agreement has been entered into under a master netting agreement. Derivative transactions with wholesale counterparties are typically collateralised under a Credit Support Annex in conjunction with the ISDA Master Agreement.
The Group considers risk concentrations by collateral providers and collateral type, as appropriate, with a view to ensuring that any potential undue concentrations of risk are identified and suitably managed by changes to strategy, policy and/or business plans.
Intensive care of customers in financial difficulty The Group operates a number of treatments to assist borrowers who are experiencing financial stress. The material elements of these treatments through which the Group has granted a concession, whether temporarily or permanently, are set out below and in note 54 on page 327.
The specific tools available to assist customers vary by territory and product and the customer’s status. In defining the treatments offered to customers who have experienced financial distress, the Group distinguishes between the following categories: – Reduced contractual monthly payment: a temporary account change to assist customers through periods of financial difficulty where arrears do not accrue at the original contractual payments, for example temporary interest only arrangements and short-term payment holidays granted in collections. Any arrears existing at the commencement of the arrangement are retained.
Impairment provisions as a percentage of impaired loans are calculated excluding retail unsecured loans in recoveries (£881 million; core: £831 million; non-core: £50 million).
Lloyds Banking Group Annual Report and Accounts 2013142 loans and advances to customers Impaired loans
Impairment provisions as a percentage of impaired loans are calculated excluding Retail unsecured loans in recoveries (£1,129 million; core: £1,047 million; non-core: £82 million).
The fair value adjustments relating to loans and advances were those required to reflect the HBOS assets in the Group’s consolidated financial records at their fair value and took into account both the expected losses and market liquidity at the date of acquisition. The unwind relating to future impairment losses requires significant management judgement to determine its timing which includes an assessment of whether the losses incurred in the current period were expected at the date of the acquisition and assessing whether the remaining losses expected at the date of the acquisition will still be incurred. The element relating to market liquidity unwinds to the income statement over the estimated expected lives of the related assets (until 2014 for wholesale loans and 2018 for retail loans) although if an asset is written-off or suffers previously unexpected impairment then this element of the fair value will no longer be considered a timing difference (liquidity) but permanent (impairment). The fair value unwind in respect of impairment losses incurred was £868 million for the period ended 31 December 2012. The fair value unwind in respect of loans and advances is expected to continue to decrease in future years as fixed-rate periods on mortgages expire, loans are repaid or written-off, and will reduce to zero over time.
– non-core portfolio represented 7 per cent of total retail assets at 31 December 2013 and primarily comprised of specialist mortgages, which is closed to new business and has been in run-off since 2009.
The impairment provisions held against secured assets reflect the Group’s view of appropriate allowance for incurred losses. The Group holds appropriate impairment provisions for customers who are experiencing financial difficulty, either on a forbearance arrangement or who may be able to maintain their repayments only whilst interest rates remain low.
Interest only mortgages The Group provides interest only mortgages to customers, whereby payments made by the customer comprise of only interest for the term of the mortgage, with the customer responsible for repaying the principal outstanding at the end of the loan term. Retail has reduced its exposure to residential interest only mortgages throughout 2013. new residential interest only mortgages are limited to a maximum lTV of 75 per cent, with a verified repayment vehicle capable of repaying the loan. Interest only mortgages represented 0.5 per cent of new residential mortgages in 2013 (3.8 per cent in 2012).
Impairment In 2013 the impairment charge on unsecured loans and advances to customers reduced by £45 million compared with 2012. The annualised impairment charge as a percentage of average loans and advances to customers increased to 3.80 per cent in 2013 from 3.73 per cent in 2012.
Impaired loans decreased by £453 million since 31 December 2012 to £1,546 million at 31 December 2013 which represented 7.2 per cent of closing loans and advances to customers, compared with 8.8 per cent at 31 December 2012. The reduction in impaired loans is a result of the Group’s prudent risk appetite and ongoing effective portfolio management. Retail’s exposure to revolving credit products has been actively managed to ensure that it is appropriate to customers’ changing financial circumstances.
– non-core now represents 15.6 per cent of total loans and advances to customers compared to 27.6 per cent at 31 December 2012, reflecting the improved mix of the portfolio overall.
Core impairment charge as a % of average advances 0.39% 0.67% (28)bp non-core impairment charge as a % of average advances 2.32% 4.28% (196)bp
The SMe portfolio continues to grow within prudent and consistent credit risk appetite parameters with net lending increasing 6 per cent year-on-year. These results reflect the Group’s continuing commitment to support the uK economy and government schemes such as Funding for lending and enterprise Finance Guarantee.
Mid Markets Mid Markets serves business customers with turnover of £25 million to £750 million. The business remains predominantly uK-focused and is closely linked to the performance of the domestic economy. Impaired loans decreased by £261 million to £1,591 million compared with £1,852 million at 31 December 2012. The impairment charge has reduced to £157 million in 2013 compared to £238 million in 2012. Overall credit quality has remained stable during 2013.
Global Corporates Global Corporates is a coverage business operating across the uK, europe and north America and is responsible for the overall management of relationships with major corporate clients. Impaired loans increased slightly by £37 million to £1,173 million compared with £1,136 million at 31 December 2012. The impairment charge has reduced to £75 million in 2013 compared to £195 million in 2012.
The real estate business within the Group’s Global Corporate portfolio is focused on the larger end of the uK property market with a bias to the quoted public listed companies and funds sector. Portfolio credit quality remains strong being underpinned by seasoned management teams with proven asset management skills generating predictable cash flows from their income producing portfolios.
Non-core specialist finance loans and advances to customers include the non-core Acquisition Finance (leverage lending) portfolio which falls into non-core since it is outside the Group’s risk appetite, and the non-core Asset Based Finance portfolios (which include Ship Finance, Aircraft Finance and Infrastructure). Total gross loans and advances reduced by £6.5 billion from £15.5 billion to £9.0 billion as at 31 December 2013 mainly due to disposals of £4.5 billion (net book value).
Overview – The Wealth, Asset Finance and International impairment charge was £730 million in 2013, 51 per cent lower than 2012. The improvement was primarily driven by the Irish portfolio.
– In the Irish wholesale portfolios, 88.3 per cent (31 December 2012: 85.2 per cent) is now impaired with an impairment provisions as a percentage of impaired loans of 73.1 per cent (31 December 2012: 68.0 per cent), primarily reflecting continued deterioration in the Irish commercial property market. net exposure in Ireland wholesale has fallen to £3.4 billion (31 December 2012: £5.4 billion).
Core impairment charge as a % of average advances 0.50% 0.45% 5bp non-core impairment charge as a % of average advances 2.03% 3.42% (139)bp
Lloyds Banking Group Annual Report and Accounts 2013156 loans and advances to customers Impaired loans
Ireland The Group continues to reduce its exposure to Ireland with gross loans and advances reducing by £4,157 million during 2013 mainly due to disposals, write-offs and net repayments.
Gross exposures > A5 million: Gross exposures < A5 million 1,238 1,294
Exposures to Eurozone countries The following section summarises the Group’s direct exposure to eurozone countries at 31 December 2013. The exposures comprise on-balance sheet exposures based on their balance sheet carrying values and off-balance sheet exposures, and are based on the country of domicile of the counterparty unless otherwise indicated.
The Group Financial Stability Forum (GFSF) monitors developments within the eurozone, carries out stress testing through detailed scenario analysis and completes appropriate due diligence on the Group’s exposures.
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.
At 31 December 2012 excludes reverse repurchase exposure to institutional funds domiciled in Ireland secured by uK gilts of £4,590 million (2012: £556 million) on a gross basis.
Environmental risk management The Group ensures appropriate management of the environmental impact of its lending activities. The Group-wide Credit Risk principles require all credit risk to be incurred with due regard to environmental legislation and the Group’s Code of Business Responsibility.
Within Commercial Banking, an electronic environmental risk screening system has been the primary mechanism for assessing environmental risk in lending transactions. This system provides screening of location specific and sector based risks that may be present in a transaction. Identified risk sees the transaction referred to the Group’s expert in-house environmental Risk team for further review and assessment, as outlined below. Where required, the Group’s panel of environmental consultants provide additional expert support.
Renewable energy Project Finance As an active participant in the Project Finance Market, the Group is already playing a key role in finding solutions to current and future ‘green’ funding requirements. For example, at the end of 2013, the Group was involved in renewable energy projects across Britain, with a combined capacity of more than 3580MW.
Definition Conduct risk is defined as the risk of customer detriment or regulatory censure and/or a reduction in earnings/value, through financial or reputational loss, from inappropriate or poor customer treatment or business conduct.
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 or failure to deal with a customer’s complaint effectively where the Group has got something wrong and not met customer expectations. Given the high level of scrutiny regarding financial institutions’ treatment of customers and business conduct from regulatory bodies, the media and politicians, there is a risk that certain aspects of the Group’s current or legacy business may be determined by the Financial Conduct Authority (FCA) and other regulatory bodies or the courts as not being conducted in accordance with applicable laws or regulations, or fair and reasonable treatment in their opinion. 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 products offered by the Group; these contain a range of product, sales and post-sales metrics to provide a more holistic view of conduct risks. CRAMs being put in place include complaints, FOS upheld, outcome testing, customer feedback, colleague survey, whistleblowing and rectification metrics. Strong governance is in place to ensure that CRAMs are presented at relevant governance forums for review, challenge and action. The Group will also measure how effectively the overall conduct strategy is embedded across all divisions and functions.
Mitigation The Group takes a range of mitigating actions with respect to this risk. These actions are being embedded throughout the Group as part of the Group’s Conduct Strategy.
– enhanced recruitment and training, and a focus on how the Group manages colleagues’ performance with clearer customer accountabilities.
Monitoring A robust outcomes testing regime is in place to test performance of customer critical activities end-to-end. Customer metrics are proactively used when reviewing business performance and feedback loops have been established to take learnings from root cause/outcome testing.
Trading portfolios The Group’s trading activity is small relative to its peers and the Group does not have a programme of proprietary trading activities. All the trading Value at Risk (VaR) resides within Commercial Banking. The average 95 per cent 1-day trading VaR was £4.1 million for the year to 31 December 2013 (2012: £7.0 million). The Group’s trading activity is undertaken to meet the requirements of wholesale and retail customers for foreign exchange, credit spread and interest rate products.
Trading market risk measures are applied to all the Group’s regulatory trading books where positions arise from supporting customer flow and market making. All positions are held with trading intent. Measures include daily VaR (Table 1.29), sensitivity based measures, and stress testing. The Group’s trading book assets and liabilities are substantially 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 (see Table 1.26 below).
Basis risk arises from the possible changes in spreads, for example where the bank lends with reference to a central bank rate but funds with reference to lIBOR and the spread between these widens or tightens.
Measurement Market risk is managed within a Board approved framework and risk appetite. This is supplemented by divisional market risk appetite limits and triggers. A variety of risk measures are used such as: – Scenario/stress based measures (e.g. single factor stresses, macroeconomic scenarios); – Percentile based measures (e.g. VaR and Stressed VaR); and
For accounting purposes, a AA corporate bond based discount rate is used to determine present value of liabilities resulting in significant credit spread risk. Assets are marked to market.
Interest rate risk exposure is monitored monthly using, primarily: (a) Market value sensitivity: this methodology considers all repricing mismatches (behaviourally adjusted where appropriate) in the current balance sheet and calculates the change in market value that would result from an instantaneous 25, 100 and 200 basis points parallel rise or fall in the yield curve (subject to a floor at zero per cent).
(c) Value at Risk (VaR): for short dated portfolios and other accrual accounted trading portfolios, where the portfolio turns over more than once within a three month horizon, VaR is used for internal risk management.
The Group has an integrated Asset and liability Management (AlM) system which supports non traded asset and liability management of the Group. This provides a single consolidated tool to measure and manage interest rate repricing profiles (including behavioural assumptions), perform stress testing and produce forecast outputs. Interest rate gaps are reported by currency and used to calculate the income and value sensitivities (in GBP equivalent). Repricing assumptions and customer reaction to changes in product pricing is a major determinant of the risk profile. The Group is aware that any assumptions based model is open to challenge. However, a full behavioural review is performed annually by Group AlM functions to ensure the assumptions remain appropriate, and is reviewed by Risk Division.
Table 1.29 below shows, split by material currency, the Group’s market value sensitivities to an instantaneous parallel up and down 25 basis points change to all interest rates.
Trading portfolios and banking activities The Group’s policy is to optimise reward whilst managing its interest rate risk exposures within the risk appetite defined by the Board. For individual banking divisions, simple positional interest rate risk is minimal due to the Group requirement for these businesses to hedge (or match fund) promptly all open positions directly via the Group Corporate Treasury (GCT) function.
Monitoring The Group Asset and liability Committee and the Group Market Risk Committee regularly review high level market risk exposure, as part of the wider risk management framework. They also make recommendations to the Group Chief executive concerning overall market risk appetite and market risk policy. exposures at lower levels of delegation are monitored at various intervals according to their volatility, from daily in the case of trading portfolios to monthly or quarterly in the case of less volatile portfolios. levels of exposures compared to approved limits and triggers are monitored by Risk Division and where appropriate, escalation procedures are in place.
Market risk in the Group’s divisional portfolios and in the Group’s capital and funding activities is managed centrally within triggers defined in the Group policy for interest rate risk in the banking book, which is reviewed and approved annually.
– Reputation: The Group manages its external profile effectively. The Group will manage and mitigate any prominent negative nationwide media coverage.
– Financial loss: The Group does not expect to experience cumulative fraud or operational losses above a defined level of budgeted Group income.
Operational risk exposure and actual losses are used by the Group to calculate the appropriate holding of operational risk regulatory capital under the Internal Capital Adequacy Assessment Process (ICAAP). The Group calculates its operational risk capital requirements using the Standardised Approach (TSA), which the Basel Committee states as being appropriate for an ‘internationally active’ bank.
Mitigation The Group’s control environment receives regular review and investment, with reporting on the material risks discussed monthly by senior management. Risks are managed via a range of strategies – avoidance, mitigation, transfer (including insurance), and acceptance, and contingency plans maintained for a range of potential scenarios with a regime of regular disaster recovery exercises, both Group specific and industry wide. Mitigating actions for the principal risks above include: – The Group completed a strategic review in 2013, focused on IT resilience (the ability of IT systems to resist and/or recover from failure). Actions from the review include implementation of a new Group-wide risk appetite for IT service and availability based on the processes most time-critical to its customers, or to manage the Group. Strategic enhancements and investment are in plan over the next three years to reflect enhanced demands on IT both in terms of customer and regulator expectations.
– The level and impact of change involved in the sale of TSB is managed via robust change management governance and a consolidated strategic change plan. There are separate governance arrangements in place to oversee the impacts of the divestment on the retained business customers, operations and controls.
– Operational resilience measures and recovery planning defined in the Group’s Business Continuity Management policy ensure an appropriate and consistent approach to the management of continuity risks, including potential interruptions from a range of internal and external incidents or threats including environmental and climatic issues, terrorism, economic instability, pandemic planning and operational incidents.
Mitigation The Group mitigates the risk of a liquidity mismatch in excess of its risk appetite by managing the liquidity profile of the balance sheet through short-term liquidity management and through the life of the funding plan. Short-term liquidity management is considered from two perspectives; business as usual and liquidity under stressed conditions, both of which relate to funding in the less than one year time horizon. The Group manages its risk appetite and liquidity position as a coverage ratio (proportion of stressed outflows covered by primary liquid assets) rather than by reference to a quantum of liquid assets; this corresponds with the PRA and CRD IV liquidity requirements. longer term funding is used to manage the Group’s strategic liquidity profile which is determined by the Group’s balance sheet structure. longer term is defined as having an original maturity of more than one year.
Lloyds Banking Group Annual Report and Accounts 2013172 liquidity risk within the Insurance business may result from the inability to sell financial assets quickly at their fair values; or from an insurance liability falling due for payment earlier than expected; or from the inability to generate cash inflows as anticipated. The shareholder (lloyds Banking Group) is exposed to liquidity risk through the shareholder business. This is predominantly the annuity portfolio, where the aim is to invest in assets such that the cash flows on investments will match those on the projected future liabilities. unit-linked and with-profits funds are normally expected to meet their own liquidity obligations. The shareholder’s exposure to liquidity risk is actively managed and monitored within Insurance to ensure that, even under stress conditions, Insurance has sufficient liquidity as required to meet its obligations and remains within approved risk appetite. In addition, liquidity risk is controlled via approved funding and liquidity policies.
Marketable asset Haircut widening and repos assumed not to roll on contractual maturity
Intra-day liquidity liquidity required for clearing and payment systems under stressed conditions
The scenarios and the assumptions are reviewed at least annually to gain assurance that they continue to be relevant to the nature of the business. The Group’s liquidity risk appetite is calibrated against a number of stressed liquidity metrics. liquidity stress tests are applied to the Group’s funding plan to project possible future stressed positions. The funding plan is also stressed against a range of macroeconomic scenarios, including those prescribed by the PRA under the Pillar II ‘anchor’ scenario. The Group also applies its own macroeconomic stress scenarios, including a one in 20 year recession.
The planned introduction of the liquidity Coverage Ratio (lCR – minimum requirement will begin at 60 per cent in January 2015 rising in equal annual steps of 10 per cent to reach 100 per cent in January 2019) and the net Stable Funding Ratio (nSFR – 100 per cent minimum requirement in January 2018) contained within CRD IV are intended to raise the resilience of banks to potential liquidity shocks and provide the basis for a harmonised approach to liquidity risk management. The Group has invested considerable resource to ensure that it satisfies the governance, reporting and stress testing requirements of the PRA’s Individual liquidity Adequacy Standards liquidity regime and will satisfy the lCR and nSFR requirements. The Group’s lCR and nSFR position is monitored and forecast. The Group notes the recommendation of the Financial Policy Committee on 18 June 2013 that, for uK banks, the minimum lCR requirement should be set at 80 per cent until 1 January 2015, rising thereafter to reach an lCR requirement of 100 per cent on 1 January 2018.
Market conditions continued to improve during 2013 along with investor confidence in the uK economy. The Group has experienced reduced term issuance costs and spreads on outstanding issuance have remained significantly narrower than previous years. As well as improved market conditions, rating changes for the Group were positive. A report from Standard & Poor’s published on 3 December 2013 affirmed the lloyds Bank ‘A/A-1’ long/short-term rating and revised upwards the stand alone rating from ‘bbb’ to ‘bbb+’. The ratings action was reflective of, in the opinion of Standard & Poor’s, a strengthened capital position and stronger prospects for lloyds Bank’s statutory earnings.
The Group core loan to deposit ratio improved to 100 per cent from 101 per cent at 31 December 2012. The Group loan to deposit ratio has improved to 113 per cent compared with 121 per cent at 31 December 2012, driven by strong deposit growth and non-core asset reduction. excluding reverse repos and repos, loans and advances to customers reduced by £16.9 billion, customer deposits increased by £15.8 billion, and there was a continued reduction in non-core assets (31 December 2013: £63.5 billion; 31 December 2012: £98.4 billion).
The Group’s 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 £6.6 billion of cash over a period of up to one year, £3.0 billion of collateral posting related to customer financial contracts and £11.8 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.
The minimum requirement for total capital is supplemented, under Pillar II of the regulatory framework, through the issuance of bank specific Individual Capital Guidance (ICG) which adjusts the Pillar I minimum for those risks not covered or not fully covered under Pillar I. A key input into the PRA’s ICG setting process is a bank’s own assessment of the amount of capital it needs, a process known as the Internal Capital Adequacy Assessment Process. The Group has been set specific ICG by the PRA and maintains capital at a level which exceeds this requirement. From 1 January 2015, at least 56 per cent of the ICG must be covered by CeT1 capital and at least 75 per cent must be covered by tier 1 capital.
As part of the capital planning process, capital positions are subjected to extensive stress analysis to determine the adequacy of the Group’s capital resources against the minimum requirements, including ICG, over the forecast period. The outputs from some of these stress analyses are used by the PRA to set a Capital Planning Buffer (CPB) for the Group. This comprises a minimum level of capital buffers over and above the minimum regulatory requirements that should be maintained in non-stressed conditions as mitigation against potential future periods of stress.
The PRA requires the ICG and the CPB to remain confidential between the Group and the PRA.
Mitigation The Group has a capital management framework including policies and procedures that are designed to ensure that it operates within its risk appetite, continues to comply with regulatory requirements and is positioned to meet anticipated future changes to its capital requirements.
Capital policies and procedures are subject to independent oversight. Regular reporting of actual and projected ratios, including those in stressed scenarios, is undertaken, including submissions to the Group Asset and liability Committee, the Group Risk Committee, Board Risk Committee and the Board.
Capital management in 2013 The Group made significant progress in further strengthening its capital position in 2013 through its strongly capital generative strategy, including capital-efficient profit generation in the core business, the release of capital through non-core asset disposals and the successful delivery of management actions.
The movements in core tier 1, tier 1, tier 2 and total capital in the period are shown below: Table 1.42: Movements in capital
Goodwill and intangible assets deductions 292 – – – 292 excess of expected losses over impairment provisions 263 – 263 – 526
Core tier 1 capital resources have decreased by £202 million in the period largely driven by movements relating to defined benefit pension schemes and attributable loss, partially offset by share issuances and reductions in excess expected losses and intangible assets. The movements relating to pension schemes primarily reflect the impact of the adoption of amendments to IAS 19, whereby valuation impacts relating to Group defined benefit schemes flow through other comprehensive income, partially offset by a reduction in the regulatory deduction of the defined benefit pension scheme asset.
The risk-weighted asset movements table provides an analysis of the movement in risk-weighted assets in 2013 and an insight in to the key drivers of the movements in credit risk risk-weighted assets over the course of the year as follows.
Removal of post-acquisition reserves impacts for Insurance business as under CRD IV, as implemented by PRA policy statement PS7/13, the deduction for significant investments in the equity of financial sector entities is based on cost of investment where previously this was based on net asset value. The overall impact of this change on the CRD IV ratios is negligible.
Includes movement from 90 per cent to 80 per cent grandfathering and adjustment due to further clarification of grandfathering rules.
Includes the full value of tier 1 instruments reported under the prevailing rules as at 31 December 2013. These instruments will become ineligible for inclusion in tier 1 capital over the transitional period.
In order to ensure that the capital and exposure components of the ratio are measured consistently CRD IV requires the assets of the Insurance entities included in the Group’s statutory consolidated balance sheet to be excluded from the exposure measure in proportion to the element of the investment in the Group’s Insurance businesses that is excluded from tier 1 capital. under the January 2014 revised BaseI III leverage ratio framework only the proportion of the investment in the Group’s Insurance businesses not deducted from tier 1 capital is included in the exposure measure.
leverage ratio exposure values for derivatives and securities financing transactions have been calculated in accordance with the methodologies prescribed by the relevant rules applied.
Off-balance sheet items primarily consist of undrawn credit facilities, including facilities that may be cancelled unconditionally at any time without notice. The leverage ratio exposure value for off-balance sheet items is determined by applying set credit conversion factors to the nominal values of the items, based on the classification of the item. On a CRD IV basis a credit conversion factor of 10 per cent is applied to unconditionally cancellable items, with remaining off-balance sheet items predominantly attracting a 100 per cent credit conversion factor. under the January 2014 revised Basel III leverage ratio framework, the credit conversion factors applied to off-balance sheet items follow those prescribed by Standardised credit risk rules, subject to a floor of 10 per cent.
Available capital resources Available capital resources represent the excess of assets over liabilities calculated in accordance with detailed regulatory rules issued by the PRA.
Formal intra group capital arrangements Scottish Widows has also provided subordinated loans to its fellow group undertaking Scottish Widows Bank plc. no such arrangement exists for Clerical Medical.
Further Support Account: The Further Support Account is an extra tier of capital support for the with-profits policies in existence at the date of demutualisation. The Scheme requires that assets can only be transferred from the non-Participating Fund if the economic value of the remaining assets in the fund exceeds the aggregate of the Support Account and Further Support Account. unlike the Support Account test, the economic value used for this test includes both admissible assets and the present value of future profits of business written in the non-Participating Fund or by any subsidiaries of that fund. The balance of the Further Support Account is expected to reduce to nil by the year 2030. At 31 December 2013, the estimated net economic value of the non-Participating Fund and its subsidiaries for the purposes of this test was £6,784 million (2012: £5,647 million) and the estimated combined value of the Support Account and Further Support Account was £2,070 million (2012: £2,171 million).
Movements in regulatory capital The movements in the Group’s available capital resources in the life business can be analysed as follows: Table 1.49: Movements in available capital resources
With-Profit Fund liabilities 13,539 7,427 – – 20,966 unit-linked business (excluding that accounted for as non-participating investment contracts) – – 45,310 4,064 49,374
– Investment volatility. The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical observed volatility where it is not possible to observe meaningful prices. For example, at 31 December 2013, the 10 year equity-implied at-the-money assumption was set at 22.1 per cent (2012: 26.3 per cent). The assumption for property volatility was 15 per cent (2012: 15 per cent). The volatility of interest rates has been calibrated to the implied volatility of swaptions which was broadly 17 per cent (2012: 18 per cent).
Risk appetite The Group has zero risk appetite for material regulatory breaches. 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 the laws, regulations and voluntary codes which apply to the Group and its activities.
Exposures The Group periodically experiences material regulatory breaches outside its risk appetite. Regulatory exposure is also driven by the significant volume of current legislation and regulation within the uK and overseas with which the Group has to comply, along with new or proposed legislation and regulation which needs to be interpreted, implemented and embedded into day-to-day operational and business practices across the Group. This is particularly the case currently: the industry still continues to witness increased levels of government and regulatory intervention in the banking sector with an increasing number of regulatory rules from both the uK and overseas affecting the Group’s operations. It is clear that regulatory challenges remain, including the area of conduct where the Group accepted the findings of the FCA investigation into its historic Bancassurance incentive schemes, and agreed to pay a fine of £28 million in 2013. The Group has made significant changes to its incentive schemes since the period relating to the fine.
Measurement Regulatory risks are measured against a set of risk appetite metrics, with appropriate thresholds, which have been approved by the Board and which are regularly reviewed and monitored. Metrics include assessments of control and material regulatory rule breaches.
The Group’s exposure to accumulations of risk and events (including possible catastrophes) is mitigated by insurance arrangements spread over different insurers. Detailed analysis, including that of the potential losses under various catastrophe scenarios, supports the choice of insurance arrangements.
Exposure The internal governance arrangements of major financial institutions continue to be subject to a high level of regulatory and public scrutiny. The Group’s exposure to governance risk is also reflective of the significant volume of existing and proposed legislation and regulation within the uK and overseas with which it must comply. Risk governance and risk culture are mutually reinforcing.
– supporting a consistent approach to Group-wide behaviour and risk decision making through a Group Policy Framework which helps everyone understand their responsibilities by clearly articulating and communicating rules, boundaries and risk appetite measures which can be controlled, enforced and monitored.
The ethics and Responsible Business Policy and supporting Codes of Personal Responsibility and Business Responsibility embody the Group’s values and reflect its commitment to operating responsibly and ethically both at a business and an individual level. All colleagues are required to adhere to the Codes in all aspects of their roles.
Notes to the parent company financial statements 369 1. Accounting policies 2. Deferred tax asset 3. Amounts due from subsidiaries 4. Share capital and share premium 5. Other reserves 6. Retained profits 7. Subordinated liabilities 8. Debt securities in issue 9. Related party transactions 10. Financial instruments 11. Approval of the financial statements and other information
– the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.
Certain disclosures required by the financial reporting framework have been presented elsewhere in the Annual Report and Accounts (‘Annual Report’), rather than in the notes to the financial statements. These are cross-referenced from the financial statements and are identified as audited.
Materiality We set certain thresholds for materiality. These helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the financial statements as a whole.
We considered the following areas to be those that required particular focus in the current year. This is not a complete list of all risks or areas of focus identified by our audit. We discussed these areas of focus with the Audit Committee. Their report on those matters that they considered to be significant issues in relation to the financial statements is set out on page 92.
We tested the design and operating effectiveness of controls for loan loss impairment, including governance processes. We critically assessed the criteria for determining whether an impairment event had occurred and therefore whether a loan loss had been incurred. We specifically tested a sample of performing loans to challenge whether impairment events had been properly identified.
Where modelling assumptions were based on historic data, we assessed whether historic experience was reflective of the losses incurred in the portfolios based upon the current economic environment and the current circumstances of the borrowers. We also tested the extraction of historic data from underlying systems to the impairment models.
For larger loan exposures (predominantly in Commercial Banking) where impairment is individually calculated, we understood the latest developments at the borrower and the basis of measuring the impairment provisions held, which is particularly significant in the non-core portfolio where management are pursuing an exit strategy. We assessed the expected future cashflows and the valuation of collateral held, and challenged management as to whether valuations were up to date, consistent with the strategy being followed and appropriate for the purpose.
The Group has to make redress payments for products and business mis-sold to customers in the past. The Group also has exposure to associated operational costs and regulatory fines.
Where provisions were made, we focused on the measurement of the provision and in particular, the assumptions underlying the calculation of the provision.
The value the Group places on insurance contracts is dependent on a number of subjective assumptions about future experience. We focused on the judgements aspects of setting economic and non-economic actuarial assumptions, in particular longevity, persistency, expenses, credit risk and illiquidity premium for which small changes can result in material impacts to the valuation of those liabilities and the value of in-force (‘VIF’) asset.
The Group has a number of open tax matters, in respect of which management is required to make certain judgements as to the likely outturn for the purposes of calculating its tax position.
We made our own assessment of the likelihood of the tax exposures occurring and the consequential accounting and disclosure treatments. In making our assessment we considered the interpretation of tax legislation in the relevant jurisdiction. We assessed the calculation of the exposures.
ISAs (uK & Ireland) state that the risk of management override of controls is a significant risk on all audit engagements.
We identified higher risk journal entries in the general ledger and assessed their appropriateness through substantiation to relevant supporting evidence.
ISAs (uK & Ireland) state that there is a rebuttable assumption that the auditor will treat revenue recognition as a significant risk.
We tested the design and operating effectiveness of controls and performed substantive testing over revenue recognition (including using computer-assisted audit techniques), particularly in relation to judgemental aspects such as determining effective interest rates on loans and deposits and recognition of fee income.
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
Other information in the Annual Report under ISAs (uK & Ireland), we are required to report to you if, in our opinion, information in the Annual Report is: – materially inconsistent with the information in the audited financial statements; or
Our responsibility is to audit and express an opinion on the Group and Parent Company financial statements in accordance with applicable law and ISAs (uK & Ireland). Those standards require us to comply with the Auditing Practices Board’s ethical Standards for Auditors.
(b) legislation in the united Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Debt securities in issue 35 87,102 117,253 184,964 liabilities arising from insurance contracts and participating investment contracts 36 82,777 82,953 78,991 liabilities arising from non-participating investment contracts 38 27,590 54,372 49,636 unallocated surplus within insurance businesses 39 391 267 300
Further details of movements in the Group’s share capital and reserves are provided in notes 45, 46, 47 and 48.
Note 1: Basis of preparation The consolidated financial statements of lloyds Banking Group plc have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the european union (eu). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body. The eu endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the eu and IFRS as issued by the IASB.
The Group has adopted the following new standards and amendments to standards which became effective for financial years beginning on or after 1 January 2013: Changes in accounting policy
(i) IFRS 10 Consolidated Financial Statements IFRS 10 supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation – Special Purpose Entities and establishes the principles for when the Group controls another entity and is therefore required to consolidate the other entity in the Group’s financial statements. under IFRS 10, the Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through the exercise of power. As a result, the Group consolidates certain entities that were not previously consolidated and no longer consolidates certain entities which were previously consolidated, principally in relation to Open ended Investment Companies. The Group has applied IFRS 10 retrospectively and restated its comparatives in accordance with the transitional provisions included in the standard. These provisions require the Group to re-assess its control conclusions as at 1 January 2013 and restate its comparative information, applying the revised assessment in 2012 to the extent that the relevant investments were held in that year. Details of the impact of these restatements are provided in note 56 to the financial statements.
(ii) Revised IAS 19 Employee Benefits (IAS 19R) IAS 19R prescribes the accounting and disclosure by employers for employee benefits. Actuarial gains and losses (remeasurements) arising from the valuation of defined benefit pension schemes are no longer permitted to be deferred using the corridor approach and must be recognised immediately in other comprehensive income. In addition, IAS 19R also replaces interest cost and expected return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined benefit liability (asset). IAS 19R has been applied retrospectively and comparative figures restated accordingly. Details of the impact of these restatements are provided in note 56 to the financial statements.
The impact of the implementation of IAS 19R on the Group’s results for the year ended 31 December 2013 has been to decrease other operating expenses by £28 million and increase profit before tax by the same amount. The impact on the balance sheet at 31 December 2013 has been to increase the net retirement benefit liability by £2,817 million, to increase deferred tax assets by £648 million and to reduce shareholders’ equity by £2,169 million.
(iii) IFRS 13 Fair Value Measurement IFRS 13 has been applied with effect from 1 January 2013. IFRS 13 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. IFRS 13 requires that the fair value of a non-financial asset is determined based on the highest and best use of the asset, and that the fair value of a liability reflects its non-performance risk. These changes had no significant impact on the measurement of the Group’s assets and liabilities. The IFRS 13 disclosures are given in notes 53 (financial instruments), 26 (investment properties) and 16 (disposal groups, in respect of assets held for sale measured at fair value) to the financial statements.
– Amendments to IAS 1 Presentation of Financial Statements – ‘Presentation of Items of Other Comprehensive Income’ The amendments to IAS 1 require entities to group items presented in other comprehensive income on the basis of whether they may potentially be reclassified to profit or loss subsequently. The statement of other comprehensive income in these financial statements has been revised to reflect the new requirements.
– Amendments to IFRS 7 Financial Instruments: Disclosures – ‘Disclosures - Offsetting Financial Assets and Financial Liabilities’ The amendments to IFRS 7 require entities to disclose information to enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on the balance sheet. These disclosures are given in note 53 to the financial statements.
– IFRS 12 Disclosure of Interests in Other Entities IFRS 12 requires an entity to disclose information that enables users of financial statements to evaluate the nature of, and risks associated with, its interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. These disclosures are made in the notes to these financial statements.
The treatment of transactions with non-controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary. Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent entity. Where the group loses control of the subsidiary, at the date when control is lost the amount of any non-controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest.
Fees and commissions which are not an integral part of the effective interest rate are generally recognised when the service has been provided. loan commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to the effective interest rate on the loan once drawn. Where it is unlikely that loan commitments will be drawn, loan commitment fees are recognised over the life of the facility. loan syndication fees are recognised as revenue when the syndication has been completed and the Group retains no part of the loan package for itself or retains a part at the same effective interest rate for all interestbearing financial instruments, including loans and advances, as for the other participants.
and receivables, deposits, debt securities in issue and subordinated liabilities when the Group becomes a party to the contractual provisions of the instrument. Regular way purchases and sales of securities and other financial assets and trading liabilities are recognised on trade date, being the date that the Group is committed to purchase or sell an asset.
financial asset from the available-for-sale category to the held-to-maturity category is permitted when the Group has the ability and intent to hold that financial asset to maturity.
carried in the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 3 (Critical accounting estimates and judgements: Fair value of financial instruments) and note 53(3) (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.
In respect of the Group’s secured mortgage portfolios, the impairment allowance is calculated based on a definition of impaired loans which are those six months or more in arrears (or certain cases where the borrower is bankrupt or is in possession). The estimated cash flows are calculated based on historical experience and are dependent on estimates of the expected value of collateral which takes into account expected future movements in house prices, less costs to sell.
Incurred but not yet identified impairment The collective provision also includes provision for inherent losses, that is losses that have been incurred but have not been separately identified at the balance sheet date. The loans that are not currently recognised as impaired are grouped into homogenous portfolios by key risk drivers. Risk drivers for secured retail lending include the current indexed loan-to-value, previous mortgage arrears, internal cross-product delinquency data and external credit bureau data; for unsecured retail lending they include whether the account is up-to-date and, if not, the number of payments that have been missed; and for wholesale lending they include factors such as observed default rates and loss given default. An assessment is made of the likelihood of each account becoming recognised as impaired within the loss emergence period, with the economic loss that each
Write offs A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that forbearance is no longer appropriate. For wholesale lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
(J) Tangible fixed assets Tangible fixed assets are included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate the difference between the cost and the residual value over their estimated useful lives, as follows: Premises (excluding land): – Freehold/long and short leasehold premises: shorter of 50 years and the remaining period of the lease.
(2) As lessor Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the lessee but not necessarily legal title. All other leases are classified as operating leases. When assets are subject to finance leases, the present value of the lease payments, together with any unguaranteed residual value, is recognised as a receivable, net of provisions, within loans and advances to banks and customers. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance lease income. Finance lease income is recognised in interest income over the term of the lease using the net investment method (before tax) so as to give a constant rate of return on the net investment in the leases. unguaranteed residual values are reviewed regularly to identify any impairment.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Income tax payable on profits is recognised as an expense in the period in which those profits arise. The tax effects of losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred and current tax related to gains and losses on the fair value re-measurement of available-for-sale investments and cash flow hedges, where these gains and losses are recognised in other comprehensive income, is also recognised in other comprehensive income. Such tax is subsequently transferred to the income statement together with the gain or loss.
– Insurance and participating investment contracts which are not unit-linked or in the Group’s with-profit funds
Unallocated surplus Any amounts in the with-profit funds not yet determined as being due to policyholders or shareholders are recognised as an unallocated surplus which is shown separately from liabilities arising from insurance contracts and participating investment contracts.
Assets arising from reinsurance contracts held – Classified as non-participating investment contracts These contracts are accounted for as financial assets whose value is contractually linked to the fair values of financial assets within the reinsurers’ investment funds. Investment returns (including movements in fair value and investment income) allocated to these contracts are recognised in insurance claims. Deposits and withdrawals are not accounted for through the income statement but are accounted for directly in the balance sheet as adjustments to the assets arising from reinsurance contracts held.
(S) 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.
Note 3: Critical accounting estimates and judgements The preparation of the Group’s financial statements in accordance with IFRS requires management to make judgements, estimates and assumptions in applying the accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
Allowance for impairment losses on loans and receivables At 31 December 2013 gross loans and receivables totalled £534,092 million (2012: £570,714 million) against which impairment allowances of £12,091 million (2012: £15,459 million) had been made (see note 24). The Group’s accounting policy for losses arising on financial assets classified as loans and receivables is described in note 2 (H)(1); this note also provides an overview of the methodologies applied.
Individual impairment allowances are generally established against the Group’s wholesale lending portfolios. The determination of individual impairment allowances requires the exercise of considerable judgement by management involving matters such as local economic conditions
Recoverability of deferred tax assets At 31 December 2013 the Group carried deferred tax assets on its balance sheet of £5,104 million (2012: £4,913 million) and deferred tax liabilities of £3 million (2012: £327 million) (note 42). This presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally enforceable right of offset. note 42 presents the Group’s deferred tax assets and liabilities by type. The largest category of deferred tax asset relates to tax losses carried forward.
As disclosed in note 42, deferred tax assets totalling £802 million (2012: £1,311 million) have not been recognised in respect of certain capital losses carried forward, trading losses carried forward and unrelieved foreign tax credits as there are no predicted future capital or taxable profits against which these losses can be recognised.
Payment protection insurance and other regulatory provisions At 31 December 2013, the Group carried provisions of £3,815 million (2012: £3,366 million) against the cost of making redress payments to customers and the related administration costs in connection with historical regulatory breaches, principally the misselling of payment protection insurance. Determining the amount of the provisions, which represent management’s best estimate of the cost of settling these issues, requires the exercise of significant judgement. It will often be necessary to form a view on matters which are inherently uncertain, such as the number of future complaints, the extent to which they will be upheld and the average cost of redress. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against actual experience and other relevant evidence and adjustments made to the provisions where appropriate.
At 31 December 2013, the Group classified £7,700 million of financial assets and £1,075 million of financial liabilities as level 3. Further details of the Group’s level 3 financial instruments and the sensitivity of their valuation including the effect of applying reasonably possible alternative assumptions in determining their fair value are set out in note 53. Details about sensitivities to market risk arising from trading assets and other treasury positions can be found in the Risk Management section on page 166.
The Group executive Committee has been determined to be the chief operating decision maker for the Group. The Group’s operating segments reflect its organisational and management structures. The Group executive Committee reviews the Group’s internal reporting based around these segments in order to assess performance and allocate resources. This assessment includes a consideration of each segment’s net interest revenue and consequently the total interest income and expense for all reportable segments is presented on a net basis. The segments are differentiated by the type of products provided, by whether the customers are individuals or corporate entities and by the geographical location of the customer.
Retail offers a broad range of retail financial service products in the uK, including current accounts, savings, personal loans, credit cards and mortgages. It is also a major general insurance and bancassurance distributor, selling a wide range of long-term savings, investment and general insurance products.
Other includes the costs of managing the Group’s technology platforms, branch and head office property estate, operations (including payments, banking operations and collections) and sourcing, the costs of which are predominantly recharged to the other divisions. It also reflects other items not recharged to the divisions, including hedge ineffectiveness, uK bank levy, Financial Services Compensation Scheme costs, gains on liability management, volatile items such as hedge accounting volatility managed centrally, and other gains from the structural hedging of interest rate risk.
Other segment items reflected in income statement above: (Decrease) increase in value of in-force business – – (9) 425 – 416
Investments in joint ventures and associates at end of year 24 62 11 – 4 101
Other segment items reflected in income statement above: (Decrease) increase in value of in-force business – – (4) 273 – 269
Debt securities held as loans and receivables 1.52 4.77 3.17 32 433 590
Customer deposits, excluding liabilities under sale and repurchase transactions 1.53 1.69 1.66 (6,119) (6,637) (6,080)
In December 2011, the Group decided to defer payment of non-mandatory coupons on certain securities and, instead, settle them using an Alternative Coupon Satisfaction Mechanism on their contractual terms. This change in expected cash flows resulted in a gain of £126 million in net interest income in the year ended 31 December 2011 from the recalculation of the carrying value of these securities.
Total net income arising on assets held at fair value through profit or loss 15,868 14,889 376 net expense arising on liabilities held at fair value through profit or loss – debt securities in issue (93) (576) (230)
Total net gains arising on assets and liabilities held at fair value through profit or loss 15,775 14,313 146 net gains (losses) on financial instruments held for trading 136 621 (1,065)
Liability management losses of £142 million arose in 2013 on transactions undertaken as part of the Group’s management of wholesale funding and capital.
– On 30 June 2013 the Group disposed of its Spanish retail banking operations, including lloyds Bank International S.A.u and lloyds Investment españa SGIIC S.A.u, to Banco Sabadell, S.A. realising a loss of £256 million.
Depreciation and amortisation: Depreciation of tangible fixed assets (note 30) 1,374 1,431 1,434
Performance-based compensation The table below analyses the Group’s performance-based compensation costs (excluding branch-based sales incentives) between those relating to the current performance year and those relating to earlier years.
Fees payable for other services: Audit of the Company’s subsidiaries pursuant to legislation 15.1 15.7 16.9
Total fees payable to the Company’s auditors by the Group 32.5 27.0 36.3
Audits of the unconsolidated Open ended Investment Companies managed by the Group 0.5 0.8 0.6
Reviews of the financial position of corporate and other borrowers 6.5 5.4 11.0
Note 13: Investments in joint ventures and associates The Group’s share of results of and investments in equity accounted joint ventures and associates comprises: Joint ventures Associates Total 2013 £m 2012 £m 2011 £m 2013 £m 2012 £m 2011 £m 2013 £m 2012 £m 2011 £m
Share of net assets at 31 December 95 298 309 6 15 25 101 313 334
The weighted-average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 28 million at 31 December 2013 (2012: 37 million; 2011: 619 million).
Note 16: Disposal groups Disposal groups are classified as held for sale if the Group will recover the carrying amount principally through a sale transaction rather than through continuing use and a sale is considered highly probable. The Group completed the sale of its joint venture interest in Sainsbury’s Bank on 31 January 2014 and expects to complete the announced sales of its international private banking operations in Monaco and Gibraltar, its German insurance business and Scottish Widows Investment Partnership, its asset management business, in the next 12 months. The assets and liabilities associated with these operations are therefore classified as held-for-sale disposal groups at 31 December 2013 and included within other assets and other liabilities respectively.
At 31 December 2012, the Group’s uruguayan branch business, its branch remittance business in Japan and its portfolio management business in luxembourg were classified as held-for-sale; these sales completed in 2013.
The major classes of assets and liabilities of the disposal groups, which are principally in the Insurance segment, are as follows: £m £m
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 £101,185 million (2012: £134,537 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 £24,552 million, see note 22; (ii) loans and advances to customers of £27 million (2012: £34 million) which are economically hedged by interest rate derivatives which are not in hedge accounting relationships and where significant measurement inconsistencies would otherwise arise if the related derivatives were treated as trading liabilities and the loans and advances were carried at amortised cost; and
(iii) private equity investments of £2,632 million (2012: £2,110 million) that are managed, and evaluated, on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.
Note 18: 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 54; and
The embedded equity conversion feature of £1,212 million (2012: £1,421 million) reflects the value of the equity conversion feature contained in the enhanced Capital notes issued by the Group in 2009; the loss of £209 million arising from the change in fair value over 2013 (2012: gain of £249 million; 2011: loss of £5 million) is included within net gains on financial instruments held for trading within net trading income (note 7).
Trading and other exchange rate contracts: Spot, forwards and futures 203,484 1,432 1,599
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £120 million (2012: £5,087 million). Collateral is held with a fair value of £112 million (2012: £4,916 million), all of which the Group is able to repledge. Included within this are collateral balances in the form of cash provided in respect of reverse repurchase agreements amounting to £49 million (2012: £2 million).
Net investment in finance leases 4,435 6,477 equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and other large individual value items. During 2013 and 2012 no contingent rentals in respect of finance leases were recognised in the income statement. The allowance for uncollectable finance lease receivables included in the allowance for impairment losses is £6 million (2012: £33 million).
arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2013 these obligations had not been triggered and the maximum exposure under these facilities was £402 million (2012: £497 million).
The Group recognises the full liabilities associated with its securitisation and covered bond programmes within debt securities in issue, although the obligations of the Group are limited to the cashflows generated from the underlying assets. The Group could be required to provide additional support to a number of the securitisation programmes to support the credit ratings of the debt securities issued, in the form of increased cash reserves and the holding of subordinated notes. Further, certain programmes contain contractual obligations that require the Group to repurchase assets should they become credit impaired.
(A) Asset-backed conduits In addition to the structured entities discussed in note 21, which are used for securitisation and covered bond programmes, the Group sponsors three asset-backed conduits, Argento, Cancara and Grampian, which invest in debt securities and client receivables. All the external assets in these conduits are consolidated in the Group’s financial statements. The total consolidated exposures in these conduits are set out in the table below: Argento £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 £24,552 million at 31 December 2013, included within financial assets designated at fair value through profit and loss (see note 17). At 31 December 2013, the total asset value of these unconsolidated structured entities, including the portion in which the Group has no interest, was £543 billion.
Recoveries of advances written off in previous years 456 – – 456 unwinding of discount (351) – – (351)
The risk-free rate is derived from the relevant swap curve less a deduction for credit risk. Prior to 2013, the risk-free rate for the valuation of financial options and guarantees was defined as the spot yield derived from the relevant government bond yield curve. The risk-free rate for the non-annuity business was defined as the 15 year government bond. For annuity business, the risk-free rate was based on the uK Government bond yield curve (plus an allowance for an illiquidity premium).
Cost: exchange and other adjustments – – – – 27 27 exchange and other adjustments – – – – 22 22
Included in the amounts reported above are deposits held as collateral for facilities granted, with a carrying value of £2,978 million (2012: £4,429 million) and a fair value of £3,114 million (2012: £4,552 million).
(i) Business description The Group has with-profit funds within Scottish Widows plc and Clerical Medical Investment Group limited containing both insurance contracts and participating investment contracts.
Liability recognised in the balance sheet 3 6 8 18 21 38 184 278 liability in respect of earlier years –
Note 37: Life insurance sensitivity analysis The following table demonstrates the effect of reasonably possible changes in key assumptions on profit before tax and equity disclosed in these financial statements assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated. These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical.
This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
Settlement balances 3,358 2,040 unitholders’ interest in Open ended Investment Companies 22,219 33,651 liabilities of disposal groups (note 16) 7,302 214
Return on plan assets 1,133 484 employer contributions 804 669 exchange and other adjustments (6) 4
The total defined benefit obligation comprises: Amounts owing to active members (8,647) (8,004)
Money market instruments, cash, derivatives and other assets and liabilities 506 1,524 2,030 522 713 1,235
BB or lower Not rated Total £m £m £m £m £m £m £m
Rate of increase for pensions in payment 2.80 2.70 2013 Years 2012 Years life expectancy for member aged 60, on the valuation date: life expectancy for member aged 60, 15 years after the valuation date: The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 at 31 December 2013 is assumed to live for, on average, 27.4 years for a male and 29.7 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60.
Asset-liability matching strategies The main schemes’ assets are invested in a diversified portfolio, consisting primarily of debt securities and equities. The investment strategy is not static and will evolve to reflect the structure of liabilities within the schemes. Specific asset-liability matching strategies for each pension plan are independently determined by the responsible governance body for each scheme and in consultation with the employer.
Deferred tax assets of £593 million (2012: £939 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.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward at 31 December 2013 of £41 million (2012: £42 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be utilised. These tax credits can be carried forward indefinitely.
The amount that is paid in redress in relation to a policy found to have been mis-sold, comprising, where applicable, the refund of premium, compound interest charged and interest at 8 per cent per annum. Actuals are based on six months to December 2013. The accumulation of interest on future redress is expected to be offset by the mix shifting away from more expensive cases.
Vacant leasehold property Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income, compared to the head rent, and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a biannual basis and will normally run off over the period of under-recovery of the leases concerned, currently averaging three years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
Total preference shares 876 1,385 a Since 2004, the Company has had in issue 400 6 per cent non-cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the rights to a fixed rate non-cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the dividend were paid. upon winding up, the shares rank equally with any other preference shares issued by the Company.
Preferred securities 6.90% Perpetual Capital Securities (uS$1,000 million) a 209 214 6.85% non-cumulative Perpetual Preferred Securities (uS$1,000 million) a 121 238 8.117% non-cumulative Perpetual Preferred Securities (Class A) (£250 million) a, b 256 262 7.627% Fixed to Floating Rate Guaranteed non-voting non-cumulative Preferred Securities (e415 million) a, c, e 66 50 6.35% Step-up Perpetual Capital Securities (e500 million) a, d 212 226 6.071% non-cumulative Perpetual Preferred Securities (uS$750 million) 423 382 7.834% Sterling Step-up non-voting non-cumulative Preferred Securities callable 2015 (£250 million) 5 5 4.939% non-voting non-cumulative Perpetual Preferred Securities (e750 million) 26 23 7.286% Perpetual Regulatory Tier One Securities (Series A) (£150 million) 132 128 4.385% Step-up Perpetual Capital Securities callable 2017 (e750 million) 89 83 6.461% Guaranteed non-voting non-cumulative Perpetual Preferred Securities (£600 million) 455 439 13% Step-up Perpetual Capital Securities callable 2019 (£785 million) 8 8 13% Step-up Perpetual Capital Securities callable 2019 (e532 million) 50 48 7.754% non-cumulative Perpetual Preferred Securities (Class B) (£150 million) 101 98 12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (uS$2,000 million) 1,211 1,239 7.281% Perpetual Regulatory Tier One Securities (Series B) (£150 million) 90 95 13% Step-up Perpetual Capital Securities callable 2029 (£700 million) 660 629 7.881% Guaranteed non-voting non-cumulative Preferred Securities (£245 million) 187 227
Floating Rate undated Subordinated notes (e500 million) 49 44 4.25% Perpetual Fixed to Floating Rate Reset Subordinated Guaranteed notes (e750 million) (Clerical Medical Finance plc) 283 261 5.125% Step-up Perpetual Subordinated notes callable 2015 (£560 million) (Scottish Widows plc) 533 556 5.125% undated Subordinated Fixed to Floating notes (e750 million) 49 45 7.5% undated Subordinated Step-up notes (£300 million) 5 4 5.125% undated Subordinated Step-up notes callable 2016 (£500 million) 2 2 6.5% undated Subordinated Step-up notes callable 2019 (£270 million) 1 1 7.375% undated Subordinated Guaranteed Bonds (£200 million) (Clerical Medical Finance plc) 44 37 5.625% Cumulative Callable Fixed to Floating Rate undated Subordinated notes callable 2019 (£500 million) 5 1 5.75% undated Subordinated Step-up notes (£600 million) 3 3 8% undated Subordinated Step-up notes callable 2023 (£200 million) – –
Floating Rate enhanced Capital notes due 2020 (e53 million) a 37 37 7.875% enhanced Capital notes due 2020 (uS$408 million) 258 267 11.04% enhanced Capital notes due 2020 (£736 million) 824 847 7.5884% enhanced Capital notes due 2020 (£732 million) 706 703 6.385% enhanced Capital notes due 2020 (e662 million) 524 493 6.439% enhanced Capital notes due 2020 (e711 million) 563 542 8% Fixed to Floating Rate undated enhanced Capital notes callable 2020 (uS$1,259 million) b 662 662 9.125% enhanced Capital notes due 2020 (£148 million) 157 157 12.75% enhanced Capital notes due 2020 (£57 million) 71 73 7.869% enhanced Capital notes due 2020 (£597 million) 593 591 7.625% enhanced Capital notes due 2020 (e226 million) 185 181 7.875% enhanced Capital notes due 2020 (uS$986 million) 595 608 11.125% enhanced Capital notes due 2020 (£39 million) 44 44 8.5% undated enhanced Capital notes callable 2021 (uS$277 million) b 146 147 14.5% enhanced Capital notes due 2022 (£79 million) 110 113 9.875% enhanced Capital notes due 2023 (£57 million) 66 66 11.25% enhanced Capital notes due 2023 (£95 million) 115 113 10.5% enhanced Capital notes due 2023 (£69 million) 78 76 11.875% enhanced Capital notes due 2024 (£35 million) 44 45 7.975% enhanced Capital notes due 2024 (£102 million) 99 99 16.125% enhanced Capital notes due 2024 (£61 million) 94 95 15% enhanced Capital notes due 2029 (£68 million) 108 108 9% enhanced Capital notes due 2029 (£107 million) 112 112 8.5% enhanced Capital notes due 2032 (£104 million) 105 105
Dated subordinated liabilities Subordinated Step-up Floating Rate notes 2016 (e500 million) a 172 172 Subordinated Step-up Floating Rate notes 2016 (£300 million) a 183 184 Callable Floating Rate Subordinated notes 2016 (e500 million) a 109 96 Callable Floating Rate Subordinated notes 2016 (e500 million) a 156 137 Subordinated Callable notes 2016 (uS$750 million) a 218 198 Subordinated Callable notes 2017 (e1,000 million) a 276 243 6.75% Subordinated Callable Fixed to Floating Rate Instruments 2017 (Aus$200 million) a, b 5 6 Subordinated Callable Floating Rate Instruments 2017 (Aus$400 million) a 33 38 5.109% Callable Fixed to Floating Rate notes 2017 (Can$500 million) a, c 10 8 Subordinated Callable notes 2017 (uS$1,000 million) a 211 198 6.305% Subordinated Callable Fixed to Floating Rate notes 2017 (£500 million) a, d 23 21 6.125% notes 2013 (e325 million) – 280 5.625% Subordinated Fixed to Floating Rate notes due 2018 callable 2013 (e1,000 million) – 858 4.25% Subordinated Guaranteed notes 2013 (uS$1,000 million) – 619 6.45% Fixed to Floating Subordinated Guaranteed Bonds 2023 (e400 million) (Clerical Medical Finance plc) – 181 11% Subordinated Bonds 2014 (£250 million) 275 284 5.875% Subordinated notes 2014 (£150 million) 155 157 5.875% Subordinated Guaranteed Bonds 2014 (e750 million) 658 669 4.375% Callable Fixed to Floating Rate Subordinated notes 2019 (e750 million) 621 604 4.875% Subordinated notes 2015 (e1,000 million) 862 844 6.625% Subordinated notes 2015 (£350 million) 371 375 6.9625% Callable Subordinated Fixed to Floating Rate notes 2020 callable 2015 (£750 million) 701 716 11.875% Subordinated Fixed to Fixed Rate notes 2021 callable 2016 (e1,147 million) 975 977 10.75% Subordinated Fixed to Fixed Rate notes 2021 callable 2016 (£466 million) 458 477 9.875% Subordinated Fixed to Fixed Rate notes 2021 callable 2016 (uS$568 million) 349 360 10.125% Subordinated Fixed to Fixed Rate notes 2021 callable 2016 (Can$387 million) 223 240 13% Subordinated Fixed to Fixed Rate notes 2021 callable 2016 (Aus$417 million) 234 280 10.5% Subordinated Bonds 2018 (£150 million) 174 177 6.75% Subordinated Fixed Rate notes 2018 (uS$2,000 million) 1,102 1,146 10.375% Subordinated Fixed to Fixed Rate notes 2024 callable 2019 (e154 million) 141 143 6.375% Subordinated Instruments 2019 (£250 million) 256 281 6.5% Dated Subordinated notes 2020 (e1,500 million) 1,433 1,458 7.375% Dated Subordinated notes 2020 3 4 5.75% Subordinated Fixed to Floating Rate notes 2025 callable 2020 (£350 million) 331 371 6.5% Subordinated Fixed Rate notes 2020 (uS$2,000 million) 1,231 1,345 Subordinated Floating Rate notes 2020 (e100 million) 85 83 9.375% Subordinated Bonds 2021 (£500 million) 617 727 5.374% Subordinated Fixed Rate notes 2021 (e160 million) 147 152 9.625% Subordinated Bonds 2023 (£300 million) 341 376 7.07% Subordinated Fixed Rate notes 2023 (e175 million) 175 183 5.50% Subordinated notes 2023 (£850 million) (Scottish Widows plc) 794 – 4.50% Fixed Rate Step-up Subordinated notes due 2030 (e750 million) 445 457 7.625% Dated Subordinated notes 2025 (£750 million) 822 915 6% Subordinated notes 2033 (uS$750 million) 313 399 7.00% Subordinated notes 2043 (£650 million) (Scottish Widows plc) 593 – Total dated subordinated liabilities 16,281 17,439 a These securities have passed their first call dates, and are callable at specific dates as per the terms of the securities at the option of the issuer and with approval of the PRA.
Preference shares The Company has in issue various classes of preference shares which are all classified as liabilities under IFRS and details of which are shown in note 44.
To meet the performance conditions, the Group’s ranking against the comparator group was required to be at least ninth. The full grant of options only became exercisable if the Group was ranked first. A performance multiplier (of between nil and 100 per cent) was applied below this level to calculate the number of shares in respect of which options granted to executive Directors would become exercisable, and were calculated on a sliding scale. If lloyds Banking Group plc was ranked below median the options would not be exercisable.
Options granted to senior executives other than executive Directors were not so highly leveraged and, as a result, different performance multipliers were applied to their options. For the majority of executives, options were granted with the performance condition but with no performance multiplier.
Save-As-You-Earn schemes eligible employees may enter into contracts through the Save-As-You-earn schemes to save up to £250 per month and, at the expiry of a fixed term of three, five or seven years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 80 per cent of the market price at the start of the invitation.
Exercisable at 31 December 11,083,749 Nil 16,509,862 nil no options were granted in 2013 or 2012. The weighted average remaining contractual life of options outstanding at the end of the year was 7.5 years (2012: 8.6 years).
Participants are entitled to any dividends paid during the vesting period. This amount will be paid in cash unless the Remuneration Committee decides it will be paid in shares.
The performance conditions for awards made in March and August 2010 were as follows: (i) EPS: relevant to 50 per cent of the award. Performance was measured based on ePS growth over a three year period from the baseline ePS of 2009.