Picture this In 2019, we offered colleagues from across the Group an opportunity to submit photographs that they felt represented our purpose of Helping Britain Prosper. The winning photos are marked with this symbol alongside the photographer’s name.
Financial results Summary of Group results 48 Divisional results 57 Other financial information 61
Other information Shareholder information 327 Five year financial summary 329 Forward looking statements 330 Abbreviations 331 Alternative performance measures 331 Subsidiaries and related undertakings 332 16.4m +4% Digitally active customers continued to increase and we remain the largest digital bank in the UK
+1pp Employee engagement index improved, two points above the norm for top performing UK companies
Statutory profit after tax was lower largely due to the additional PPI charge. Tax expense of £1.4 billion 3.37p +5% Progressive and sustainable ordinary dividend per share including interim and final dividends
Equally important is how we engage with our customers on this issue and to support this change we have trained over 800 colleagues, enhancing their awareness of the risks and opportunities the transition to a low carbon economy represents. We will also continue our partnership with the Cambridge Institute for Sustainability Leadership to provide high quality training to executives and colleagues in risk management, product development and client facing roles.
Our partnership with Mental Health UK began in 2017, with the aim of raising £4 million over a two year period, however we quickly exceeded that and have raised over £11 million to date. As a Group we believe that a shift in mindset is needed amongst UK employers when it comes to mental health and our approach focuses on a willingness to acknowledge, support and manage mental health in the workplace. In 2019, we announced that we are continuing our journey with Mental Health UK for another two years and aim to raise a further £4 million by the end of 2021. In addition, we aim to continue to raise awareness and reduce stigma. We have committed to training 2,500 colleagues to become Mental Health Advocates by 2020, and also provided colleagues with training to help support customers.
Our colleagues and culture Throughout 2019, I have travelled across Britain to see how colleagues are embracing new ways of working and the contribution they are making towards Helping Britain Prosper. These visits enabled me to see first-hand how we support customers and respond to their needs in a challenging environment.
The total GPS outcome remains a small proportion of underlying profit at 3.7 per cent and an even smaller proportion of overall revenues. Cash GPS awards are capped at £2,000 per colleague, with additional amounts paid in shares and subject to deferral and performance adjustment to ensure their ultimate value reflects sustained performance. More information on this year's outcomes and on how we ensure our approach to remuneration supports our strategy can be found in the Directors’ Remuneration Report on pages 98 to 123.
Directors We review the Board’s composition and diversity regularly and have continued to strengthen and further diversify the knowledge and experience on our Board. During 2019, we have announced a number of Board changes, as outlined below.
In 2019 the Group has continued to deliver for customers while making significant strategic progress and delivering a solid financial performance in a challenging external market. While it is disappointing that this was impacted by the additional PPI charge in the year, as a result of this performance, the Board has been able to recommend an increased total ordinary dividend of 3.37 pence per share.
Reading and ensuring that victims of the HBOS Reading fraud have their claims assessed in an open and transparent manner. We have apologised to those impacted and are determined to put things right.
Financial performance Statutory profit before tax of £4.4 billion was 26 per cent lower than 2018 and earnings per share at 3.5 pence was down 36 per cent, due to the PPI charge of £2.45 billion in 2019 (2018: £0.75 billion). Underlying profit of £7.5 billion was down 7 per cent on 2018, reflecting continued revenue pressure and higher impairments partly offset by lower total costs. Our relentless focus on cost efficiency has led to a reduction in operating costs, where we enhanced our guidance twice during 2019. This was achieved whilst increasing strategic investment and our net promoter scores. Our cost:income ratio improved again to 48.5 per cent. Credit quality remains strong with the Group’s net asset quality ratio of 29 basis points in line with the target of less than 30 basis points, despite two material corporate cases.
Investment in technology remains a key strategic priority for the Group and enables us to improve the experience of our customers and colleagues; technology spend now represents 19 per cent of operating costs
In enhancing capabilities and accelerating our transformation, we are working in collaboration with a number of fintechs and we continue to monitor opportunities in this space 16.4m digitally active customers year-on-year increase in technology spend
We are making our biggest ever investment in people, with a focus on ensuring that we are able to continue to attract, develop and retain the talent and capabilities we will need in the future
Commercial Banking has supported Insurance and Wealth by sourcing £0.6 billion of new long-term assets to support five new bulk annuity transactions
Our colleagues have also taken an active role in supporting good causes, including raising over £11 million for Mental Health UK over a two year period, as well as volunteering 246,000 hours of their time through our Day to Make a Difference initiative.
The Group faces the future with confidence. As a result, we will continue to target a progressive and sustainable ordinary dividend. In 2020, the Group will also commence paying dividends quarterly, accelerating payments to shareholders, with the first dividend being paid in June 2020.
The Group’s market-leading cost:income ratio including remediation continued to provide a competitive advantage and further strengthened to 48.5 per cent in 2019.
CURRENT TARGET Cost income ratio including remediation to be lower in 2020 1 Excluding TSB.
As per pages 101 and 110 our 2020 balanced scorecard measures will remain broadly unchanged from 2019 and will be used in both short term and long-term reward decision making. KPIs have been proposed to underpin the long term share awards focusing on capital strength, relative returns and a progressive and sustainable ordinary dividend.
From a strategic perspective this measures how well we are delivering a leading customer experience. It tells us how effective we are in building strong customer relationships.
From a strategic perspective, reduction in customer complaints confirms our achievements in delivering a leading customer experience.
Colleague engagement was two points above the norm for top performing UK companies with colleagues continuing to score pride and advocacy favourably. High scores were also achieved for customer focus, wellbeing, recognition and speaking out.
Barring sudden shocks stemming from these challenges, the UK economy is expected to grow through 2020 to 2022 at around 1.5 per cent, slightly above the 1.4 per cent average across the past two years. The unemployment rate is expected to rise only a little from its current 44 year low. The outlook for the bank rate is uncertain, but capacity constraints and a fiscal boost may support a moderate increase in interest rates. House prices are expected to continue to grow mildly.
Our response Given our UK focus, the Group’s prospects are closely linked to the performance of the UK economy. Our low risk, stable business model and focus on efficiency positions us well to continue to support customers irrespective of macro conditions.
Similar to personal customers, business client expectations spanning speed, convenience and insight-driven personalisation are being shaped by experiences outside of financial services. Alongside this, smaller business customers are starting to look for support beyond their banking needs.
While not yet a major driver of behaviour and preferences, customers are becoming increasingly aware of societal and environmental issues, with rising expectations of how the companies they engage with are responding to these challenges.
Given our history and scale, we have a wealth of customer data and remain focused on using this valuable insight ethically and responsibly to develop products and services that are more personalised to our different customers’ needs.
Against the broader backdrop of increasing expectations and an evolving competitive environment, we cannot become complacent and need to continue to improve the customer experience to remain relevant and attractive to customers.
New regulation and market reviews continue to be issued, with further regulatory changes anticipated
Other A number of other regulatory initiatives are in the pipeline which seek to address, amongst other things; operational resilience, climate change, General Insurance, revised Payment Services Directive (PSD2) requirements, MIFIDII and fraud.
Given the Group’s simple, low risk business model, it is well placed to meet these requirements and welcomes the positive effect that they will have on the industry, its customers and other stakeholders.
Highlights Regulatory changes have resulted in increased competition across more traditional product lines, as excess liquidity is deployed within ring-fenced bank entities
Beyond this, digital-only providers have grown their share of the UK market within the past year. This growth has predominantly been driven by neo-banks that provide a more traditional customer offering alongside leading digital functionality and are able to target selected customer segments. This is supported by the emergence of marketplace models which enable these providers to collaborate with more specialist fintechs to provide a broader suite of products and financial services, both for personal and business banking customers.
Across our core markets such as mortgages, we have looked to prioritise value while maintaining share and supporting our purpose of Helping Britain Prosper. As marginal players have withdrawn from the market, we have more recently strengthened our position, including through the acquisition of Tesco Bank’s mortgage portfolio in September. Alongside this, we have also continued to invest in areas where we are under-represented, such as Insurance and Commercial Banking, in line with the commitments outlined at the start of this strategic plan.
In addition, we remain committed to retaining the largest branch network in the UK. This allows our customers to interact with us in whichever way they prefer, while also providing a human touch point for more complex financial needs. Our network is also key to building and deepening our business banking relationships. We see these as unique competitive advantages, and combined with our ongoing commitment to innovation, provide us with a strong platform to maintain relevance and deepen relationships with our customer base.
Prudent, low risk participation choices with strong capital position Being low risk is fundamental to our business model. Our low risk appetite is reflected through the quality of our loan portfolio and underwriting criteria. Our financial strength has been transformed in recent years and our capital position is strong.
Attracting, developing and retaining the best talent to respond to new ways of working
Strategic priorities Leading customer experience Driving stronger customer relationships through best-in-class propositions while continuing to provide our customers with brilliant servicing and a seamless experience across all channels.
Consistent with this focus, we have also built on our progress in allowing our customers to see all their bank accounts, across different providers, in one place. In 2019, we were the first UK bank to expand this Open Banking aggregation capability to include both savings accounts and credit cards. We’re unique amongst our banking peers in enabling our customers to also view these products together with their Group insurance and pensions products, with our Single Customer View demonstrating strong engagement levels.
Embracing the power of technology As our transformation progresses, we have significantly increased our adoption of new technologies and are seeing a number of tangible customer and colleague benefits as a result. For example, having introduced the use of robotics for simple, repetitive tasks in 2018, we have now created in excess of 1 million cumulative hours of colleague capacity, allowing them to focus on more value adding activities for our customers. In addition, around 55 per cent of our cost base has now been covered by transformation. This is up from just from 12 per cent at the end of 2017 and we expect this to surpass 70 per cent by the end of 2020.
Meeting our customers’ growing financial planning and retirement needs As the UK’s sole integrated financial services provider, we are unique in being able to show and serve all of our customers’ financial needs in one place. In 2019, we extended our Single Customer View capability to over 5 million customers, who are now able to view their insurance and pension products alongside the banking products they hold with us and other providers. Importantly, this is enabling our customers to engage with their longerterm savings needs more proactively, with engagement levels surpassing those of stand alone insurers.
Improving the experience of our Commercial Banking clients We have delivered material improvements to our client experience, while also meeting our £18 billion gross lending commitment to UK businesses, remaining a leader in green financing and maintaining our strong support for exporters and manufactures. We have significantly reduced the time taken to fulfil various client needs through the digitisation of key banking processes. In business banking, the average time to cash for new unsecured loans has been reduced from 6 days in 2018 to a few hours. Similarly, the launch of API connectivity has resulted in a response time of 1.5 seconds for payables transactions, while also driving significantly quicker and more accurate asset finance credit decisions. Through the enhancement of our cash management and payments capabilities, we have also successfully deepened our client relationships.
Strong start for Schroders Personal Wealth Our joint venture with Schroders has harnessed the unique strengths of two of the UK’s strongest financial services businesses to create a market-leading wealth proposition with the expertise and broad spectrum of investment and retirement products to optimise customers’ entire financial lives. Schroders Personal Wealth has got off to a strong start since its launch, with Retail wealth referrals from the Group up 33 per cent in 2019.
Progress in 2019 With our competitive environment increasingly influenced by technological change and innovation, it is critical that we continue to equip our colleagues with the skills needed to deliver our ongoing transformation. We have made significant progress in 2019 and are seeing tangible benefits as these changes take effect. These achievements also continue to be supported by improvements to our working environment, with benefits including greater collaboration and efficiency.
Focus for 2020 We will continue to provide our colleagues with the required skills to support our ongoing transformation, with more specialist skills gaps being addressed by targeted recruitment. This, combined with our shift towards a more collaborative culture will enable us to reduce bureaucracy, harness innovation and deliver change more efficiently than ever before, while also making the Group a more attractive place for people to work.
In July 2019, we launched the reconnecting with customers pilot programme, specifically designed to bring senior leaders across the Group closer to our customers and customerfacing teams.
Earning and retaining the trust of customers is a priority for the Board with regular updates received. The Group remains committed to doing whatever is necessary to ensure all customers impacted by past conduct failures receive fair recompense. During 2019, an independent review highlighted shortcomings in our approach to victims of the historic HBOS Reading fraud and as a result the Board is now taking swift action to contact the impacted victims and ensure they receive fair recompense.
Investor Relations provides regular reports and feedback to the Board on key market issues and shareholder concerns. This includes an annual presentation involving our corporate brokers on market dynamics and corporate perception.
Regular feedback is provided to the Board and appropriate Committees on retail shareholder correspondence.
The Group communicates with its shareholders through regular results and strategy announcements and has a comprehensive website on which detailed company information is available. To ensure effective communication, the Group Chief Executive also specifically writes to all shareholders, updating them on progress, every six months.
Our response to shareholder priorities Group financial performance Read more on pages 36 to 39
The Group has the largest shareholder base in the UK with around 2.4 million shareholders and we undertake a comprehensive shareholder engagement programme including both institutional and retail shareholders with regular feedback to management and the Board. We strive to consider all shareholder groups evenly when making key decisions for the Group.
During 2019, we hosted two retail shareholder briefings, one in London and one in Edinburgh, in which we updated shareholders on strategy and performance and obtained feedback. These briefings were hosted by Investor Relations and senior management.
In May 2019 the Group announced that it will move to the payment of quarterly dividends, from the first quarter of 2020.
Additional information on the changes, including how shareholders can move to direct credit payments, is available on the Group website www.lloydsbankinggroup.com/investors/ shareholder-info/dividends/.
The Board considered the benefits and possible drawbacks for different types of shareholders, in particular retail shareholders given the size of their holdings, along with the Group impact
The Board also looked at various options for the phasing of dividend payments, while remaining mindful of the goal to accelerate payments
The Board places great importance on opportunities to engage directly with colleagues. The Board visited office locations throughout the UK, taking the opportunity to hear directly from colleagues about their work and their successes, passion, drive and commitment to improve the business for the benefit of the Group’s customers.
In 2019, the Board agreed how they would engage with the workforce. The definition of workforce, was agreed by the Board as: Our permanent colleagues, contingent workers and third-party suppliers that work on the Group’s premises delivering services to our customers and supporting key business operations.
As well as its own engagement survey, the Group also takes part in the Banking Standards Board assessment on a yearly basis, which provides member firms with the evidence, support and challenge to help them achieve and maintain high standards of behaviour and competence both individually and collectively. There are five parts to the assessment; an online employee survey, a set of Board questions, interviews with Executive and Non-Executive Directors and employee focus groups.
We have thought carefully about the purpose of remuneration and believe this is an opportune time to propose a simplified reward package that provides greater alignment with the Group’s strategy and the experience of customers, colleagues and shareholders.
Please see page 99 and 101 for further information on key areas of focus discussed with stakeholders.
We offer a competitive and fair reward package. Colleagues are also eligible to participate in HMRC approved share plans which promote share ownership by giving colleagues an opportunity to invest in Group shares. Further information can be found on page 116 in the Directors’ Remuneration Report.
The transition to a low carbon economy impacts us all and subsequently is a fundamental element of our strategy and core to Helping Britain Prosper.
Long-term implications The Board believe we have a responsibility to help drive progress towards a sustainable and resilient UK economy, taking into consideration the needs of different stakeholders and risks to the business, and were comfortable endorsing ambitious plans, given the benefit to the Group and future generations.
Maximising Group capabilities >£4.9bn Green finance Read more about our approach to green finance on page 29 >50% by 2030 We aim to help reduce the emissions we finance by more than 50 per cent by 2030
The Board recognises the responsibility the Group has to engage with and respond to some of the economic, social and environment challenges the UK faces
The Chairman has had extensive dialogue with both the FCA and PRA on all aspects of their regulatory agenda.
Given the importance of this topic for the Group and the country, numerous stakeholders were engaged to inform our approach including customers, colleagues, shareholders, suppliers, regulators and government.
The extended EU Exit Executive Forum was established, chaired by the Group Chief Financial Officer, with comprehensive cross-Group representation, to provide an update to the Board on the Group’s EU Exit contingency planning
Additional updates from the EU Exit Forum were also submitted to the Board Risk Committee and Group Risk Committee
Engagement with politicians, officials, media, trade and other bodies to reassure our commitment to Helping Britain Prosper
Our approach to tax Our comprehensive and diligent approach to regulation is typified by our approach to tax, with HMRC being a key stakeholder for the Group.
As a Group with the purpose to Help Britain Prosper, and with 98 per cent of our business subject to tax in the UK, we’re proud to be one of the largest contributors of UK tax revenues. As well as our tax expense of £1.4 billion as seen in the income statement, in 2019 we also paid £0.8 billion of other business taxes (including the Bank levy and our employer NIC costs) and £0.8 billion of irrecoverable VAT, a total tax contribution for the year of £2.9 billion. In addition, we are also a major tax collector, gathering £1.9 billion on behalf of HMRC.
Our response to supplier priorities In 2019 our supplier expenditure was £5.9 billion with over 95 per cent of our third party suppliers located in the UK.
Working closely to share expertise in developing innovative, high quality products and services and effectively managing risk
The Group collaborates with its suppliers on key issues. The Group held a supplier breakfast with a roundtable discussion on cyber, resilience and information security.
The Board has a zero tolerance attitude towards modern slavery in our supply chain and continue to make enhancements to address the risk of and provide specific training on human trafficking and modern slavery for specialist colleagues.
As previously indicated, the Group’s strong free capital build gives us flexibility to consider inorganic growth opportunities in selected target areas, where we see value for shareholders
We are working to empower our colleagues and one example of this is our award winning behavioural experiments initiative, where colleagues test new ways of working that can lead to permanent process and policy changes, including those that improve customer satisfaction.
Addressing some of the social, economic and environmental challenges facing the UK is the foundation of our Helping Britain Prosper Plan. The Plan takes us beyond business as usual, uniting the Group behind an inspiring set of objectives.
Homes: be a leading UK provider of customer support on energy efficient, sustainable homes
Green finance We have provided more than £4.9 billion in green finance since 2016 through our Clean Growth Finance Initiative, Commercial Real Estate Green Loans Initiative, Renewable Energy Financing, and green bonds facilitation. While green loan standards are evolving, we have teamed up with leading sustainability consultants when developing green finance products to determine a list of qualifying green criteria. These green finance products support a range of eligible product activity including; reducing emissions, improving energy efficiency, reducing waste, improving water efficiency, and funding low carbon transport and renewable energy.
Climate risk sectors In line with TCFD recommendations, we have identified our loans and advances to customers in high carbon sectors and a selection of other sectors that will be exposed to transition risk (see table). This is our initial view and will be reviewed as our transition risk insight develops. We continue to work with our customers to support transition, taking into account both risks and opportunities.
Cement, Chemicals and Steel Manufacture 1 Exposures are based on 2007 Standard Industrial Classification codes except for Agriculture, Forestry and Fishing (based on NACE code A00-0) and Mortgages and UK Motor Finance, where the full portfolios have been used. These exposures will include green and other sustainable finance loans, which support the transition to the low carbon economy. As such, these figures and/or trends should not be read as the only measure to gauge transition risk or financed emissions.
2 Disclosures are based on loans and advances to customers on a statutory basis, before allowance for impairment losses. Analysis covers at least 95 per cent of loans and advances and does not include data from the Insurance and Wealth division.
Loans and advances to customers in high carbon sectors and selected other sectors subject to transition risks
– The Responsible Business Committee (RBC), a sub-committee of the Board, chaired by Sara Weller, Group Non-Executive Director and which includes the Chairman, Lord Blackwell as a member
Clean growth in the fashion industry Teemill Tech, a sustainable t-shirt manufacturer, bought a 15,000 square feet site to expand its operations with support from Lloyds Bank’s Clean Growth Finance Initiative. Their renewable energy-powered factory on the Isle of Wight uses robotics and Artificial Intelligence, creating efficiencies that make sustainability affordable. Their expansion will increase capacity tenfold, creating 100 new jobs over the next three years.
Lloyds Banking Group achieved the Leadership level in the 2019 Carbon Disclosure Project (CDP) Climate Change survey, scoring an A minus; the highest placed financial services firm on the Fortune Sustainability All Stars list; and won the Real Estate Capital Sustainable Finance Provider of the Year
Our £2 billion Clean Growth Finance Initiative (CGFI) provides discounted lending to low carbon projects. In 2019, we expanded eligibility to include hire purchase and leasing in the agriculture and manufacturing sectors. We have provided more than £950 million since launching in 2018.
Evolving our disclosure In 2020, we will continue to review and enhance our methodologies and framework for reporting Environmental, Social and Governance risks. This review will take into account a range of industry guidelines including TCFD, Principles for Responsible Banking, Sustainability Accounting Standards Board (SASB), the evolving World Economic Forum (WEF) ESG standards, and regulatory reporting requirements with a view to further enhancing our disclosures and responding to the evolving needs of both our shareholders and other stakeholders.
Coalition for Climate Resilient Investment In September 2019, we joined the newly formed coalition that aims to transform infrastructure investment by integrating climate risks into decision making.
Working with more than 200 housing associations across the UK, we have provided more than £6.4 billion of finance for the social housing sector since 2018.
LiveWest offer affordable rent and shared ownership, building new homes, and using the profits to build more affordable homes. With sites across the South West and employing over 1,400 people, they have a strong positive social impact. Their investment plans will sustain around 7,000 jobs in the building supply chain, protecting livelihoods and offering fresh opportunities.
As one of the UK’s largest corporate donors, we use our scale to reach people in communities across the country. Our four independent charitable Foundations, which cover the whole of the UK and the Channel Islands, are critical to our vision of tackling social disadvantage by partnering with local charities to help overcome complex social issues and rebuild lives.
Our total community investment in 2019 was £50.8 million and includes our colleagues’ time, direct donations, and a share of the Group’s profits given annually to the Foundations. In 2019, the Foundations received £25.9 million, enabling them to support 2,929 charities. These charities are tackling issues such as domestic abuse, mental health, modern slavery and human trafficking, and employability. In addition to providing funding, colleagues across the UK also volunteered as mentors to charities supported by the Foundations.
The digital skills gap The 2019 Lloyds Bank Consumer Digital Index showed that more people than ever are digitally connected. Digital skills help individuals find a job, make progress in work, save money on bills, and reduce social isolation by connecting them to support services, as well as friends and family. The 2019 Lloyds Bank Business Digital Index showed that digital benefits businesses and charities too. Digital marketing skills for businesses can open up growth opportunities, while cyber skills make them more secure.
Working Better Together Angela Loveridge created Better Together after identifying a gap in parents’ understanding of online safety for children. It provides training to help safeguard children online, delivering workshops for schools, childrens centres, businesses and charities, and in 2018 was nominated for the NSPCC Child Protection Trainer award.
Looking to a brighter future Angel Eyes Northern Ireland is a small charity based in Belfast, which was set up in 2007 by parents of visually impaired children, to improve the support available to other parents in the same situation. The charity offers a range of services to families including an education service, Saturday club and advocacy work. The Halifax Foundation for Northern Ireland was one of the first funders of this charity, helping it to secure five community grants since 2014.
with disabilities, including those who became disabled while employed. We hold a Business Disability Forum (BDF) Gold Standard, and Disability Confident Leader status with the Department for Work and Pensions. In July, we received the National Autistic Society’s Autism Friendly Award, marking our commitment to become the UK’s first autism friendly bank for customers.
In 2019, the Group featured in Fortune’s Change the World list for our work with Mental Health UK and the Group Chief Executive was named a top 50 world leader by Fortune magazine for raising mental health awareness.
We are a founding signatory of the Mental Health at Work Commitment and our colleague wellbeing resources provide a range of support including direct access to counselling services. We also offer colleagues private medical benefits that give parity to mental and physical health conditions.
Finding the right solution Throughout 2019 many colleagues shared their experiences to help reduce stigma around mental illness in the workplace. One colleague accessed telephone counselling through the Employee Assistance Programme. He then saw his GP, which in turn led to treatment through Cognitive Behavioural Therapy and psychotherapy.
I am incredibly grateful for the support I have had from the Group. I recognise that I have been fortunate, and many others may not have access to the support I did. I’m sharing my story, to act as an advocate for the support I received.
Approaching diversity as a business issue reflects our firm view that diverse teams, working within inclusive environments, are more innovative, engaged, and deliver better outcomes for our customers. As the first FTSE 100 company to set targets to increase both gender and ethnic diversity at senior levels, we continue to invest in being a leading inclusive employer, where the unique differences our colleagues bring to work every day are valued.
Information necessary to understand our Group and its impact, policies due diligence and outcomes
– Helping the transition to a sustainable low carbon economy: Risk management, page 30
The policies mentioned above form part of the Group’s Policy Framework which is founded on key risk management principles. The policies which underpin the principles define mandatory requirements for risk management. Robust processes and controls to identify and report policy outcomes are in place and were followed in 2019.
5 The CET1, MREL, leverage ratios and risk-weighted assets at 31 December 2019 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The pro forma CET1 ratio at 31 December 2018 incorporates the effects of the share buyback announced in February 2019 and is reported post dividend accrual.
Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value, and by providing customers with choice and flexibility, with propositions increasingly personalised to their needs.
£13.8bn Lending to first time buyers £3.5bn Acquired Tesco’s Bank UK prime residential mortgage portfolio supporting 23,000 new customers
Maintained the largest UK branch network while trialling new branch formats with the latest flagship Bank of Scotland branch in Glasgow, and Home by Halifax, an innovative store dedicated to supporting customers purchase a property
Supporting first time buyers with further £13.8 billion of lending, building on success of Lloyds Lend a Hand mortgage, launched Halifax Family Boost mortgage, providing customers' financial supporters with enhanced savings rates
Encouraging customers to talk more openly about their finances, through the launch of the M Word campaign earlier this year and co-funding a brand new television series with Channel 4 called ‘Save Well, Spend Better’
– Statement search helping customers find transactions quicker and easier, with c.300,000 searches per week
Maximising Group capabilities Acquired Tesco Bank’s UK prime residential mortgage portfolio supporting 23,000 new customers
Transforming ways of working Continued progress in 'skills of the future' training delivered to colleagues with over 750,000 additional hours in 2019
Financial performance Net interest income was 3 per cent lower due to a 5 basis point reduction in net interest margin with continued pressure on mortgages margin, partly offset by lower funding costs and a benefit from aligning credit card terms
Operating costs reduced 3 per cent, as increased investment in the business was more than offset by efficiency savings. Remediation decreased 11 per cent to £238 million
Customer deposits include current account growth, stable relationship savings and reduced low margin tactical savings
Commercial Banking has a client-led, low risk, capital efficient strategy, committed to supporting UK based clients and international clients with a link to the UK.
Improved eTrading capability, enabling larger clients to undertake foreign exchange trades electronically 24 hours per day across multiple geographies and supporting clients in automating their businesses
On track to meet the Group’s target of £3 billion of investment in the UK manufacturing sector by the end of 2020
Net interest income of £2,918 million reduced 3 per cent, reflecting asset margin pressure
Customer deposits at £145.1 billion, down 2 per cent, reflecting funding optimisation activity including a reduction in short-term financial institutions deposits with growth in current accounts of 3 per cent in the second half of the year
The Group continues to invest significantly in the business, with the aims of capturing considerable opportunities in pensions and financial planning whilst driving growth across intermediary and relationship channels through a strong distribution model, offering customers a single home for their banking and insurance needs.
Sourced £0.6 billion of new long-term assets in collaboration with Commercial Banking to support five bulk annuity transactions, generating over £2 billion of new business premiums
The Board delegate executive authorities to ensure there is effective oversight of risk management.
The identification, measurement and control of our risks form an integral part of our Risk and Control Self Assessment.
The robust approach to monitoring, oversight and assurance ensures effective risk management across the Group.
Risk as a strategic differentiator Risks are identified, managed, mitigated and monitored using our comprehensive enterprise risk management framework, and our well-articulated risk appetite provides a clear framework for decision-making. The principal risks we face, which could significantly impact the delivery of our strategy, are discussed on pages 139 to 187.
We believe effective risk management can be a strategic differentiator, in particular: Prudent approach to risk Being low risk is fundamental to our business model and drives our participation choices. Strategy and risk appetite are developed in tandem and together outline the parameters within which the Group operates
Our enterprise risk management framework The Group’s risk appetite, principles, policies, procedures, controls and reporting are regularly reviewed and updated where needed to ensure they remain fully in line with regulations, law, corporate governance and industry good practice.
Our risk management framework outlines the framework in place for risk management across the Group. During 2019, we updated this framework to be more succinct and to better ensure it is accessible to all colleagues.
Based on the Group’s conservative business model, prudent approach to risk management, and guided by the Board, senior management articulate the core risk values to which the Group aspires, and set the tone from the top, with a strong focus on building and sustaining long-term relationships with customers through the economic cycle. The Group’s Code of Responsibility reinforces colleague accountability for the risks they take and their responsibility to prioritise their customers’ needs.
Effective communication and challenge As a Group we are open, honest and transparent with risk colleagues working in collaboration with business areas to: Support effective risk management
2019 themes Our priorities for risk management have continued to evolve, alongside progression of the Group’s strategy and development of external factors. Our principal risks are outlined over the next few pages but some themes have been particularly prevalent in 2019.
EU exit Given the vast majority of our business is in the UK, the direct impact on the Group from leaving the EU is relatively small and we have taken the necessary steps to ensure continuity of our limited EU business activities, where permitted.
The risk that, in delivering our change agenda, we fail to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operate within our approved risk appetite.
We recognise the importance of delivering the Group’s strategic priorities and will continue to invest in the transformation of the Group to deliver a leading customer experience
The risk that we fail to effectively govern, manage, and control our data (including data processed by third party suppliers) leading to unethical decisions, poor customer outcomes, loss of value and mistrust.
Mitigation Significant investment has been made to enhance the maturity of data risk management in recent years
We recognise that lawful, fair and transparent collection and appropriate use of data, is critical to delivering a leading customer experience and maintaining trust across the wider industry
The risk that we fail to design resilience into business operations, underlying infrastructure and controls (people, process, technology) so that it is able to withstand external or internal events which could impact the continuation of operations, and fails to respond in a way which meets customer and stakeholder expectations and needs when the continuity of operations is compromised.
End-to-end resilience of our critical processes is a key strategic priority and the Group operational resilience programmes continue to invest in improving our control environment and resilience. We continue to exercise, test and improve our resilience through scenario testing as well as learning from real events (those impacting ourselves but also those impacting others) through understanding the root cause
Change/execution risk was elevated from a secondary risk to a principal risk in recognition of the significant volumes of complex change the Group is currently undertaking to deliver its strategy. This includes key change initiatives, digitising the Group and transforming ways of working which will help to future-proof against the heightened risks associated with the use of new technologies and manage regulatory requirements and expectations. The decision aligns with the Group’s progress in developing and embedding its change and execution risk management capabilities
The risks which result from strategic plans which do not adequately reflect trends in external factors, ineffective business strategy execution, or failure to respond in a timely manner to external environments or changes in stakeholder behaviours and expectations.
Example The financial services sector operates in evolving regulatory and competitive environments with an increased pace, scale and complexity of change which creates a risk to the Group’s strategic plans
Robust operating and contingency planning to ensure potential impacts of strategic initiatives and external drivers are mitigated
Strategic risk is a new principal risk in acknowledgment of the increasing rate of change in customer expectations, regulatory and competitive environments along with the demands for specialist skills to meet these evolving needs. This aligns with our strategic priorities to deliver a leading customer experience by digitising the Group, maximising Group capabilities and transforming ways of working
The risk of loss from inadequate or failed internal processes, people and systems, or from external events.
The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (including insurance) and acceptance
Example Inability to attract or retain colleagues with key skills could impact the achievement of business objectives.
The risk of customer detriment across the customer lifecycle including: failures in product management, distribution and servicing activities; from other risks materialising, or other activities which could undermine the integrity of the market or distort competition, leading to unfair customer outcomes, regulatory censure, reputational damage or financial loss.
Key risk indicators £17,515m Life and pensions present value of new business premiums £671m General insurance underwritten total gross premiums 2018: £690m
Risk Appetite We have robust controls in place to manage the insurance underwriting risk inherent in the products our Insurance business offers to meet customer needs.
Key risk indicators £118bn LCR eligible assets 2018: £129bn 107% Loan to deposit ratio
Example The consequences of inadequate models could include: inappropriate levels of capital or impairments; inappropriate credit or pricing decisions; and adverse impacts on funding or liquidity, or the Group’s earnings and profits.
Mitigation Structural hedge programmes implemented to manage liability margins and margin compression Equity and credit spread risks are closely monitored and, where appropriate, asset and liability matching is undertaken The Group’s defined benefit pension schemes continue to monitor their credit allocation as well as the hedges in place against nominal rate and inflation movements
The risk that our organisational infrastructure fails to provide robust oversight of decision making and the control mechanisms to ensure strategies and management instructions are implemented effectively.
Non-compliance with, or breaches of SMCR requirements could result in lack of clear accountability, and legal and regulatory consequences
Mitigation Defining individual and collective accountabilities for risk management, risk oversight and risk assurance through a three lines of defence model which supports the discharge of responsibilities to customers, shareholders and regulators
Our governance framework and strong culture of ownership and accountability enabled effective, on time, compliance with the SMCR requirements and enable us to demonstrate clear accountability for decisions
Anwyl Homes One of the UK’s leading independent housing developers has boosted its turnover by 60 per cent, after receiving support from Lloyds Bank to expand its presence across the North West.
Net income of £17,142 million was 4 per cent lower than in 2018, reflecting lower net interest income and other income, while operating lease depreciation increased by 1 per cent.
Cost: income ratio 48.5% 49.3% (0.8)pp 1 2018 Business as usual costs are adjusted to reflect the impact of applying IFRS 16. Excluding the impact of IFRS 16 business as usual costs in 2018 were £6,048 million.
Operating costs of £7,875 million were 4 per cent lower with a 6 per cent reduction in business as usual costs, largely driven by increased efficiency from digitalisation and process improvements, in parallel with strategic investment of £1.0 billion in the business, up 6 per cent in the year. During 2019 the Group capitalised around £1.5 billion of investment spend, of which around £1.0 billion related to intangible assets. Total capitalised spend was equivalent to around 60 per cent of above the line investment, in line with 2018.
Remediation charges of £445 million, including additional charges of £219 million in the fourth quarter of 2019 relating to a number of items across existing programmes, were significantly lower than the £600 million in 2018.
Stage 2 loans and advances to customers as % of total 7.7 7.8 (0.1)pp
Stage 2 ECL2 allowances as % of Stage 2 drawn balances 3.7 4.1 (0.4)pp
Stage 3 ECL2 allowances as % of Stage 3 drawn balances 22.5 24.3 (1.8)pp
Total ECL2 allowances as % of drawn balances 0.8 0.9 (0.1)pp 1 Underlying basis.
The Group’s loan portfolios continue to be well positioned, reflecting the Group’s prudent, through the cycle approach to credit risk, and benefiting from continued low interest rates and a resilient UK economy.
3 Excludes balances relating to margins of £4.2 billion (31 December 2018: £3.8 billion) and settlement accounts of £1.9 billion (31 December 2018: £1.2 billion).
Wholesale funding increased by 4 per cent to £128 billion (31 December 2018: £123 billion) in part as a result of refinancing Funding for Lending Scheme maturities in the year. The proportion maturing in less than one year increased by 31 per cent to £43.4 billion (31 December 2018: £33.1 billion) due to higher term funding maturities in 2020. The Group’s liquidity position continues to exceed the regulatory minimum and internal risk appetite.
2 The CET1, total, MREL, leverage ratios and risk-weighted assets at 31 December 2019 and 31 December 2018 are reported on a pro forma basis, reflecting the dividend paid up by the Insurance business in the subsequent first quarter period. The pro forma CET1 ratio at 31 December 2018 incorporates the effects of the share buyback announced in February 2019 and is reported post dividend accrual.
The Group’s CET1 capital build in the year amounted to 207 basis points before PPI, and to 86 basis points after the in-year PPI charge, equivalent to 121 basis points. Solid financial performance has driven underlying capital build of 198 basis points, including 18 basis points from the dividend from the Insurance business. Capital build also included 20 basis points from favourable, risk-weighted asset and other movements (reflecting market movements and the continued optimisation of Commercial Banking risk-weighted assets, net of additional pension contributions and model updates), partly offset by the 11 basis points impact of IFRS 16. The Group’s capital position also benefitted by 34 basis points from the cancellation of the remaining c.£650 million of the 2019 buyback programme, as announced in September 2019. The Group used 9 basis points of capital for the acquisition of Tesco Bank’s UK prime residential mortgage portfolio.
During 2019 the Prudential Regulation Authority (PRA) reduced the Group’s Pillar 2A CET1 requirement from 2.7 per cent to 2.6 per cent. Separately, the Financial Policy Committee of the Bank of England announced an increase in the Countercyclical Capital Buffer (CCYB) rate for the UK from 1.0 per cent to 2.0 per cent, effective from December 2020. During 2020 the PRA will consult on a proposed reduction in Pillar 2A total capital requirements by 50 per cent of this increase in the CCYB, equivalent to reducing the Pillar 2A CET1 requirement by 28 per cent of the increase. Taking into account the current and potential future changes to capital requirements, the Board’s view of the current level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties continues to be c.12.5 per cent plus a management buffer of c.1 per cent.
Risk-weighted assets on a pro forma basis have reduced by £3.0 billion to £203.4 billion driven primarily by the optimisation of the Commercial Banking portfolio, offset in part by model updates in mortgages, the implementation of IFRS 16 and the acquisition of the Tesco Bank’s mortgage portfolio. We now expect risk-weighted assets at the end of 2020 to be broadly in line with the end of 2019, including regulatory headwinds.
Tangible net assets per share 50.8p 52.0p 53.0p 53.4p 53.0p 51.3p 52.1p 52.3p 1 Comparatives for 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206.
4 Risk-weighted assets at 30 June 2018 are reported on a pro forma basis reflecting the sale of the Irish mortgage portfolio.
Ordinary shares in issue, excluding own shares 70,031m 70,007m – 70,740m (1) 71,149m (2)
8 The adoption of IFRS 16 on 1 January 2019 resulted in the recognition of a right-of-use asset of £1.7 billion and lease liabilities of £1.8 billion.
2 Includes Mid Corporates (31 December 2019: £5.3 billion; 31 December 2018: £5.8 billion).
3 The Group’s insurance businesses’ income statements include income and expenditure which are attributable to the policyholders of the Group’s long-term assurance funds. These items have no impact in total upon the profit attributable to equity shareholders and, in order to provide a clearer representation of the underlying trends within the business, these items are shown net within the underlying results.
Banking net interest margin (%) 2.88 2.93 1 2019 includes impact from the implementation of IFRS 16.
In-year volatility movements were largely driven by insurance volatility arising from interest rate and credit spread movements. The capital impact of equity market movements is now hedged within Insurance and this also reduces the IFRS earnings exposure to equity market movements.
Statutory return on tangible equity (%) 7.8 11.7 1 Prior period restated to reflect amendments to IAS 12, see basis of presentation on page 206.
Quarterly dividend I am pleased to report that the Board approved the Group moving to the payment of quarterly dividends in 2020, with the first quarterly dividend in respect of the first quarter of 2020 payable in June 2020. The Group has around 2.4 million shareholders, the vast majority of whom are retail shareholders, and this approach will provide a more regular flow of dividend income to all shareholders whilst accelerating the receipt of payments. Further information on quarterly dividends can be found on pages 21 and 268.
Comprising Directors with the right mix of skills and experience, the Board is collectively responsible for overseeing delivery of the Group’s strategy 1. Lord Blackwell Chairman Appointed: June 2012 (Board), April 2014 (Chairman) Skills, experience and contribution: Deep financial services knowledge including insurance and banking Significant experience with strategic planning and implementation Regulatory and public policy experience gained from senior positions in Downing Street, Regulators and a wide range of industries Credibility with key stakeholders Strong leadership qualities Lord Blackwell is an experienced Chairman and Non-Executive Director within the financial services sector having previously been Chairman of Scottish Widows Group. He was previously Senior Independent Director and Chairman of the UK Board for Standard Life and Director of Group Development at NatWest Group. His past Board roles have also included Chairman of Interserve plc, and Non-Executive Director of Halma plc, Dixons Group, SEGRO and Ofcom. He was Head of the Prime Minister’s Policy Unit from 1995 to 1997 and was appointed a Life Peer in 1997. External appointments: Governor of the Yehudi Menuhin School and a member of the Governing Body of the Royal Academy of Music.
2. Anita Frew Deputy Chairman Appointed: December 2010 (Board), May 2014 (Deputy Chairman), May 2017 to December 2019 (Senior Independent Director) Skills, experience and contribution: Significant board, financial and general management experience Experience across a range of sectors, including banking, asset and investment management, manufacturing and utilities Extensive experience as chairman in a range of industries
Qualification as an Audit Committee Financial Expert Strong board governance experience, including investor relations and remuneration Simon was formerly Chief Financial Officer and Executive Director of Royal Dutch Shell plc. He was also previously Chair of the European Round Table CFO Taskforce and a Member of the Main Committee of the 100 Group of UK FTSE CFOs. External appointments: Non-Executive Director of Rio Tinto plc and Rio Tinto Limited and Chair of their Audit Committee, Independent Director of PetroChina Company Limited, Member of the Defence Board and Chair of the Defence Audit Committee, UK Government, Member of the Advisory Panel of CIMA and of the Advisory Board of the Centre for European Reform.
5. Sarah Legg Independent Director Appointed: December 2019 Skills, experience and contribution: Strong financial leadership skills Significant experience in financial and regulatory reporting Strong transformation programme experience Sarah has spent her entire career in financial services with HSBC in finance leadership roles. She was the Group Financial Controller and a Group General Manager of HSBC until early 2019 and previously Chief Financial Officer for HSBC’s Asia Pacific region. She also spent 8 years as a Non-Executive Director on the Board of Hang Seng Bank Limited, a Hong Kong listed bank. External appointments: Honorary Vice President of The Hong Kong Society for Rehabilitation and Chair of the Campaign Advisory Board of King’s College, Cambridge University.
2 Alan Dickinson succeeded Anita Frew as Senior Independent Director on 1 December 2019 and will succeed her as Deputy Chairman when she retires from the Board at the AGM in May 2020.
3 Juan Colombás has announced his plan to retire from the Group in July 2020.
Lloyds Banking Group Annual Report and Accounts 2019 67 Lloyds Banking Group Annual Report and Accounts 2019 67 Strateg ic rep ort
11. António Horta-Osório Executive Director and Group Chief Executive Appointed: January 2011 (Board), March 2011 (Group Chief Executive) Skills, experience and contribution: Extensive experience in, and understanding of, both retail and commercial banking built over a period of more than 30 years, working both internationally and in the UK Drive, enthusiasm and commitment to customers Proven ability to build and lead strong management teams António previously worked for Citibank and Goldman Sachs and held various senior management positions at Grupo Santander before becoming its Executive Vice President and member of the Group’s Management Committee. He was a Non-Executive Director of Santander UK and subsequently its Chief Executive. He is also a former Non-Executive Director of the Court of the Bank of England. External appointments: Non-Executive Director of EXOR N.V., Fundação Champalimaud and Sociedade Francisco Manuel dos Santos in Portugal, a member of the Board of Stichting INPAR Management/ Enable and Chairman of the Wallace Collection.
4. Paul Day Chief Internal Auditor Appointed: September 2016 (GEC attendee) Skills and experience: Paul joined the Group as a contractor in September 2016 and was formally employed by the Group in June 2017. He joined from Deloitte where he was a partner in the UK Financial Services practice and led the UK Financial Services Internal Audit business. Paul has specialised in internal and external audit roles across financial services for over 20 years, including 10 years in various leadership roles in Barclays Internal Audit.
William Chalmers Executive Director and Chief Financial Officer William joined the Board in August 2019 as an executive director and the Chief Financial Officer. Read his full biography on page 67.
Lloyds Banking Group Annual Report and Accounts 2019 69 Lloyds Banking Group Annual Report and Accounts 2019 69 Strateg ic rep ort
10. Stephen Shelley Chief Risk Officer Appointed: September 2017 (GEC) Skills and experience: Stephen was appointed Chief Risk Officer in September 2017. He joined the Group in May 2011 as Chief Credit Officer for Wholesale, Commercial and International. In October 2012 he became Risk Director, Commercial Banking Risk and was also a member of the Commercial Banking Management Group. Prior to joining the Group, Stephen was Chief Risk Officer at Barclays Corporate and prior to that was Chief Credit Officer for the UK Retail and Corporate business in Barclays. In a 21-year career at Barclays, Stephen undertook a variety of roles in the front office and risk. Stephen is also the Group’s Executive Sponsor for Gender Diversity and Equality.
11. Letitia Smith Group Director, Conduct, Compliance and Operational Risk Appointed: June 2019 (GEC attendee) Skills and experience: Letitia joined the Group in 2014, undertaking Conduct, Compliance and Operational Risk roles across both Retail and Commercial divisions before being appointed into her current role as the Group Director, Conduct, Compliance and Operational Risk in 2016. Prior to joining the Group, Letitia was Chief Risk Officer at Kleinwort Benson Private Bank with responsibility for Risk, Compliance, Legal, Internal Audit and Company Secretariat. She spent 11 years at RBS in various roles, but latterly as the Chief Risk Officer of the Wealth Division with responsibility for Risk and Compliance across several banks including Coutts UK and Coutts Switzerland. Letitia is also a qualified accountant and has a background in forensic accountancy.
12. Jennifer Tippin Group People and Productivity Director Appointed: July 2017 (GEC) Skills and experience: Jen was appointed as the Group People and Productivity Director in July 2017 and is responsible for several functions including people, property, sourcing and supply chain management, divestment and development and Group costs. Prior to this role, Jen was Group Customer Services and Managing Director, Business Banking. Jen joined the Group in 2005 having previously worked in the engineering and airline sector. Jen is a Non-Executive Director of Lloyds Bank Corporate Markets plc. In March 2020 Jen will join the Board of Morgan Sindall plc as a Non-Executive Director.
4 Unable to attend due to a scheduling clash with a prior business commitment.
5 Unable to attend due to a scheduling clash with another Group business commitment.
Where further training or awareness is identified, such as new technology, regulations or sector advances, deep dives are held with the relevant field expert to provide overviews, chances to raise questions, and debate the impacts on business in an informal setting.
The right processes in place to deliver on our strategy During the year, there were 11 scheduled Board meetings, with details of attendance shown on page 70. In addition to formal meetings, the Board meets as necessary to consider matters of a time-sensitive nature. The Chairman and the Chairmen of each Committee ensure Board and Committee meetings are structured to facilitate open discussion, debate and challenge.
The draft Board agenda is discussed with the Chairman and the Group Chief Executive and reviewed at GEC meetings
Committee meetings are generally held prior to Board meetings, with the Chairman of each Committee then reporting matters discussed to the Board
Minutes and matters arising from the Board meeting are produced and circulated to the Directors for review and feedback
Those responsible for matters arising are asked to provide updates to a subsequent meeting
The Board sets the strategy, oversees its delivery and establishes the culture, values and standards of the Group. The Board ensures that the Group manages risk effectively, monitors financial performance and reporting and ensures that appropriate and effective succession planning arrangements and remuneration policies are in place. It provides and encourages entrepreneurial leadership across the Group within this framework.
Link to strategic priorities: Link to stakeholder groups: Customers; Colleagues; Regulatory and Government; Suppliers
Reviewed and approved funding and liquidity plans and capital plan Link to stakeholder groups: Regulatory and Government
Discussed GSR3 and four year operating plan Link to strategic priorities: Reviewed and approved Basel Pillar 3 disclosures Link to stakeholder groups: Regulatory and Government
Discussed outcome of Board effectiveness review and agreed actions arising from it Link to stakeholder groups: Shareholders
Discussed update on Banking Standards Board 2018 survey Link to stakeholder groups: Colleagues; Regulatory and Government
Considered key areas of conduct risk Link to stakeholder groups: Colleagues; Customers; Regulatory and Government
Reviewed and approved PRA stress testing results Link to stakeholder groups: Customers; Shareholders; Regulatory and Government
Deep dive sessions The Board regularly takes the opportunity to hold deep dive sessions with senior management outside formal Board meetings. The purpose of the sessions is to provide the Board with deeper insight into key areas of strategic focus, whilst providing Directors with a greater understanding and appreciation for the subject matter to help drive better quality of debate and enhance knowledge. The sessions are structured to allow plenty of opportunity for discussion and include presentations and videos.
Details of the deep dive sessions that were held in 2019 are set out in the key focus areas section on pages 72 and 73. In addition, detailed updates were received from, and joint discussions held with, Scottish Widows Group Limited and Lloyds Bank Corporate Markets plc.
Governance in action Board oversight: culture The Group aims to continually develop a values-led culture with the Board providing sponsorship of this approach. Our values and behaviours are the foundation of our culture, providing us with a clear framework to ensure we understand what is expected of each other every day. Despite many strengths, the Board recognises that the Group’s culture needs to continually change to ensure the business can adapt rapidly to a changing environment while delivering the best outcomes for customers.
How important is sustainability and the management of climate change risk to the Group? Sustainability and climate change has become a pressing priority for the country and beyond. Over the past year we have been working, right across the business, on the best ways for the Group to respond to these challenges, and have developed a sustainability strategy which is committed to supporting the UK’s transition to a sustainable, low-carbon economy, and is fully aligned to the Paris
It was also important, in this round, to build in as much optionality as we could, so that change in society’s expectations or regulation or indeed the market for top talent could be accommodated within the new Policy. The various tests which have been engineered into the Policy, along with the continued expectation of Committee override and discretion, give the Committee some reassurance that a degree of future proofing has been built in.
Board oversight: operational resilience The Board believes that operational resilience has become ever more important: maintaining the Group’s most important services for our customers and the market in which we operate is critical and requires ongoing focus as the Group becomes more reliant on technology against a changing threat landscape.
The Board also approved, and receives regular updates from the Group Chief Operating Officer, on progress against the Group’s Operational Resilience strategy, and the operational resilience investment programmes that are delivering the strategy.
A suite of formal Board metrics and qualitative reporting to monitor progress and risks
Deep dives sessions on key areas (see pages 72 and 73 for more information)
These touchpoints enable the Board to oversee the Group’s transformation strategy, continually challenge and develop that strategy and take informed decisions on the critical issues relating to the Group’s strategy.
Workforce engagement Please refer to page 22 for details of how the Board engages with the Group’s workforce and why the Board considers these arrangements to be effective.
Clear and effective governance at both Ring-Fenced Bank and Lloyds Banking Group plc level – including second and third lines of defence in respect of risk management
Non Ring-Fenced bank sub-group - Lloyds Bank Corporate Markets plc (LBCM) - which provides products and services to Group customers that are not allowed within the ring-fence as well as serving Financial Service customers and holding the Group’s subsidiaries and branches outside the UK
Lloyds Bank Corporate Markets has its own Board as a separately constituted and regulated banking subsidiary, chaired by a Non-Executive Group Board member, Lord Lupton, and with its own independent Non-Executive Directors. Scottish Widows Group, which is regulated as an insurance group, similarly has its own Board with independent Non-Executive Directors, and is chaired by a Group Non-Executive Director, Nick Prettejohn. The Chief Executives and Functional Heads of these businesses have reporting lines to the Group executives, and the Group Board receives regular updates on their strategic development and performance.
Group Chief Executive António Horta-Osório undertook a number of visits throughout the UK in 2019. During his regional visit to Glasgow in October 2019, António took the opportunity to spend time with our teams and customers, including holding a town hall, a recognition dinner to celebrate colleagues and all they are doing to Help Britain Prosper and embody the Group’s values and a business breakfast with local Small and Medium-sized Enterprise and Corporate clients.
Lloyds Banking Group Annual Report and Accounts 2019 77 Lloyds Banking Group Annual Report and Accounts 2019 77 Strateg ic rep ort
December 2019 to January 2020 Report prepared by the Company Secretary based on the questionnaire results and matters raised in individual meetings.
April 2020 Actions to be recommended to the Board by the Nomination and Governance Committee to reflect the Board discussion in January.
Lord Blackwell took part in the branch team talk with colleagues from the Lloyds Bank Branch. Topics covered the Group’s joint venture with Schroders Personal Wealth, customer referrals and supporting our local communities. There were questions for Lord Blackwell covering the economic environment, digital technology, the Group’s brands and its branch network.
The visit continued with a Town Hall session for around 80 colleagues at which Lord Blackwell invited questions and answered a wide variety of questions covering topics such as resilience for colleagues and the Group, his own mentors and inspirations, the branch network, EU exit and leadership styles and skills.
Board responsibility The Board is responsible for the Group’s risk management and internal control systems, which are designed to facilitate effective and efficient operations and to ensure the quality of internal and external reporting and compliance with applicable laws and regulations. The Directors and senior management are committed to maintaining a robust control framework as the foundation for the delivery of effective risk management. The Directors acknowledge their responsibilities in relation to the Group’s risk management and internal control systems and for reviewing their effectiveness.
As Deputy Chairman, Anita Frew supports the Chairman in representing the Board, and acts as a spokesperson for the Group. She deputises for the Chairman and is available to the Board for consultation and advice. The Deputy Chairman may also represent the Group’s interests to official enquiries and review bodies. Having spent nine years on the Board, Anita will retire at the forthcoming AGM. Anita’s independence up to the point of her retirement is confirmed on page 81.
The Non-Executive Directors satisfy themselves on the integrity of financial information and review the Group’s risk exposures and controls. The Non-Executive Directors, through the Remuneration Committee, also determine the remuneration of Executive Directors.
B. The Board assumes responsibility for establishing the purpose of the Company, setting its strategy, establishing its culture, and determining the values to be observed in achieving that strategy. Central to this is the Company’s role as a trusted and responsible business, with the Board’s Responsible Business Committee overseeing the Group’s ambitions in this regard. The Group’s approach to acting as a responsible business is discussed in detail on pages 26 to 35, and in the report of the Responsible Business Committee on page 93.
C. The Board retains ultimate responsibility for ensuring adequate resource is available to meet agreed objectives and strategy, and ensures such resources are responsibly and effectively deployed. The effective management of risk is central to the Company’s strategy, supported by the Group’s enterprise risk management framework, as discussed in the risk management report on pages 129 to 187.
E. All policy and practice relating to Group colleagues is developed and implemented in a way which is consistent with the Group’s purpose and values, with the Board receiving regular updates on matters relevant to colleagues. The Board has appointed Anita Frew as its whistleblowing champion, with responsibility for overseeing the integrity, independence and effectiveness of the Group’s whistleblowing procedures. In addition, the Audit Committee reviews reports on whistleblowing to ensure there are arrangements in place which colleagues can use in confidence to report relevant concerns, as discussed on page 88 and reports on such review to the Board.
I. The Chairman, supported by the Group Company Secretary, ensures that Board members receive appropriate and timely information. The Group provides access, at its expense, to the services of independent professional advisers in order to assist Directors in their role. Board Committees are also provided with sufficient resources to discharge their duties.
K. The Chairman leads the training and development of Directors and the Board regularly reviews and agrees with each Director their individual and combined training and development needs. The Chairman personally ensures that on appointment each Director receives a full, formal and tailored induction. The emphasis is on ensuring the induction brings the business and its issues alive, taking account of the specific role the Director has been appointed to fulfil and their skills and experience to date. Directors who take on or change roles during the year attend induction meetings in respect of those new roles. The Group Company Secretary maintains a training and development log for each Director.
At the 2020 AGM all Directors will seek re-election or election save for Anita Frew, who will be stepping down at the 2020 AGM. Being the first AGM since their respective appointments, William Chalmers and Sarah Legg will stand for election, together with Catherine Woods, who, as announced in October 2019, will join the Board on 1 March 2020. The Board believes that all Directors continue to be effective and committed to their roles.
O. The Board is responsible for the Group’s risk management and internal controls systems, including the determination of the nature and extent of risk the Company is willing to take. Risk is further managed through the Board approved Risk Control Framework, as discussed in the risk management report on pages 129 to 187. The Audit Committee assumes further responsibility for the effectiveness of internal controls, with the Board Risk Committee assuming responsibility for the review of the risk culture of the Group, ensuring the correct ‘tone from the top’ in respect of risk management. The related Directors’ Viability Statement can be found on pages 95 to 96 and confirmation that the business is a going concern can be found on page 96.
The Committee oversaw the planned transition of the Senior Independent Director role from Anita Frew to Alan Dickinson with effect from 1 December 2019, ahead of Anita’s planned retirement from the Board at the forthcoming AGM when Alan will also succeed her as Deputy Chairman. Alan’s breadth and depth of experience make him ideally suited to the role of Deputy Chairman and Senior Independent Director.
Following our announcement in February 2019, William Chalmers joined the Board on 1 August 2019 as an Executive Director and Chief Finance Officer, succeeding George Culmer. As announced in October 2019, Juan Colombás plans to retire from the Group in July 2020, and I plan to retire as Group Chairman at or before the AGM in 2021, by which time I will have served 9 years on the Group Board. The Committee has initiated a search process for my successor under the leadership of the Senior Independent Director.
A number of changes have also been made to the membership of Board Committees during the year, reflecting Board changes and the ongoing review of Committee membership.
Annually, as part of the Board effectiveness review, the Committee also undertakes a review of its own effectiveness. The findings of this review, which were considered by the Committee at its meeting in January 2020, found that the Committee had met its key objectives and carried out its responsibilities effectively.
Independence and time commitments Based on its assessment for 2019, the Committee is satisfied that, throughout the year, all Non-Executive Directors remained independent1 as to both character and judgement. The Committee, and the Board gave specific consideration to Anita Frew’s continuing independence as detailed on page 81.
The Group’s Corporate Governance Framework The annual review of the Corporate Governance Framework was undertaken during the year with the inclusion of further enhancements to the ring-fenced banking governance arrangements which came into effect on 1 January 2019, together with various other minor amendments, and updates to committee terms of reference.
Committee composition, skills and experience To ensure a broad representation of experienced and independent Directors, membership of the Committee comprises the Chairman, Deputy Chairman, the Chairman of the Board Risk Committee (and Senior Independent Director since December 2019), the Chairman of our Insurance Subsidiary, and the Chairman of the Responsible Business Committee. In addition, as announced on 25 November 2019, Stuart Sinclair, Chairman of the Remuneration Committee, was appointed as a member of the Committee with effect from 1 December 2019.
On gender diversity the Board is committed to maintaining at least 3 female Board members and over time will expect female representation on the Board to match the 40 per cent target that the Group has set for senior executives. Reflecting these aspirations, the Board will aim to meet the Hampton-Alexander objective of 33 per cent female representation by, or as soon as possible after, the target date of 2020. Female representation on the Board is currently 31 per cent (based on four female Directors and nine male Directors).
The Committee were provided with a list of potential candidates for consideration, from which a short list was identified.
After further consideration, the Committee recommended to the Board the appointment of the preferred candidates.
The Board formally approved the appointments, subject to any remaining checks and approvals required.
Assessing the final provisioning for the costs relating to Payment Protection Insurance redress has remained a significant area of judgement in the Group’s financial reporting, with the Committee continuing to challenge management’s assumptions used to calculate the Group’s provision.
Simon Henry is a Chartered Global Management Accountant and has extensive knowledge of financial markets, treasury, risk management and international accounting standards. He is a member having recent and relevant financial experience for the purposes of the UK Corporate Governance Code and is the Audit Committee financial expert for SEC purposes.
Management judgement is used to determine the assumptions used to calculate the Group’s PPI provision. Following the deadline for submission of claims in August 2019, the principal year-end assumptions used in the calculation are the extent to which customer enquiries convert to valid complaints, are then upheld, the average redress to be paid and expected future administration costs.
There were relatively few new conduct matters in 2019. The Group made provisions totalling £445 million in respect of other conduct matters, including £188 million for costs of identifying and rectifying certain arrears management fees and activities.
The Committee has considered management’s assessment of the provisions required for other conduct matters and was satisfied that the provisions were appropriate. The disclosures relating to other conduct provisions are set out in note 38: ‘Other provisions’ of the financial statements.
The Group’s impairment provision is dependent on management’s judgements on matters such as future interest rates, house prices and unemployment rates, as well as its assessment of a customer’s current financial position and whether it has suffered a significant increase in credit risk.
The Committee was satisfied that the impairment provisions and associated disclosures were appropriate. The disclosures relating to impairment provisions are set out in note 20: ‘Allowance for impairment losses’ and note 53: ‘Financial risk management’ of the financial statements.
The Committee considered management’s assessment of forecast taxable profits based on the Group’s operating plan, the split of these forecasts by legal entity and the Group’s long-term financial and strategic plans.
Financial Reporting During the year, the Committee considered the following issues in relation to the Group’s financial statements and disclosures, with input from management, Risk Division, Group Internal Audit and the external auditor
The Committee was satisfied that the assumptions used to calculate the VIF asset (2019: £5,558 million; 2018: £4,762 million) and liabilities arising from insurance contracts and participating investment contracts (2019: £111,449 million; 2018: £98,874 million) were appropriate. The disclosures are set out in note 25: ‘Value of in-force business’ and note 32: ‘Liabilities arising from insurance contracts and participating investment contracts’ of the financial statements.
During 2019, the Group entered into a wealth management partnership with Schroders plc. This involved the Group retaining a 50.1 per cent ownership interest in an entity into which it transferred assets under management and associated advisers from its existing business. Determining the appropriate accounting classification of the new activities required management judgement. The Committee reviewed the accounting proposed by management which determined that the entity should be accounted for as a joint venture and was satisfied that this was appropriate.
Payment Protection Insurance The Group increased its provision for payment protection insurance (PPI) redress and associated administration costs by £2,450 million in the year ended 31 December 2019, bringing the total amount provided to £21,875 million. As in previous years, the Committee has reviewed management’s assumptions used to calculate the Group’s provision.
Other significant issues The following matters were also considered by the Committee: Risk management and internal control systems Full details of the internal control and risk management systems in relation to the financial reporting process are given within the risk management section on pages 129 to 187. Specific related matters that the Committee considered for the year included: The effectiveness of systems for internal control, financial reporting and risk management
The major findings of internal investigations into control weaknesses, fraud or misconduct and management’s response along with any control deficiencies identified through the assessment of the effectiveness of the internal controls over financial reporting under the US SarbanesOxley Act
Q1 and Q3 Interim Management Statements (‘IMS’) The Committee considered the processes and format of the Company’s IMS reporting and concluded that improvements could be made, which resulted in simplification of IMS reporting in Q1 and Q3 for 2019.
Group Internal Audit In monitoring the activity, role and effectiveness of the internal audit function and their audit programme the Committee: Monitored the effectiveness of Group Internal Audit and their audit programme through quarterly reports on the activities undertaken and a report from the Quality Assurance function within Group Internal Audit
During the year, the Committee again focused on a wide range of existing and emerging risks, using dedicated sub-committees and effective planning of the agenda to ensure that focus and attention was given to those risks which were considered to be of ongoing importance to the Group and its customers. The environment within which the Group operates remained subject to continually evolving risks with considerable degrees of change and uncertainty.
Committee purpose and responsibilities The purpose of the Committee is to review the risk culture of the Group, setting the tone from the top in respect of risk management. The Committee is also responsible for ensuring the risk culture is fully embedded and supports at all times the Group’s agreed risk appetite, covering the extent and categories of risk which the Board considers as acceptable for the Group.
Conclusion: Root cause analysis and read-across activities continue to improve and embed across the Group with good progress in reducing the volume of rectification programmes and customers impacted. This will remain a key focus for the Committee in 2020.
Vulnerability Vulnerable customers represent a significant proportion of the Group’s customer base and continue to be an area of close focus with increasing regulatory focus.
Conclusion: The Committee recognise the importance of this subject and the increasing regulatory focus. It will continue to require ongoing focus and investment to execute the Group’s strategy in relation to vulnerable customers and meet external expectations.
Climate change and sustainability have been added as top areas of ongoing focus and the Committee has increased consideration of the risks that may arise.
Key sector concentrations, including commercial real estate and the funds business, as well as those sectors more vulnerable to the wider economic backdrop or structural change, were also examined in greater detail, including construction, manufacturing and consumer related sectors, such as retail. Specific consideration was also given to the automotive sector, which continues to face into disruptors such as new technologies and changing consumer behaviours.
The Committee noted that lending controls, risks appetite metrics and segmented reporting for both indebtedness and affordability assessments are in place, and acknowledged the Group’s continued actions closely to monitor and control higher risk and marginal indebtedness segments and reduce exposure over time. The Committee reviewed management action which had also been taken within retail secured lending, including buy-to-let, to protect against contagion risk from growth in consumer debt levels, and to ensure that customers’ finances were resilient to stress.
Data risk continues to be an area of significant regulatory and media attention. The Committee has remained focused on ensuring effective controls are in place regarding the governance, privacy, ethics and management of our customers’ data. Third party oversight controls continue to embed and mature following the successful implementation of GDPR. Compliance with the principles of the Basel Committee of Banking Supervision (BCBS) also remains a key area of focus.
Conclusion: The Group continues to enhance the controls required to identify and manage data risk.
The Committee continues to focus on the risks associated with delivery and embedding of an extensive strategic change agenda, including both discretionary and regulatory change.
Change and execution risk has been elevated to a primary risk category to recognise the risk attached to the delivery of GSR3 and its impact on the enterprise wide risk profile.
Conclusion: Change and execution risk will remain an area of focus for the Committee as the Group continues to increase its understanding of the change and execution risk associated with our transformation agenda and evolve its change delivery approaches. Further focus is required fully to reflect the enterprise wide impacts of our strategic agenda into business risk profiles and to leverage this awareness in key investment funding decisions.
Conclusion: The Committee will continue to closely monitor risks arising from economic uncertainty. The Committee will also focus on risks emerging due to slower economic growth and political challenges, as well as risks from wider global events.
The Committee acknowledged the continued focus the Group places on the fight against financial crime and is playing an active part in developing and delivering on the strategic aims of HM Government’s Economic Crime Reform programme, including designing and delivering improvements in the UK SARs (Suspicious Activity Reporting) regime. This is a multi-year programme delivering through a private and public partnership, and for which the Group is represented by the Chief Operating Officer attending the Home Office’s Economic Crime Strategic Board.
The Committee continues to oversee and track progress against the Group’s Helping Britain Prosper Plan, including reviewing performance against strategic aims, focusing on digital skills, sustainability and our Charitable Foundations.
I would like to thank the thousands of colleagues across the entire Group for their hard work and extraordinary commitment to supporting Responsible Business activity in their daily work, as well as by volunteering over 246,000 hours of their time and helping to raise over £11 million to date for our charity of the year, Mental Health UK.
The Group’s Sustainability strategy made consistent progress in 2019. A number of targets were achieved ahead of plan such as the EV1000 initiative of supporting 1,000 electric vehicles which was achieved during the third quarter of 2019. The Committee continues to present challenge on the Group’s strategy of developing new products and strategies to help and support customers in a sustainable way. The Company’s sustainability strategy is available on the Group’s website www.lloydsbankinggroup.com/our-group/ responsible-business
Representatives from Group Internal Audit and the Chief Operating Office attend meetings as appropriate.
During the year, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review. The Committee will consider the output from the 2019 effectiveness review and whether amendments could be made to its current working arrangements.
Corporate governance statement The Corporate Governance report found on pages 65 to 93 together with the discussion of the composition of the Remuneration Committee on page 114 and this Directors’ report, which form part of the Corporate Governance Report, fulfils the requirements of the Corporate Governance Statement for the purpose of the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DTR).
The final dividend in respect of 2018 of 2.14 pence per ordinary share was paid to shareholders on 21 May 2019, and an interim dividend for 2019 of 1.12 pence per ordinary share was paid on 13 September 2019; these dividends totalled £2.312 billion. Further information on dividends is shown in note 45 on page 268 and is incorporated by reference.
Board composition changes Changes to the composition of the Board since 1 January 2019 up to the date of this report are shown in the table below: Joined the Board Left the Board
Directors’ indemnities The Directors of the Company, including the former Director who retired during the year, have entered into individual deeds of indemnity with the Company which constituted ‘qualifying third-party indemnity provisions’ for the purposes of the Companies Act 2006. The deeds indemnify the Directors to the maximum extent permitted by law and remain in force. The deeds were in force during the whole of the financial year or from the date of appointment in respect of the Directors appointed in 2019. Deeds for existing Directors are available for inspection at the Company’s registered office.
Information incorporated by reference The following additional information forms part of the Directors’ report, and is incorporated by reference.
Future developments Supporting people with disabilities Engagement with colleagues Engagement with customers, suppliers and others
Employee share schemes – exercise of voting rights 1 George Culmer also served as a director during the year, retiring from the Company on 1 August 2019.
The Group’s four year operating plan which comprises detailed customer, financial, capital and funding projections together with an assessment of relevant risk factors for the period from 2020 to 2023 inclusive
In particular, the assessment included consideration of the impact of the UK’s exit from the EU on the economy and on the regulatory agenda, and the implications of alternative interest rate scenarios given volatility in interest rate markets.
Group, divisional and business unit operating plans covering a period of four years are produced and subject to rigorous stress testing on an annual basis. The planning process takes account of the Group’s business objectives, the risks taken to seek to meet those objectives and the controls in place to mitigate those risks to remain within the Group’s overall risk appetite.
The Group’s annual planning process comprises the following key stages: The Board reviews and revises the Group’s strategy, risk appetite and objectives in the context of the operating environment and external market commitments
The final four year operating plan, Risk Division assessment and the results of the stress testing are presented to the Board for approval. Once approved, the operating plan drives detailed divisional and Group targets for the following year
Greenhouse gas emissions The Group has voluntarily reported greenhouse gas emissions and environmental performance since 2009, and since 2013 this has been reported in line with the requirements of the Companies Act 2006. Our total emissions, in tonnes of CO2 equivalent, are reported in the table below. Deloitte LLP has provided limited level ISAE 3000 (revised) and 3410 (ISAE 3410) assurance over selected non-financial indicators as noted by . Their full, independent assurance statement is available online at www.lloydsbankinggroup.com/our-group/responsible-business
Methodology The Group follows the principles of the Greenhouse Gas (GHG) Protocol Corporate Accounting and Reporting Standard to calculate our Scope 1, 2 and 3 emissions from our worldwide operations. The reporting period is 1 October 2018 to 30 September 2019, which is different to that of our Directors’ report (January 2019 – December 2019). This is in line with Regulations in that the majority of the emissions reporting year falls within the period of the Directors’ Report. Emissions are reported based on an operational boundary. Reported Scope 1 emissions cover emissions generated from gas and oil used in buildings, emissions from UK company-owned vehicles used for business travel and emissions from the use of air conditioning and chiller/refrigerant plant. Reported Scope 2 emissions cover emissions generated from the use and purchase of electricity for own use, calculated using both the location and market based methodologies. Reported Scope 3 emissions relate to business travel and commuting undertaken by colleagues and emissions associated with waste and the extraction and distribution of each of our energy sources; electricity, gas and oil. In 2019 we have expanded Scope 3 emissions as part of our sustainability strategy to increase transparency of reporting of our carbon footprint, and to drive reductions in additional categories of emissions; these include Waste Emissions, Upstream Business Travel (the well to tank emissions of rail, air, road vehicles, hired vehicles); Hotels; Commuting; Tube; Taxis. A detailed definition of these emissions can be found in our 2019 Reporting Criteria online at www.lloydsbankinggroup.com/our-group/responsible-business
2 Scope 3 emissions have been expanded to include additional elements within the Group’s own operations including emissions from waste, colleague commuting and additional elements of business travel (including taxis, tube, well to tank emissions of business travel and hotels). We have disclosed these figures parallel to legacy scope numbers to allow fairer comparison to numbers previously disclosed and to demonstrate performance versus our previous targets.
Scope 1 emissions include mobile and stationary combustion of fuel and operation of facilities.
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 position and performance, business model and strategy. The Directors have also separately reviewed and approved the strategic report.
Our latest policy provides direct alignment between remuneration and the purpose of the Group, and is designed to be fair and consistent. We have thought carefully about the simplest and clearest way to reward the right behaviours and outcomes. Stuart Sinclair Chairman, Remuneration Committee
Annual report on remuneration pages 103 to 114 2020 Remuneration Policy pages 115 to 123
Dear Shareholder On behalf of the Board I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2019 and the proposed Directors’ Remuneration Policy (our Policy) for which we are seeking your support and approval at our Annual General Meeting in May 2020.
Our upcoming AGM marks the beginning of our next remuneration policy cycle, which will run until the end of 2022. This offered the opportunity to take a fresh look at how we incentivise and reward our colleagues, and what values and outcomes we wish to encourage.
While we were pleased to receive over 90 per cent support for our Annual Report on Remuneration at the AGM in 2019, we heard during that process a continued desire for greater simplicity and transparency in our approach. To that end, we started to make changes early in 2019, without waiting for our full redesign to be finalised.
In November 2019, we announced our decision, subject to AGM approval, to reduce pension allowances for Executive Directors to 15 per cent of salary in a single step in 2020 with no offsetting adjustment in salary or other remuneration.
Our new Policy In approaching the refresh of the Directors’ Remuneration Policy, my committee colleagues and I thought carefully about what behaviours and outcomes we wanted to see and how the remuneration structure could support them. We approached the review with the following core aims: Purpose Remuneration should be linked to the Group’s purpose of Helping Britain Prosper
The Group Chief Executive's pension reduced from 46 per cent to 33 per cent of salary in 2018 and will now be 15 per cent with effect from 2020, a decrease of 67 per cent from 2018 to 2020
The ratio of CEO pay to the medium employee has reduced by 24 per cent between 2018 and 2019
The pay budget for colleagues this year is 2.4 per cent, above the budget of 2 per cent for executives and we will once again make an award of free shares worth £200 to every permanent colleague in the Group. All these actions are intended to reduce the gap between executives and the wider workforce
– Flexible benefit allowance of 4 per cent of base salary in line with other colleagues.
Group Performance Share (GPS) – Maximum opportunity of 140 per cent of salary for
GCE and 100 per cent of salary for other EDs with normal target to 30 per cent of maximum.
AGM. An alternative reward structure to a traditional LTIP that has similarities with a restricted share awards.
– Maximum opportunities will significantly reduce from 400 per cent for the GCE and 300 per cent for other EDs to 200 per cent of base salary. The normal ‘target’ level of award will be 150 per cent of base salary. Please see page 101 for further explanation of how we determined the right maximum opportunities for the business.
Proposed Policy overview Pages 100 to 103 provide an overview of the new proposed 2020 Policy. The full policy can be found on page 115.
The Group considers it important to ensure Executive Directors continue to have a substantial shareholding after employment to continue to align their interests with shareholders over a longer time horizon than simply whilst in role. Our existing reward structures and the structure designed through the Long Term Share Plan, which, in line with regulatory requirements, mean that a substantial proportion of variable reward for Executive Directors and other senior employees takes the form of shares, deferred and held over a period of up to eight years. These structures achieve the outcomes intended from the introduction of a post-employment shareholding requirement and ensure that Executive Directors continue to meet their shareholding requirements for a minimum of two years after leaving the Group. On this basis, the Group already complies with best practice and therefore no formal post-employment shareholding policy is necessary.
Individual assessment As now, the Committee will determine if an Executive Director’s personal performance justifies a variation in the assessment of performance or award values determined by the Balanced Scorecard, and will explain how this is determined
Pre-grant test Committee discretion, incorporating an assessment of risk and conduct, will be applied where actual behaviours or outcomes are not adequately captured in the Balanced Scorecard assessment
Q How does the use of the Balanced Scorecard ensure that Executive Directors are rewarded for performance aligned to the strategic objectives of the Group?
The diagram below illustrates the performance inputs, underpin assessment and delivery of the Group’s proposed short and long-term variable reward structures. The new structure has multiple test points to ensure the Remuneration Committee can use its discretion and make an evaluation beyond formulaic outcomes. Further details on the use of discretion are explained in full within the Policy on page 118.
Underpin Assessment 1 yr hold 1 yr hold 1 yr hold 1 yr hold 1 yr hold
Group ROTE exceeds average for UK peer banks (excluding the Group) over the 3 years
Pension and benefits (audited) Pension/Benefits £ António Horta-Osório Juan Colombás William Chalmers George Culmer
Allocating Underlying Profit To simplify the approach to determining the Group Performance Share outcome for 2019, the Committee agreed that a fixed 5 per cent of Underlying Profit (UP)would be used as a starting position for the overall pool
Delivered costs and investments favourable to plan in 2019, maintaining cost efficiency versus peers
The Committee has an overarching discretion to reduce the level of award that will vest, regardless of whether the performance condition for partial or full vesting has been met. This qualitative judgement ensures that vesting is not simply driven by a formula that may give an unexpected or unintended remuneration outcome compared to Group performance and that share price performance can also be considered. The Committee agreed that no adjustment would be applied to the vesting outcome of 49.7 per cent.
=<25% FOS uphold rate 10% Customer Satisfaction Group performance relative to market peers 3rd 1st 1st 10.00%
Single Total Figure of Remuneration for Chairman and Non-Executive Directors (audited) Fees £000 Benefits £0002 Total £000
Deborah McWhinney – 174 – – – 174 2 The Chairman receives a car allowance of £12,000. Other benefits relate to reimbursement for expenses incurred in the course of duties.
He received a payment of £79,595 in lieu of unused annual leave entitlement up to his Retirement Date. In accordance with contractual entitlements, George was entitled to a capped contribution of up to £10,000 (excluding VAT) towards legal fees incurred in connection with his retirement from the Company.
A 2019 Group Performance Share award was made, pro-rated for the period of 2019 elapsed to George Culmer's retirement date, as described on page 105. This award is subject to deferral, holding periods, malus and clawback. Under the Executive Group Ownership Plan Rules (Executive GOS), George Culmer’s outstanding 2017 and 2018 Executive GOS awards will be time pro-rated to his retirement date (2017 becomes 2,660,946 Shares and 2018 becomes 2,144,958 Shares). The awards remain subject to the performance measures which apply to the relevant awards and will continue to vest at the normal vesting dates and be released on their scheduled release dates, subject to the relevant terms (including post-vesting retention periods, malus and, where applicable, clawback and to deductions for national insurance and income tax).
Payments within the reporting year to past Directors (audited) There were no payments made to past directors in 2019.
Salaries and performance-based compensation £m 1 2019: Ordinary dividend in respect of the financial year ended 31 December 2019, partly paid in 2019 and partly to be paid in 2020.] 2018: Ordinary dividend in respect of the financial year ended 31 December 2018, partly paid in 2018 and partly to be paid in 2019 and intended share buyback.
The FTSE 100 index has been chosen as it is a widely recognised equity index of which Lloyds Banking Group plc has been a constituent throughout this period.
Growth in the value of a hypothetical £100 holding since 31 December 2009 (to 31 December 2019)
Notes: J E Daniels served as GCE until 28 February 2011; António Horta-Osório was appointed GCE from 1 March 2011. António Horta-Osório declined to take a bonus in 2011 and independently requested that he be withdrawn from consideration for a Group Performance Share award in 2019.
Sara Weller CBE 372,988 – – – – 372,988 372,988 n/a 1 Including holdings of connected persons.
William Chalmers 1 Calculated using the average share price for the period 1 January 2019 to 31 December 2019 (58.07 pence). Includes ordinary shares acquired through the vesting of the deferred Group Performance Share plan, Fixed Share Awards as the shares have no performance conditions; American Deposit Receipts (ADRs) with each one ADR equating to four shares, Executive Share Awards which have vested but have not been exercised; shares held in the Share Incentive Plan (SIP) Trust, i.e. Free, Partnership, Matching and Dividend shares which are no longer subject to forfeiture, as defined in the SIP Rules. Shares held by Connected Persons, as defined by the Companies Act, but broadly meaning spouse or partner and children, may also be included.
6. Part of GPS is deferred into shares (in the form of conditional rights to free shares). The face value of the share awards in respect of GPS granted in March 2019 was £942,160 (1,494,258 shares) for António Horta-Osório; £421,473 (668,453 shares) for Juan Colombás and £421,473 (668,453) for George Culmer. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence.
10. Part of GPS is deferred into shares. The face value of the share awards in respect of GPS granted in March 2018 was £1,058,016 (1,555,288 shares) for António Horta-Osório; £479,200 (704,426 shares) for Juan Colombás and £479,200 (704,426) for George Culmer. The share price used to calculate the face value is the average price over the five days prior to grant (27 February to 5 March 2019), which was 63.052 pence.
Absolute total shareholder return (TSR) Growth in share price including dividends over 3-year period
3 A measure of profit taking into account Expected Losses, tax and a charge for equity utilisation.
It was agreed that a salary increase of 2 per cent would apply for the Group Chief Executive (GCE) and Chief Financial Officer (CFO). Following confirmation that the Chief Operating Officer (COO) is due to retire in 2020, his salary is due to remain in line with 2019. Salaries will therefore be as follows: GCE: £1,294,674 (with effect from 1 January 2020) COO: £794,938 CFO: £810,837 (with effect from 1 April 2020)
Subject to approval shares will be released in equal tranches over three years. (See page 116 for further details).
Over 50,000 colleagues participate in the Group’s Defined Contribution (DC) Pension scheme. We therefore believe the DC pension provisions provide an accurate reflection of the pension rate available to the majority of the workforce. With effect from July 2020 the maximum employer contribution for all colleagues will be 15 per cent of base salary and Executive Directors will be aligned to the majority of the workforce.
A measurement of the Group’s performance will be assessed against Balanced Scorecard objectives and receive a score from 1 to 5. The Group Balanced Scorecard must exceed a threshold score of 1.5, below which no award will be payable.
Chairman and Non-Executive Director fees in 2019 The annual fee for the Chairman was increased by 2 per cent to £772,855, in line with the overall salary budget for the executive population. The annual Non-Executive Director fees were increased by 2 per cent, in line with the base salary increase awarded to the senior management of the Group. These changes took effect from 1 January 2020.
1 Reflects the increase in base salary from 1 January 2019 against which the award is determined. 2 Adjusted for movements in colleagues numbers and other impacts to ensure a like-for-like comparison. Salary increases effective 1 April 2020.
The 2019 base salary for the colleagues identified at P25, P50 and P75 are as follows: £22,227, £31,671, £50,431
The P25, P50 and P75 colleagues were determined on 12 February 2020 based on calculating total remuneration for all UK employees for the 2019 financial year. Payroll data from 1 January 2019 to 31 December 2019 and variable remuneration outcomes approved in February 2020 were used
The median ratio has decreased 24 per cent year-on-year. The reduction is largely attributed to the Group Chief Executive’s request to withdraw from consideration by the Remuneration Committee (the Committee) for a Group Performance Share award for 2019. Volatility in variable reward outcomes has contributed to the year-on-year changes in the ratio.
The Committee is thoughtful of the volatility in pay ratios due to variable reward outcomes. Although the pay ratio is used as a useful reference point to inform policy-setting, the Committee takes into account a number of other factors to assess colleague pay progression.
For the majority of colleagues, year-on-year changes in remuneration are principally driven by pay increases. We are committed to reducing the pay gap between executives and wider colleagues and continue to remain focused on addressing the gap from the bottom up and not just from the top down. To support this, the Group has a commitment to pay progression and a continued focus on ensuring higher pay awards for colleagues who are lower paid, or paid lower within their pay range.
For 2020, the pay budget has been set at 2.4 per cent, with over 63 per cent of colleagues at lower grades receiving a pay award of 2.5 per cent or over. The pay budget for senior colleagues was set lower, at 2 per cent.
Remuneration Committee The Committee comprises six Non-Executive Directors; Stuart Sinclair (Chair), Lord Blackwell, Alan Dickinson, Anita Frew, Sara Weller and Amanda Mackenzie; to provide a balanced and independent view on remuneration matters. Stuart Sinclair has been Chair of the Committee since 1 September 2018 and has been a member of the Committee since January 2016. For further details of Committee membership and attendance at meetings, please see page 70.
Mercer was appointed by the Committee in 2016 following a competitive tender process and was retained for 2019. The Committee is of the view that Mercer provides independent remuneration advice to the Committee and does not have any connections with the Group or any director that may impair its independence. The broader Mercer company provides unrelated advice on accounting and investments. During the year the Committee requested advice and independent research on market and best practice in relation to fixed and variable reward structures to support formulating the Policy. Mercer attended Committee meetings upon invitation and fees payable for the provision of services in 2019 were £31,630.
How the Remuneration Committee spent its time in 2019 and compliance with the 2018 Corporate Governance Code
Executives Key highlights: Assurance that the new Policy supports the delivery of the Group’s purpose and long-term goals while rewarding the right behaviours in line with the Group’s culture and values.
Oversight and approval Review of 2018 performance and remuneration for EDs and senior management. Particularly focused on discussing and challenging performance outcomes and the direct implications of risk and conduct on reward outcomes
Code Provision 40. When designing the new Directors’ Remuneration Policy, the Committee has aimed to design clear and transparent remuneration structures that reduce complexity and promote behaviours that support the Group’s purpose, values and culture. Risk and conduct has been considered to avoid rewarding for failure and the range of possible values of rewards EDs can potentially receive have been reviewed. Please see pages 98 to 102 for examples of how we have considered the key principles of Provision 40 in 2019
Received a quarterly report on key colleague and wider workforce reward activity including in-year spend on colleague pay increases and a review of the Group Remuneration Policy for third party suppliers sharing enhancements to the assessment framework used to ensure third party reward polices align to the Group’s own principles
Key highlights: Consideration of a balanced range of opinions from stakeholders on remuneration matters.
The Chair attended the Work and Pensions Select Committee and reiterated intentions to focus on purpose and behaviour when designing the Policy in its entirety whilst also gaining further insight into external sentiment felt in relation to executive pensions
Base salary Purpose and link to strategy To support the recruitment and retention of Executive Directors of the calibre required to develop and deliver the
Changes The effective date will change from January to April each year for future Executive Directors to align delivery with the rest of the workforce.
Changes Delivery of vested shares will change from five to three years to align the delivery schedule with other colleagues eligible to receive a Fixed Share Award.
Where an award or a deferred award is in shares or other share-linked instrument, the number of shares to be awarded may be calculated using a fair value or based on discount to market value, as appropriate.
The Committee retains full discretion to amend the payout levels should the award not reflect business and/or individual performance. The Committee may reduce (including to zero) the level of the award, apply additional conditions to the vesting, or delay the vesting of awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate.
Discretion in relation to variable rewards The Committee retains discretion with regards to these plans. This relates to: The timing, size and type of awards and holding periods, subject to policy maxima, and the annual setting of targets
Adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends)
Amounts are based on based salaries as at 1 January 2020 for the Group Chief Executive and Chief Operating Officer and 1 April 2020 for the Chief Financial Officer. Implementation of the Policy in 2020 is set out in the annual report on remuneration.
The package will normally be aligned with the remuneration policy as described in the policy report. However, the Committee retains the discretion to make appropriate remuneration decisions outside the standard policy to facilitate the recruitment of an individual of the calibre required and in exceptional cases.
In the event of long-term incapacity, if the Executive Director does not perform their duties for a period of at least 26 weeks (in aggregate over a 12 month period), the Group shall be entitled to terminate the executive’s employment by giving three months’ notice
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 ( known as Group Performance Share) to the individual, this should relate to the period of actual service, rather than the full notice period. Any Group Performance Share payment will be determined on the basis of performance as for all continuing employees and will remain subject to performance adjustment (malus and clawback) and deferral. Generally, on termination of employment, Group Performance Share awards, in flight Group Ownership Share awards, Long Term Share Plan 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 Group Performance Share, Group Ownership Share and Long Term Share Plan awards will lapse.
Paid until date of death/ retirement (subject to individual benefit scheme rules). For ill health, injury, permanent disability, paid for the notice period including any period of leave required by the Group (subject to individual benefit scheme rules).
Resignation Unvested deferred Group Performance Share awards are forfeited and in-year Group Performance Share awards are accrued until the date of termination (or the commencement of garden leave if earlier) unless the Committee determines otherwise (in exceptional circumstances), in which case such awards are subject to deferral, malus and clawback.
Unvested deferred Group Performance Share awards are retained and in-year Group Performance Share awards are accrued until the date of termination (or the commencement of garden leave if earlier). Such awards would be subject to deferral, malus and clawback.
Awards vest on date of event. Vesting is subject to the underpins and time pro-rating (for months worked in underpin period unless determined otherwise). Malus and clawback will normally apply. Instead of vesting, awards may be exchanged for equivalent awards over the shares of the acquiring company or another company or equivalent cash based awards.
Where an Executive Director is in receipt of expatriate or relocation expenses at the time of termination (as at the date of the AGM no current Executive Directors are in receipt of such expenses), the cost of actual expenses incurred may continue to be reimbursed for up to 12 months after termination or, at the Group’s discretion, a one-off payment may be made to cover the costs of premature cancellation. The cost of repatriation may also be covered.
Additional fees are also paid to the senior independent director and to the deputy chairman to reflect additional responsibilities.
The Remuneration Committee’s terms of reference are available from the Company Secretary and are displayed on the Group’s website, www.lloydsbankinggroup.com/ourgroup /corporate-governance. These terms are reviewed each year to ensure compliance with the remuneration regulations and were last updated in November 2018.
Remuneration is delivered via a combination of fixed and variable remuneration. Fixed remuneration reflects the role, responsibility and experience of a colleague. Variable remuneration is based on an assessment of individual, business area and Group performance. The mix of variable and fixed remuneration is driven by seniority, grade and role. Taking into account the expected value of awards, the performance-related elements of pay make up a considerable proportion of the total remuneration package for MRTs, whilst maintaining an appropriate balance between the fixed and variable elements. The maximum ratio of variable to fixed remuneration for MRTs is 200 per cent, which has been approved by shareholders (98.77 per cent of votes cast) at the AGM on 15 May 2014.
attendees of the GEC and their respective direct reports – Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function – Other MRTs – Non-MRTs
Further information on fixed share awards can be found on page 116 of the DRP.
attendees of the GEC and their respective direct reports – Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function1 – Other MRTs1
The Group Ownership Share (GOS) plan is an important tool for aligning the Group’s reward strategy to the long-term performance of the business. Through the application of carefully considered, stretching target measures, the Group can ensure that awards are forfeited or restricted where performance does not meet the desired level.
Table 3 Fixed and variable remuneration (Material Risk Takers) Analysis of remuneration between fixed and variable amounts
2 Senior Management are defined as Group Executive Committee (GEC) members/attendees (excluding Group Executive Directors and Non-Executive Directors) and their direct reports (excluding those direct reports who do not materially influence the risk profile of any in-scope group firm).
Of which: Total amount of outstanding remuneration exposed to ex-post explicit and/or implicit adjustment
GRE’s exporting activity is set to boost annual turnover by 20 per cent, from £2.5 million to more than £3 million, and increase its head count by 10 per cent.
Jobs will be created in the workshop and purchasing departments, alongside additional graduate engineering roles.
The ERMF applies to every area of the business and covers all types of risk. It is reviewed, updated and approved by the Board at least annually to reflect any changes in the nature of our business and external regulations, law, corporate governance and industry best practice. The ERMF provides the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also seeks to facilitate effective communication on these matters across the Group.
Risk appetite Risk appetite is defined within the Group as ‘the amount and type of risk that the Group is prepared to seek, accept or tolerate’ in delivering our Group strategy.
Group risk appetite headlines are outlined within Our Principal Risks section on pages 42 to 46.
Clear responsibilities and accountabilities for risk are defined across the Group through a three lines of defence model which ensures effective independent oversight and assurance in respect of key decisions.
The primary role of Group Internal Audit (third line) is to help the Board and senior executive management protect the assets, reputation and sustainability of the Group. Group Internal Audit is led by the Group Chief Internal Auditor. Group Internal Audit provides independent assurance to the Audit Committee and the Board through performing reviews and engaging with committees and senior executive management, providing opinion and challenge on risk and the state of the control environment. Group Internal Audit is a single independent internal audit function, reporting to the Board Audit Committee of the Group and the Board Audit Committee of the key subsidiaries.
Financial reporting risk management systems and internal controls The Group maintains risk management systems and internal controls relating to the financial reporting process which are designed to: ensure that accounting policies are appropriately and consistently applied, transactions are recorded accurately, and undertaken in accordance with delegated authorities, that assets are safeguarded and liabilities are properly stated enable the calculation, preparation and reporting of financial, prudential regulatory and tax outcomes in accordance with applicable International Financial Reporting Standards, statutory and regulatory requirements enable certifications by the Senior Accounting Officer relating to maintenance of appropriate tax accounting and in accordance with the 2009 Finance Act ensure that disclosures are made on a timely basis in accordance with statutory and regulatory requirements (for example UK Finance Code for Financial Reporting Disclosure and the US Sarbanes Oxley Act)
– We work closely with regulatory authorities and industry bodies to ensure that the Group can identify and respond to the evolving regulatory and legal landscape.
There also remains a risk that campaign groups or other bodies could seek to take legal or other action against the Group and/or the financial services industry for investing in or lending to organisations that they deem to be responsible for, or contributing to, climate change.
– Group Corporate Treasury tracking market conditions closely and actively managing the Group’s balance sheet.
Financial services transformation impact on customers: The risk that transformation of the financial services industry and the Group does not adequately consider vulnerable customers. As technology and innovation move at increasing pace, the more vulnerable customers could be at a disadvantage.
Any changes could have important implications for our customers, for example: necessitating amendments to existing documents and contracts; and differential in performance of benchmark rates and financial products which reference them.
– Transition programme established and the appointment of an IBOR Transition Director as accountable executive.
Responsible for the strategic direction of the Group’s assets and liabilities and the profit and loss implications of balance sheet management actions. The committee reviews and determines the appropriate allocation of capital, funding and liquidity, and market risk resources and makes appropriate trade-offs between risk and reward.
Oversees the Group’s people and colleague policies, the remuneration policy and Group-wide remuneration matters, oversees compliance with Senior Manager and Certification Regime (SM&CR) and other regulatory requirements, monitors colleague engagement surveys, progress of the Group towards its culture targets and oversees the implementation of action plans.
Acts as a Risk community forum to independently challenge and oversee the Group-wide risk and control environment, using read-across and lessons learned from the three lines of defence to ensure that the Group-wide risk profile adapts to emerging risks, trends and themes, and the control environment is sustainable to deliver the Bank of the Future.
Group Financial Risk Committee Responsible for overseeing, reviewing, challenging and recommending to senior executives and Board committees on internal and regulatory stress tests, Internal Capital Adequacy Assessment Process, Individual Liquidity Adequacy Assessment Process, Pillar 3 disclosures, Recovery and Resolution Plans, and other analysis as required.
Overview Stress testing is recognised as a key risk management tool by the Boards, senior management, the businesses and the Risk and Finance functions of all parts of the Group and its legal entities. It is fully embedded in the planning process of the Group and its legal entities as a key activity in medium-term planning, and senior management is actively involved in stress testing activities via a strict governance process.
Strategic and Capital Planning: Allow senior management and the Boards of the Group and its applicable legal entities to adjust strategies if the plan does not meet risk appetite in a stressed scenario
Methodology The stress tests at all levels must comply with all regulatory requirements, achieved through the comprehensive construction of macroeconomic scenarios and a rigorous divisional, functional, risk and executive review and challenge process, supported by analysis and insight into impacts on customers and business drivers.
The engagement of all required business, Risk and Finance teams is built into the preparation process, so that the appropriate analysis of each risk category’s impact upon the business plans is understood and documented. The methodologies and modelling approach used for stress testing ensure that a clear link is shown between the macroeconomic scenarios, the business drivers for each area and the resultant stress testing outputs. All material assumptions used in modelling are documented and justified, with a clearly communicated review and sign-off process. Modelling is supported by expert judgement and is subject to the Group Model Governance Policy.
The review and challenge of the Group’s and Ring-Fenced Bank’s detailed stress forecasts, the key assumptions behind these, and the methodology used to translate the economic assumptions into stressed outputs conclude with the divisional Finance Directors’, appropriate Risk Directors’ and Managing Directors’ sign-off. The outputs are then presented to GFRC and Board Risk Committee for review and challenge, before being approved by the Board. There is a similar process within LBCM for the governance of the LBCM-specific results.
Definition Change and execution is defined as the risk that, in delivering its change agenda, the Group fails to ensure compliance with laws and regulation, maintain effective customer service and availability, and/or operation within the Group’s risk appetite.
Exposures Change and execution risks arise when the Group undertakes activities which require products, processes, people, systems or controls to change. These changes can be as a result of external drivers (for example, a new piece of regulation that requires the Group to put in place a new process or reporting) and internal drivers (such as the strategic transformation that is outlined in our GSR3).
Measurement The Group currently measures change and execution risk against a defined risk appetite metric which is a combination of lead, quality and delivery indicators across the investment portfolio. These indicators are reported through defined internal governance structures in the form of a monthly execution risk dashboard. An associated measure, based on the aggregate performance of the dashboard is included in the Group Balanced Scorecard.
Measurement Data risk is measured through a series of quantitative and qualitative indicators, aligned to key sources of data risk for the Group covering data governance, data management and data privacy and ethics. In addition to risk appetite measures and limits, data risks and controls are monitored and governed on a monthly basis through divisional risk committees. Significant issues are escalated to Group Risk Committee.
Delivered enhanced controls and processes for data retention and destruction, deleting large volumes of historic over-retained data
The Group not having an adequate succession plan in place for designated subject matter experts
The Group’s strategic review considers the changing risk management requirements, adapting the change delivery model to be more agile and develop the people skills and capabilities needed to be a ‘Bank of the Future’. The Group continues to review and invest in its control environment to ensure it addresses the risks it faces. Risks are reported and discussed at local governance forums and escalated to executive management and Board as appropriate. The Group employs a range of risk management strategies, including: avoidance, mitigation, transfer (including insurance) and acceptance. Where there is a reliance on thirdparty suppliers to provide services, the Group’s sourcing policy ensures that outsourcing initiatives follow a defined process including due diligence, risk evaluation and ongoing assurance.
IT resilience: the Group continues to optimise its approach to IT and operational resilience by investing in technology improvements and enhancing the resilience of systems that support the Group’s critical business processes, primarily through the technology resilience programme, with independent verification of progress on an annual basis. The Board recognises the role that resilient technology plays in achieving the Group’s strategy of becoming the best bank for customers and in maintaining banking services across the wider industry. As such, the Board dedicates considerable time and focus to this subject at both the Board and the Board Risk Committee, and continues to sponsor key investment programmes that enhance resilience
Sourcing: the threat landscape associated with third party suppliers and the critical services they provide continues to receive a significant amount of regulatory attention. The Group acknowledges the importance demonstrating control and responsibility for those critical business services which could cause significant harm to our customers. Risks and controls are regularly reported through committee(s) and is further supported via the mobilisation of the Sourcing enterprise programme
Credit risk also arises from debt securities and derivatives. The total notional principal amount of interest rate, exchange rate, credit derivative and other contracts outstanding at 31 December 2019 is shown on page 161. The notional principal amount does not, however, represent the Group’s credit risk exposure, which is limited to the current cost of replacing contracts with a positive value to the Group. Such amounts are reflected in note 53 on page 289.
Limitations on concentration risk: there are portfolio controls on certain industries, sectors and products to reflect risk appetite as well as individual, customer and bank limit risk tolerances. Credit policies and appetite statements are aligned to the Group’s risk appetite and restrict exposure to higher risk countries and potentially vulnerable sectors and asset classes. Note 18 on page 235 provides an analysis of loans and advances to customers by industry (for commercial customers) and product (for retail customers). Exposures are monitored to prevent both an excessive concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a maximum limit on exposure, but may instead require new business in concentrated sectors to fulfil additional minimum policy and/or guideline requirements. The Group’s largest credit limits are regularly monitored by the Board Risk Committee and reported in accordance with regulatory requirements.
Defined country risk management framework: the Board sets a broad maximum country risk appetite. Within this, the Executive Credit Approval Committee approves the Group country risk framework and sovereign limits on an annual basis. Risk based appetite for all countries is set within the independent Risk division, taking into account economic, financial, political and social factors as well as the approved business and strategic plans of the Group.
For UK mortgages, the Group’s policy permits owner occupier applications with a maximum loan to value (LTV) of 95 per cent. This can increase to 100 per cent for specific products where additional security is provided by a supporter of the applicant and held on deposit by the Group. Applications with an LTV above 90 per cent are subject to enhanced underwriting criteria, including higher scorecard cut-offs and loan size restrictions.
The Group continues to grow lending to targeted segments in line with strategy, without relaxing credit criteria
Sector concentrations within the portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes
Credit risk basis of presentation The analyses which follow have been presented on two bases; the statutory basis which is consistent with the presentation in the Group’s accounts and the underlying basis which is used for internal management purposes. Reconciliations between the two bases have been provided.
At 31 December 20182 1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries in Retail of £205 million (31 December 2018: £250 million).
3 Prior period segmental comparatives restated. See note4 on page 217.
Central items – – – – – – – – – – – – – – –
Additional information The measurement of ECL reflects an unbiased probability-weighted range of possible future economic outcomes. The Group achieves this by selecting four economic scenarios to reflect the range of outcomes; the central scenario reflects the Group’s base case assumptions used for medium term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. The base case, upside and downside scenarios carry a 30 per cent weighting; the severe downside is weighted at 10 per cent. The table below shows the decomposition of the final probability-weighted ECL for each forward-looking economic scenario. The stage allocation for an asset is based on the overall scenario probability-weighted PD and, hence, the Stage 2 allocation is constant across all the scenarios.
– New business quality remains strong – The flow of loans entering arrears remains at low levels – Stage 3 loans and advances as a per cent of total decreased slightly to 1.5 per cent (31 December 2018: 1.7 per cent)
Unsecured loans and advances remained broadly flat at £28.3 billion. The impairment charge increased by £265 million to £948 million for 2019 (2018: £683 million), due to provisioning methodology refinements, including the alignment of credit card methodologies, and lower cash recoveries following prior year debt sales. The total coverage was 3.8 per cent (31 December 2018: 3.5 per cent)
Expected credit loss allowance on drawn balances (2,698) (420) (1,173) (1,105)
Table 1.19: Reconciliation between statutory and underlying basis of Retail expected credit loss allowances on drawn balances
At 31 December 2018 1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million (31 December 2018: £17 million) for Business Banking within other.
At 31 December 20182 1 Stage 3 ECL allowances as a percentage of drawn balances are calculated excluding loans in recoveries for unsecured of £184 million (31 December 2018: £233 million) and £21 million (31 December 2018: £17 million) for Business Banking within other.
At 31 December 2018 1 Includes forbearance and product-specific indicators not reflected within quantitative PD assessments.
1 Value of loans represents total gross book value of mortgages more than three months in arrears; the balances exclude the impact of the HBOS acquisition adjustments.
Interest only mortgages The Group provides interest only mortgages to owner occupier mortgage customers whereby only payments of interest are made for the term of the mortgage with the customer responsible for repaying the principal outstanding at the end of the loan term. At 31 December 2019, owner occupier interest only balances as a proportion of total owner occupier balances had reduced to 23.9 per cent (31 December 2018: 26.7 per cent). The average indexed loan to value remained at 41.2 per cent (31 December 2018: 41.2 per cent).
Table 1.27: Analysis of owner occupier interest only mortgages (statutory basis)
Retail forbearance The basis of disclosure for forbearance is aligned to definitions used in the European Banking Authority’s FINREP reporting. On an underlying basis, total forbearance for the major retail portfolios has improved by £665 million to £6.5 billion driven primarily by a reduction in customers where arrears are written on to the loan balance (capitalisations). On a statutory basis the equivalent total forbearance position improved by £546 million to £6.2 billion.
At 31 December 20182 1 Expected credit loss allowance as a percentage of total loans and advances which are forborne is calculated excluding loans in recoveries for Unsecured (31 December 2019: £82 million; 31 December 2018: £107 million).
The size and nature of the commercial portfolio results in some volatility as cases move between stages. Stage 3 loans as a proportion of total loans and advances to customers has increased to 3.6 per cent (31 December 2018: 3.2 per cent). Stage 3 ECL allowance as a percentage of Stage 3 drawn balances has reduced to 27.4 per cent (31 December 2018: 32.1 per cent), predominantly due to the change in mix of assets due to write-offs and the transfer in of a small number of larger, individually assessed names with lower likelihood of net loss
Through clearly defined sector strategies, Financial Institutions serves predominantly investment grade counterparties with whom relationships are either client driven or held to support the Group’s funding, liquidity or general hedging requirements. Overall performance of the portfolio remains good
Expected credit loss allowance on drawn balances (1,265) (96) (228) (941)
Expected credit loss allowance on drawn balances (1,449) (93) (325) (1,031)
Expected credit loss allowances (drawn and undrawn) as a percentage of gross lending (%) 1.5 0.1 5.1 32.1 1 Prior period segmental comparatives restated. See note 4 on page 217.
At 31 December 20181 1 Prior period segmental comparatives restated. See note 4 on page 217.
Table 1.33: Commercial Banking Stage 2 loans and advances to customers
Commercial Banking UK Direct Real Estate LTV analysis The Group classifies Direct Real Estate as exposure which is directly supported by cash flows from property activities (as opposed to trading activities, such as hotels, care homes and housebuilders). Exposures to social housing providers is also excluded
Commercial Banking UK Direct Real Estate gross lending stood at £13.6 billion at 31 December 2019 (net of exposures subject to protection through Significant Risk Transfer securitisations). The Group has a further £0.47 billion of UK Direct Real Estate exposure in Business Banking within Retail
The LTV profile of the UK Direct Real Estate portfolio in Commercial Banking remains robust
4 December 2019 <£1m investment exposures have an LTV profile broadly similar to the >£1m investment exposures.
Environmental risk management As appropriate, the Group considers the 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 Responsibility. The Group’s external sector statements determine the appetite for many activities that impact the environment. The Group seeks to reduce detrimental impacts and support clients as they improve their own environmental footprint. Further detail is provided in the Responsible Business section (see pages 26 to 34).
Within Commercial Banking, an electronic Environmental Risk Screening Tool is the primary mechanism for assessing environmental risk for lending transactions. This system provides screening of location specific and sector based risks that may be present in a transaction. Where a risk is identified, the transaction is referred to the Group’s expert in-house environmental risk team for further review and assessment. Where required, the Group’s panel of environmental consultants provide additional expert support.
Definition Regulatory and legal risk is defined as the risk of financial penalties, regulatory censure, criminal or civil enforcement action or customer detriment as a result of failure to identify, assess, correctly interpret, comply with, or manage regulatory and/or legal requirements.
CRAMs have been designed for services and product families offered by the Group and are measured by a consistent set of common metrics. These contain a range of product design, sales and process metrics to provide a more holistic view of conduct risks; some products also have a suite of additional bespoke metrics.
Each of the tolerances for the metrics are agreed for the individual product or service and are regularly tracked. At a consolidated level these metrics are part of the Board risk appetite. The Group has, and continues to, evolve its approach to conduct risk measurements, including those supporting customer vulnerability, process delivery and customer journeys.
Adoption of robust change delivery methodology to enable prioritisation and delivery of initiatives to address conduct challenges
Mitigating actions to the principal operational risks are: The threat landscape associated with cyber risk continues to evolve and there is significant regulatory attention on this subject. The Board continues to invest heavily to protect the Group from malicious cyberattacks. Investment continues to focus on improving the Group’s approach to identity and access management, improving capability to detect and respond to cyber-attacks and improved ability to manage vulnerabilities across the estate
Ensuring compliance with legal and regulatory requirements related to SM&CR, embedding compliant and appropriate colleague behaviours in line with Group policies, values and its people risk priorities
Reviewing and enhancing people processes to ensure they are fit for purpose and operationally resilient
Exposures The major source of insurance underwriting risk within the Group is the Insurance business.
Mitigation Insurance underwriting risk in the Insurance business is mitigated in a number of ways: General Insurance exposure to accumulations of risk and possible catastrophes is mitigated by reinsurance arrangements broadly spread over different reinsurers. Detailed modelling, including that of the potential losses under various catastrophe scenarios, supports the choice of reinsurance arrangements
Longevity risk transfer and hedging solutions are considered on a regular basis and since 2017 we have reinsured £3.1 billion of annuitant longevity. A team of longevity and pricing experts has been built to support the annuity proposition
Exposures A capital risk exposure arises when the Group has insufficient capital resources to support its strategic objectives and plans, and to meet both regulatory and external stakeholder requirements and expectations. This could arise due to a depletion of the Group’s capital resources as a result of the crystallisation of any of the risks to which it is exposed. Alternatively a shortage of capital could arise from an increase in the amount of capital that needs to be held either at Group level, Ring-Fenced Bank (RFB) subgroup level or at a regulated entity level. The Group’s capital management approach is focused on maintaining sufficient capital resources across all regulated levels of its structure in order to prevent such exposures while optimising value for shareholders.
As part of the capital planning process, forecast capital positions are subjected to wide ranging programme of stress testing to determine the adequacy of the Group’s capital resources against the minimum requirements, including the ICR. The PRA considers outputs from both the Group’s internal stress tests and the annual Bank of England stress test, in conjunction with the Group’s other regulatory capital buffers and non-stress related elements, as part of the process for informing the setting of a bankspecific capital buffer for the Group, known as the PRA Buffer. The PRA requires this buffer to remain confidential between the Group and the PRA.
The Group maintains a recovery plan which sets out a range of potential mitigating actions that could be taken in response to a stress. For example, the Group is able to accumulate additional capital through the retention of profits over time, which can be enhanced through reducing or cancelling dividend payments and share buybacks, by raising new equity via, for example, a rights issue or debt exchange and by raising additional tier 1 or tier 2 capital securities. The cost and availability of additional capital is dependent upon market conditions and perceptions at the time. The Group is also able to manage the demand for capital through management actions including adjusting its lending strategy, risk hedging strategies and through business disposals.
Target capital ratios The Board’s view of the ongoing level of CET1 capital required by the Group to grow the business, meet regulatory requirements and cover uncertainties continues to be c.12.5 per cent plus a management buffer of c.1 per cent.
The ability of the Group to pay a dividend is also subject to constraints including the availability of distributable reserves, legal and regulatory restrictions and the Group's financial and operating performance.
In the UK the Bank of England has implemented the requirements of the TLAC standard through a statement of policy on MREL (the MREL SoP).
Other movements (20 basis points), reflecting market movements and the continued optimisation of Commercial Banking risk-weighted assets, net of additional pension contributions and model updates
Overall the Group’s CET1 capital ratio is 15.0 per cent on a pro forma basis before ordinary dividends and 13.8 per cent on a pro forma basis after ordinary dividends (31 December 2018: 13.9 per cent pro forma, after ordinary dividends and incorporating the effects of the share buyback announced in February 2019).
Excluding the Insurance dividend paid in February 2020 the Group’s actual CET1 ratio is 13.6 per cent after ordinary dividends (31 December 2018: 14.6 per cent).
The UK leverage ratio, after ordinary dividends, reduced from 5.6 per cent on a pro forma basis to 5.2 per cent on a pro forma basis, largely reflecting the reduction in the fully loaded tier 1 capital position, partially offset by a reduction in the exposure measure.
Capital resources An analysis of the Group’s capital position as at 31 December 2019 is presented in the following section on both a CRD IV transitional arrangements basis and a CRD IV fully loaded basis, as amended by provisions of the revised Capital Requirements Regulation (CRR II) that came into force in June 2019. In addition the Group’s capital position reflects the application of the transitional arrangements for IFRS 9.
Adjustment to retained earnings for foreseeable dividends (1,586) (1,523) (1,586) (1,523)
1 For regulatory capital purposes, the Group’s Insurance business is deconsolidated and replaced by the amount of the Group’s investment in the business. A part of this amount is deducted from capital (via ‘significant investments’ in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets.
IFRS 9 transitional adjustment to retained earnings (49) – – (49)
Fair value through other comprehensive income reserve (142) – – (142)
Movements in other equity, subordinated debt and other tier 2 items: Repurchases, redemptions and other – (2,032) (284) (2,316)
Tier 2 capital resources have reduced by £271 million over the year, largely reflecting the amortisation of dated instruments and a reduction in eligible provisions, partially offset by the transitioning of grandfathered AT1 instruments to tier 2.
Senior unsecured securities issued by Lloyds Banking Group plc 23,554 20,213
1 Instruments with less than one year to maturity or governed under non-EEA law without a contractual bail-in clause.
Significant investments primarily arise from investment in the Group’s Insurance business.
Risk-weighted assets as at 31 December 2019 203,431 1 Credit risk includes securitisation risk-weighted assets.
Methodology and policy changes reduced risk-weighted assets by £1.8 billion principally as a result of securitisation activity, partially offset by the introduction of IFRS 16
Counterparty credit risk, risk-weighted assets reduced by £1.4 billion due to reduced contributions to the default fund of a central counterparty, movement in CVA and a reduction in asset size.
The SFT exposure measure, representing SFT assets per the balance sheet net of deconsolidation and other SFT adjustments, reduced by £0.6 billion during the period, largely reflecting a reduction in volumes.
Off-balance sheet items reduced by £3.2 billion during the period, reflecting an overall reduction in corporate facilities driven by commercial portfolio management, offset in part by new residential mortgage offers placed.
1 Deconsolidation adjustments relate to the deconsolidation of certain Group entities that fall outside the scope of the Group’s regulatory capital consolidation, being primarily the Group’s Insurance business.
Table 1.45 : Application of IFRS 9 on a full impact basis for capital and leverage
The Solvency II regime for insurers and insurance groups came into force from 1 January 2016. The insurance businesses are required to calculate solvency capital requirements and available capital on a risk-based approach. The Insurance business of the Group calculates regulatory capital on the basis of an internal model, which was approved by the PRA on 5 December 2015, with the latest major change to the model approved in December 2019.
Exposure Liquidity exposure represents the potential stressed outflows in any future period less expected inflows. The Group considers liquidity exposure from both an internal and a regulatory perspective.
Liquidity risk within the Insurance business may result from: the inability to sell financial assets quickly at their fair values; an insurance liability falling due for payment earlier than expected; the inability to generate cash inflows as anticipated; an unexpected large operational event; or from a general insurance catastrophe, for example, a significant weather event. Liquidity risk is actively managed and monitored within the Insurance business to ensure that it remains within approved risk appetite, so that even under stress conditions, there is sufficient liquidity to meet obligations.
During 2019, the Group repaid its Funding for Lending Scheme (FLS) contractual maturities of £12.1 billion and early repaid £4.5 billion of its Term Funding Scheme (TFS) drawings, representing all of its 2020 TFS maturities. This has reduced the balance of FLS outstanding to £1 billion and the balance of TFS to £15.4 billion as at 31 December 2019.
The Group’s liquidity coverage ratio (LCR) was 137 per cent (based on a monthly rolling average over the previous 12 months) as at 31 December 2019 calculated on a consolidated basis based on the EU Delegated Act. Following the implementation of structural reform, liquidity risk is managed at a legal entity level with the Group consolidated LCR representing the composite of the ring-fenced bank and non ring-fenced bank entities.
Financial assets at fair value through other comprehensive income – non-LCR eligible3 0.1 0.8 (88)
Liquidity Portfolio At 31 December 2019, the banking business had £118.3 billion of highly liquid unencumbered LCR eligible assets (31 December 2018: £129.4 billion), of which £115.7 billion is LCR level 1 eligible (31 December 2018: £128.6 billion) and £2.6 billion is LCR level 2 eligible (31 December 2018: £0.8 billion). These assets are available to meet cash and collateral outflows and regulatory requirements. Total LCR eligible liquid assets represent over five times the Group’s money market funding less than one year to maturity (excluding derivative collateral margins and settlement accounts) and thus provide a substantial buffer in the event of market dislocation. The Insurance business manages a separate liquidity portfolio to mitigate insurance liquidity risk.
Stress testing results Internal liquidity stress testing results at 31 December 2019 showed that the banking business had liquidity resources representing 158 per cent of modelled outflows over a three month period from all wholesale funding sources, retail and corporate deposits, intraday requirements and rating dependent contracts under the Group’s most severe liquidity stress scenario.
Financial assets at fair value through profit or loss 51 – 4,834 4,885 – 2,469 – 152,835 155,304 160,189
Loans and advances to customers 7,319 33,161 7,109 47,589 133,732 14,087 171,370 128,210 313,667 494,988
Derivative financial instruments – – – – – – – 23,595 23,595 23,595
Loans and advances to customers 5,774 29,041 6,012 40,827 159,822 12,098 155,278 116,833 284,209 484,858
3 The following assets are classified as unencumbered – cannot be used: assets held within the Group’s Insurance businesses which are generally held to either back liabilities to policyholders or to support the solvency of the Insurance subsidiaries; assets held within consolidated limited liability partnerships which provide security for the Group’s obligations to its pension schemes; assets segregated in order to meet the Financial Resilience requirements of the PRA’s Supervisory Statement 9/6 ‘Operational Continuity in Resolution’; assets pledged to facilitate the use of intra-day payment and settlement systems; and reverse repos and derivatives balance sheet ledger items.
Outlining governance arrangements which articulate the enterprise-wide approach to risk managemen
Financial assets at fair value through profit or loss 160,189 17,982 5,352 136,855
Derivative financial instruments 26,369 18,885 5,119 2,365 Interest rate, foreign exchange, credit spread
Loans and advances to banks 9,775 – 9,710 65 Interest rate
Financial liabilities at fair value through profit or loss 21,486 13,955 7,531 –
Derivative financial instruments 25,779 15,654 7,719 2,406 Interest rate, foreign exchange, credit spread
Liabilities arising from insurance and investment contracts 148,908 – – 148,908 Credit spread
The defined benefit pension schemes’ assets and liabilities are included under Other assets and Other liabilities in this table and note 36 on page 253 provides further information.
The Group’s trading book assets and liabilities are originated within the Commercial Banking division. Within the Group’s balance sheet these fall under the trading assets and liabilities and derivative financial instruments. The assets and liabilities are classified as trading books if they meet the requirements as set out in the Capital Requirements Regulation, article 104. Further information on these activities can be found under the Trading portfolios section on page 187.
Derivative assets and liabilities are held by the Group for three main purposes; to provide risk management solutions for clients, to manage portfolio risks arising from client business and to manage and hedge the Group’s own risks. Insurance business assets and liabilities relate to policyholder funds, as well as shareholder invested assets, including annuity funds. The Group recognises the value of in-force business in respect of Insurance’s long-term life assurance contracts as an asset in the balance sheet (see note 25, page 243).
The majority of debt issuance originates from the Group’s capital and funding activities and the interest rate risk of the debt issued is hedged by swapping them into a floating rate.
The non-trading book primarily consists of customer on-balance sheet activities and the Group’s capital and funding activities, which expose it to the risk of adverse movements in market prices, predominantly interest rates, credit spreads, exchange rates and equity prices, as described in further detail within the Banking activities section (page 183).
Banking activities Exposures The Group’s banking activities expose it to the risk of adverse movements in market prices, predominantly interest rates, credit spreads, exchange rates and equity prices. The volatility of market values can be affected by both the transparency of prices and the amount of liquidity in the market for the relevant asset, liability or instrument.
Credit spread risk Credit spread risk arises largely from (i) the liquid asset portfolio held in the management of Group liquidity, comprising of government, supranational and other eligible assets; (ii) the Credit Valuation Adjustment (CVA) and Debit Valuation Adjustment (DVA) sensitivity to credit spreads; (iii) a number of the Group’s structured medium-term notes where we have elected to fair value the notes through the profit and loss account; and (iv) banking book assets held at fair value in Commercial Banking under IFRS9.
Measurement Interest rate risk exposure is monitored monthly using, primarily: 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 an appropriate floor). The market value sensitivities are calculated on a static balance sheet using principal cash flows excluding interest, commercial margins and other spread components and are therefore discounted at the risk free zero-coupon rate.
The market value sensitivity is driven by temporary customer flow positions not yet hedged plus other positions occasionally held, within limits, by the Group’s wholesale funding desks in order to minimise overall funding and hedging costs. The level of risk is low relative to the size of the total balance sheet.
The increase in the net interest income sensitivity to a downwards 100bps shock reflects additional margin compression risk within retail savings and a reduction in the size of the structural hedge.
Net investment foreign exchange exposures are managed centrally by GCT, by hedging non-sterling asset values with currency borrowing. Economic foreign exchange exposures arising from non-functional currency flows are identified by divisions and transferred and managed centrally. The Group also has a policy of forward hedging its forecasted currency profit and loss to year end. The Group makes use of both accounting and economic foreign exchange exposures, as an offset against the impact of changes in foreign exchange rates on the value of non-sterling-denominated RWAs. This involves the holding of a structurally open currency position; sensitivity is minimised where, for a given currency, the ratio of the structural open position to RWAs equals the CET1 ratio. Continually evaluating this structural open currency position against evolving non-sterling-denominated RWAs, mitigates volatility in the Group’s CET1 ratio.
For further information on defined benefit pension scheme assets and liabilities please refer to note 36 on page 253.
Equity risk arises indirectly through the value of future management charges on policyholder funds. These management charges form part of the value of in-force business (see note 25 on page 243). Equity risk also arises in the with-profits funds but is less material
Measurement The Group internally uses VaR as the primary risk measure for all trading book positions.
Although it is an important market standard measure of risk, VaR has limitations. One of them is the use of a limited historical data sample which influences the output by the implicit assumption that future market behaviour will not differ greatly from the historically observed period. Another known limitation is the use of defined holding periods which assumes that the risk can be liquidated or hedged within that holding period. Also calculating the VaR at the chosen confidence interval does not give enough information about potential losses which may occur if this level is exceeded. The Group fully recognises these limitations and supplements the use of VaR with a variety of other measurements which reflect the nature of the business activity. These include detailed sensitivity analysis, position reporting and a stress testing programme.
Exposures There are over 300 models in the Group performing a variety of functions including: capital calculation credit decisioning, including fraud pricing models impairment calculation stress testing and forecasting market risk measurement
This provides the basis for the Group Model Governance Policy, which defines the mandatory requirements for models across the Group, including: the scope of models covered by the policy model materiality roles and responsibilities, including ownership, independent oversight and approval key principles and controls regarding data integrity, development, validation, implementation, ongoing maintenance and revalidation, monitoring, and the process for non-compliance
The above ensures all models in scope of policy, including those involved in regulatory capital calculation, are developed consistently and are of sufficient quality to support business decisions and meet regulatory requirements.
Financial statements Independent auditors’ report 189 Consolidated income statement 198 Consolidated statement of comprehensive income 199 Consolidated balance sheet 200 Consolidated statement of changes in equity 202 Consolidated cash flow statement 205
Parent company balance sheet 318 Parent company statement of changes in equity 319 Parent company cash flow statement 320
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 189
We critically assessed the assumptions adopted in the base case economic scenario by comparing them to our independent view of the economic outlook and market consensus data. We investigated any economic variables outside of our thresholds. We also assessed the risk of bias in the forecasts, as well as the existence of contrary evidence.
Based on the evidence obtained, we consider that the economic scenarios adopted reflect an unbiased, probability weighted view, that appropriately captures the impact of non-linearity.
The allowance for ECL relating to loans and advances in the Retail division is determined on a collective basis, with the use of impairment models. These models use a number of key assumptions including probability of default, loss given default (including propensity for possession and forced sale discounts for mortgages) and valuation of recoveries. Management also apply overlays where they believe the model calculated assumptions and allowances are not appropriate, either due to emerging trends or the model limitations. An example of this is an overlay to the impairment model output for the UK mortgages portfolio relating to ECL on past term interest only exposures. Our work therefore focused on the appropriateness of modelling methodologies adopted and significant judgements made in determining overlays as well as the measurement of those overlays.
Based on the evidence assessed, we found the methodologies, modelled assumptions and data used within the allowance for ECL assessment to be appropriate and in line with the requirements of IFRS 9.
Our work focused on the valuation of conduct provisions relating to PPI policies.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 193
For persistency, we considered the appropriateness of assumptions set by management in light of actual experience and regulatory changes. For example, we considered how the assumptions reflected expected persistency experience following the increase in the minimum contribution rate for auto-enrolment business.
For maintenance expenses, we assessed the appropriateness of the judgements in respect of costs deemed to be non-attributable to the long-term insurance business and the resulting allocation of attributable costs to product types which then form the basis of the per-policy costs assumptions.
For credit default and illiquidity premium, we assessed the appropriateness of the methodology against our knowledge and experience with regulatory requirements and industry practice. We challenged whether the asset mix used in the illiquidity premium calculation remained an appropriate proxy to a market consistent portfolio by comparing the proportion of illiquid assets held to those held by other similar companies.
We performed testing over the members data used in calculating the obligation through a combination of substantive testing and consideration of member-related controls at the administrators. Where material, we also considered the treatment of curtailments, settlements, past service costs, remeasurements, benefits paid and any other movement in obligations during the year.
Within its Level 3 financial instruments, the Group holds two portfolios (Loans and advances to customers of £8.2bn and £1.6bn of debt securities) which are each concentrations of similar, non-traded assets. They are classified as Level 3 instruments as their valuation is subjective and determined using bespoke models which rely on a range of unobservable inputs.
The Group’s application of hedge accounting, including determining effectiveness, is largely manual in nature, which increases the risk of errors and hence the risk that financial reporting is not compliant with IFRS requirements.
The Group’s financial reporting processes are reliant on automated processes, controls and data managed by IT systems.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. This included regular communication with the component auditors throughout the audit, the issuance of instructions, a review of the results of their work on significant and elevated risk areas and formal clearance meetings.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 195
Our starting point was 5 per cent of profit before tax, a generally accepted auditing practice. Profit before tax was adjusted to remove the disproportionate effect of regulatory provisions as they are considered not to reflect the long term performance of the Group.
For each component in the scope of the Group audit, we allocated a materiality that is less than the overall Group materiality. The range of materiality allocated across components was between £50 million and £100 million. Certain components were audited to a local statutory audit materiality that was also less than the allocated materiality.
Based on the responsibilities described above and our work undertaken in the course of the audit, the Companies Act 2006 (CA06), ISAs (UK) and the Listing Rules of the FCA require us also to report certain opinions and matters as described below (required by ISAs (UK) unless otherwise stated).
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group We have nothing material to add or draw attention to regarding: – The directors’ confirmation on page 95 of the Annual Report that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; – The disclosures in the Annual Report that describe those risks and explain how they are being managed or mitigated; and – The directors’ explanation on page 95 of the Annual Report as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Responsibilities for the financial statements and the audit Responsibilities of the directors for the financial statements As explained more fully in the Statement of Directors’ Responsibilities set out on page 97, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 197
Other required reporting Companies Act 2006 exception reporting Under the Companies Act 2006 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
Share of other comprehensive income of associates and joint ventures – 8 –
Items that may subsequently be reclassified to profit or loss: Movements in revaluation reserve in respect of debt securities held at fair value through other comprehensive income: Change in fair value (30) (37)
Lord Blackwell António Horta-Osório William Chalmers Chairman Group Chief Executive Chief Financial Officer
Post-retirement defined benefit scheme remeasurements, net of tax – – (1,117) (1,117) – – (1,117)
Movements in revaluation reserve in respect of financial assets held at fair value through other comprehensive income, net of tax: Gains and losses attributable to own credit risk, net of tax – – (306) (306) – – (306)
Movement in treasury shares – – (3) (3) – – (3)
Changes in non-controlling interests – – – – – (14) (14)
Profit for the year1 – – 4,408 4,408 – 98 4,506
Share of other comprehensive income of associates and joint ventures – – 8 8 – – 8
Movements in cash flow hedging reserve, net of tax – (354) – (354) – – (354)
Profit for the year1 – – 3,559 3,559 – 90 3,649
Post-retirement defined benefit scheme remeasurements, net of tax – – 482 482 – – 482
Net cash provided by (used in) operating activities 11,281 (11,107) (3,195)
Acquisition of businesses, net of cash acquired 54(E) (21) (49) (1,923)
Disposal of businesses, net of cash disposed 54(F) – 1 129
Effects of exchange rate changes on cash and cash equivalents (5) 3 –
Cash and cash equivalents at beginning of year 55,224 58,708 62,388
The Group elected to apply the standard retrospectively with the cumulative effect of initial application being recognised at 1 January 2019, comparatives have therefore not been restated. There was no impact on shareholders' equity. Further details of the impact of adoption of IFRS 16 are provided in note 55.
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
Financial liabilities are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit or loss on initial recognition which are held at fair value.
(5) Sale and repurchase agreements (including securities lending and borrowing) Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and rewards are retained. Funds received under these arrangements are included in deposits from banks, customer deposits, or trading liabilities. Conversely, securities purchased under agreements to resell (reverse repos) , where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and advances measured at amortised cost or trading securities. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.
Securities borrowing and lending transactions are typically secured; collateral takes the form of securities or cash advanced or received. Securities lent to counterparties are retained on the balance sheet. Securities borrowed are not recognised on the balance sheet, unless these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability. Cash collateral given or received is treated as a loan and advance measured at amortised cost or customer deposit.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 209
Note 2: Accounting policies continued (F) Derivative financial instruments and hedge accounting As permitted by IFRS 9, the Group continues to apply the requirements of IAS 39 to its hedging relationships. All derivatives are recognised at their fair value. Derivatives are carried on the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 50(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models.
(1) Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk; this also applies if the hedged asset is classified as a financial asset at fair value through other comprehensive income. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item attributable to the hedged risk are no longer recognised in the income statement. The cumulative adjustment that has been made to the carrying amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity.
(H) Impairment of financial assets The impairment charge in the income statement includes the change in expected credit losses and certain fraud costs. Expected credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income, and certain loan commitments and financial guarantee contracts. Expected credit losses are calculated as an unbiased and probability-weighted estimate using an appropriate probability of default, adjusted to take into account a range of possible future economic scenarios, and applying this to the estimated exposure of the Group at the point of default after taking into account the value of any collateral held, repayments, or other mitigants of loss and including the impact of discounting using the effective interest rate.
Notes to the consolidated financial statements continued credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. Where the credit risk subsequently improves such that it no longer represents a significant increase in credit risk since initial recognition, the asset is transferred back to Stage 1.
(I) Property, plant and equipment Property, plant and equipment (other than investment property) is 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: the shorter of 50 years and the remaining period of the lease for freehold/long and short leasehold premises; the shorter of 10 years and, if lease renewal is not likely, the remaining period of the lease for leasehold improvements; 10 to 20 years for fixtures and furnishings; and 2 to 8 years for other equipment and motor vehicles.
(L) Taxation Tax expense comprises current and deferred tax. Current and deferred tax are charged or credited in the income statement except to the extent that the tax arises from a transaction or event which is recognised, in the same or a different period, outside the income statement (either in other comprehensive income, directly in equity, or through a business combination) , in which case the tax appears in the same statement as the transaction that gave rise to it. The tax consequences of the Group's dividend payments (including distributions on other equity instruments) , if any, are charged or credited to the statement in which the profit distributed originally arose.
Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income and accumulated in a separate component of equity together with exchange differences arising from the translation of borrowings and other currency instruments designated as hedges of such investments (see (F) (3) above) . On disposal or liquidation of a foreign operation, the cumulative amount of exchange differences relating to that foreign operation are reclassified from equity and included in determining the profit or loss arising on disposal or liquidation.
Where the Company or any member of the Group purchases the Company’s share capital, the consideration paid is deducted from shareholders’ equity as treasury shares until they are cancelled; if these shares are subsequently sold or reissued, any consideration received is included in shareholders’ equity.
Definition of default The probability of default (PD) of an exposure, both over a 12 month period and over its lifetime, is a key input to the measurement of the ECL allowance. Default has occurred when there is evidence that the customer is experiencing significant financial difficulty which is likely to affect the ability to repay amounts due. The definition of default adopted by the Group is described in note 2(H) Impairment of financial assets. The Group has rebutted the presumption in IFRS 9 that default occurs no later than when a payment is 90 days past due for UK mortgages. As a result, at 31 December 2019, approximately £0.6 billion of UK mortgages (31 December 2018: £0.6 billion) were classified as Stage 2 rather than Stage 3; the impact on the Group’s ECL allowance was not material.
At 31 December 2019, significant post-model adjustments included within the allowance for expected credit losses amounted to £161 million (2018: £195 million) , less than 5 percent of overall provisions. This comprises increases for the additional end of term risk on interest only mortgages of £132 million (2018: £114 million) ; mortgage accounts in long term default of £33 million (2018: £47 million) ; the extension of modelled lifetime on Retail revolving products of £36 million (2018: £34 million) ; and a decrease from the temporary effects of bureau data changes which artificially inflate PDs, and the resulting ECL, of £40 million; (2018: Nil) .
The Group’s base-case economic scenario has changed little over the year and reflects a broadly stable outlook for the economy. Although there remains considerable uncertainty about the economic consequences of the UK’s exit from the European Union, the Group considers that at this stage the range of possible economic outcomes is adequately reflected in its choice and weighting of scenarios. The averages shown above do not fully reflect the peak to trough changes in the stated assumptions over the period. The tables below illustrate the variability of the assumptions from the start of the scenario period to the peak and trough.
Commercial real estate price growth (0.9) 0.3 (17.5) (30.9) (0.1) 0.0 (23.8) (33.8)
The table below shows the extent to which a higher ECL allowance has been recognised to take account of forward looking information from the weighted multiple economic scenarios. The most significant difference between these bases arises on UK mortgages as the probability weighted ECL includes the impact of house price movements on the loss given default. For other portfolios adjustment is made only for the probability of default. All non-modelled provisions, including post model adjustments, are based on the probability weighted modelled ECL across all scenarios.
The value of in-force business asset represents the estimated present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts. The valuation of this asset requires assumptions to be made about future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to this asset. The methodology used to value this asset and the key assumptions that have been made in determining the carrying value of the value of in-force business asset at 31 December 2019 are set out in note 25.
At 31 December 2019, the Group carried total liabilities arising from insurance contracts and participating investment contracts of £111,449 million (2018: £98,874 million) . Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require management to estimate future investment returns, future mortality rates, future expenses and future policyholder behaviour. These estimates are subject to significant uncertainty. The methodology used to value these liabilities and the key assumptions that have been made in determining their carrying value are set out in note 32.
The effect on the Group’s profit before tax and shareholders’ equity of changes in key assumptions used in determining the life insurance assets and liabilities is set out in note 33.
Recoverability of deferred tax assets At 31 December 2019 the Group carried deferred tax assets on its balance sheet of £2,666 million (2018: £2,453 million) principally relating to tax losses carried forward. Further information on the Group's deferred tax assets and uncertain tax positions is provided in notes 37 and 48 respectively.
As disclosed in note 37, deferred tax assets totalling £428 million (2018: £584 million) have not been recognised in respect of certain capital and trading losses carried forward, unrelieved foreign tax credits and other tax deductions, as there are currently no expected future taxable profits against which these assets can be utilised.
Fair value of financial instruments At 31 December 2019, the carrying value of the Group’s financial instrument assets held at fair value was £211,650 million (2018: £206,939 million) , and its financial instrument liabilities held at fair value was £47,265 million (2018: £51,920 million) .
For the purposes of the underlying income statement, operating lease depreciation (net of gains on disposal of operating lease assets) is shown as an adjustment to total income.
Inter-segment services are generally recharged at cost, although some attract a margin. In particular a profit margin is charged on the internal commission arrangements between the UK branch and other distribution networks and the insurance product manufacturing businesses within the Group. Intersegment lending and deposits are generally entered into at market rates, except that non-interest bearing balances are priced at a rate that reflects the external yield that could be earned on such funds.
Other income, net of insurance claims 2,014 1,422 2,021 275 5,732
Other income, net of insurance claims 2,097 1,670 1,865 378 6,010
Other segment items reflected in income statement above: Decrease in value of in-force business – – (55) – (55)
2 Net of profits on disposal of operating lease assets of £60 million.
Other income, net of insurance claims 2,150 1,803 1,846 406 6,205
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 221
Total income, net of insurance claims 18,359 (47) (203) – 18,109
5 Comprises the effects of asset sales (gain of £30 million) ; volatile items (gain of £263 million) ; liability management (loss of £14 million) ; the amortisation of purchased intangibles (£91 million) ; restructuring costs (£621 million, principally comprising costs relating to the Simplification programme; the rationalisation of the non-branch property portfolio, the work on implementing the ring-fencing requirements and the integration of MBNA) ; and the fair value unwind and other items (loss of £270 million) .
Interest receivable on financial assets held at amortised cost 2.89 2.87 2.81 16,426 15,709 15,026
Financial assets at fair value through other comprehensive income 1.64 1.98 435 640
Total interest and similar expense3 1.31 0.60 1.06 (6,681) (2,953) (5,094)
3 Includes £119 million (2018: £10 million; 2017: £50 million) of interest expense on assets with negative interest rates.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 223
Note 6: Net fee and commission income continued In respect of current accounts, the Group receives fees for the provision of bank account and transaction services such as ATM services, fund transfers, overdraft facilities and other value-added offerings.
Note 8: Insurance premium income 2019 £m 2018 £m 2017 £m
Movement in value of in-force business (note 25) 825 (55) (165)
Share of results of joint ventures and associates (note 22) 6 9 6
Pensions and other post-retirement benefit schemes (note 36) 532 705 625
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 225
Performance-based awards expensed in 2019 include cash awards amounting to £89 million (2018: £137 million; 2017: £102 million) .
It is the Group’s policy to use the auditors on assignments in cases where their knowledge of the Group means that it is neither efficient nor cost effective to employ another firm of accountants.
The Group has procedures that are designed to ensure auditor independence, including prohibiting certain non-audit services. All audit and non-audit assignments must be pre-approved by the audit committee on an individual engagement basis; for certain types of non-audit engagements where the fee is ‘de minimis’ the audit committee has pre-approved all assignments subject to confirmation by management. On a quarterly basis, the audit committee receives and reviews a report detailing all pre-approved services and amounts paid to the auditors for such pre-approved services.
Audits of the unconsolidated Open Ended Investment Companies managed by the Group 0.4 0.3 0.3
In respect of: Loans and advances to banks – – – – –
Tax relief on coupons on other equity instruments 89 83 79
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 229
Asset-backed securities: Corporate and other debt securities 233 17,983 18,216 247 18,063 18,310
Other financial assets at fair value through profit or loss include assets backing insurance contracts and investment contracts of £136,855 million (31 December 2018: £116,903 million) . Included within these assets are investments in unconsolidated structured entities of £38,177 million (31 December 2018: £26,028 million) , see note 49.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 231
The accumulated amount of fair value hedge adjustments remaining in the balance sheet for hedged items that have ceased to be adjusted for hedging gains and losses is a liability of £692 million (2018: liability of £170 million) .
Total loans and advances to banks 9,775 – – – 9,775
Financial assets that have been written off during the year (1,828) (54) (1,882)
Total loans and advances to customers 449,300 27,548 4,568 13,572 494,988
Total financial assets at amortised cost 464,619 27,548 4,568 13,572 510,307
Movements on Retail mortgage balances were as follows: Retail mortgages £m £m £m
Financial assets that have been written off during the year (19) – (19)
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 237
Additions (repayments) comprise new loans originated and repayments of outstanding balances throughout the reporting period. Loans which are written off in the period are first transferred to Stage 3 before acquiring a full allowance and subsequent write-off.
Gross investment in finance leases, receivable: Not later than 1 year 490 458
The net investment in finance leases represents amounts recoverable as follows: 2019 £m 2018 £m
Recoveries of advances written off in previous years 29 28 57
Note 20: Allowance for impairment losses continued Movements in the Group's allowance for impairment losses in respect of Retail mortgages were as follows: Stage 1 £m
Recoveries of advances written off in previous years 3 27 30
The movement tables are compiled by comparing the position at 31 December to that at the beginning of the year. Transfers between stages are deemed to have taken place at the start of the reporting period, with all other movements shown in the stage in which the asset is held at 31 December, with the exception of those held within Purchased or originated credit-impaired, which are not transferrable. As assets are transferred between stages, the resulting change in expected credit loss of £598 million (2018: £493 million) for drawn balances, and £6 million (2018: £8 million) for undrawn balances, is presented separately as Impacts of transfers between stages, in the stage in which the expected credit loss is recognised at the end of the reporting period.
All assets were assessed at Stage 1 at 31 December 2018 and 2019.
Share of other comprehensive income – 8 – – – 8
The Group's unrecognised share of losses of associates for the year was £nil (2018: £4 million; 2017; £nil) . For entities making losses, subsequent profits earned are not recognised until previously unrecognised losses are extinguished. The Group's unrecognised share of losses net of unrecognised profits on a cumulative basis of associates is £17 million (2018: £17 million; 2017 £17 million) and of joint ventures is £3 million (2018: £3 million; 2017: £29 million) .
The table below sets out the fair value of the identifiable assets and liabilities acquired.
The carrying value of the goodwill arising on acquisition of £14 million has been reviewed at 31 December 2019, with appropriate assumptions made as to the future performance of the acquired business, and no adjustments are considered necessary.
In connection with this partnership, the Group sold a 49.9 per cent interest in Scottish Widows Schroder Wealth Holdings Limited to Schroders Administration Limited in exchange for a 19.9 per cent interest in Schroder Wealth Holdings Limited, the holding company of Schroders plc’s existing UK wealth management business, valued at £202 million.
Risk-free rate (financial options and guarantees) 1 0.00 to 3.90 0.00 to 4.05
The acquired value of in-force non-participating investment contracts includes £150 million (2018: £167 million) in relation to OEIC business.
Cost: Exchange and other adjustments – – – – 4 4
Balance sheet amount at 31 December 2019 380 – 521 – 2,907 3,808
Balance sheet amount at 31 December 2018 380 – 591 – 2,376 3,347
Brands of £380 million (31 December 2018: £380 million) that have been determined to have indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These brands are well established financial services brands and there are no indications that they should not have an indefinite useful life.
Depreciation charge for the year – 125 715 1,008 216 2,064
Capital expenditure in respect of investment properties which had been contracted for but not recognised in the financial statements was £7 million (2018: £33 million) .
The table above analyses movements in investment properties, all of which are categorised as level 3. See note 50 for details of levels in the fair value hierarchy.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 247
Note 29: Financial liabilities at fair value through profit or loss 2019 £m 2018 £m
Liabilities designated at fair value through profit or loss: Debt securities in issue 7,531 7,085
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements 11,048 21,595
For the fair value of collateral pledged in respect of repurchase agreements see note 53.
Total securitisation and covered bond programmes 37,156 33,673 1 Includes £47 million (2018: £53 million) of securitisation notes held at fair value through profit or loss.
Cash deposits of £4,703 million (2018: £4,102 million) which support the debt securities issued by the structured entities, the term advances related to covered bonds and other legal obligations are held by the Group. Additionally, the Group had certain contractual arrangements to provide liquidity facilities to some of these structured entities. At 31 December 2019 these obligations had not been triggered; the maximum exposure under these facilities was £56 million (2018: £88 million) .
– Change in the assumption in respect of current and future mortality and morbidity rates (£164 million increase) . – Change in expenses assumptions (£208 million increase) .
Note 33: 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.
Future maintenance and investment expenses4 10% reduction 299 248 262 217
Guaranteed annuity option take up6 5% addition (1) (1) (3) (2)
The Group adopted IFRS 16 Leases from 1 January 2019, see note 1.
Note 36: Retirement benefit obligations 2019 £m 2018 £m 2017 £m
A valuation to determine the funding status of each scheme is carried out at least every three years, whereby scheme assets are measured at market value and liabilities (technical provisions) are measured using prudent assumptions. If a deficit is identified a recovery plan is agreed between the employer and the scheme Trustee and sent to the Pensions Regulator for review. The Group has not provided for these deficit contributions as the future economic benefits arising from these contributions are expected to be available to the Group. The Group’s overseas defined benefit pension schemes are subject to local regulatory arrangements.
The Group has also established three private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final Salary Pension Scheme, a section of the Lloyds Bank Pension Scheme No 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2019 these held assets of approximately £4.8 billion in aggregate. The private limited companies are consolidated fully in the Group’s balance sheet. The terms of these arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed to the relevant Group pension schemes. The Group has satisfied this requirement during 2019.