We considered the individual financial significance of other components in relation to primary statement account balances. We considered the presence of any significant audit risks and other qualitative factors (including history of misstatements through fraud or error). Any component which was not already included as a full scope component but was identified as being individually financially significant in respect of one or more account balances was subject to specific audit procedures over those specific account balances. Inconsequential components (defined as components which, in our judgement, did not present a reasonable possibility of a risk of material misstatement either individually or in aggregate) were eliminated from further consideration for specific audit procedures, although they were subject to Group level analytical review procedures.
Components within the scope of our audit contributed 98 per cent of Group total assets and 81 per cent of Group total income.
How we determined it 5 per cent of the four-year average adjusted profit before tax for the financial years ended 31 December 2017, 2018, 2019 and 2020, adjusted to remove the effects of certain items which were considered to have a disproportionate impact.
1 per cent of total assets, but limited to the overall Group materiality.
Due to the impact of COVID-19 on profit for 2020, our starting point was 5 per cent of the average adjusted profit before tax across 2017, 2018, 2019 and 2020. 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 our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £50m and £100m. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £15m (Group and parent company audit) (2019: £18m) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
In relation to the Group’s and the parent company’s reporting on how they have applied the UK Corporate Governance Code, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Strategic report and Directors’ report In our opinion, based on the work undertaken in the course of the audit, the information given in the Strategic report and Directors’ report for the year ended 31 December 2020 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements.
In light of the knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit, we did not identify any material misstatements in the Strategic report and Directors’ report.
Directors’ remuneration In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the corporate governance statement, included within the Annual Report is materially consistent with the financial statements and our knowledge obtained during the audit, and we have nothing material to add or draw attention to in relation to: – The directors’ confirmation that they have carried out a robust assessment of the emerging and principal risks; – The disclosures in the Annual Report and Accounts that describe those principal risks, what procedures are in place to identify emerging risks and an explanation of how these are being managed or mitigated; – The directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the Group’s and parent company’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; – The directors’ explanation as to their assessment of the Group’s and parent company’s prospects, the period this assessment covers and why the period is appropriate; and
– The section of the Annual Report describing the work of the Audit Committee.
We have nothing to report in respect of our responsibility to report when the directors’ statement relating to the Group and parent company’s compliance with the Code does not properly disclose a departure from a relevant provision of the Code specified under the Listing Rules for review by the auditors.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 215
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: Remeasurements before tax 138 (1,433) 167
Movements in revaluation reserve in respect of equity shares held at fair value through other comprehensive income: Change in fair value (50) — (97)
Gains and losses attributable to own credit risk: (Losses) gains before tax (75) (419) 533
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 46 (30) (37)
Total comprehensive income attributable to other equity holders 453 466 433
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 217
The directors approved the consolidated financial statements on 23 February 2021.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 219
Movements in cash flow hedging reserve, net of tax — 125 — 125 — — 125
Currency translation differences (tax: £nil) — 17 — 17 — — 17
Distributions on other equity instruments — — — — (453) — (453)
Issue of ordinary shares 191 — — 191 — — 191
Other employee award schemes — — 74 74 — — 74
Realised gains and losses on equity shares held at fair value through other comprehensive income — — — — — — —
1 Total comprehensive income attributable to owners of the parent was £1,428 million (2019: £1,799 million; 2018: £4,295 million).
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 38, 39, 40, 41 and 42.
Total £ million £ million £ million £ million £ million £ million £ million
Post-retirement defined benefit scheme remeasurements, net of tax — — (1,117) (1,117) — — (1,117)
Movements in cash flow hedging reserve, net of tax — 453 — 453 — — 453
Currency translation differences (tax: £nil) — (12) — (12) — — (12)
Distributions on other equity instruments — — — — (466) — (466)
Issue of ordinary shares 107 — — 107 — — 107
Movement in treasury shares — — (3) (3) — — (3)
Other employee award schemes — — 165 165 — — 165
Movements in cash flow hedging reserve, net of tax — (354) — (354) — — (354)
Distributions on other equity instruments — — — — (433) — (433)
Movement in treasury shares — — 40 40 — — 40
Value of employee services: Share option schemes — — 53 53 — — 53
Other employee award schemes — — 207 207 — — 207
Proceeds from sale and maturity of financial assets 6,347 9,631 26,806
Acquisition of businesses, net of cash acquired 52(E) (3) (21) (49)
Effects of exchange rate changes on cash and cash equivalents (196) (5) 3
Cash and cash equivalents at end of year 52(D) 75,467 57,811 55,224
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 223
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, financial assets measured at fair value through other comprehensive income, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. As stated on page 113, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements. In reaching this assessment, the directors have considered the implications of the COVID-19 pandemic upon the Group's performance and projected funding and capital position and have also taken into account the impact of further stress scenarios. On this basis, the directors are satisfied that the Group will maintain adequate levels of funding and capital for the foreseeable future. Further details of the Group's funding and capital position are set out on pages 183 to 196.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2020 and which have not been applied in preparing these financial statements are given in note 53.
(1) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it has power over the entity, is exposed to, or has rights to, variable returns from its involvement with the entity, and has the ability to affect those returns through the exercise of its power. This generally accompanies a shareholding of more than one half of the voting rights although in certain circumstances a holding of less than one half of the voting rights may still result in the ability of the Group to exercise control. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The Group reassesses whether or not it controls an entity if facts and circumstances indicate that there are changes to any of the above elements. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are deconsolidated from the date that control ceases.
The Group consolidates collective investment vehicles if its beneficial ownership interests give it substantive rights to remove the external fund manager over the investment activities of the fund. Where a subsidiary of the Group is the fund manager of a collective investment vehicle, the Group considers a number of factors in determining whether it acts as principal, and therefore controls the collective investment vehicle, including: an assessment of the scope of the Group’s decision making authority over the investment vehicle; the rights held by other parties including substantive removal rights without cause over the Group acting as fund manager; the remuneration to which the Group is entitled in its capacity as decision maker; and the Group’s exposure to variable returns from the beneficial interest it holds in the investment vehicle. Consolidation may be appropriate in circumstances where the Group has less than a majority beneficial interest. Where a collective investment vehicle is consolidated the interests of parties other than the Group are reported in other liabilities and the movement in these interests in interest expense.
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 noncontrolling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest.
Notes to the consolidated financial statements for the year ended 31 December
(1) Financial instruments measured at amortised cost Financial assets that are held to collect contractual cash flows where those cash flows represent solely payments of principal and interest are measured at amortised cost. A basic lending arrangement results in contractual cash flows that are solely payments of principal and interest on the principal amount outstanding. Where the contractual cash flows introduce exposure to risks or volatility unrelated to a basic lending arrangement such as changes in equity prices or commodity prices, the payments do not comprise solely principal and interest. Financial assets measured at amortised cost are predominantly loans and advances to customers and banks together with certain debt securities used by the Group to manage its liquidity. Loans and advances are initially recognised when cash is advanced to the borrower at fair value inclusive of transaction costs. Interest income is accounted for using the effective interest method (see (D) above).
The assets backing the insurance and investment contracts issued by the Group do not meet the criteria to be measured at amortised cost or fair value through other comprehensive income as they are managed on a fair value basis and accordingly are measured at fair value through profit or loss. Similarly, trading securities, which are debt securities and equity shares acquired principally for the purpose of selling in the short-term or which are part of a portfolio which is managed for short-term gains, do not meet these criteria and are also measured at fair value through profit or loss. Financial assets measured at fair value through profit or loss are recognised in the balance sheet at their fair value. Fair value gains and losses together with interest coupons and dividend income are recognised in the income statement within net trading income.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. The fair values of derivative financial instruments are adjusted where appropriate to reflect credit risk (via credit valuation adjustments (CVAs), debit valuation adjustments (DVAs) and funding valuation adjustments (FVAs)), market liquidity and other risks.
Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities. The coupon on these instruments is recognised in the income statement as interest expense. Securities which carry a discretionary coupon and have no fixed maturity or redemption date are classified as other equity instruments. Interest payments on these securities are recognised, as distributions from equity in the period in which they are paid. An exchange of financial liabilities on substantially different terms is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the new financial liability is recognised in profit or loss together with any related costs or fees incurred.
(2) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income in the cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
At initial recognition, allowance (or provision in the case of some loan commitments and financial guarantees) is made for expected credit losses resulting from default events that are possible within the next 12 months (12-month expected credit losses). In the event of a significant increase in credit risk since origination, allowance (or provision) is made for expected credit losses resulting from all possible default events over the expected life of the financial instrument (lifetime expected credit losses). Financial assets where 12-month expected credit losses are recognised are considered to be Stage 1; financial assets which are considered to have experienced a significant increase in credit risk since initial recognition are in Stage 2; and financial assets which have defaulted or are otherwise considered to be credit impaired are allocated to Stage 3. Some Stage 3 assets, mainly in Commercial Banking, are subject to individual rather than collective assessment. Such cases are subject to a risk-based impairment sanctioning process, and these are reviewed and updated at least quarterly, or more frequently if there is a significant change in the credit profile. The collective assessment of impairment aggregates financial instruments with similar risk characteristics such as whether the facility is revolving in nature or secured and the type of security against financial assets.
An assessment of whether credit risk has increased significantly since initial recognition considers the change in the risk of default occurring over the remaining expected life of the financial instrument. In determining whether there has been a significant increase in credit risk, the Group uses quantitative tests based on relative and absolute probability of default (PD) movements linked to internal credit ratings together with qualitative indicators such as watchlists and other indicators of historical delinquency, credit weakness or financial difficulty. The use of internal credit ratings and qualitative indicators ensure alignment between the assessment of staging and the Group’s management of credit risk which utilises these internal metrics within distinct retail and commercial portfolio risk management practices. However, unless identified at an earlier stage, the credit risk of financial assets is deemed to have increased significantly when more than 30 days past due. The use of a payment holiday in itself has not been judged to indicate a significant increase in credit risk, with the underlying long-term credit risk deemed to be driven by economic conditions and captured through the use of forward-looking models. These portfolio level models are capturing
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 227 the anticipated volume of increased defaults and therefore an appropriate assessment of staging and expected credit loss. 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.
Assets are transferred to Stage 3 when they have defaulted or are otherwise considered to be credit impaired. Default is considered to have occurred when there is evidence that the customer is experiencing financial difficulty which is likely to affect significantly the ability to repay the amount due. IFRS 9 contains a rebuttable presumption that default occurs no later than when a payment is 90 days past due. The Group uses this 90 day backstop for all its products except for UK mortgages. For UK mortgages, the Group uses a backstop of 180 days past due as mortgage exposures more than 90 days past due, but less than 180 days, typically show high cure rates and this aligns with the Group’s risk management practices. Key differences between Stage 3 balances and nonperforming loans relate to the use of 180 days past due for Stage 3 mortgages and to the cure periods applied to forbearance exposures. The use of payment holidays is not considered to be an automatic trigger of regulatory default and therefore does not automatically trigger Stage 3. Days past due will also not accumulate on any accounts that have taken a payment holiday including those already past due.
Purchased or originated credit-impaired financial assets (POCI) include financial assets that are purchased or originated at a deep discount that reflects incurred credit losses. At initial recognition, POCI assets do not carry an impairment allowance; instead, lifetime expected credit losses are incorporated into the calculation of the effective interest rate. All changes in lifetime expected credit losses subsequent to the assets’ initial recognition are recognised as an impairment charge.
Operating lease assets are included within property, plant and equipment at cost and depreciated over their estimated useful lives, which equates to the lives of the leases, after taking into account anticipated residual values. Operating lease rental income is recognised on a straight-line basis over the life of the lease.
The costs of the Group’s defined contribution plans are charged to the income statement in the period in which they fall due.
(2) Share-based compensation The Group operates a number of equity-settled, share-based compensation plans in respect of services received from certain of its employees. The value of the employee services received in exchange for equity instruments granted under these plans is recognised as an expense over the vesting period of the instruments, with a corresponding increase in equity. This expense is determined by reference to the fair value of the number of equity instruments that are expected to vest. The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In the absence of market prices, the fair value of the instruments at the date of grant is estimated using an appropriate valuation technique, such as a Black-Scholes option pricing model or a Monte Carlo simulation. The determination of fair values excludes the impact of any non-market vesting conditions, which are included in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date, this estimate is reassessed and if necessary revised. Any revision of the original estimate is recognised in the income statement, together with a corresponding adjustment to equity. Cancellations by employees of contributions to the Group’s Save As You Earn plans are treated as non-vesting conditions and the Group recognises, in the year of cancellation, the amount of the expense that would have otherwise been recognised over the remainder of the vesting period. Modifications are assessed at the date of modification and any incremental charges are charged to the income statement.
Current tax includes amounts provided in respect of uncertain tax positions when management expects that, upon examination of the uncertainty by Her Majesty’s Revenue and Customs (HMRC) or other relevant tax authority, it is more likely than not that an economic outflow will occur. Provisions reflect management’s best estimate of the ultimate liability based on their interpretation of tax law, precedent and guidance, informed by external tax advice as necessary. Changes in facts and circumstances underlying these provisions are reassessed at each balance sheet date, and the provisions are remeasured as required to reflect current information.
– Investment contracts containing a discretionary participation feature (participating investment contracts) – these contracts do not transfer significant insurance risk, but contain a contractual right which gives the holder the right to receive, in addition to the guaranteed benefits, further additional discretionary benefits or bonuses that are likely to be a significant proportion of the total contractual benefits and the amount and timing of which is at the discretion of the Group, within the constraints of the terms and conditions of the instrument and based upon the performance of specified assets.
Liabilities of the Group’s with-profit funds, including guarantees and options embedded within products written by these funds, are stated at their realistic values in accordance with the Prudential Regulation Authority’s realistic capital regime, except that projected transfers out of the funds into other Group funds are recorded in the unallocated surplus (see below). Further details on valuation under the realistic capital regime are included in note 30 Liabilities arising from insurance contracts and participating investment contracts.
Further details on valuation are included in note 30 Liabilities arising from insurance contracts and participating investment contracts.
Liabilities for unit-linked insurance contracts and participating investment contracts are stated at the bid value of units plus an additional allowance where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Benefit claims in excess of the account balances incurred in the period are also charged through insurance claims. Revenue consists of fees deducted for mortality, policy administration and surrender charges.
(2) General insurance business The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are deferred in the balance sheet within liabilities arising from insurance contracts and participating investment contracts on a basis that reflects the length of time for which contracts have been in-force and the projected incidence of risk over the term of the contract and only credited to the income statement when earned. Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer. Where appropriate, provision is made for the effect of future policy terminations based upon past experience.
(4) Reinsurance Contracts entered into by the Group with reinsurers under which the Group is compensated for benefits payable on one or more contracts issued by the Group are recognised as assets arising from contracts held with reinsurers. Where the contract transfers significant insurance risk, the contract issued by the Group is classified as an insurance contract; where the contract transfers financial risk, the contract issued by the Group is recognised at fair value through profit or loss.
Assets arising from contract held with reinsurers – Insurance risk transferred Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured contracts and in accordance with the terms of each reinsurance contract and are regularly reviewed for impairment. Premiums payable for reinsurance contracts are recognised as an expense when due within insurance premium income. Changes in the reinsurance recoverable assets are recognised in the income statement through insurance claims.
The results and financial position of all Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows: the assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on the acquisition of a foreign entity, are translated into sterling at foreign exchange rates ruling at the balance sheet date; and the income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the foreign exchange rates ruling at the dates of the transactions in which case income and expenses are translated at the dates of the transactions.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 231
Key judgements: Determining an appropriate definition of default against which a probability of default, exposure at default and loss given default parameter can be evaluated
Establishing the criteria for a significant increase in credit risk The use of management judgement alongside impairment modelling processes to adjust inputs, parameters and outputs to reflect risks not captured by models
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 2020, approximately £0.6 billion of UK mortgages (2019: £0.6 billion) were classified as Stage 2 rather than Stage 3; the impact on the Group’s ECL allowance was not material.
For Commercial a doubling of PD with a minimum increase in PD of 1 per cent and a resulting change in the underlying grade is treated as a SICR.
The Group uses the internal credit risk classification and watchlist as qualitative indicators to identify a SICR. The Group does not use the low credit risk exemption in its staging assessments. The use of a payment holiday in and of itself has not been judged to indicate a significant increase in credit risk, nor forbearance, with the underlying long-term credit risk deemed to be driven by economic conditions and captured through the use of forward-looking models. These portfolio level models are capturing the anticipated volume of increased defaults and therefore an appropriate assessment of staging and expected credit loss. During 2020, the Group has granted payment holidays on Retail loans and advances, £6.4 billion remained in place at 31 December 2020, £4.3 billion of these balances were classified as Stage 1. If all of these assets were classified as Stage 2, the Group's ECL would have been less than £50 million higher.
The Group models a full distribution of economic scenarios around this base case, ranking them using estimated relationships with industry-wide historical loss data. The full distribution is summarised by a practical number of scenarios to run through ECL models representing four sections: an upside, the base case, and a downside scenario weighted at 30 per cent each, with a severe downside scenario weighted at 10 per cent. With the base case already pre-defined, the other three scenarios are constructed as averages of constituent modelled scenarios around the 15th, 75th and 95th percentiles of the distribution. The scenario weights therefore represent the allocation to each summary segment of the distribution and not a subjective view on likelihood. The inclusion of a severe downside scenario with a smaller weighting but relatively large credit losses, ensures the non-linearity of losses in the tail of the distribution is captured when ECL based on the weighted result of the four scenarios is calculated.
A committee under the chairmanship of the Chief Economist meets at least quarterly to review and, if appropriate, recommend changes to the method by which economic scenarios are generated; for approval by the Chief Financial Officer and Chief Risk Officer. In 2020, a change was made to the way in which the distribution of scenarios is created. This change allows for a greater dispersal of economic outcomes in the early periods of the forecast, to recognise the increased near-term profile of risks present since the onset of the coronavirus pandemic. This change allows for a wider distribution of losses both on the upside and downside, although is most evident in the severe downside scenario, given it represents a more adverse segment of the distribution. The change is estimated to have driven an additional £200 million of ECL resulting from the inclusion of more adverse economic outcomes.
Base Case and MES Economic Assumptions The Group’s base case economic scenario has continued to be revised in light of the impact of the coronavirus pandemic in the UK and globally. The scenario reflects judgements of the net effect of government-mandated restrictions on economic activity, large-scale government interventions, and behavioural changes by households and businesses that may persist beyond the rollout of coronavirus vaccination programmes.
Despite large-scale vaccination efforts commencing in the UK and globally, there remains considerable uncertainty about the pace and eventual extent of the post-pandemic recovery. The Group’s current base case scenario builds in three key conditioning assumptions. First, the UK vaccine rollout successfully protects the elderly, key workers and the clinically vulnerable by mid-2021. Second, national lockdowns end by April 2021, allowing a phased return to a tiered system of restrictions that are progressively eased in the second quarter and second half of 2021, leaving only limited restrictions in place by the end of 2021. Third, government policy measures including specifically the furlough scheme continue to provide support for the duration of severe economic restrictions, through to mid-2021.
1 Gross domestic product presented quarter on quarter, house price growth and commercial real estate growth presented year on year - i.e. from the equivalent quarter the previous year. Bank Rate is presented end quarter.
Commercial real estate price growth 2.1 (1.1) (4.9) (9.7) 1.6 (0.3) (3.9) (7.3)
ECL sensitivity to economic assumptions 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. A 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 (LGD). Commercial Banking also reflects movements in the loss given default, whereas for Other Retail portfolios only the probability of default responds to changes in the economic outlook. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. Judgements applied through changes to inputs are reflected in the scenario sensitivities.
Base case Probabilityweighted Difference Base case Probabilityweighted Difference Impact of multiple economic scenarios £m £m £m £m £m £m
The table below shows the Group’s ECL for the upside, base case, downside and severe downside scenarios, with stage allocation based on each specific scenario. ECL applied through individual assessments and post-model adjustments is reported flat against each economic scenario, reflecting the basis on which they are evaluated. Judgements applied through changes to inputs are reflected in the scenario sensitivities. A probability-weighted scenario is not shown as this does not reflect the basis on which ECL is reported.
The table below shows the percentage of assets that would be recorded in Stage 2 for the upside, base case, downside and severe downside scenarios, if stage allocation was based on each specific scenario. Given additional data has been generated to support this new disclosure the prior year comparatives are not available.
The impact of changes in the UK unemployment rate and House Price Index (HPI) have also been assessed. Although such changes would not be observed in isolation, as economic indicators tend to be correlated in a coherent scenario, this gives insight into the sensitivity of the Group’s ECL to gradual changes in these two critical economic factors. The assessment has been made against the base case with the reported staging unchanged.
Individual assessments Stage 3 ECL in Commercial Banking is largely assessed on an individual basis using bespoke assessment of loss for each specific client. These assessments are carried out by the Business Support Unit based on detailed reviews and expected recovery strategies. While these assessments are based on the Group’s latest economic view, the use of group-wide multiple economic scenarios and weightings is not considered appropriate for these cases due to their individual characteristics. In place of this a range of case specific outcomes are considered with any alternative better or worse outcomes that carry a 25 per cent likelihood taken into account in establishing a probability-weighted ECL. At 31 December 2020 individually assessed provisions for Commercial Banking were £1,222 million (2019: £890 million) which reflected a range of £982 million to £1,548 million (2019: £515 million to £1,183 million), based on the range of alternative outcomes considered.
At 31 December 2020 the coronavirus pandemic and the various support measures that have been put in place have resulted in an economic environment which differs significantly from the historical economic conditions upon which the impairment models have been built. As a result there is a greater need for management judgements to be applied alongside the use of models. At 31 December 2020 management judgement resulted in additional ECL allowances totalling £1,383 million (2019: £153 million). This comprises judgements added due to COVID-19 in the year and other judgements not directly linked to COVID-19 but which have increased in size under the current outlook. The table below analyses total ECL allowance at 31 December 2020 by portfolio, separately identifying the amounts that have been modelled, those that have been individually assessed and those arising through the application of management judgement.
UK mortgages: £36 million This reflects an adjustment made to reflect an increase in the time assumed between default and repossession as a result of the Group temporarily suspending the repossession of properties to support customers during the pandemic.
Other Retail: £321 million These adjustments principally comprise: Recognition of impact of support measures: £218 million
Modelled LGDs in non-mortgage Retail portfolios are predominantly based on observed customer behaviour and resulting incurred losses. Management believes that this may not be representative of future experience, given the current economic outlook, and consequently an adjustment has been made to increase forward-looking LGDs to reflect a deterioration in cure and recovery rates. The impact has been estimated by using experience of losses in previous downturns and management’s view of relative comparability of anticipated economic scenarios.
Management does not believe that the observed corporate insolvency rates used as an input to Commercial default models adequately reflect the current economic situation and outlook given the temporary government support. As a result, the observed reductions in the rate of insolvencies have been replaced with an increase proportionate to that seen in unemployment to generate a level of predicted defaults.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 237
Other: £400 million Central overlay in respect of economic uncertainty: £400 million
An important element of the methodology used to calculate the Group’s ECL allowance is the determination of a base case economic scenario, predicated on certain conditioning assumptions, from which alternative scenarios are derived using stochastic shocks. The rapid evolution of the pandemic and significant changes that this has brought about could continue into 2021 and may partially invalidate the conditioning assumptions that underpin the Group’s base case scenario. Management believes that the risks to the conditioning assumptions around the base case scenario are markedly to the downside, reflecting notably the potential for a material delay in the vaccination programme or reduction in its effectiveness from further virus mutation and the corresponding delayed withdrawal of restrictions on social interaction or introduction of further lockdowns. The Group's ECL allowances are required to reflect an unbiased probability-weighted view of all possible future outcomes and therefore management believes that an adjustment is required to capture these additional risks.
An adjustment of £400 million has been made to increase the Group’s ECL allowances to reflect this increased uncertainty around the conditioning assumptions. This equates to a 1 percentage point increase in unemployment allied with a 5 per cent lower HPI in 2021, reflecting a more immediate and therefore greater ECL impact than the gradual increase reflected in the stated univariate sensitivity. It is proportionate to the level of volatility seen in forecasts as the pandemic has unfolded and is also equivalent to a 10 per cent re-weighting from the upside to the severe downside scenario. The adjustment, which has not been allocated to a specific portfolio, has been allocated against Stage 1 assets given the downside risks are largely considered to relate to exposures with currently low default probabilities, the majority of which are in Stage 1. Through 2021 the scale of the uncertainty is expected to diminish and the need for this adjustment will then be reassessed.
Due to a shortcoming in the models, it is not possible to retrieve relevant credit data for a number of accounts and therefore no PD is available and no assessment of whether there has been a SICR can be carried out. The model defaults these accounts to Stage 2 and a proxy ECL allowance calculated based on similar accounts within the portfolio. The deterioration in the economic outlook and growth in the number of accounts subject to this proxy have resulted in this approach having a more significant effect and an exercise has been carried out to identify and adjust those accounts which should not have been allocated to Stage 2.
The MBNA impairment model was developed using historical MBNA data. Following the acquisition of the business and the subsequent migration of this portfolio to Lloyds Banking Group collections strategies an adjustment is required to reflect the recent improvement in cure rates now evident as collections strategies harmonise, which are not captured by the original MBNA model development data.
Key judgements: Future economic and operating conditions Key estimates: Investment returns
The effect on the Group’s profit before tax and shareholders’ equity of changes in annuitant mortality and other key assumptions used in determining the life insurance assets and liabilities is set out in note 31. Reducing annuitant mortality rates to 95 per cent of the expected rate would reduce profit before tax by £333 million (2019: £293 million).
The net asset recognised in the balance sheet at 31 December 2020 in respect of the Group’s defined benefit pension scheme obligations was £1,578 million comprising an asset of £1,714 million and a liability of £136 million (2019: a net asset of £550 million comprising an asset of £681 million and a liability of £131 million). The Group’s accounting policy for its defined benefit pension scheme obligations is set out in note 2(K).
The discount rate is required to be set with reference to market yields at the end of the reporting period on high quality corporate bonds in the currency of and with a term consistent with the defined benefit pension schemes’ obligations. The average duration of the schemes’ obligations is approximately 19 years. The market for bonds with a similar duration is limited and, as a result, significant management judgement is required to determine an appropriate yield curve on which to base the discount rate. Assuming that there is no change in other assumptions or in the value of the schemes' assets, the effect on the net accounting surplus at 31 December 2020 of a decrease of 10 basis points in the discount rate would be a reduction of £890 million (2019: £784 million). To the extent that changes in the discount rate arise from changes in gilt yields, rather than credit spreads, the impact is largely mitigated by the schemes' assetliability matching strategies.
The cost of the benefits payable by the schemes will also depend upon the life expectancy of the members. The mortality assumptions used by the Group are based on standard industry tables for both current mortality rates and the rate of future mortality improvement, adjusted in line with the actual experience of the Group's schemes. Assuming that there is no change in other assumptions or in the value of the schemes' assets, the effect on the net accounting surplus at 31 December 2020 of an increase in one year in the average life of scheme members would be a reduction of £2,146 million (2019: £1,636 million). The Group has in place a longevity swap, as described in note 34, to partially mitigate mortality risk.
Further sensitivities and the balance sheet impact of changes in the principal actuarial assumptions are provided in part (v) of note 34.
Key judgements: Assessing the likely level of future taxable profits taking into account the Group’s long-term financial and strategic plans
At 31 December 2020 the Group carried deferred tax assets on its balance sheet of £2,741 million (2019: £2,666 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 35 and 46 respectively.
The Group’s expectations of future UK taxable profits require management judgement, and take into account the Group’s long-term financial and strategic plans and anticipated future tax-adjusting items. In making this assessment, account is taken of business plans, the Board-approved operating plan and the expected future economic outlook as set out in the strategic report, as well as the risks associated with future regulatory change, in order to produce a base case forecast of future UK taxable profits. Under current law there is no expiry date for UK trading losses not yet utilised, and given the forecast of future profitability and the Group’s commitment to the UK market, it is more likely than not the value of the losses will be recovered at some point in the future. Banking tax losses that arose before 1 April 2015 can only be used against 25 per cent of taxable profits arising after 1 April 2016, and they cannot be used to reduce the surcharge on banking profits. These restrictions in utilisation means that the value of the deferred tax asset in respect of tax losses is only expected to be fully recovered by 2049 (2019: 2039) in the base case forecast. The rate of recovery of the Group’s tax loss asset is not a straight line, being affected by the relative profitability of the legal entities in future periods, and the relative size of their tax losses carried forward. It is expected in the base case that 60 per cent of the value will be recovered by 2034, when Bank of Scotland plc will have utilised all of its available tax losses. It is possible that future tax law changes could
As disclosed in note 46, the Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, where the final tax position will remain uncertain until the matter is finally determined by judicial process.
At 31 December 2020, the Group carried provisions of £642 million (2019: £2,408 million) against the cost of making redress payments to customers and the related administration costs in connection with historical regulatory breaches.
Determining the amount of the provisions, which represent management’s best estimate of the cost of settling these issues, requires the exercise of significant judgement and estimation. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by regulators, and to estimate the number of future complaints, the extent to which they will be upheld, the average cost of redress and the impact of decisions reached by legal and other review processes that may be relevant to claims received. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against actual experience and other relevant evidence and adjustments made to the provisions where appropriate.
At 31 December 2020, the carrying value of the Group’s financial instrument assets held at fair value was £248,385 million (2019: £234,467 million), and its financial instrument liabilities held at fair value was £49,959 million (2019: £47,265 million).
The valuation techniques for level 3 financial instruments involve management judgement and estimates the extent of which depends on the complexity of the instrument and the availability of market observable information. In addition, in line with market practice, the Group applies credit, debit and funding valuation adjustments in determining the fair value of its uncollateralised derivative positions. A description of these adjustments is set out in note 48. Details about sensitivities to market risk arising from trading assets and other treasury positions can be found in the risk management section on page 159.
During 2020, the Group migrated certain customer relationships from the SME business within Commercial Banking to Business Banking within Retail; the Group has also revised its approach to internal funding charges, including the adoption of the Sterling Overnight Index Average (SONIA) interest rate benchmark in place of LIBOR. Comparatives have been restated accordingly.
Other income, net of insurance claims 1,733 1,292 1,250 240 4,515
Insurance and other, net of insurance claims 147 349 1,389 (1,055) 830
Other external income, net of insurance claims 1,319 1,158 1,580 (702) 3,355
Segment other income, net of insurance claims 1,733 1,292 1,250 240 4,515
Other segment items reflected in income statement above: Movement in value of in-force business — — 76 — 76
Non-income statement segment items: Investments in joint ventures and associates at end of year 4 — — 292 296 1 Net of profits on disposal of operating lease assets of £127 million.
Total underlying income, net of insurance claims 11,203 4,309 2,098 499 18,109
Segment underlying income, net of insurance claims 11,203 4,309 2,098 499 18,109
Gains less losses on disposal of financial assets at fair value through other comprehensive income — (5) — 201 196
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 243
Total underlying income, net of insurance claims 11,533 4,650 1,988 553 18,724
Analysis of segment underlying other income, net of insurance claims: Credit and debit card fees 660 332 1 — 993
Gains less losses on disposal of financial assets at fair value through other comprehensive income — — — 275 275
Segment other income, net of insurance claims 2,102 1,665 1,865 378 6,010
Other income, net of insurance claims 8,179 (426) (2,021) — 5,732
Total income, net of insurance claims 18,626 259 (161) — 18,724
3 Net of profits on disposal of operating lease assets of £127 million (2019: £41 million; 2018: £60 million). 4 Certain derivative valuation adjustments associated with credit-impaired customers are included within the impairment charge on an underlying basis but reported within other income, net of insurance claims on a statutory basis.
5 Comprises the effects of asset sales (gains of £214 million); volatility and other items (losses of £88 million); the amortisation of purchased intangibles (£68 million); restructuring (£471 million, comprising severance related costs, the integration of Zurich's UK workplace pensions and savings business and costs associated with establishing the Schroders Personal Wealth joint venture); and the fair value unwind and other items (losses of £275 million).
Geographical areas The Group’s operations are predominantly UK-based and as a result an analysis between UK and non-UK activities is not provided.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 245
The most significant performance obligations undertaken by the Group are in respect of current accounts, the provision of other banking services for commercial customers and credit and debit card services.
Interest income: Loans and advances to customers 2.72 3.17 3.17 13,704 15,790 15,078
Amounts payable to unitholders in consolidated open-ended investment vehicles3 (1.58) 13.64 (6.07) 175 (1,822) 844
2 The impact of the Group’s hedging arrangements is included on this line; excluding this impact the weighted average effective interest rate in respect of debt securities in issue would be 2.28 per cent (2019: 2.57 per cent; 2018: 2.68 per cent).
Included within interest income is £171 million (2019: £198 million; 2018: £227 million) in respect of credit-impaired financial assets. Net interest income also includes a credit of £496 million (2019: credit of £608 million; 2018: credit of £701 million) transferred from the cash flow hedging reserve (see note 40).
Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss as follows: £m £m £m
Other financial instruments mandatorily held at fair value through profit or loss: Debt securities, loans and advances 3,554 3,509 (26)
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.
The Group receives interchange and merchant fees, together with fees for overseas use and cash advances, for provision of card services to cardholders and merchants.
Change in insurance and participating investment contracts (note 30) (4,590) (12,633) 4,565
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows: Total life insurance gross claims and surrenders (7,670) (8,684) (8,735)
Movement in value of in-force business (note 23) 76 825 (55)
Pensions and other post-retirement benefit schemes (note 34) 566 532 705
Regulatory provisions: Payment protection insurance provision (note 36) 85 2,450 750
Total operating expenses 9,745 12,670 11,729 1 Net of profits on disposal of operating lease assets of £127 million (2019: £41 million; 2018: £60 million).
Performance-based compensation The table below analyses the Group’s performance-based compensation costs between those relating to the current performance year and those relating to earlier years.
Performance-based compensation expense comprises: Awards made in respect of the year ended 31 December 22 244 362
Performance-based compensation expense deferred until later years comprises: Awards made in respect of the year ended 31 December 30 113 152
Fees payable for other services: Audit of the Company’s subsidiaries pursuant to legislation 22.4 20.2 19.1
Other non-audit fees: Services relating to corporate finance transactions — — —
The following types of services are included in the categories listed above: Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory filings. Other services supplied pursuant to legislation relate primarily to costs incurred in connection with client asset assurance and with the Sarbanes-Oxley Act requirements associated with the audit of the Group’s financial statements filed on its Form 20-F.
Audits of the unconsolidated Open Ended Investment Companies managed by the Group 0.4 0.4 0.3
In respect of: Loans and advances to banks — — — — —
Financial assets at fair value through other comprehensive income (14) — — — (14)
The impairment charge includes £41 million (2019: £134 million; 2018: £29 million) in respect of residual value impairment and voluntary terminations within the Group’s UK motor finance business.
Methodology and model changes Increase or decrease in impairment charge as a result of adjustments to the models used for expected credit loss calculations; either as changes to the model inputs or to the underlying assumptions, as well as the impact of changing the models used.
Movements in the Group's impairment allowances are shown in note 18.
UK corporation tax: Current tax on profit for the year (480) (1,389) (1,280)
Deferred tax: Adjustments in respect of prior years (323) 139 (29)
Tax relief on coupons on other equity instruments 86 89 83
Other financial assets mandatorily at fair value through profit or loss Total
Other financial assets mandatorily at fair value through profit or loss Total £m £m £m £m £m £m
Loans and advances to customers 12,765 11,244 24,009 10,422 10,654 21,076
Loans and advances to banks 229 4,238 4,467 513 1,886 2,399
Debt securities: Other public sector securities — 2,354 2,354 — 2,126 2,126
Bank and building society certificates of deposit — 4,841 4,841 — 984 984
Asset-backed securities: Corporate and other debt securities 246 17,888 18,134 233 17,983 18,216
Other financial assets at fair value through profit or loss include assets backing insurance contracts and investment contracts of £145,905 million (31 December 2019: £136,855 million). Included within these assets are investments in unconsolidated structured entities of £55,235 million (31 December 2019: £38,177 million), see note 47.
Profit attributable to ordinary shareholders – basic and diluted 865 2,459 3,975 million million million
Weighted-average number of ordinary shares in issue – basic 70,606 70,603 71,638
Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted-average number of ordinary shares in issue during the year, which has been calculated after deducting 28 million (2019: 25 million; 2018: 38 million) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.
For the calculation of diluted earnings per share the weighted-average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares that arise in respect of share options and awards granted to employees. The number of shares that could have been acquired at the annual average price of the Company’s shares based on the monetary value of the subscription rights attached to outstanding share options and awards is determined. This is deducted from the number of shares issuable under such options and awards to leave a residual bonus amount of shares which are added to the weighted-average number of ordinary shares in issue, but no adjustment is made to the profit attributable to equity shareholders.
Note 17: Derivative financial instruments The fair values and notional amounts of derivative instruments are set out in the following table: Contract/ notional amount
Exchange rate contracts: Interest rate contracts: Total derivative assets/liabilities – trading and other 7,053,405 28,797 26,629 6,492,038 25,133 24,674
The notional amount of the contract does not represent the Group’s exposure to credit risk which is limited to the current cost of replacing contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement techniques such as netting and collateralisation, where security is provided against the exposure; a large proportion of the Group's derivatives are held through exchanges such as London Clearing House and are collateralised through those exchanges. Further details are provided in note 51 Credit risk.
– Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place.
– Equity derivatives are also used by the Group as part of its equity-based retail product activity to eliminate the Group’s exposure to fluctuations in various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date.
Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total At 31 December 2020 £m £m £m £m £m £m
Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total At 31 December 2019 £m £m £m £m £m £m
Changes in fair value used for calculating hedge ineffectiveness At 31 December 2020 £m £m £m £m
Changes in fair value used for calculating hedge ineffectiveness At 31 December 2019 £m £m £m £m
The Group’s hedged items are as follows: Carrying amount of the hedged item
Assets Liabilities Assets Liabilities Continuing hedges Discontinued hedges At 31 December 2020 £m £m £m £m £m £m £m
Amounts reclassified from reserves to income statement as: Hedged cash flows will no longer occur £m
Income statement line item that includes reclassified amountAt 31 December 2020
Customer deposits — — — 6 Interest expense 1 Hedge ineffectiveness is included in the income statement within net trading income.
Note 18: Financial assets at amortised cost Year ended 31 December 2020
Additions (repayments) 925 — — — 925 — — — — —
Impact of transfers between stages (25,516) 22,480 3,036 — (85) 883 569 1,367
Financial assets that have been written off during the year (1) — (1) (1) — (1)
Total financial assets at amortised cost 448,722 49,514 4,508 12,250 514,994 1 Exchange and other adjustments includes the impact of movements in exchange rates, derecognising assets as a result of modifications and adjustments in respect of purchased or originated creditimpaired financial assets.
During the year, the economic outlook deteriorated markedly as a consequence of the COVID-19 pandemic. The Group’s economic assumptions are outlined in note 3 and these have resulted in a significant increase in the expected credit loss (ECL) allowance.
The total allowance for impairment losses includes £192 million (2019: £201 million) in respect of residual value impairment and voluntary terminations within the Group’s UK motor finance business.
Movements in Retail mortgage balances were as follows: Gross carrying amount Allowance for expected credit losses
Movements in allowance for expected credit losses in respect of undrawn balances were as follows: Allowance for expected credit losses
Other items charged to the income statement 126 70 (9) — 187
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 261
In respect of: Loans and advances to banks 6 — — — 6
Impact of transfers between stages (8,306) 5,790 2,516 — (175) 353 420 598
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 263
Impact of transfers between stages (5,246) 4,713 533 — (15) 104 39 128
Recoveries of advances written off in previous years 29 28 57 29 28 57
Provisions in relation to loan commitments and financial guarantees 95 77 5 — 177
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 transferable.
Note 20: Financial assets at fair value through other comprehensive income £m £m
All assets were assessed at Stage 1 at 31 December 2019 and 2020.
Note 19: Finance lease receivables The Group's finance lease receivables are classified as loans and advances to customers and accounted for at amortised cost. The balance is analysed as follows: £m £m
Later than 2 years and not later than 3 years 150 181
Later than 1 year and not later than 2 years 135 326
Later than 2 years and not later than 3 years 105 130
Later than 3 years and not later than 4 years 160 103
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,320 million (2019: £2,324 million), £1,836 million, or 79 per cent (2019: £1,836 million, 79 per cent) has been allocated to Scottish Widows in the Group’s Insurance and Wealth division; £302 million, or 13 per cent (2019: £302 million, or 13 per cent) has been allocated to the credit card business in the Group’s Retail division; and £166 million, or 7 per cent (2019: £170 million, 7 per cent) to Motor Finance in the Group’s Retail division.
The recoverable amount of the goodwill relating to Scottish Widows has been based on a value-in-use calculation. The calculation uses pre-tax projections of future cash flows based upon budgets and plans approved by management covering a three-year period, the related run-off of existing business in-force and a discount rate of 10 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal
Share of other comprehensive income — — 8 — — — — — 8
Share of total comprehensive income (6) 7 17 (7) (1) — (13) 6 17
Movement in investments over the year: Establishment of joint venture — 208 — — — 208
Share of net assets at 31 December 279 293 17 11 296 304
A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. Further information on options and guarantees can be found in note 30.
Risk-free rate (financial options and guarantees)1 (0.36) to 3.75 0.00 to 3.90
The gross value of in-force business asset in the consolidated balance sheet is as follows: £m £m
The acquired value of in-force non-participating investment contracts includes £134 million (2019: £150 million) in relation to OEIC business.
Movement in value of in-force business The movement in the value of in-force insurance and participating investment contracts over the year is as follows: £m £m
Movement in the value of in-force business (note 9) 76 825
This breakdown shows the movement in the value of in-force business only, and does not represent the full contribution that each item in the breakdown makes to profit before tax. This will also contain changes in the other assets and liabilities of the relevant businesses, including the effects of changes in assumptions used to value the liabilities. The presentation of economic variance includes the impact of financial market conditions being different at the end of the year from those included in assumptions used to calculate new and existing business returns.
Cost: Exchange and other adjustments — — — — 4 4
Accumulated amortisation: Exchange and other adjustments — — — — 4 4
Charge for the year (note 11) — — 70 — 496 566
Brands arising from the acquisition of Bank of Scotland in 2009 are recognised on the Group's balance sheet and have been determined to have an indefinite useful life. The carrying value at 31 December 2020 was £380 million (2019: £380 million). The Bank of Scotland name has been in existence for over 300 years and there are no indications that the brand should not have an indefinite useful life. The recoverable amount has been based on a value-in-use calculation. The calculation uses post-tax projections of the income generated by the brands, a discount rate of 9.31 per cent and a future growth rate of 2.5 per cent. Management estimates that if the growth rate were decreased by 1 per cent there would have been an impairment charge of £50 million.
Cost or valuation: Expenditure on investment properties (see below) 73 — — — — 73
Change in fair value of investment properties (note 7) (108) — — — — (108)
Expenditure on investment properties (see below) 82 — — — — 82
Accumulated depreciation and impairment: Depreciation charge for the year (note 11) — 125 715 1,008 216 2,064
Balance sheet amount at 31 December 2020 3,347 885 2,062 3,960 1,500 11,754
Liabilities designated at fair value through profit or loss: debt securities in issue 6,828 7,531
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements 14,996 11,048
Total financial liabilities at fair value through profit or loss 22,646 21,486
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2020 was £11,503 million, which was £4,675 million higher than the balance sheet carrying value (2019: £14,365 million, which was £6,834 million higher than the balance sheet carrying value). At 31 December 2020 there was a cumulative £109 million increase in the fair value of these liabilities attributable to changes in credit spread risk; this is determined by reference to the quoted credit spreads of Lloyds Bank plc, the issuing entity within the Group. Of the cumulative amount, an increase of £75 million arose in 2020 and an increase of £419 million arose in 2019.
For the fair value of collateral pledged in respect of repurchase agreements see note 51.
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to these arrangements and the carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 28.
Loans and advances securitised Notes in issue £m £m £m £m
Total securitisation and covered bond programmes 28,431 37,156 1 Includes £45 million (2019: £47 million) of securitisation notes held at fair value through profit or loss.
The Group recognises the full liabilities associated with its securitisation and covered bond programmes within debt securities in issue, although the obligations of the Group in respect of its securitisation issuances are limited to the cash flows generated from the underlying assets. The Group could be required to provide additional support to a number of the securitisation programmes to support the credit ratings of the debt securities issued, in the form of increased cash reserves and the holding of subordinated notes. Further, certain programmes contain contractual obligations that require the Group to repurchase assets should they become credit impaired or as otherwise required by the transaction documents.
Life insurance (see (1) below): Non-life insurance contracts (see (2) below): 1 Reinsurance balances are reported within assets.
Participating investment contracts Gross Reinsurance Net £m £m £m £m £m
Liabilities for insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the PRA’s realistic capital regime (realistic liabilities) and non-profit fund liabilities, accounted for using a prospective actuarial discounted cash flow methodology, as follows: With-profit fund
(i) Business description Scottish Widows Limited has the only with-profit funds within the Group. The primary purpose of the conventional and unitised business written in the withprofit funds is to provide a smoothed investment vehicle to policyholders, protecting them against short-term market fluctuations. Payouts may be subject to a guaranteed minimum payout if certain policy conditions are met. With-profit policyholders are entitled to at least 90 per cent of the distributed profits, with the shareholders receiving the balance. The policyholders are also usually insured against death and the policy may carry a guaranteed annuity option at retirement.
(iii) Assumptions Key assumptions used in the calculation of with-profit liabilities, which reflect the impacts of COVID-19 (in particular in relation to persistency and mortality assumptions) that has also increased the level of uncertainty, and the processes for determining these, are: Investment returns and discount rates With-profit fund liabilities are valued on a market-consistent basis, achieved by the use of a valuation model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant swap curve, adjusted for credit risk. Further information on significant options and guarantees is given below.
Historical persistency experience is analysed using statistical techniques. As experience can vary considerably between different product types and for contracts that have been in-force for different periods, the data is broken down into broadly homogenous groups for the purposes of this analysis.
For those policies written in Scottish Widows pre-demutualisation containing potentially valuable options and guarantees, under the terms of the Scheme a separate memorandum account was set up, within the With-Profit Fund originally held in Scottish Widows plc and subsequently transferred into Scottish Widows Limited, called the Additional Account which is available, inter alia, to meet any additional costs of providing guaranteed benefits in respect of those policies. The Additional Account had a value at 31 December 2020 of £2.5 billion (2019: £2.6 billion). The eventual cost of providing benefits on policies written both pre and post demutualisation is dependent upon a large number of variables, including future interest rates and equity values, demographic factors, such as mortality, and the proportion of policyholders who seek to exercise their options. The ultimate cost will therefore not be known for many years.
(ii) Method of calculation of liabilities The non-profit fund liabilities are determined on the basis of recognised actuarial methods and involve estimating future policy cash flows over the duration of the in-force book of policies, and discounting the cash flows back to the valuation date allowing for probabilities of occurrence.
(iii) Assumptions Generally, assumptions used to value non-profit fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This margin for adverse deviation is based on management’s judgement and reflects management’s views on the inherent level of uncertainty. In calculating the value of nonprofit fund liabilities, the impacts of COVID-19 that has also increased the level of uncertainty have been considered, in particular in relation to persistency and mortality. The key assumptions used in the measurement of non-profit fund liabilities are: Interest rates The rates of interest used are determined by reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.
– Change in the assumption in respect of current and future mortality and morbidity rates (£52 million increase (2019: £164 million increase)).
– Change in expenses assumptions (£124 million decrease (2019: £208 million increase)).
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.
1 This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate. 2 This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate. 3 This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate. 4 This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate. 5 This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis points. 6 This sensitivity shows the impact of a flat 5 per cent addition to the expected rate. 7 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate. 8 This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Swap curves, the risk-free rate and illiquidity premia are all assumed to be unchanged.
9 This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall spreads on assets are unchanged and hence market values are unchanged. Swap curves and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 277
Later than 2 years and not later than 3 years 180 207
The balances above are shown gross of reinsurance. As at 31 December 2020, related reinsurance balances were £8 million (2019: £21 million); reinsurance balances are reported within assets. Liabilities arising from non-participating investment contracts are categorised as level 2. See note 48 for details of levels in the fair value hierarchy.
During 2009, the Group made one-off contributions to the Lloyds Bank Pension Scheme No. 1 and Lloyds Bank Pension Scheme No. 2 in the form of interests in limited liability partnerships for each of the two schemes which hold assets to provide security for the Group’s obligations to the two schemes. At 31 December 2020, the limited liability partnerships held assets of approximately £6.7 billion. The limited liability partnerships are consolidated fully in the Group’s balance sheet.
In July 2018 a decision was sought from the High Court in respect of the requirement to equalise the Guaranteed Minimum Pension (GMP) benefits accrued between 1990 and 1997 from contracting out of the State Earnings Related Pension Scheme. In its judgment handed down on 26 October 2018 the High Court confirmed the requirement to treat men and women equally with respect to these benefits and a range of methods that the Trustee is entitled to adopt to achieve equalisation. The Group recognised a past service cost of £108 million in respect of equalisation in 2018 and, following agreement of the detailed implementation approach with the Trustee, a further £33 million was recognised in 2019. A further hearing was held during 2020 which confirmed the extent of the Trustee's obligation to revisit past transfers out of the Schemes. The amount of any additional liability as a result of this judgment is still being reviewed but is not considered likely to be material.
Debt instruments1: Fixed interest government bonds 11,328 — 11,328 8,893 — 8,893
Corporate and other debt securities 12,736 — 12,736 10,588 — 10,588
1 Of the total debt instruments, £39,439 million (2019: £33,134 million) were investment grade (credit ratings equal to or better than ‘BBB’).
(iv) Assumptions The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows: Discount rate 1.44 2.05
On 25 November 2020 the Chancellor of the Exchequer announced the outcome of a consultation into a reform of the calculation of RPI. It is now expected that from 2030 RPI will be aligned with CPIH (the Consumer Price Index including owner-occupiers' housing costs). To determine the RPI assumption a termdependent inflation curve has been used adjusting for an assumed inflation risk premium. In the period to 2030 a gap of 100 basis points has been assumed between RPI and CPI; thereafter no gap has been assumed.
Interest rate risk: The defined benefit obligation is determined using a discount rate derived from yields on AA-rated corporate bonds. A decrease in corporate bond yields will increase plan liabilities although this will be materially offset by an increase in the value of bond holdings and through the use of derivatives.
Inflation (including pension increases)1: Discount rate2: Expected life expectancy of members: Increase of one year 39 40 2,146 1,636 1 At 31 December 2020, the assumed rate of RPI inflation is 2.80 per cent and CPI inflation 2.41 per cent (2019: RPI 2.94 per cent and CPI 1.99 per cent). 2 At 31 December 2020, the assumed discount rate is 1.44 per cent (2019: 2.05 per cent).
Sensitivity analysis method and assumptions The sensitivity analysis above reflects the impact on the liabilities of the Group’s three most significant schemes which account for over 90 per cent of the Group’s defined benefit obligations. Whilst differences in the underlying liability profiles for the remainder of the Group’s pension arrangements mean they may exhibit slightly different sensitivities to variations in these assumptions, the sensitivities provided above are indicative of the impact across the Group as a whole.
At 31 December 2020 the asset-liability matching strategy mitigated around 105 per cent of the liability sensitivity to interest rate movements and around 100 per cent of the liability sensitivity to inflation movements. In addition a small amount of interest rate sensitivity arises through holdings of corporate and other debt securities.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 283
Movements in deferred tax liabilities and assets (before taking into consideration the offsetting of balances within the same taxing jurisdiction) can be summarised as follows: Other post-retirement benefit schemes The Group operates a number of schemes which provide post-retirement healthcare benefits to certain employees, retired employees and their dependants. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken to meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January 1996. The Group has entered into an insurance contract to provide these benefits and a provision has been made for the estimated cost of future insurance premiums payable.
Deferred tax assets £m £m £m £m £m £m £m £m £m
(Charge) credit to the income statement (167) (16) (83) (87) 4 149 — 174 (26)
(Charge) credit to the income statement 453 5 6 6 (4) 10 29 83 588
Other charge to equity — — — — (18) — — — (18)
Deferred tax liabilities £m £m £m £m £m £m £m £m
(Charge) credit to the income statement 15 (193) 221 59 (48) (19) (35) —
(Charge) credit to other comprehensive income — — — 64 (148) 83 — (1)
(Charge) credit to the income statement (207) (13) 144 (77) (46) (25) (76) (300)
(Charge) credit to other comprehensive income — — — (165) (109) 60 — (214)
Deferred tax assets of approximately £114 million (2019: £48 million) have not been recognised in respect of £582 million of UK tax losses and other temporary differences which can only be used to offset future capital gains. UK capital losses can be carried forward indefinitely.
At 31 December 2020, a provision of £201 million remained unutilised relating to complaints and associated administration costs excluding amounts relating to MBNA. Total cash payments were £1,462 million during the year ended 31 December 2020.
Other provisions for legal actions and regulatory matters In the course of its business, the Group is engaged in discussions with the PRA, FCA and other UK and overseas regulators and other governmental authorities on a range of matters. The Group also receives complaints in connection with its past conduct and claims brought by or on behalf of current and former employees, customers, investors and other third parties and is subject to legal proceedings and other legal actions. Where significant, provisions are held against the costs expected to be incurred in relation to these matters and matters arising from related internal reviews. During the year ended 31 December 2020 the Group charged a further £379 million in respect of legal actions and other regulatory matters, and the unutilised balance at 31 December 2020 was £380 million (31 December 2019: £528 million). The most significant items are as follows.
Arrears handling related activities The Group has provided an additional £35 million in the year ended 31 December 2020 for arrears handling related activities, bringing the total provided to date to £1,016 million; the unutilised balance at 31 December 2020 was £62 million.
Other Following the sale of TSB Banking Group plc, the Group raised a provision of £665 million in relation to various ongoing commitments; £111 million of this provision remained unutilised at 31 December 2020.
Provisions are made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes committed to the expenditure. At 31 December 2020 provisions of £198 million (31 December 2019: £129 million) were held.
Dated subordinated liabilities £m 4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€309 million) 275 2.707% Fixed Rate Dated Subordinated Reset Notes due 2035 (£1,309 million) 735
Preferred securities £m 12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (US$2,000 million) 119 13% Sterling Step-up Perpetual Capital Securities callable 2029 (£700 million) 515 7.281% Perpetual Regulatory Tier One Securities (Series B) (£150 million) 111 6.85% Non-cumulative Perpetual Preferred Securities (US$1,000 million) 580 7.881% Guaranteed Non-voting Non-cumulative Preferred Securities (£245 million) 284
Dated subordinated liabilities £m 6.5% Dated Subordinated Notes 2020 (€1,500 million) 1,464 4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€309 million) 284 5.75% Subordinated Fixed to Floating Rate Notes 2025 callable 2020 (£350 million) 370 6.50% Subordinated Fixed Rate Notes 2020 (US$2,000 million) 674
Subordinated Floating Rate Notes 2020 (€100 million) 90 7.375% Dated Subordinated Notes 2020 4
Certain of the above securities were issued or redeemed under exchange offers, which did not result in an extinguishment of the original financial liability for accounting purposes.
Undated subordinated liabilities £m 6.5% Undated Subordinated Step-up Notes callable 2019 1 7.375% Undated Subordinated Guaranteed Bonds 52
Dated subordinated liabilities £m 10.375% Subordinated Fixed to Fixed Rate Notes 2024 callable 2019 135
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 287
Revaluation reserve in respect of debt securities held at fair value through other comprehensive income 99 123 279
The capital redemption reserve represents transfers from distributable reserves in accordance with companies’ legislation upon the redemption of ordinary and preference share capital.
The cash flow hedging reserve represents the cumulative after-tax gains and losses on effective cash flow hedging instruments that will be reclassified to the income statement in the periods in which the hedged item affects profit or loss.
Shares cancelled under share buyback programmes — 189 158 £m £m £m
Income statement transfers in respect of disposals (note 9) (149) (196) (275)
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 289 £m £m £m
Revaluation reserve in respect of equity shares held at fair value through other comprehensive income
Realised gains and losses transferred to retained profits (16) 14 151 £m £m £m
Issued in the year: US dollar notes ($1,500 million nominal) — — 1,136
The AT1 securities are Fixed Rate Resetting Perpetual Subordinated Contingent Convertible Securities with no fixed maturity or redemption date. The principal terms of the AT1 securities are described below: – The securities rank behind the claims against Lloyds Banking Group plc of (a) unsubordinated creditors, (b) claims which are, or are expressed to be, subordinated to the claims of unsubordinated creditors of Lloyds Banking Group plc but not further or otherwise or (c) whose claims are, or are expressed to be, junior to the claims of other creditors of Lloyds Banking Group, whether subordinated or unsubordinated, other than those whose claims rank, or are expressed to rank, pari passu with, or junior to, the claims of the holders of the AT1 Securities in a winding-up occurring prior to a conversion event being triggered.
– The securities are undated and are repayable, at the option of Lloyds Banking Group plc, in whole at the first call date or period, or on any fifth anniversary after the first call date or period. In addition, the AT1 securities are repayable, at the option of Lloyds Banking Group plc, in whole for certain regulatory or tax reasons. Any repayments require the prior consent of the PRA.
Realised gains and losses on equity shares held at fair value through other comprehensive income — (2) (129)
Retained profits are stated after deducting £230 million (2019: £575 million; 2018: £499 million) representing 592 million (2019: 902 million; 2018: 909 million) treasury shares held.
Note 43: Dividends on ordinary shares The directors have recommended a final dividend, which is subject to approval by the shareholders at the Annual General Meeting, of 0.57 pence per share representing a total dividend of £404 million, the maximum allowable under PRA guidelines, which will be paid on 25 May 2021.
Final dividend recommended by directors at previous year end — 2.14 2.05 — 1,523 1,475
The weighted average share price at the time that the options were exercised during 2020 was £0.61 (2019: £0.59). The weighted average remaining contractual life of options outstanding at the end of the year was 2.98 years (2019: 2.22 years).
The weighted average fair value of SAYE options granted during 2020 was £0.05 (2019: £0.10). The fair values of the SAYE options have been determined using a standard Black-Scholes model.
The weighted average fair value of awards granted in the year was £0.28 (2019: £0.45).
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 293
Chief Financial Officer Buyout William Chalmers joined the Group on 3 June 2019 and was appointed as Chief Financial Officer on 1 August 2019 on the retirement of George Culmer. He was granted deferred share awards over 4,086,632 shares, to replace unvested awards from his former employer, Morgan Stanley, that were forfeited as a result of him joining the Group.
The fair value calculations at 31 December 2020 for grants made in the year, using Black-Scholes models and Monte Carlo simulation, are based on the following assumptions: SAYE
Matching shares The Group undertakes to match shares purchased by employees up to the value of £45 per month; these matching shares are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non-market based condition: if an employee leaves within this three year period for other than a ‘good’ reason, all of the matching shares are forfeited. Similarly if the employees sell their purchased shares within three years, their matching shares are forfeited.
The number of shares awarded relating to matching shares in 2020 was 62,262,140 (2019: 37,346,812), with an average fair value of £0.34 (2019: £0.56), based on market prices at the date of award.
Fixed share awards Fixed share awards were introduced in 2014 in order to ensure that total fixed remuneration is commensurate with role and to provide a competitive reward package for certain Lloyds Banking Group employees, with an appropriate balance of fixed and variable remuneration, in line with regulatory requirements. The fixed share awards are delivered in Lloyds Banking Group shares, released over five years with 20 per cent being released each year following the year of award. From June 2020, the fixed share awards are released over three years with one third being released each year following the year of award. The number of shares purchased in 2020 was 13,975,993 (2019: 8,239,332).
Note 45: Related party transactions Key management personnel Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity; the Group’s key management personnel are the members of the Lloyds Banking Group plc Group Executive Committee together with its Non-Executive Directors.
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £nil (2019: £nil; 2018: £nil).
Granted, including certain adjustments (includes entitlements of appointed key management personnel) 46 46 39
Advanced (includes loans of appointed key management personnel) — 1 1
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 0.39 per cent and 24.20 per cent in 2020 (2019: 6.45 per cent and 24.20 per cent; 2018: 6.70 per cent and 24.20 per cent).
Placed (includes deposits of appointed key management personnel) 25 44 33
Deposits placed by key management personnel attracted interest rates of up to 2.0 per cent (2019: 3.0 per cent; 2018: 3.5 per cent).
At 31 December 2020, the Group did not provide any guarantees in respect of key management personnel (2019 and 2018: none).
At 31 December 2020, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected persons included amounts outstanding in respect of loans and credit card transactions of £0.6 million with four directors and two connected persons (2019: £0.6 million with four directors and two connected persons; 2018: £0.5 million with three directors and three connected persons).
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 295
Subsidiaries Details of the Group’s subsidiaries and related undertakings are given on pages 349 to 354. In accordance with IFRS 10 Consolidated Financial Statements, transactions and balances with subsidiaries have been eliminated on consolidation.
Pension funds The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2020, customer deposits of £151 million (2019: £169 million) and investment and insurance contract liabilities of £152 million (2019: £127 million) related to the Group’s pension funds. As disclosed in note 34, the Group’s main pension funds have entered into a longevity insurance arrangement that was structured as a pass-through involving Scottish Widows.
During the year the Group paid fees of £7 million (2019: £2 million) to its Schroders Personal Wealth joint venture and also made a payment of £20 million under the terms of an Operating Margin Guarantee put in place as part of the agreements for the establishment of the joint venture.
– litigation brought on behalf of UK consumers in the English Courts against Mastercard, which the Supreme Court has now confirmed can proceed.
Any impact on the Group of the litigation against Visa and Mastercard remains uncertain at this time, such that it is not practicable for the Group to provide an estimate of any potential financial effect. Insofar as Visa is required to pay damages to retailers for interchange fees set prior to June 2016, contractual arrangements to allocate liability have been agreed between various UK banks (including the Group) and Visa Inc, as part of Visa Inc’s acquisition of Visa Europe in 2016. These arrangements cap the maximum amount of liability to which the Group may be subject and this cap is set at the cash consideration received by the Group for the sale of its stake in Visa Europe to Visa Inc in 2016. In 2016, the Group received Visa preference stock as part of the consideration for the sale of its shares in Visa Europe. In 2020, some of these Visa preference shares were converted into Visa Inc Class A common stock (in accordance with the provisions of the Visa Europe sale documentation) and they were subsequently sold by the Group. The sale had no impact on this contingent liability.
LIBOR and other trading rates Certain Group companies, together with other panel banks, have been named as defendants in private lawsuits, including purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling London Interbank Offered Rate and the Australian BBSW reference rate. Certain of the plaintiffs' claims have been dismissed by the US Federal Court for the Southern District of New York (subject to appeals).
Tax authorities The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013, HMRC informed the Group that its interpretation of the UK rules means that the group relief is not available. In 2020, HMRC concluded their enquiry into the matter and issued a closure notice. The Group's interpretation of the UK rules has not changed and hence it has appealed to the First Tier Tax Tribunal, with a hearing expected in early 2022. If the final determination of the matter by the judicial process is that HMRC’s position is correct, management estimate that this would result in an increase in current tax liabilities of approximately £810 million (including interest) and a reduction in the Group’s deferred tax asset of approximately £270 million. The Group, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due.
There are a number of other open matters on which the Group is in discussions with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc), none of which is expected to have a material impact on the financial position of the Group.
Contingent liabilities, commitments and guarantees arising from the banking business £m £m
Performance bonds, including letters of credit, and other transaction-related contingencies 2,105 2,454
Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year original maturity: Mortgage offers made 20,179 12,684
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £73,962 million (2019: £63,504 million) was irrevocable.
Capital commitments Excluding commitments in respect of investment property (note 25), capital expenditure contracted but not provided for at 31 December 2020 amounted to £501 million (2019: £405 million). Of this amount, £501 million (2019: £400 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
(A) Asset-backed conduits In addition to the structured entities discussed in note 29, which are used for securitisation and covered bond programmes, the Group sponsors an active asset-backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated exposure of Cancara at 31 December 2020 was £2,490 million (2019: £3,735 million), comprising £1,695 million of loans and advances (2019: £3,670 million) and £795 million of debt securities (2019: £65 million).
All lending assets and debt securities held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary for standard lending activities in the normal course of the Group’s banking activities. During 2020 there have continued to be planned drawdowns on certain liquidity facilities for balance sheet management purposes, supporting the programme to provide funding alongside the proceeds of the asset-backed commercial paper issuance. The Group could be asked to provide support under the contractual terms of these arrangements including, for example, if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption.
(C) Unconsolidated collective investment vehicles and limited partnerships The Group’s direct interests in unconsolidated structured entities comprise investments in collective investment vehicles, such as Open-Ended Investment Companies, and limited partnerships with a total carrying value of £55,235 million at 31 December 2020 (2019: £38,177 million), included within financial assets designated at fair value through profit and loss (see note 16). These investments include both those entities managed by third parties and those managed by the Group. At 31 December 2020, the total asset value of these unconsolidated structured entities, including the portion in which the Group has no interest, was £2,473 billion (2019: £2,363 billion).
Given the nature of these investments, the Group’s maximum exposure to loss is equal to the carrying value of the investment. However, the Group’s investments in these entities are primarily held to match policyholder liabilities in the Insurance division and the majority of the risk from a change in the value of the Group’s investment is matched by a change in policyholder liabilities. The collective investment vehicles are primarily financed by investments from investors in the vehicles.
The Group earns fees from managing the investments of these funds. The investment management fees that the Group earned from these entities, including those in which the Group held no ownership interest at 31 December 2020, are reported in note 6.
Mandatorily held at fair value through profit or loss Designated at fair value through profit or loss
Cash and balances at central banks — — — — — 73,257 — 73,257
Loans and advances to customers — — — — — 498,843 — 498,843
Financial assets at amortised cost — — — — — 514,994 — 514,994
Financial assets at fair value through other comprehensive income — — — — 27,603 — — 27,603
Deposits from banks — — — — — 31,465 — 31,465
Liabilities arising from insurance contracts and participating investment contracts — — — — — — 116,060 116,060
Liabilities arising from nonparticipating investment contracts — — — — — — 38,452 38,452
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 299
Insurance related contracts Held for trading Other Total £m £m £m £m £m £m £m £m
Cash and balances at central banks — — — — — 55,130 — 55,130
Items in the course of collection from banks — — — — — 313 — 313
Financial assets at fair value through profit or loss — 17,982 142,207 — — — — 160,189
Loans and advances to banks — — — — — 9,775 — 9,775
Assets arising from contracts held with reinsurers — — 22,817 — — — 750 23,567
Items in course of transmission to banks — — — — — 373 — 373
Liabilities arising from insurance contracts and participating investment contracts — — — — — — 111,449 111,449
Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to those of the instruments held by the Group. The Group measures valuation adjustments for its derivative exposures on the same basis as the derivatives are managed.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 301
Bank and building society certificates of deposit 44 4,797 — 4,841
Financial assets at fair value through profit or loss 115,081 41,499 15,046 171,626
Total financial assets at fair value through profit or loss 115,081 61,042 15,046 191,169
Total financial assets at fair value through other comprehensive income 14,820 12,437 346 27,603
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 303
Gains recognised in the income statement within other income 836 — 836 794 — 794
(Losses) gains recognised in other comprehensive income within the revaluation reserve in respect of financial assets at fair value through other comprehensive income — (48) (48) — 12 12
Transfers into the level 3 portfolio 167 — 167 644 19 663
– A number of earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax, depreciation and amortisation. The particular multiple selected is appropriate for the type of business being valued and is derived by reference to the current market-based multiple. Consideration is given to the risk attributes, growth prospects and financial gearing of comparable businesses when selecting the appropriate multiple.
(B) Financial liabilities, excluding derivatives Valuation hierarchy At 31 December 2020, the Group’s financial liabilities carried at fair value, excluding derivatives, comprised its financial liabilities at fair value through profit or loss and totalled £22,646 million (2019: £21,486 million). The table below analyses these financial liabilities by balance sheet classification and valuation methodology (level 1, 2 or 3, as described on page 300). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and 2 during the year.
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements — 14,996 — 14,996
Total financial liabilities carried at fair value, excluding derivatives 778 21,823 45 22,646
Liabilities designated at fair value through profit or loss — 7,483 48 7,531
Trading liabilities: Liabilities in respect of securities sold under repurchase agreements — 11,048 — 11,048
The table below analyses movements in the level 3 financial liabilities portfolio, excluding derivatives.
Losses (gains) recognised in the income statement within other income 1 —
At 31 December 2020, the own credit adjustment arising from the fair valuation of £6,828 million (2019: £7,531 million) of the Group’s debt securities in issue designated at fair value through profit or loss resulted in a loss of £75 million (2019: loss of £419 million), before tax, recognised in other comprehensive income.
Complex interest rate and foreign exchange products where inputs to the valuation are significant are material and unobservable are classified as level 3.
Transfers out of the level 3 portfolio 1 160 (518) 336
Gains (losses) recognised in the income statement, within other income, relating to the change in fair value of those assets or liabilities held at 31 December 99 (131) (14) 18
(i) Uncollateralised derivative valuation adjustments The following table summarises the movement on this valuation adjustment account during 2019 and 2020: £m £m
The combination of a one notch deterioration in the credit rating of derivative counterparties and a ten per cent increase in LGD increases the CVA by £83 million. Current market value is used to estimate the projected exposure for products not supported by the model, which are principally complex interest rate options that are traded in very low volumes. For these, the CVA is calculated on an add-on basis (although no such adjustment was required at 31 December 2020).
A one per cent rise in the CDS spread would lead to an increase in the DVA of £101 million.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 307
Unobservable inputs Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows: – Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends on the behaviour of those underlying references through time.
– Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality; higher spreads lead to a lower fair value.
– in line with International Private Equity and Venture Capital Guidelines, the values of underlying investments in fund investment portfolios.
Financial assets at amortised cost: Loans and advances to customers: Stage 1 432,571 431,395 — 58,643 372,752
Loans and advances to customers: Stage 3 4,508 4,412 — — 4,412
Reverse repos included in above amounts: Loans and advances to customers 58,643 58,643 — 58,643 —
Loans and advances to customers: Stage 31 4,568 4,496 — — 4,496
Loans and advances to customers The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. Due to their short-term nature, the carrying value of the variable rate loans and those relating to lease financing is assumed to be their fair value.
To determine the fair value of loans and advances to customers, loans are segregated into portfolios of similar characteristics. A number of techniques are used to estimate the fair value of fixed rate lending; these take account of expected credit losses based on historic trends, prevailing market interest rates and expected future cash flows. For retail exposures, fair value is usually estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair value of commercial loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk.
(B) Financial liabilities Valuation hierarchy The table below analyses the fair values of the financial liabilities of the Group which are carried at amortised cost by valuation methodology (level 1, 2 or 3, as described on page 300).
Carrying value Fair value Level 1 Level 2 Level 3 £m £m £m £m £m
Repos included in above amounts: Deposits from banks 18,767 18,767 — 18,767 —
Repos included in above amounts: Deposits from banks 18,105 18,105 — 18,105 —
(5) Reclassifications of financial assets There have been no reclassifications of financial assets in 2019 or 2020.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 311
Note 49: Transfers of financial assets There were no significant transferred financial assets which were derecognised in their entirety, but with ongoing exposure. Details of transferred financial assets that continue to be recognised in full are as follows.
The Group enters into repurchase and securities lending transactions in the normal course of business that do not result in derecognition of the financial assets as substantially all of the risks and rewards, including credit, interest rate, prepayment and other price risks are retained by the Group. In all cases, the transferee has the right to sell or repledge the assets concerned.
As set out in note 29, included within financial assets measured at amortised cost are loans transferred under the Group’s securitisation and covered bond programmes. As the Group retains all or a majority of the risks and rewards associated with these loans, including credit, interest rate, prepayment and liquidity risk, they remain on the Group’s balance sheet. Assets transferred into the Group’s securitisation and covered bond programmes are not available to be used by the Group whilst the assets are within the programmes. However, the Group retains the right to remove loans from the covered bond programmes where they are in excess of the programme’s requirements. In addition, where the Group has retained some of the notes issued by securitisation and covered bond programmes, the Group has the ability to sell or pledge these retained notes.
The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities lending transactions, the associated liabilities represent the Group’s obligation to repurchase the transferred assets. For securitisation programmes, the associated liabilities represent the external notes in issue (note 29). Except as otherwise noted below, none of the liabilities shown in the table below have recourse only to the transferred assets.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 313
2 The amounts offset in the balance sheet as shown above represent derivatives and repurchase agreements with central clearing houses which meet the criteria for offsetting under IAS 32.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and its capital can be found on pages 144 to 204. The following additional disclosures, which provide its quantitative information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.
Market risk (A) Interest rate risk Interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the UK Bank Rate, set by the Bank of England. The rates on the remaining deposits are contractually fixed for their term to maturity.
The Group’s risk management policy is to optimise reward whilst managing its market risk exposures within the risk appetite defined by the Board. The largest residual risk exposure arises from balances that are deemed to be insensitive to changes in market rates (including current accounts, a portion of variable rate deposits and investable equity), and is managed through the Group’s structural hedge. The structural hedge consists of longer-term fixed rate assets or interest rate swaps and the amount and duration of the hedging activity is reviewed regularly by the Group Asset and Liability Committee. Further details on the Group market risk policy can be found on page 155.
In addition the Group has cash flow hedges which are primarily used to hedge the variability in the cost of funding within the commercial business. The notional principal of the interest rate swaps designated as cash flow hedges at 31 December 2020 was £326,386 million (2019: £426,740 million) with a net fair value asset of £30 million (2019: liability of £388 million) (note 17). In 2020, ineffectiveness recognised in the income statement that arises from cash flow hedges was a loss of £2 million (2019: gain of £134 million).
– an accounting hedging relationship should be discontinued because of a failure of the retrospective effectiveness test the Group assumes that the interest rate benchmark on which the hedged risk or the cash flows of the hedged item or hedging instrument are based is not altered by uncertainties resulting from interest rate benchmark reform. In addition, for a fair value hedge of a non-contractually specified benchmark portion of interest rate risk, the Group assesses only at inception of the hedge relationship and not on an ongoing basis that the risk is separately identifiable and hedge effectiveness can be measured. The Group’s most significant hedge accounting relationships are exposed to the following interest rate benchmarks: Sterling LIBOR, US Dollar LIBOR and EURIBOR.
At 31 December 2020, the Group expects that EURIBOR will continue to exist as a benchmark rate for the foreseeable future and, as a result does not anticipate changing the hedged risk to a different benchmark. Accordingly, the Group does not consider its fair value or cash flow hedges of the EURIBOR benchmark interest rate to be directly affected by interest rate benchmark reform.
The notional of the hedged items that the Group has designated into cash flow hedge relationships that is directly affected by the interest rate benchmark reform is £20,243 million (2019: £29,202 million), of which £16,523 million (2019: £25,438 million) relates to Sterling LIBOR and £3,720 million (2019: £1,350 million) relates to US Dollar LIBOR. These are principally loans and advances to customers in Commercial Banking.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 315
Euro US Dollar Other non-sterling Euro US Dollar Other non-sterling £m £m £m £m £m £m
(A) Maximum credit exposure The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral held and the maximum exposure to loss, which includes amounts held to cover unit-linked and With Profits funds liabilities, is considered to be the balance sheet carrying amount or, for non-derivative off-balance sheet transactions and financial guarantees, their contractual nominal amounts.
Financial assets at amortised cost 514,994 (2,762) 512,232 510,307 (2,792) 507,515
Assets arising from contracts held with reinsurers 20,385 — 20,385 23,567 — 23,567
Off-balance sheet items: Other items serving as direct credit substitutes 317 — 317 366 — 366
At 31 December 2020 the most significant concentrations of exposure were in mortgages (comprising 62 per cent of total loans and advances to customers) and to financial, business and other services (comprising 19 per cent of the total).
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 317
Loans and advances to banks: CMS 15-18 — — — — — — — — — —
CMS 20-23 — — — — — — — — — —
RMS 11-13 — — — — — — — — — —
Total loans and advances to customers 433,943 51,659 6,490 12,511 504,603 1,372 2,145 1,982 261 5,760
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 319
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 321
CMS 11-14 — — — — — — — — — —
Total loans and advances to customers 449,975 28,543 6,015 13,714 498,247 675 995 1,447 142 3,259
Total loans and advances to customers 129,634 3,741 99 79 133,553 95 77 5 — 177
In respect of: Total loans and advances to customers 129,634 3,741 99 79 133,553 95 77 5 — 177
Average PD grade The table below shows the average Probability of Default for the major portfolios used in the calculation of ECL and therefore Stage 2 Average PD reflects the lifetime value. These reflect the forward-looking view under the Group’s base case scenario prior to the application of MES and post-model adjustments which further impact ECL.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 325
Total debt securities held at amortised cost 5,405 5,544 1 Credit ratings equal to or better than ‘BBB’.
Debt securities: Asset-backed securities: Mortgage-backed securities — — — 121 — 121
2 Other comprises sub-investment grade (2020: £92 million; 2019: £89 million) and not rated (2020: £141 million; 2019: £nil).
Total held as trading assets 7,803 28 7,831 7,038 9 7,047
Other assets held at fair value through profit or loss: Bank and building society certificates of deposit 4,841 — 4,841 984 — 984
Total debt securities held at fair value through profit or loss 36,697 2,155 38,852 31,771 2,088 33,859
Total other assets held at fair value through profit or loss 36,715 2,155 38,870 31,790 2,088 33,878
Derivative assets An analysis of derivative assets is given in note 17. The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the Group’s net credit risk relating to derivative assets of £13,747 million (2019: £11,673 million), cash collateral of £8,715 million (2019: £7,650 million) was held and a further £454 million was due from OECD banks (2019: £274 million).
2 Other comprises sub-investment grade (2020: £1,499 million; 2019: £1,555 million) and not rated (2020: £522 million; 2019: £645 million).
(D) Collateral held as security for financial assets A general description of collateral held as security in respect of financial instruments is provided on page 161. The Group holds collateral against loans and advances and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for financial assets at fair value through profit or loss and for derivative assets is also shown below.
Mortgages An analysis by loan-to-value ratio of the Group's residential mortgage lending is provided below. The value of collateral used in determining the loan-tovalue ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowances for indexation error and dilapidations.
Total gross £m £m £m £m £m £m £m £m £m £m
At 31 December 2019 70 per cent to 80 per cent 44,384 2,343 181 1,751 48,659 7 75 29 38 149 80 per cent to 90 per cent 27,056 1,057 86 677 28,876 7 58 25 23 113 90 per cent to 100 per cent 5,663 199 34 207 6,103 2 17 12 10 41
Other The majority of non-mortgage retail lending is unsecured. At 31 December 2020, Stage 3 non-mortgage lending amounted to £538 million, net of an impairment allowance of £492 million (2019: £610 million, net of an impairment allowance of £368 million).
Stage 1 and Stage 2 non-mortgage retail lending amounted to £58,183 million (2019: £54,307 million). Lending decisions are predominantly based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at the time of loan origination and are thereafter monitored in accordance with business unit credit policy.
The Group's credit risk disclosures for unimpaired non-mortgage retail lending report assets gross of collateral and therefore disclose the maximum loss exposure. The Group believes that this approach is appropriate.
At 31 December 2020, Stage 3 secured commercial lending amounted to £739 million, net of an impairment allowance of £294 million (2019: £966 million, net of an impairment allowance of £243 million). The fair value of the collateral held in respect of impaired secured commercial lending was £753 million (2019: £744 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
Stage 1 and Stage 2 secured lending For Stage 1 and Stage 2 secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of collateral if the obligor enters a distressed state.
Derivative assets, after offsetting of amounts under master netting arrangements The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the net derivative assets after offsetting of amounts under master netting arrangements of £13,747 million (2019: £11,673 million), cash collateral of £8,715 million (2019: £7,650 million) was held.
Collateral repossessed During the year, £125 million of collateral was repossessed (2019: £413 million), consisting primarily of residential property.
Financial assets at fair value through profit or loss 3,224 5,857
Financial assets at fair value through other comprehensive income 894 2,020
Securitisations and covered bonds In addition to the assets detailed above, the Group also holds assets that are encumbered through the Group’s asset-backed conduits and its securitisation and covered bond programmes. Further details of these assets are provided in note 29.
Liquidity risk Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost. Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity. The Group carries out monthly stress testing of its liquidity position against a range of scenarios, including those prescribed by the PRA. The Group’s liquidity risk appetite is also calibrated against a number of stressed liquidity metrics. The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category. Certain balances, included in the table below on the basis of their residual maturity, are repayable on demand upon payment of a penalty.
Over 5 years Total £m £m £m £m £m £m £m £m £m
Financial assets at fair value through profit or loss 8,085 8,168 7,446 1,428 1,132 2,420 5,193 137,754 171,626
Loans and advances to banks 5,372 1,391 1,170 217 50 — 2,544 2 10,746
Debt securities held at amortised cost 118 18 — — — 1,651 1,089 2,529 5,405
Financial assets at fair value through other comprehensive income 51 272 569 349 255 3,423 11,289 11,395 27,603
Loans and advances to customers 35,973 26,036 23,283 12,626 11,425 29,917 74,416 281,312 494,988
Derivative financial instruments and financial liabilities at fair value through profit or loss 5,182 6,101 2,579 784 528 1,644 5,238 25,209 47,265
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 331
Financial liabilities at fair value through profit or loss 4,370 5,543 2,255 2,690 14,653 29,511
Derivative financial liabilities: Gross settled derivatives – net flows 2,289 1,425 1,046 1,254 485 6,499
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows: Up to 1 month 1-3 months 3-12 months 1-5 years
1 Includes a decrease of £172 million (2019: increase of £82 million; 2018: increase of £27 million) in respect of lease liabilities.
Total contingents, commitments and guarantees 73,323 5,451 22,493 4,156 5,590 23,432 11,497 4,486 150,428
Write-off of allowance for loan losses, net of recoveries (1,377) (1,458) (1,025)
Net gain on sale of financial assets at fair value through other comprehensive income (149) (196) (275)
1 When considering the movement on each line of the balance sheet, the impact of foreign exchange rate movements is removed in order to show the underlying cash impact.
IFRS 17 Insurance Contracts IFRS 17 replaces IFRS 4 Insurance Contracts and is effective for annual periods beginning on or after 1 January 2023.
IFRS 17 requires insurance contracts and participating investment contracts to be measured on the balance sheet as the total of the fulfilment cash flows and the contractual service margin. Changes to estimates of future cash flows from one reporting date to another are recognised either as an amount in profit or loss or as an adjustment to the expected profit for providing insurance coverage, depending on the type of change and the reason for it. The effects of some changes in discount rates can either be recognised in profit or loss or in other comprehensive income as an accounting policy choice. The risk adjustment is released to profit and loss as an insurer’s risk reduces. Profits which are currently recognised through a value in-force asset, will no longer be recognised at inception of an insurance contract. Instead, the expected profit for providing insurance coverage is recognised in profit or loss over time as the insurance coverage is provided. The standard will have a significant impact on the accounting for the insurance and participating investment contracts issued by the Group.
The Group's IFRS 17 project is progressing to plan. Work has focused on interpreting the requirements of the standard, developing methodologies and accounting policies, and assessing the changes required to reporting and other systems. The development of the Group's data warehousing and actuarial liability calculation processes required for IFRS 17 reporting is progressing.
Interest Rate Benchmark Reform The IASB’s Phase 2 amendments in response to issues arising from the replacement of interest rate benchmarks in a number of jurisdictions are effective for annual periods beginning on or after 1 January 2021.
Under these amendments, an immediate gain or loss is not recognised in the income statement where the contractual cash flows of a financial asset or financial liability are amended as a direct consequence of the rate reform and the revised contractual terms are economically equivalent to the previous terms. In addition, hedge accounting is continued for relationships that are directly affected by the reform.
Net cash outflow arising from acquisition of subsidiaries and businesses — 20 26
Acquisition of and additional investment in joint ventures (3) 1 23
Net cash (inflow) outflow from acquisitions in the year (3) 21 49
Financial assets at fair value through profit or loss 2 14,362 12,516
Financial liabilities at fair value through profit or loss 9 8,635 3,464
Total equity and liabilities 87,246 77,573 1 The parent company recorded a profit after tax for the year of £1,302 million (2019: £5,415 million).
Distributions on other equity instruments — — — — — (433) (433)
Issue of ordinary shares 162 — — — 162 — 162
Movement in treasury shares — — — (74) (74) — (74)
Other employee award schemes — — — 207 207 — 207
Redemption of other equity instruments — — — — — (1,481) (1,481)
Movement in treasury shares — — — 74 74 — 74
Other employee award schemes — — — 165 165 — 165
Distributions on other equity instruments — — — — — (453) (453)
Issue of ordinary shares 191 — — — 191 — 191
Cash and cash equivalents at beginning of year 29 57 272
Note 2: Financial assets at fair value through profit or loss £m £m
The assets held at fair value through profit or loss represent holdings of debt securities issued by subsidiary companies. The contractual terms of such instruments contain certain write-down and conversion features, and so are not deemed to satisfy the solely payments of principal and interest test.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of certain financial assets and liabilities at fair value through profit or loss and all derivative contracts.
The accounting policies of the Company are the same as those of the Group which are set out in note 2 to the consolidated financial statements. Investments in subsidiaries are carried at historical cost, less any provisions for impairment.
Note 9: Financial liabilities at fair value through profit or loss Financial liabilities designated at fair value through profit or loss represent debt securities in issue which are accounted for at fair value to significantly reduce an accounting mismatch. The changes in the credit risk of these liabilities are linked to the changes in credit risk on corresponding assets that the Company holds at fair value through profit or loss, representing debt securities issued by subsidiaries. Given the economic relationship between these assets and liabilities, the Company presents changes in the credit risk of its liabilities in profit or loss in order to avoid creating or enlarging an accounting mismatch.
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2020 was £8,060 million, which was £575 million lower than the balance sheet carrying value (2019: £3,393 million which was £71 million lower than the balance sheet carrying value). At 31 December 2020 there was a cumulative £541 million increase in the fair value of these liabilities attributable to changes in credit risk (2019: increase of £101 million), of which £440 million arose in 2020 and £101 million arose in 2019; this is determined by reference to the quoted credit spreads of the Company.
Redemption: 6.3673% Non-cumulative Fixed to Floating Rate Preference Shares callable 2019 (3) — — (3)
Issued in the year: 4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€309 million) — — 280 280 2.707% Fixed Rate Dated Subordinated Reset Notes due 2035 (£1,309 million) — — 1,309 1,309
Note 7: Debt securities in issue These comprise notes issued by the Company in a number of currencies, although predominantly Euros and US dollars, with maturity dates ranging up to 2038.
Other employee award schemes 74 165 207 1 Details of the Company’s dividends are as set out in note 43 to the consolidated financial statements.
As discussed in note 2 to the consolidated financial statements, the Group provides share-based compensation to employees through a number of schemes; these are all in relation to shares in the Company and the costs of providing those benefits are treated as capital contributions to the employing companies in the Group.
O ther inform ation Financial statem ents Lloyds Banking Group Annual Report and Accounts 2020 341
Financial assets at fair value through profit or loss — — 14,362 — — 14,362
Financial liabilities at fair value through profit or loss — — — 8,635 — 8,635
As discussed in note 10, the Company has entered into interest rate and currency swaps with its subsidiaries, Lloyds Bank plc and Lloyds Bank Corporate Markets plc, to manage these risks.
Valuation hierarchy The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1 (2019: none).
Level 2 Level 3 Level 2 Level 3 £m £m £m £m £m £m £m £m
Financial liabilities at fair value through profit or loss 8,635 8,635 8,635 — 3,464 3,464 3,464 —
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 343 2020 CAPTURED BY LLOYDS BANKING GROUP COLLEAGUES
Other information Shareholder information 344 Five year financial summary 346 Forward-looking statements 347 Abbreviations 348 Alternative performance measures 348 Subsidiaries and related undertakings 349
Reports and communications The Group issues regulatory announcements through the Regulatory News Service (RNS); shareholders can subscribe for free via the Investors section of our website at www.lloydsbankinggroup.com, where our statutory reports and shareholder communications are available. A summary of the scheduled reports and communications to be issued in 2021 is set out below: Available format
Share dealing for the Lloyds Banking Group Shareholder Account Share dealing services for the Lloyds Banking Group Shareholder Account are provided by Equiniti Shareview Dealing, operated by Equiniti Financial Services Limited. Details of the services provided can be found either on the Shareholder information page of our website at www.lloydsbankinggroup.com or by contacting Equiniti using the contact details provided on the next page.
Share price information Shareholders can access both the latest and historical share prices via our website at www.lloydsbankinggroup.com as well as listings in most national newspapers. For a real time buying or selling price, you will need to contact a stockbroker, or you can contact the share dealing providers detailed above.
Profit after tax for the year 1,387 3,006 4,506 3,649 2,605
Net asset value per ordinary share 61.1p 59.5p 61.0p 60.5p 60.2p
1 The Group adopted IFRS 16 Leases with effect from 1 January 2019, in accordance with the transition requirements of the standard, comparative information was not restated.
2 The Group implemented the amendments to IAS 12 Income Taxes with effect from 1 January 2019 and as a result tax relief on distributions on other equity instruments, previously taken directly to retained profits, is now reported within tax expense in the income statement. Comparatives were restated.
4 Annual dividends comprise both interim and estimated final dividend payments. The total dividend for the year represents the interim dividend paid during the year and the final dividend which is paid and accounted for in the following year.
6 Dividends per ordinary share in 2016 included a recommended special dividend of 0.5 pence.
or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; political instability including as a result of any UK general election and any further possible referendum on Scottish independence; technological changes and risks to the security of IT and operational infrastructure, systems, data and information resulting from increased threat of cyber and other attacks; natural, pandemic (including but not limited to the COVID-19 pandemic) and other disasters, adverse weather and similar contingencies outside the Group’s control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, or other such events; geopolitical unpredictability; risks relating to climate change; changes in laws, regulations, practices and accounting standards or taxation, including as a result of the UK’s exit from the EU; changes to regulatory capital or liquidity requirements (including regulatory measures to restrict distributions to address potential capital and liquidity stress) and similar contingencies outside the Group’s control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the US or elsewhere including the implementation and interpretation of key laws, legislation and regulation together with any resulting impact on the future structure of the Group; the ability to attract and retain senior management and other employees and meet its diversity objectives; actions or omissions by the Group's directors, management or employees including industrial action; changes to the Group's post-retirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including non-bank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed by Lloyds Banking Group plc with the US Securities and Exchange Commission for a discussion of certain factors and risks.
Except as required by any applicable law or regulation, the forward-looking statements contained in this document are made as of today's date, and the Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this document to reflect any change in the Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. The information, statements and opinions contained in this document do not constitute a public offer under any applicable law or an offer to sell any securities or financial instruments or any advice or recommendation with respect to such securities or financial instruments.
Alternative performance measures As described on page 72, the Group analyses its performance on an underlying basis. The Group also calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis as these provide management with a relevant and consistent view of these measures from period to period. A description of the Group’s alternative performance measures and their calculation is set out below.
Present value of new business premium The total single premium sales received in the period (on an annualised basis) plus the discounted value of premiums expected to be received over the term of the new regular premium contracts.
Tangible net assets per share Net assets excluding intangible assets such as goodwill and acquisition-related intangibles divided by the weighted average number of ordinary shares in issue.
Underlying, or above the line, profit Statutory profit adjusted for certain items as detailed on page 72.
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 349
Bank of Scotland Branch Nominees Ltd 5 i Bank of Scotland Central Nominees Ltd 5 * Bank of Scotland Edinburgh Nominees Ltd 5 * Bank of Scotland Equipment Finance Ltd (in liquidation)
Bank of Scotland London Nominees Ltd – applied for strike off 5 *
Bank of Scotland P.E.P. Nominees Ltd – applied for strike off 5 *
BOS (Shared Appreciation Mortgages) No. 1 plc 4 # i BOS (Shared Appreciation Mortgages) No. 2 plc 4 # i BOS (Shared Appreciation Mortgages) No. 3 plc 4 # i BOS (Shared Appreciation Mortgages) No. 4 plc 4 # i BOS (Shared Appreciation Mortgages) No. 5 plc 4 i BOS (Shared Appreciation Mortgages) No. 6 plc 4 i BOS (USA) Fund Investments Inc. 11 xiv BOS (USA) Inc. 11 i BOS Mistral Ltd 1 i BOSSAF Rail Ltd 1 i BOS Personal Lending Ltd 4 i ii iii British Linen Leasing (London) Ltd 5 i British Linen Leasing Ltd 5 i British Linen Shipping Ltd 5 i Capital 1945 Ltd 47 i Capital Bank Leasing 3 Ltd (in liquidation) 13 i Capital Bank Leasing 5 Ltd 47 i Capital Bank Leasing 12 Ltd 5 i Capital Bank Property Investments (3) Ltd 47 i Capital Personal Finance Ltd 4 i
Cloak Lane Funding S.A.R.L. 56 i Cloak Lane Investments S.A.R.L. 56 i CM Venture Investments Ltd 23 i v Conquest Securities Ltd 1 v xxviii Corbiere Asset Investments Ltd 1 ii iii Create Services Ltd (in liquidation) 13 i Dalkeith Corporation 24 i Dunstan Investments (UK) Ltd 1 i Eurolead Services Holdings Ltd 9 i First Retail Finance (Chester) Ltd 4 i Forthright Finance Ltd 47 i France Industrial Premises Holding Company 28 i General Leasing (No. 12) Ltd 1 i General Reversionary and Investment Company 20 i Gresham Nominee 1 Ltd 1 i Gresham Nominee 2 Ltd 1 i Halifax Credit Card Ltd (in liquidation) 13 ii iii viii Halifax Financial Brokers Ltd 4 i Halifax Financial Services (Holdings) Ltd 4 i Halifax Financial Services Ltd 4 i Halifax General Insurance Services Ltd 4 i Halifax Group Ltd 4 i Halifax Investment Services Ltd (in liquidation) 13 i Halifax Leasing (March No.2) Ltd 1 i Halifax Leasing (September) Ltd 1 i Halifax Life Ltd 4 i Halifax Ltd 4 i Halifax Loans Ltd 4 i Halifax Mortgage Services Ltd 4 i Halifax Nominees Ltd – applied for strike off 4 i Halifax Pension Nominees Ltd 29 i Halifax Share Dealing Ltd 4 i Halifax Vehicle Leasing (1998) Ltd 4 i HBOS Covered Bonds LLP 4 * HBOS Final Salary Trust Ltd 5 i HBOS Financial Services Ltd 20 i HBOS Insurance & Investment Group Ltd 20 i HBOS International Financial Services Holdings Ltd 20 i HBOS Investment Fund Managers Ltd 4 ii HBOS plc 5 i xxx xxxii HBOS Social Housing Covered Bonds LLP 47 * HBOS UK Ltd 5 i Heidi Finance Holdings (UK) Ltd 1 i Hill Samuel Bank Ltd 1 i Hill Samuel Finance Ltd 1 v xxxi Hill Samuel Leasing Co. Ltd 1 i Home Shopping Personal Finance Ltd 4 i Horizon Capital 2000 Ltd 5 i Housing Growth Partnership GP LLP 1 * Housing Growth Partnership LP 1 * # Housing Growth Partnership Ltd 1 ii iii Housing Growth Partnership Manager Ltd 1 i HSDL Nominees Ltd 4 i HVF Ltd 2 i Hyundai Car Finance Ltd 50 ii iii IBOS Finance Ltd 47 i Inchcape Financial Services Ltd (in liquidation) 13 ii # Intelligent Finance Financial Services Ltd 4 i Intelligent Finance Software Ltd 4 i International Motors Finance Ltd 2 ii # Kanaalstraat Funding C.V. 35 * Katrine Leasing Ltd (in liquidation) 39 i LB Healthcare Trustee Ltd 1 i LB Share Schemes Trustees Ltd 1 i LBCF Ltd 9 i LBG Brasil Administração LTDA 38 i LBG Capital Holdings Ltd 1 i ̂ LBG Equity Investments Ltd 1 i ̂ LBI Leasing Ltd 1 i LDC (General Partner) Ltd 40 i LDC (Managers) Ltd 40 i LDC (Nominees) Ltd 40 i LDC GP LLP 41 * LDC I LP 41 * LDC II LP 41 * LDC III LP 41 * LDC IV LP 41 * LDC Parallel (Nominees) Ltd 40 i LDC IX LP 40 * LDC V LP 41 * LDC VI LP 41 * LDC VII LP 41 * LDC VIII LP 40 * Legacy Renewal Company Ltd 5 i
Lloyds Bank Covered Bonds LLP 26 * Lloyds Bank Equipment Leasing (No. 1) Ltd 1 i Lloyds Bank Equipment Leasing (No. 7) Ltd 1 i Lloyds Bank Equipment Leasing (No. 9) Ltd 1 i Lloyds Bank Financial Services (Holdings) Ltd 1 i v Lloyds Bank General Insurance Holdings Ltd 45 i Lloyds Bank General Insurance Ltd 1 i Lloyds Bank General Leasing (No. 3) Ltd 1 i Lloyds Bank General Leasing (No. 5) Ltd (in liquidation)
Lloyds Bank MTCH Ltd 1 i Lloyds Bank Nominees Ltd 1 i Lloyds Bank Offshore Pension Trust Ltd 33 i Lloyds Bank Pension ABCS (No. 1) LLP 1 * Lloyds Bank Pension ABCS (No. 2) LLP 1 * Lloyds Bank Pension Trust (No. 1) Ltd 1 i Lloyds Bank Pension Trust (No. 2) Ltd 1 i Lloyds Bank Pensions Property (Guernsey) Ltd 34 ii iii Lloyds Bank plc 1 ̂ i vii Lloyds Bank Property Company Ltd 1 i Lloyds Bank S.F. Nominees Ltd 1 i Lloyds Bank Subsidiaries Ltd 1 i Lloyds Bank Trustee Services Ltd 1 i Lloyds Banking Group Pensions Trustees Ltd 1 i Lloyds Capital GP Ltd 10 i Lloyds Commercial Leasing Ltd (in liquidation) 13 i Lloyds Corporate Services (Jersey) Ltd 58 i Lloyds Development Capital (Holdings) Ltd 40 i Lloyds Engine Capital (No.1) U.S LLC 11 * Lloyds Far East S.A.R.L. 56 i Lloyds General Leasing Ltd 1 i Lloyds Holdings (Jersey) Ltd 58 i Lloyds Hypotheken B.V. 37 i Lloyds Industrial Leasing Ltd 1 i Lloyds International Pty Ltd 8 i Lloyds Investment Bonds Ltd (in liquidation) 13 i Lloyds Investment Securities No.5 Ltd 1 i Lloyds Leasing (North Sea Transport) Ltd 1 i Lloyds Leasing Developments Ltd 1 i Lloyds Offshore Global Services Private Ltd 48 i Lloyds Plant Leasing Ltd 1 i Lloyds Portfolio Leasing Ltd 1 i Lloyds Project Leasing Ltd 1 i Lloyds Property Investment Company No. 3 Ltd (in liquidation)
Lloyds Secretaries Ltd 1 i Lloyds Securities Inc. 11 i Lloyds TSB Pacific Ltd 51 i
In compliance with Section 409 of the Companies Act 2006, the following comprises a list of all related undertakings of the Group, as at 31 December 2020. The list includes each undertaking’s registered office and the percentage of the class(es) of shares held by the Group. All shares held are ordinary shares unless indicated otherwise in the notes.
Credit Card Securitisation Europe Ltd 63 Deva Financing Holdings Ltd 26 Deva Financing plc 26 Deva One Ltd 63 Deva Three Ltd 63 Deva Two Ltd 63 Edgbaston RMBS 2010-1 plc 26 Edgbaston RMBS Holdings Ltd 26 Elland RMBS 2018 plc 26 Elland RMBS Holdings Ltd 26 Fontwell Securities 2016 Ltd 61 Gresham Receivables (No. 1) Ltd 63 Gresham Receivables (No. 3) Ltd 63 Gresham Receivables (No. 10) Ltd 63 Gresham Receivables (No.11) UK Ltd 54 Gresham Receivables (No. 12) Ltd 63 Gresham Receivables (No. 13) UK Ltd 54 Gresham Receivables (No. 14) UK Ltd 54 Gresham Receivables (No. 15) UK Ltd 54 Gresham Receivables (No. 16) UK Ltd 54 Gresham Receivables (No. 19) UK Ltd 54 Gresham Receivables (No. 20) Ltd 63 Gresham Receivables (No. 21) Ltd 63 Gresham Receivables (No. 22) Ltd 63 Gresham Receivables (No. 23) Ltd 63 Gresham Receivables (No. 24) Ltd 63 Gresham Receivables (No. 25) UK Ltd 54 Gresham Receivables (No. 26) UK Ltd 54 Gresham Receivables (No.27) UK Ltd 54 Gresham Receivables (No.28) Ltd 63 Gresham Receivables (No.29) Ltd 63 Gresham Receivables (No. 30) UK Ltd 54 Gresham Receivables (No. 31) UK Ltd 54 Gresham Receivables (No. 32) UK Ltd 54 Gresham Receivables (No. 33) UK Ltd 54 Gresham Receivables (No. 34) UK Ltd 54 Gresham Receivables (No.35) Ltd 63 Gresham Receivables (No.36) UK Ltd 54 Gresham Receivables (No.37) UK Ltd 54 Gresham Receivables (No.38) UK Ltd 54 Gresham Receivables (No.39) UK Ltd 54 Gresham Receivables (No.40) UK Ltd 54 Gresham Receivables (No.41) UK Ltd 54 Gresham Receivables (No.44) UK Ltd 54 Gresham Receivables (No.45) UK Ltd 54 Gresham Receivables (No.46) UK Ltd 54 Gresham Receivables (No.47) UK Ltd 54
Housing Association Risk Transfer 2019 DAC 42 Leicester Securities 2014 Ltd 26 Lingfield 2014 I Holdings Ltd 26 Lingfield 2014 I plc 26 Lloyds Bank Covered Bonds (Holdings) Ltd 26 Lloyds Bank Covered Bonds (LM) Ltd 26 Molineux RMBS 2016-1 plc 26 Molineux RMBS Holdings Ltd 26 Penarth Asset Securitisation Holdings Ltd 26 Penarth Funding 1 Ltd 26 Penarth Funding 2 Ltd 26 Penarth Master Issuer plc 26 Penarth Receivables Trustee Ltd 26 Permanent Funding (No. 1) Ltd 26 Permanent Funding (No. 2) Ltd 26 Permanent Holdings Ltd 26 Permanent Master Issuer plc 26 Permanent Mortgages Trustee Ltd 26 Permanent PECOH Holdings Ltd 26 Permanent PECOH Ltd 26 Salisbury Securities 2015 Ltd 36 Salisbury II Securities 2016 Ltd 61 Salisbury II-A Securities 2017 Ltd 61 Salisbury III Securities 2019 DAC 42 Sandown 2012-2 Holdings Ltd (applied for strike off)
Scottish Widows Group Ltd 3 ii iii xi Scottish Widows Industrial Properties Europe B.V. 18 i Scottish Widows Ltd 1 i Scottish Widows Pension Trustees Ltd 3 i Scottish Widows Property Management Ltd 25 i Scottish Widows Schroder Personal Wealth (ACD) Ltd 1 i
Subsidiary undertakings continued The Group has determined that it has the power to exercise control over the following entities without having the majority of the voting rights of the undertakings. Unless otherwise stated, the undertakings do not have share capital or the Group does not hold any shares.
United Dominions Trust Ltd 1 i Universe, The CMI Global Network Fund 49 * Upsaala Ltd 16 i Ward Nominees (Abingdon) Ltd 1 i Ward Nominees (Birmingham) Ltd 1 i Ward Nominees (Bristol) Ltd 1 i Waverley – Fund II Investor LLC 24 i Waverley – Fund III Investor LLC 24 i Waymark Asset Investments Ltd 1 ii iii West Craigs Ltd 5 i Wood Street Leasing Ltd 1 i
Addo Food Group (Holdings) Ltd 76.85% Queens Drive, Nottingham, NG2 1LU ii & Addison Social Housing Ltd 20% 1 Bartholomew Lane, London, EC2N 2AX i Archer Topco Ltd 99% c/o Crestbridge Limited, 47 Esplanade, St. Helier, Jersey JE1 0BD xvii & Aghoco 1472 Ltd 89.25% 58 Evans Road, Liverpool, L24 9PB ii & Airline Services And Components Group Ltd 94.45% Squire Patton Boggs (UK) LLP (Ref: Csu), Rutland House, 148 Edmund Street, Birmingham,
Station Road, High Bentham, Near Lancaster, LA2 7NA xviii xvii & Applied Composites Group Ltd (in liquidation) 85.76% 1 Bridgewater Place, Water Lane, Leeds, West Yorkshire LS11 5QR xviii & Aqualisa Holdings (International) Ltd 76.12%
Bacchus Newco Ltd 89.25% Park Lane Industrial Estates, Park Lane Off Wigan Road, Ashton in Makerfield, Wigan, WN4 0BZ, United Kingdom ii &
Ground Floor, Redcentral, 60 High Street, Redhill, RH1 1SH xvii xviii & Cleanslate Ashford Ltd 50% Chobham Farm, Sandpit Hall Road, Chobham, Surrey, GU24 8HA ii Columbus UK Holdings Ltd 99% 1 Fore Street Avenue, Moorgate, London UK, EC2Y 6DT ii & Connect Health Group Ltd 99% The Light Box Quorum Business Park, Benton Lane, Newcastle Upon Tyne, United Kingdom, NE12 8EU ii Connery Ltd 20% 44 Esplanade, St. Helier, Jersey, JE4 9WG & Couple Holdco Ltd 26.70% 353 Buckingham Avenue, Slough, England, SL1 4PF ii & Croud Holdings Ltd 99% First Floor, 39 Tabernacle Street, London EC2A 4AA ii & Cruden Homes (Aberlady) Ltd 50% 16 Walker Street, Edinburgh EH3 7LP ii Cruden Homes (Longniddry) Ltd 50% 16 Walker Street, Edinburgh EH3 7LP ii D.U.K.E Real Estate Ltd 50% Cromwell Property Group Spaces, Lochrin Square, 1 Lochrin Square, 92-98
The Yard, Dodd Lane, Westhoughton, Bolton, BL5 3NU x xv & Ensco 1314 Ltd 99%
90 Tottenham Court Road, London W1T 4TJ ii xxii & Ensco 1322 Ltd 99% Newbury House, 20 Kings Road West, Newbury, Berkshire, RG14 5XR ii & Ensco 1327 Ltd 99% First Floor, 65 Gresham Street, London, England, EC2V 7NQ ii & Ensco 1337 Ltd 99% Cotton Tree Lane, Colne, BB8 7BH ii & Ensco 1366 Ltd 99% 25a Market Street, Bicester, Oxfordshire, OX26 6AD ii & Ensco 1375 Ltd 99% 25 Southampton Buildings, London, England, WC2A 1AL ii & Ensek Holdings Ltd 99.17% The Watercourt, 116-118 Canal Street, Nottingham, NG1 7HF xviii & Erris Homes (Almondbury) Ltd 50% Unit 11 Acorn Business Park, Killingbeck Drive, Leeds, LS14 6UF, United Kingdom ii Escapade Bidco Ltd 99%
FDL Salterns Ltd 50% 2 Poole Road, Bournemouth, BH2 5QY ii FHR European Ventures LLP n/a CMS Cameron Mckenna LLP, 78 Cannon Street, London, EC4N 6AF * Ginger Acquisition Company Ltd 89.25% Tudno Mill, Smith Street, Ashton-Under-Lyne, OL7 0DB, United Kingdom ii & Global Autocare Holding Ltd 99% The Hub, Gelderd Lane, Leeds, England, LS12 6AL ii & Great Wigmore Property Ltd 50% 33 Cavendish Square, London, W1G 0PW & Hamsard 3468 Ltd 89.25%
KERV Group Ltd 99% 1st Floor 16 St. Clare Street, London, England, EC3N 1LQ ii & KHL 2017 Ltd 84.4%
Waverley House, Hampshire Road, Granby Industrial Estate, Weymouth, DT4 9XD xviii & xvii Mandata Group Ltd 89.25% 3rd Floor Q5 Quorum Business Park, Benton Lane, Longbenton, Newcastle Upon Tyne,
Mansion House Group (Sandbach) Ltd 50% 8-10 Old Market Place, Altrincham, Cheshire, United Kingdom, WA14 4DF ii Measured Identity Hub Ltd 97.92% 3 Long Acres, Willow Farm, Castle Donington, Derbyshire DE74 2UG ii & MFS Groupco Ltd 99% York House, Wetherby Road, Long Marston YO26 7NH ii & Motability Operations Group plc 40%
3MC Middlemarch Business Park, Siskin Drive, Coventry, United Kingdom, CV3 4FJ ii iii & Osprey Aviation Services (UK) Ltd 89.25%
Two Snowhill, Snow Hill Queensway, Birmingham, West Midlands, B4 6GA ii & xxiv xxv xxvi xxvii
PIHL Equity Administration Ltd 35% Cavendish House, 18 Cavendish Square, London, W1G 0PJ iii PIMCO (Holdings) Ltd (in liquidation) 82.5%
Unit 2 Acorn Business Park Airedale Business Centre, Keighley Road, Skipton, North Yorkshire, England, BD23 2UE
Solid Solutions Group Ltd 99% Building 500 Abbey Park, Stareton, Kenilworth, Warwickshire, CV8 2LY ii & SOLO Topco Ltd 99% Onecom House, 4400 Parkway, Whiteley, Fareham, Hampshire, PO15 7FJ ii & Specialist People Services Group Ltd 82.5%
7 Bradford Business Park, Kingsgate, Bradford, BD1 4SJ xviii xvii v &
SSP Topco Ltd 89.25% Fourth Floor D Mill, Dean Clough, Halifax, United Kingdom, HX3 5AX ii & Stewart Milne (Glasgow) Ltd 100% The Mound, Edinburgh, EH1 1YZ, United Kingdom ii ~ Stewart Milne (West) Ltd 100% The Mound, Edinburgh, EH1 1YZ, United Kingdom ii ~ Stratus (Holdings) Ltd 82.5%
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2020 353
Collective Investment Vehicles The following comprises a list of the Group’s and other external collective investment vehicles (CIV), where the shareholding is greater than or equal to 20% of the nominal value of any class of shares, or a book value greater than 20% of the CIV’s assets.
ABERDEEN LIQUIDITY FUND (LUX) 7 Aberdeen Liquidity Fund (Lux) - Ultra Short Duration
Aberdeen European Property Share Fund 32.06% Aberdeen Sterling Bond Fund 78.65%
ACS POOLED PROPERTY 2 Scottish Widows Pooled Property ACS Fund 100% Scottish Widows Pooled Property ACS Fund 2 100%
BLACKROCK COLLECTIVE INVESTMENT FUNDS 9 iShares Global Property Securities Equity Index Fund 39.47%
BLACKROCK FIXED INCOME DUBLIN FUNDS 5 iShares Emerging Markets Government Bond Index
BNY MELLON INVESTMENTS FUNDS 10 BNY Mellon Global Balanced Fund 20.64% BNY Mellon Global Equity Fund 25.41% BNY Mellon US Opportunities Fund 38.85% Insight Global Absolute Return Fund 77.48% Insight Global Multi-Strategy Fund 42.37% Newton Multi-Asset Growth Fund 25.43% Newton UK Income Fund 27.65% Newton UK Opportunities Fund 52.95%
INVESTMENT PORTFOLIO ICVC 22 IPS Growth Portfolio 28.33% IPS Income Portfolio 24.99%
MGI FUNDS PLC 14 Mercer Diversified Retirement Fund 69.42% Mercer Multi Asset Defensive Fund 58.01% Mercer Multi Asset Growth Fund 64.05% Mercer Multi Asset High Growth Fund 80.19% Mercer Multi Asset Moderate Growth Fund 82.02%
PEMBERTON DEBT FUND SCS 25 Pemberton European Mid-Market Debt Fund II 100%
RETAIL AUTHORISED UNIT TRUSTS 9 BlackRock Balanced Growth Portfolio Fund 36.73%
Asia Pacific (ex Japan) Equity Fund 98.63% European (ex UK) Equity Fund 95.99% Fundamental Index Emerging Markets Equity Fund 95.11% Fundamental Index Global Equity Fund 95.61% Fundamental Index UK Equity Fund 86.44% Japan Equities Fund 88.67% Scottish Widows Corporate Bond Fund 67.34% Scottish Widows Gilt Fund 96.14% Scottish Widows High Income Bond Fund 28.92% Scottish Widows International Bond Fund 69.82% Scottish Widows Strategic Income Fund 64.53% Fundamental Low Volatility Index Emerging Markets Equity Fund 95.24% Fundamental Low Volatility Index UK Equity Fund 91.30% Fundamental Low Volatility Index Global Equity Fund 98.13% US Equities Fund 100%
Balanced Portfolio Fund 82.72% Cash Fund 98.94% Cautious Portfolio Fund 61.79% International Equity Tracker Fund 80.95% Opportunities Portfolio Fund 91.60% Progressive Portfolio Fund 72.11%
Environmental Investor Fund 73.54% Ethical Fund 80.07% UK Growth Fund 62.36%
THE TM LEVITAS FUNDS 21 TM Levitas A Fund 52.60% TM Levitas B Fund 47.11%
Principal place of business for collective investment vehicles (1) Trinity Road, Halifax, West Yorkshire, HX1 2RG (2) 15 Dalkeith Road, Edinburgh, EH16 5WL (3) Cassini House, 57 St James’s Street, London SW1A 1LD (4) 20 Churchill Place, Canary Wharf, London E14 5HJ (5) 200 Capital Dock, 79 Sir John Rogerson's Quay, Dublin 2, Ireland (6) Lemanik Asset Management S.A, 106 route d’Arlon, L-8210, Mamer, Luxembourg (7) 35a Avenue John F. Kennedy, L-1855, Luxembourg (8) Aberdeen Asset Managers Ltd, 1 Bread Street, Bow Bells House, London, EC4M 9HH (9) BlackRock Fund Managers Ltd, 12 Throgmorton Avenue, London EC2N 2DL (10) BNY Mellon Investment Funds, BNY Mellon Centre, 160 Queen Victoria Street, London,
EC4V 4LA (11) Aztec Group House, 11-15 Seaton Place, St Helier, Jersey, Channel Islands, JE4 0QH (12) Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH (13) Calton Square, 1 Greenside Row, Edinburgh EH1 3AN (14) 70 Sir John Rogerson’s Quay, Dublin 2, Ireland (15) 78 Sir John Rogerson’s Quay, Dublin 2, Ireland (16) 50 Stratton Street, London, W1J 8LL (17) UBS Investment Funds ICVC, 21 Lombard Street, London, EC3V 9AH (18) Oppenheim Asset Management Services S.à r.l. , 2, Boulevard Konrad Adenauer, L-1115
Street, Dubin 2, DO2 R156 (24) Jackson House, 18 Saville Row, London, W1S 3PW (25) 2 - 4, Rue Eugène Ruppert, L-2453, Luxembourg (26) 3rd Floor South, 55 Baker Street, London, W1U 8EW
̂Shares held directly by Lloyds Banking Group plc & The Group holds voting rights of between 20% and 49.9% ~ The Group holds voting rights of 50% (i) Ordinary Shares (ii) A Ordinary Shares (iii) B Ordinary Shares (iv) Deferred Shares (v) Preference Shares (vi) Preferred Ordinary Shares (vii) Redeemable Non-voting Shares (viii) C Ordinary Shares (ix) N Ordinary Shares (x) Preferred A Ordinary Shares (xi) Redeemable Preference Shares (xii) A4 Ordinary Shares (xiii) Redeemable Ordinary Shares (xiv) Common Stock (xv) Preferred B Ordinary Shares (xvi) A3 Ordinary Shares (xvii) A2 Ordinary Shares (xviii) A1 Ordinary Shares (xix) Z Ordinary Shares (xx) B1 Ordinary Shares (xxi) LN Deferred Shares (xxii) D Ordinary Shares (xxiii) E Ordinary Shares (xxiv) W Ordinary Shares (xxv) X Ordinary Shares (xxvi) Y Ordinary Shares (xxvii) Z1 Ordinary Shares (xxviii) Ordinary Non-Voting Shares (xxix) B Ordinary Non-Voting Shares (xxx) Non-Voting Deferred Shares (xxxi) Ordinary Limited Voting Shares (xxxii) Non-Voting Preference