We're helping individuals, families, businesses and communities all across Britain to prosper
£600m given to support charities through our independent charitable Foundations over the last 30 years. We believe no other bank has the reach or resources to help tackle social disadvantage
On behalf of the Board Lord Blackwell Chairman Lloyds Banking Group 21 February 2017
Simple, low cost operating model Our simpler operating model and focus on operational efficiency provides a cost advantage which benefits both customers and shareholders.
Multi-brand proposition Offering our services through a number of recognised brands enables us to address the needs of different customer segments more effectively.
Strong balance sheet position with pro forma CET1 ratio (post dividend) of
Asset quality ratio of 15 bps Asset quality remains strong with no deterioration in the underlying portfolio
Our Consumer Finance division provides motor finance solutions, consumer loans and credit cards to consumer and commercial customers.
Corporate culture The Board and senior management have a vital role to play in shaping and embedding a healthy corporate culture, and this continued to be a major focus in 2016. At the heart is our core value of ‘doing the right thing for customers’ – rebuilding trust that is the foundation for our customer franchise.
Our target is to raise £22 million by 2020 for our chosen charity partners. Starting this year, our new charity partner is Mental Health UK. There is a growing recognition that mental health and financial health are closely linked, and yet there is no single source of support in this area. By bringing our two organisations together we aim to create the perfect partnership to start developing this support for people across the UK.
Meanwhile, the UK financial services sector continues to face a number of near term challenges. The economic environment remains uncertain, the level of regulatory change remains high, competition continues to be fierce and the pace of technological change requires continuing innovation while posing new threats from data and cyber security. This reinforces our conviction that our differentiated, simple, low risk, UK retail and commercial strategy is the right approach. It has helped us deliver over the last few years and will, I believe continue to do so going forward.
Directors We review the Board’s composition and diversity regularly and are committed to ensuring we have the right balance of skills and experience within the Board. As announced last year, Stuart Sinclair joined the Board in January 2016 and Dyfrig John retired from the Board at our AGM in 2016. We are very grateful to Dyfrig for his contribution to the Group.
Remuneration Our approach to reward aims to provide a clear link between remuneration and delivery of the Group's key strategic objectives, namely, becoming the best bank for customers whilst delivering long-term, superior and sustainable returns to shareholders. We believe in offering fair reward where colleagues are rewarded for performance aligned to the long-term sustainable success of the business, our commitment to rebuilding trust and changing the culture of the Group.
Total bonus outcome remains a small proportion of underlying profit at 4.8 per cent. Cash bonuses are capped at £2,000 with additional amounts paid in shares and subject to deferral and performance adjustment.
More information on how we ensure our approach to remuneration supports our strategy can be found in the Directors’ remuneration report on page 84.
Despite the uncertainty created by the political and economic events of 2016, we have continued to achieve many of our targets. Highlights include: – provided £1.2 billion of new funding to UK manufacturing businesses – helped more than 10,000 clients to start exporting for the first time – helped more than 75,000 first-time buyers – supported more than 121,000 start-up businesses – created more than 1,000 new apprenticeship positions
Quantitative components we measure include our net promoter score, complaints data, colleague engagement surveys, whistleblowing, regulatory engagement information and assurance from risk on compliance with policies and the Risk Framework. We also host breakfasts, dinners, branch visits and staff engagement events.
The culture of the Board itself is measured in the Board Effectiveness Review which is facilitated externally every three years. You can read more about this review in our corporate governance report on page 66.
We have delivered strong financial performance in 2016 as we continue to make good progress against our strategic priorities. Underlying profit was £7.9 billion and statutory profit has more than doubled to £4.2 billion. We continue to improve our customers’ experience, simplifying the business whilst growing in targeted areas and in December announced the acquisition of MBNA’s prime UK credit card business. Strong capital generation, which is a consequence of our business model, has enabled us to fully cover the expected capital impact of the MBNA acquisition, increase our ordinary dividend by 13 per cent and pay a special dividend. As a simple, low risk, UK focused bank we are committed and well positioned to help Britain prosper and become the best bank for customers and shareholders.
Operating environment Given our UK focus, our performance is inextricably linked to the health of the UK economy which has been more resilient than the market expected post referendum, with GDP growth of 2 per cent in 2016. The UK’s decision to leave the European Union means the exact nature of our relationship with Europe going forward remains unclear and the economic outlook is uncertain. However, the recovery in recent years with low unemployment, reduced levels of household and corporate indebtedness and increased house prices means the UK is well positioned.
The regulatory environment also continues to evolve and there are a number of areas on which we await further clarity but, given the strength of our balance sheet and the capital generative nature of our business model, we are well placed to meet these regulatory requirements and the economic uncertainty. Following the de-risking of the balance sheet in recent years our PRA Buffer has been reduced but, in light of expected future regulatory capital developments, the Group will continue to target a CET1 ratio of around 13 per cent.
Financial performance The Group has delivered strong financial performance in the year. Underlying profit was £7.9 billion with an underlying return on required equity of 13.2 per cent (return on tangible equity of 14.1 per cent). Income was slightly lower which was more than offset by lower operating costs, resulting in an improved cost:income ratio of 48.7 per cent. Impairment increased, primarily due to lower releases and write-backs, but asset quality remains strong with no signs of deterioration in the portfolio. The difference between underlying profit and statutory profit reduced significantly in 2016, as statutory profit before tax more than doubled to £4.2 billion, largely due to lower PPI provisions, and this enabled the Group to generate approximately 190 basis points of CET1 capital during the year.
Delivering sustainable growth The Group aims to deliver sustainable growth in line with its low risk business model. We have continued to make good progress in growing market share in areas where we are underrepresented, and have grown lending to SME and Mid Markets clients by around £2 billion in the year. In Consumer Finance we have continued to grow our motor finance and credit card portfolios organically and the agreement to acquire MBNA’s prime UK credit card business will give us the opportunity to create a best-in-class credit card operation. In Insurance, we will continue to invest in developing the brand and the business, including our financial planning and retirement capabilities, and have also completed four bulk annuity deals. In addition, we are committed to supporting first-time home buyers and remain the largest lender to this customer group.
The combination of the progress we have made towards our strategic priorities and our strong financial performance has enabled the UK government to further reduce its stake in the Group to less than 5 per cent, at a profit, returning over £18.5 billion to the UK taxpayer since 2009.
JANUARY Ambassador programme launch Our senior leaders represent the Group, build strategic relationships and promote our ambition to help Britain prosper across the regions
SEPTEMBER Commitment to helping Britain prosper We announced our aim to provide over £60 billion of lending in the next 12 months
Total ordinary dividend declared for 2015 of 2.25 pence per ordinary share as well as a special dividend of 0.5 pence per share
UK house prices increased by around 7 per cent during the year, largely driven by strong growth in the first quarter. Prices have continued to increase, albeit at slower rates, during the rest of the year in almost all geographic areas, although the most expensive parts of London have seen some reductions over the last six months.
Impairment expected to remain benign Improving indebtedness, along with the continued low interest rate environment, is continuing to keep impairment levels low and they remain below through-the-cycle levels.
Outlook for 2017 How the economy evolves in 2017 is highly dependent on the type of EU-exit deal that companies expect to be achieved in 2019, how deeply that impacts investment and employment plans, and how much squeezed consumer spending power is offset by improved competitiveness of exports following the fall in sterling. Each of these carries a high degree of uncertainty.
Conduct In 2016 the Senior Manager & Certification Regimes were implemented, introducing greater clarity and accountability into decision making for financial institutions. In addition, the FCA announced in December it would extend the timetable for its announcement on a potential deadline for PPI complaints until the first quarter of 2017. We continue to work to ensure we provide appropriate and fair products with clear, simple and relevant terms.
Summary There are a number of other regulatory changes that have been implemented or developed through 2016, several of which are relevant to our business, including caps and prohibitions on early-exit charges for pension-scheme members, the implementation of the revised Markets in Financial Instruments Directive, the application of the Interchange Fee Regulation, changes to the regulation of claims-management companies, the final report of the Financial Advice Market Review, the entry into force of the General Data Protection Regulation and the cancellation of plans to create a secondary annuities market.
Overall however, we believe our simple, low risk, UK focused strategy puts us in a strong position to adapt to the evolving regulatory landscape.
CUSTOMER TRENDS AND COMPETITION In the competitive open markets in which we operate, customers are benefiting from an increasing range of products and services from a growing choice of providers and via a range of channels. Access through digital platforms, including via mobile devices, has increased significantly in recent years, changing customer behaviours and expectations in terms of how they shop for goods and undertake banking, and these trends are expected to accelerate.
Key challenges – Economic environment: uncertain impact of EU referendum decision and continued low interest rates. – Regulatory environment: the level of regulatory change remains high with continued focus on ring-fencing, resolution, competition, capital and conduct. – Competition: increased competition for lending and deposits could further impact margins. – Digital transformation: the pace of change is significant and we will need to continue to invest to meet evolving customer needs.
As a UK focused bank we are well placed to help Britain prosper, delivering for customers, shareholders and wider society. Our differentiated business model gives us competitive advantage, enabling us to continue to deliver for our customers in a challenging environment
Our focus on the UK means our future is inextricably linked to the UK economic and political environment, so we need to be agile to adapt to the uncertainty following the vote to leave the European Union.
The level of regulation remains high, although we are now seeing more clarity around competition, conduct, capital and ring-fencing and resolution.
CREATING VALUE Outcomes for our stakeholders: Best bank for customers Doing the right thing for our customers by meeting their financial needs, helping them succeed, improving our service proposition and creating value for them, is fundamental to our business model and the long-term sustainability of the business.
Superior and sustainable returns The successful delivery of our business model and strategy should enable delivery of superior and sustainable returns for our shareholders.
Helping Britain Prosper Plan Our response to some of the social and economic issues facing the UK is our Helping Britain Prosper Plan which sets out clear targets to address issues where we can make a measurable and meaningful contribution. These include the shortage of affordable homes; supporting small businesses and the UK's manufacturing base; helping people and organisations acquire the digital skills and capabilities they need; and tackling disadvantage in local communities.
STRATEGIC PRIORITIES We are adapting to the changes brought about by technology, changing customer behaviour and regulation in a competitive market environment. To achieve this, we are focusing on three strategic priorities whilst building the best team.
Multi-brand proposition Offering our services through a number of recognised brands enables us to address the needs of different customers segments more effectively.
Multi-channel approach Operating in an integrated way through a range of distribution channels, including the largest branch network digital bank in the UK, ensures our customers can interact with us when and how they want.
– Transforming our digital presence, providing simpler, seamless interactions across online and mobile while sustaining extensive customer reach through our leading branch network
– Employee engagement at 71 points, equalling our highest ever score – Line Manager Index at 86 points, our highest score ever – Our Line Manager Academy, launched in 2015, won the ‘Most effective cultural transformation initiative’ award at the London Institute of Banking & Finance’s Financial Innovation Awards 2016 – Average of 6 days formal training per colleague per year – 32.4 per cent of senior roles now held by women – Number 1 private sector employer in the Stonewall Top 100 – Launch of Families Matter, a network for parents and carers – 40,000 colleagues on boarded to HIVE, a new collaboration platform; 59 per cent are active users against industry benchmarks of 20-24 per cent – Provided new opportunities for colleagues to become shareholders; over 80 per cent now have an ownership interest
– maintaining market leadership in our main retail businesses, making the most of our multi-brand, multi-channel strategy
An increased ordinary dividend of 2.55 pence per share, in line with our progressive and sustainable dividend policy. In addition, the Board has recommended a special dividend of 0.5 pence per share.
Earnings per share increased in the year, largely due to the significant increase in statutory profit.
Our common equity tier 1 ratio remains strong at 13.8 per cent despite increased dividends. It also remains one of the strongest compared to our major UK banking peers. 1 Pro forma
Our asset quality ratio remains low at 15 basis points, reflecting our effective risk management and continued low interest rates.
Trade: we helped business grow and trade – we supported 121,000 start-up businesses and helped more than 10,000 clients export for the first time
The index is the outcome of a survey of more than 70,000 colleagues which shows how strongly they believe we are committed to becoming the best bank for customers. Our score remained the same as in 2015.
The FCA changed the approach to complaint classification and reporting from 30 June 2016. Updated complaint data is not yet available on the new basis but will be available by the end of the first quarter. Total customer complaints have been on a downward trend since 2012 and have continued to fall in the second half of 2016. 1 Excluding PPI.
We are part of the fabric of Britain, visible on almost every high street through our iconic brands. The challenges Britain faces affect us directly, our operations and our colleagues.
We continue to make progress against our target that women hold 40 per cent of our senior roles by 2020. In 2016, despite focusing on building a talent pipeline of female managers, we fell slightly short of our 33 per cent senior management goal. We also fell just short of our target to fully engage more of our disabled colleagues but we will continue to support them through our award-winning workplace adjustment programme and our colleague network.
We increased net lending to SME and Mid Markets companies by £1.6 billion, but fell short of our £2 billion Plan target1. Since 2011, our net lending to SMEs has increased by 30 per cent whilst the market has contracted 11 per cent, and since 2012 our lending to Mid Markets companies has increased by 15 per cent, compared to a market that has declined 3 per cent. We aim to increase lending to the sector by £2 billion in 2017.
Key actions By working with our independent charitable Foundations we have continued to support communities across the UK. In 2016 we gave £18.5 million to our Foundations and have supported 3,700 charities, which reach some of the most disadvantaged people in Britain today.
A responsible approach Doing business responsibly is fundamental to our strategy to become the best bank for customers, our Helping Britain Prosper Plan, our Code of Responsibility and all of our Group policies and standards and the future success of the business.
We aspire to conduct business in a way that values and respects the human rights of our colleagues, suppliers, customers and the communities we operate in.
In 2016 many of the same issues as 2015 emerged as the most material, with human rights, colleague diversity and wellbeing, economic impact, and data privacy and security growing in importance. The top material issues are as follows: 1. HOW WE RUN OUR BUSINESS 2. BUILDING TRUST 3. ECONOMIC IMPACT 4. SERVING OUR CUSTOMERS FAIRLY 5. HUMAN RIGHTS, DIVERSITY AND WELLBEING
We’ve had a Panel in place since 2012 but in 2016 we established a smaller and more focused Independent Stakeholder Advisory Panel. It will provide informed and constructive external challenge and advice on our Responsible Business strategy and programmes, including the Helping Britain Prosper Plan.
'The Stakeholder Panel will be powerful in helping us to stay focused on our priorities, to advise us and to challenge us to think innovatively about emerging issues.'
3. ECONOMIC IMPACT We contribute to the UK economy through our products and services, and through the commitments in our Helping Britain Prosper Plan. We also make a positive economic impact as a major employer and purchaser.
Opening a basic bank account can be the first step towards financial inclusion for many customers. In 2016, we provided almost 350,000 (2015: over 300,000) new basic bank accounts and also helped 70,000 customers upgrade from basic to more mainstream products. We also recognise that not having the right ID can be a major barrier to opening an account, so we aim to treat each customer as an individual, and ensure our colleagues have ways to accept many different forms of ID, in order to help them onto the banking platform. We know we have more to do to achieve this level of personal service.
Businesses who want to trade internationally can use our new International Trade Portal to access a wealth of practical information and advice. We also make it easy for them by linking with 100 partner banks outside the UK and we have launched a marketing campaign promoting the benefits of doing business internationally.
Promoting equal opportunities and Inclusion & Diversity We widen and promote Inclusion & Diversity (I&D) through our Group Executive Committee, executive level I&D sponsors, quarterly I&D forum and I&D Operational committee, which oversees implementation of our strategy. During 2016, we launched a new Group-wide ‘everyone’ campaign to explain the relevance and importance of inclusion to all colleagues, introduced our new ‘Family Matters’ network for parents and carers and re-launched our REACH (Race, Ethnicity and Cultural Heritage) network.
Supporting line managers and senior leaders We have continued to develop our Line Manager Academy to meet the changing needs of our line manager population. During the year colleagues attended Academy training programmes more than 3,200 times. Our Leadership Academy provides senior leaders with relevant development solutions. In 2016 we developed five new Programmes for the Academy which together attracted almost 300 attendees. In March 2016 we launched our Strategic Leaders Programme which supports our senior 175 leaders in the Group with the aim of driving the culture we need to be the best bank for customers.
Data source: HR system (HR Online). Apart from gender data, all diversity information is based on colleagues’ voluntary self-declaration. As a result this data is not 100 percent representative; our systems do not record diversity data for the proportion of colleagues who have not declared this information.
The impact we‘re making colleagues work in an agile way members of our colleague disability network 'Access'
We want to do more to help tackle disadvantage through our independent charitable Foundations. Our England and Wales Foundation is the UK’s largest corporate foundation. Since 1985, we have given almost £600 million to tackle disadvantage in communities across the UK.
Supporting regional prosperity Our Group Ambassador Programme supports our ambition to enable social and economic prosperity in all parts of the UK. Our ten Ambassadors, who are all senior colleagues, have a mandate from the Group Chief Executive to support economic and social development across the whole of the UK. They work with politicians, government officials, regional development agencies and local enterprise partnerships as well as local councils to help achieve this. In 2016 the Ambassadors have worked on three core themes: housing, the rural economy and agriculture, and education and skills with a supporting focus on digital.
Effective risk analysis, management and reporting Continuing to deliver close monitoring and stringent reporting to all levels of management and the Board on a regular basis ensures appetite limits are maintained and subject to stressed analysis at a risk type and portfolio level.
Sustainable growth Embedding a risk culture that ensures proactive support and constructive challenge takes place across the business is important for delivering sustainable growth.
Determined by the Board and Senior Management. Business units formulate their strategy in line with the Group’s risk appetite Risk appetite
An important element of the framework is the maintenance of strong internal controls which are owned and operated by individual business areas. The Group’s risk governance arrangements supported the effective implementation of the requirements of the SM&CR which came into force in 2016.
Credit risk The risk that customers and/or other counterparties whom we have either lent money to or entered into a financial contract with, or other counterparties with whom we have contracted, fail to meet their financial obligations, resulting in loss to the Group.
– Credit policy, incorporating prudent lending criteria, aligned with Board approved risk appetite, to effectively manage risk. – Robust risk assessment and credit sanctioning to ensure we lend appropriately and responsibly. – Extensive and thorough credit processes and controls to ensure effective risk identification, management and oversight. – Effective, well-established governance process supported by independent credit risk assurance. – Early identification of signs of stress leading to prompt action in engaging the customer.
People risk Key people risks include the risk that we fail to maintain organisational skills, capability, resilience and capacity levels in response to increasing volumes of organisational, political and external market change.
Impairments remain below long term levels and are expected to increase as the level of write-backs and releases normalise. Emerging credit risks that have the potential to increase impairment include the global and UK economic environment, in particular increasing interest rates, as it can impact customer and counterparties’ affordability.
As we transform and simplify our business, minimising conduct risk is critical to achieving our strategic goals and meeting market and regulatory standards.
Liquid assets now exceed our total wholesale funding. This provides a substantial buffer in the event of a market-wide stress which could reduce our options to fund our balance sheet in future.
Strategic growth initiatives within Insurance are developed and managed in line with a defined risk appetite, aligned to the Group risk appetite and strategy.
Total loans and advances to customers were £450 billion, compared with £455 billion at 31 December 2015, and customer deposits were similarly £5 billion lower than a year ago at £413 billion.
The balance sheet remains strong and the CET1 ratio at 31 December 2016 was 13.8 per cent on a pro forma basis and reflects the retention of c.80 basis points of CET1 capital to cover the estimated capital impact of the MBNA acquisition. The Group generated c.190 basis points of CET1 capital, pre dividends, in the period and tangible net asset value per share increased to 54.8 pence (31 December 2015: 52.3 pence).
Total income of £17,500 million was 1 per cent lower than 2015, with a small reduction in net interest income and a 1 per cent fall in other income.
The Group’s market-leading cost:income ratio improved to 48.7 per cent (2015: 49.3 per cent) with positive operating jaws of 1 per cent. The Group remains committed to achieving annual improvements in the cost:income ratio and continues to target a cost:income ratio of around 45 per cent exiting 2019.
The average indexed loan to value (LTV) of the Retail mortgage portfolio improved to 44.0 per cent (31 December 2015: 46.1 per cent) and the percentage of lending with an indexed LTV of greater than 100 per cent improved to 0.7 per cent (31 December 2015: 1.1 per cent).
Statutory profit in 2015 included a charge of £745 million, comprising £660 million relating to the sale of TSB and £85 million of TSB dual-running costs.
Taxation The tax charge was £1,724 million (2015: £688 million) representing an effective tax rate of 41 per cent (2015: 42 per cent). The high effective tax rate in 2016 was due to the banking surcharge, restrictions on the deductibility of conduct provisions, and the negative impact on the net deferred tax asset of both the change in corporation tax rate and the expected utilisation by the insurance business. The Group continues to expect a medium term effective tax rate of around 27 per cent.
Return on required equity and tangible equity The underlying return on required equity was 13.2 per cent (2015: 15.0 per cent) and the underlying return on tangible equity was 14.1 per cent (2015: 16.0 per cent). The reduction in both return measures reflects the lower underlying profit and higher underlying tax charge following implementation of the banking tax surcharge.
Deposits fell 1 per cent to £413 billion, with increased high quality deposits from Commercial clients offset by lower Retail and Consumer Finance tactical balances, largely in response to the active management of deposit and funding requirements. The Group has maintained its strong funding position with a loan to deposit ratio of 109 per cent (2015: 109 per cent).
The CET1 ratio improved to 13.8 per cent (2015: 13.0 per cent) on a pro forma basis and reflects the retention of c.80 basis points of CET1 capital to cover the estimated capital impact of the MBNA acquisition. The pro forma ratio includes the 2016 dividend paid by the Insurance business in February 2017.
The Group continues to be strongly capital generative and over the year generated c.190 basis points of CET1 capital, pre dividend. This largely comprised c.220 basis points of underlying capital generation, along with benefits from a reduction in risk-weighted assets (c.40 basis points) and the insurance dividend (c.20 basis points) partially offset by conduct (c.100 basis points) and other items. This strong capital generation has enabled us to fully cover the expected CET1 capital impact of the MBNA acquisition, increase the ordinary dividend and pay a special dividend. Going forward we now expect to generate 170 to 200 basis points of capital per annum pre dividends. This will enable us to support sustainable growth in the business and help Britain prosper whilst delivering sustainable returns to shareholders.
The tangible net asset value per share increased to 54.8 pence (31 December 2015: 52.3 pence) after payment of the 2015 final and 2016 interim dividends totalling 2.85 pence. The increase reflects good underlying profitability partly offset by tax and other statutory items.
Dividend The Board has recommended a final ordinary dividend of 1.7 pence per share, together with a capital distribution in the form of a special dividend of 0.5 pence per share. This is in addition to the interim ordinary dividend of 0.85 pence per share that was announced at the 2016 half year results.
The total ordinary dividend per share for 2016 of 2.55 pence per share has increased by 13 per cent, from 2.25 pence per share in 2015 and is in line with our progressive and sustainable ordinary dividend policy. We continue to expect ordinary dividends to increase over the medium term with a dividend payout ratio of at least 50 per cent of sustainable earnings.
Alternative performance measures The Group uses a number of alternative performance measures, including underlying profit, in the discussion of its business performance and financial position. Further information is provided on page 289.
3 The common equity tier 1 and leverage ratios at 31 December 2016 and 2015 are reported on a pro forma basis, including the dividends paid by the Insurance business in February 2017 and February 2016 respectively, in relation to prior year earnings.
Number of ordinary shares in issue (millions)4 71,374 71,374 71,374 71,368 70,343
- Closed further branches, but maintaining the UK’s largest branch network with a 21 per cent market share.
Delivering sustainable growth – Increased lending in SME and Mid Markets by around £2 billion in 2016 and provided UK manufacturers with over £1 billion of funding support in 2016. – Facilitated over £10.5 billion of financing to support UK government infrastructure projects, including the creation of a wood pellet power plant in Teesside which will provide energy to 600,000 homes and Race Bank Offshore Windfarm which will play a key part in the UK’s green energy future.
New business income has increased by £55 million, or 17 per cent, driven by growth in planning and retirement and protection propositions. This has more than offset lower income from corporate pensions.
There was a net benefit of £223 million (2015: £235 million) as a result of experience and other items. This included one off benefits following an update to the methodology for calculating the illiquidity premium and the addition of a new death benefit to legacy pension contracts, to align terms with other pensions products. These were partly offset by the effect of recent reforms on activity within the pensions market.
General insurance income net of claims has increased by £31 million primarily driven by lower weather related claims.
Total income increased to £330 million (2015: £176 million) largely as a result of sales of liquid assets including gilts, and the timing of dividends from the Group’s strategic investments.
Banking net interest margin The banking net interest margin is calculated by dividing banking net interest income by average interest-earning banking assets. Non-banking net interest income includes the net interest expense reported by the Insurance business, net interest income earned from non-banking assets, negative fair value adjustments relating to certain past liability management exercises and consolidation adjustments between net interest and other income to eliminate the impact of certain intragroup transactions. Non-banking assets include loans and advances within Commercial Banking where the predominant income stream is fees rather than net interest, and loans sold by Commercial Banking and Retail to Insurance to back annuitant liabilities.
The insurance gross up of £1,898 million (2015: £38 million) largely represents amounts payable to unitholders in consolidated open-ended investment vehicles managed by the Insurance business. The increased expense in the year reflects strong market performance in the second half of 2016.
Excess equity based on 12 per cent CET 1 requirement (2.4) (2.7)
Stakeholder engagement takes many different forms, both through formal updates at Board and through more in-formal channels, such as site and branch visits. You can read more on page 64. We place great importance on colleague surveys and customer satisfaction measures, which help inform our decisions and track progress.
We engage with our shareholders through a full calendar of meetings and events, including the AGM and webcasts. The Board is briefed regularly through the year on both retail shareholder and institutional investor issues and concerns. More details of our shareholder relationship programme can be found on page 68.
Dear Shareholders I am pleased to present our corporate governance report for 2016. This report sets out our approach to governance in practice, the work of the Board and includes reports from each of the Board’s Committees.
Board changes There were two changes to the Board in 2016. Stuart Sinclair joined the Board in January 2016 and Dyfrig John retired from the Board in May 2016.
The structure, size and composition of the Board and its Committees will continue to be kept under review.
Corporate governance framework The Board recognises that governance is not static but must adapt to continually changing risks and changes in the regulatory environment. The corporate governance arrangements are therefore regularly reviewed to ensure they remain effective.
In 2016 we established two further sub-committees of the Board Risk Committee to focus on Financial Markets and IT Resilience & Cyber, in addition to an existing Stress Testing & Recovery Planning sub-committee. The sub-committees were constituted to enable members of the Board Risk Committee to dedicate additional time and resource to better understand and to enable fuller review and challenge of these risks. Additionally, a Cyber Security Advisory Panel was established to bring an industry perspective and allow for discussion of the key cyber related activities and threats.
The announcement in December 2016 that we had agreed to acquire MBNA is a significant step which reinforces our ability to deliver sustainable growth whilst helping Britain prosper.
It is important to define culture in a way that makes it actionable. This is why we have defined our culture based on behaviours we expect to see from all colleagues in their day-to-day work
We have established a clear and simple approach to our culture that sets out how our purpose of helping Britain prosper and our vision of becoming the best bank for customers will be achieved by all colleagues living the Values in everything they do. We believe it is important to define culture in a way that makes it actionable, so we have described it based on behaviours we expect to see from all colleagues in their day-to-day work.
Governance and oversight We have an effective top-to-bottom governance structure providing active oversight of our Culture, Conduct and Customer objectives, which cascades to every part of the business.
Comprising Directors with the right mix of skills and experience, the Board is collectively responsible for overseeing delivery of the Group’s strategy
Skills and experience: Alan is a highly regarded retail and commercial banker having spent 37 years with the Royal Bank of Scotland, most notably as Chief Executive of RBS UK. More recently, he was a Non-Executive Director of Willis Limited and Chairman of its Risk Committee. He was formerly Chairman of Brown, Shipley & Co. Limited and a Non-Executive Director of Nationwide Building Society where he was Chairman of its Risk Committee. Alan’s strategic focus and core banking experience complements the balance of skills on our Board and makes him ideal for the role of Chairman of the Board Risk Committee. He is a Fellow of the Chartered Institute of Bankers and the Royal Statistical Society and has an MBA from the Manchester Business School and a Bachelor of Science from the University of Birmingham.
Skills and experience: Tony is our Senior Independent Director and with over 40 years of experience in the investment management industry and related sectors, he is well placed to carry out this role. His former positions include Chief Executive of Hermes Pensions Management and Chairman of the Asian Infrastructure Fund, MEPC, the Marks & Spencer Pension Trustees and of the Strategic Investment Board (Northern Ireland). He is also a former Member of the Financial Reporting Council, a Senior Independent Director of Hammerson and a Non-Executive Director of the Shareholder Executive and Vodafone Group. He has a BSc (Hons) in Economics from Queen’s University Belfast, a Diploma in Security Analysis from the New York Institute of Finance and is a Barrister at Law, England and Wales.
External appointments: Non-Executive Director of United Utilities Group and Chair of their Remuneration Committee, a Governing Council Member of Cambridge University, Chairman of the Planning Inspectorate and Board member at the Higher Education Funding Council.
11 António Horta-Osório Executive Director and Group Chief Executive Appointed: January 2011 (Board), March 2011 (Group Chief Executive)
Skills and experience: António brings extensive experience in, and understanding of, both retail and commercial banking. This has been built over a period of more than 30 years, working both internationally as well as in the UK. António’s drive, enthusiasm and commitment to customers, along with his proven ability to build and lead strong management teams, brings significant value to all stakeholders of Lloyds Banking Group. Previously he worked for Goldman Sachs, Citibank and held various senior management positions at Grupo Santander before becoming its Executive Vice President. He was a Non-Executive Director of Santander UK and subsequently its Chief Executive. He is also a former Non-Executive Director of the Court of the Bank of England and Governor of the London Business School. António has a Degree in Management & Business Administration from the Universidade Católica Portuguesa, an MBA from INSEAD and has completed the Advanced Management Program at Harvard Business School.
13 Juan Colombás Executive Director and Chief Risk Officer Appointed: January 2011 (Chief Risk Officer), November 2013 (Board)
06 Simon Davies Chief People, Legal and Strategy Officer Simon joined the Group in 2016 from Linklaters LLP where he was Firmwide Managing Partner, a position he held from January 2008. Prior to this, Simon spent 12 years in Asia, specialising in M&A and securities advice, serving terms in each of Hong Kong and Tokyo and was Managing Partner for Asia from 2003-2007. He is a Solicitor of the High Court of the Hong Kong Special Administrative Region, as well as a Solicitor of the Senior Courts of England and Wales. Simon joined Linklaters in London in 1990, having studied at Emmanuel College, Cambridge. Simon is Group Executive sponsor for Ethnicity. He is also a member of TheCityUK China Market Advisory Group and a trustee of the National Youth Theatre of Great Britain.
07 Antonio Lorenzo Chief Executive, Scottish Widows and Group Director, Insurance Antonio joined the Group in 2011 as head of the Wealth and International division and Group Corporate Development, leading a strategic review and subsequent programme of reducing non-core assets and exiting international locations. From 2013, he assumed the role of Group Director, Consumer Finance & Group Corporate Development, leading the division’s growth strategy whilst completing the sale of TSB, before being appointed as Chief Executive, Scottish Widows and Group Director, Insurance. Antonio is also Group Executive Sponsor for Emerging Talent.
08 Vim Maru Group Director, Customer Products and Marketing Vim is the Group Director for the Customer Products and Marketing division responsible for Retail customer products and all marketing across Lloyds Banking Group. Vim joined the Group in June 2011 as Managing Director, Customer Products, responsible for Retail product design and management across all of the Group’s brands. He was appointed to the Group Executive Committee in August 2013. Vim is a non-executive member of the Group’s Insurance Board. Previously Vim worked for over 12 years at Santander, in a range of roles in Corporate Strategy, Mergers & Acquisitions, the Life Division and most recently held the position of Director, Retail Products. Vim holds an Economics degree from the London School of Economics and is a member of the Institute of Chartered Accountants.
There is a clear division of responsibility at the head of the Company, which is documented in the Group’s Corporate Governance Framework. The Chairman has overall responsibility for the leadership of the Board and for ensuring its effectiveness while the Group Chief Executive manages and leads the business.
The Board sets the strategy, oversees its delivery and establishes the culture, values and standards of the Group.
Senior Independent Director Anthony Watson As the Senior Independent Director, Anthony Watson is a sounding board for the Chairman and Group Chief Executive. He acts as a conduit for the views of other Non-Executive Directors and conducts the Chairman’s annual performance appraisal. He is available to help resolve shareholders’ concerns and attend meetings with major shareholders and financial analysts to understand issues and concerns.
The Board in 2016 Non-Executive Directors see attendance at Board and Committee meetings as only one part of their role. In addition to the annual schedule of Board and Committee meetings, the Non-Executive Directors undertake a full programme of activities each year, as set out on page 64.
2 Mr Henry was unable to join the July Board meeting due to the second quarter 2016 results announcement for Royal Dutch Shell plc, of which he is Chief Financial Officer, being presented on the same day.
B oa rd p ap er te m p la te a nd g ui d el in es an d ta rg et ed tr ai ni ng fo r a ut ho rs
Matters may be added to agendas in response to external events, Non-Executive Director requests and the quarterly Board Topic Review meetings
Corporate Governance Framework imposes clear responsibility on GEC members to escalate matters
The Chairman holds monthly meetings to review the draft agenda and planner with the Company Secretary and the Chief of Staff
Draft Board agenda discussed between the Chairman and the Group Chief Executive and reviewed at GEC meetings
– Customer performance dashboard – Conduct, culture and values – Responsible Business report – Helping Britain Prosper Plan
EBA stress testing results – CMA market review into retail banking services – IT resilience and cyber security
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
Board site visit to Halifax and Group operating plan with strategic focus
The agenda included case studies from banking and other industries, and presentations from senior management and smaller break-out sessions on specific topics.
The Chairman and Non-Executive Directors also spent time with the Banking Complaints Team, where they followed a complaint through to its outcome and joined a ‘huddle’ discussing how Financial Ombudsmen Service learnings could be used to ensure fair customer outcomes in the future.
Ample opportunities, support and resources for learning are provided through a comprehensive programme, which is in place throughout the year comprising both formal and informal training and information sessions.
Executive Directors are restricted to taking no more than one non-executive director role in a FTSE 100 company and may not take on the chairmanship of such a company. The Chairman is committed to this being his primary role, limiting his other commitments to ensure he can spend as much time as the role requires. In February 2016, the Chairman retired as Chairman of Interserve plc. The Chairman’s biography can be found on page 54.
Conflicts of interest The Board has a comprehensive procedure for reviewing and, as permitted by the Companies Act 2016 and the Company’s articles of association, approving actual and potential conflicts of interests.
Group’s business divisions – Branch and site visits – Opportunity to meet with major shareholders as requested
– Chairman – Company Secretary – Executive Directors – GEC members – Group Audit Director – Senior executives from across the Group
– The Chairman personally ensures a new Director receives a tailored induction.
Conduct of Board/Committees Several Directors said that they would value more time in agendas for discussion, while recognising the pressures on meeting time.
– Continue the progress made in 2015 in ensuring that information provided to the Board and its Committees is clear, concise, relevant and focused – Review and continue to evolve metrics used to assess business performance to ensure that they provide an appropriate level of detail and insight for the Board
– Continued progress on reducing unnecessary material and presentations – Revised Board template and guidance in place – Regular reporting on business performance has continued to develop in response to Board feedback 2016 EVALUATION PROCESS Step 1 Detailed questionnaire completed by each Director
Step 2 Individual meetings held between each Director and the Company Secretary
Step 4 Draft conclusions discussed by the Company Secretary with the Chairman
Scottish Widows Group Limited The Board of the Group’s insurance subsidiary, Scottish Widows Group Limited, which also sits as the Board of its major subsidiaries, is chaired by a Non-Executive member of the Lloyds Banking Group Board and contains a balance of independent Non-Executive Directors, Group executives (serving as NonExecutives ) and Insurance Division executives. This composition supports its legal and regulatory requirements for independent decision making within the overall framework of Group policies and controls.
– nearly 200 shareholders represented – over 70 per cent of total voting rights voted – over 97 per cent of votes cast ‘in favour’ of the Directors’ Remuneration Report – all resolutions voted on by way of a poll 2016 RELATIONSHIP PROGRAMME
Succession planning The Committee, led by the Chairman, continued to keep the adequacy of succession arrangements under review to ensure the desired mix of skills and experience of Board members now and in the future. Full details of the Group’s approach to succession planning can be found on the next page.
Effectiveness The Committee oversaw the annual evaluations of the performance of the Board and its Committees. In January 2016, the Committee reviewed the findings of the 2015 Board Effectiveness Review and recommended actions to the Board to address the areas identified for improvement. Progress against the plan was reviewed during the year. In preparation for the 2016 Board Effectiveness Review, the Committee made recommendations to the Board on the process and timing of the review, which was carried out internally by the Company Secretary. Full details of the 2016 Board Effectiveness Review together with details of the progress against the 2015 review actions are set out on page 66.
Board Diversity Policy The Board places great emphasis on ensuring that its membership reflects diversity in its broadest sense. A combination of demographics, skills, experience and personal attributes on the Board is important in providing a range of perspectives, insights and challenge needed to support good decision making.
The Committee’s review was shaped by an in-depth review and broader discussion by the Non-Executive Directors of the Group’s talent management approach and succession pipeline for key senior executive roles. This annual talent review allows the Board to identify talent and ensure the Group has the right succession plans and development programmes in place. The review noted the work done to strengthen the approach to talent and development during the year, including the extension of the annual talent review programme and improved tracking and review of succession plans. There was recognition of the further work to be done to continue to increase the diversity of the succession pipeline. The robustness of the succession plans for the Group Chief Executive and other key senior management roles in terms of contingency arrangements and over the medium to longer term were also reviewed.
Colleagues were always very open and willing to spend time with me to ensure my questions were fully answered. The level of openness within the senior management team is reflective of the Group’s wider culture.
What also struck me during my first year is the very genuine commitment to diversity in its broadest sense. There is a real understanding that diversity is more than gender, it’s a ‘frame of mind’ that helps bring diversity of thought to Board debate and conversations. I support the Group’s diversity programmes through mentoring women in senior roles and by speaking at diversity events.
At all times colleagues were welcoming and never failed to find answers to my questions. As a newly appointed Non-Executive Director, I felt that a ‘go anywhere, ask anything’ culture was apparent.
Estimates of the cost have changed as complaint trends and regulatory factors have evolved. The Committee has reviewed these estimates, and challenged the assumptions behind them, as well as ensuring that appropriate disclosures have been made to explain the uncertainties that remain.
During the year the Committee considered a number of issues relating to the Group’s financial reporting, these issues are summarised below, including discussion of the conclusions the Committee reached, and the key factors considered by the Committee in reaching its conclusions.
During the year the Group provided a further £1,000 million to cover further operating costs and redress, including the impact of a proposed June 2019 deadline. To 31 December 2016, the Group has provided a total of £17,025 million in respect of PPI mis-selling redress and administration costs.
The Group has also made provisions totalling £1,085 million in respect of other conduct matters, including £280 million for packaged back accounts and £261 million for secured and unsecured arrears handling activities.
– The Committee was satisfied that the value of the VIF asset and insurance liabilities were appropriate. The disclosures are set out in note 24: ‘Value of in-force business’ on page 213 and note 32: ‘Liabilities arising from insurance contracts and participating investment contracts’ on page 217 of the financial statements.
Determining the appropriate accounting treatment for gilts held within the liquidity portfolio.
PwC have been auditor to the company and the Group since 1995, having previously been auditor to certain of the Group’s constituent companies. PwC were re-appointed as auditor with effect from 1 January 2016 following a tender process conducted during 2014. There will be a mandatory rotation for the 2021 audit, if not earlier.
More details on the Group’s wider approach to risk management can be found in the risk management section on pages 116 to 169. Full details of the Committee’s responsibilities are set out in its terms of reference, which can be found at www.lloydsbankinggroup.com/ our-group/corporate-governance
Committee composition, skills and experience Alan Dickinson, Chairman of the Committee, is a highly regarded retail and commercial banker, having spent 37 years with the Royal Bank of Scotland, most notably as Chief Executive of RBS UK, overseeing the group’s Retail and Commercial operations in the UK. The Committee is composed of independent Non-Executive Directors, who provide core banking and risk knowledge, together with breadth of experience which brings knowledge from other sectors, and a clear awareness of the importance of putting the customer at the centre of all that the Group does.
Dyfrig John3 4 4 1 Mr Henry was unable to attend the May Risk Committee meeting due to prior executive commitments.
How Committee meetings are run The management of the Committee is in keeping with the basis on which meetings of the Board are managed, as detailed on page 62, with a structure which facilitates open discussion and debate. Steps are taken to ensure adequate time for members to consider proposals which are put forward.
As a result of the referendum outcome and to manage the impact of uncertainty caused by the referendum process and ensuing economic concerns, detailed EU exit portfolio assessments were undertaken to understand potential impacts on the Bank’s credit risk profile and to assess the potential need for any changes to Group risk appetite. Additional regular monitoring of internal and external early warning and key performance indicators was instigated and continues to be closely monitored by the Committee to track any adverse movement in the risk profile of the Retail and Commercial portfolios, and to ensure that risk appetite remains appropriate.
Cyber risk and IT resilience A resilient IT environment is critical to providing reliable services to customers and enabling sustainable growth. The dynamic threat posed by cyber risk and the potential for external attacks on the integrity of electronic data or the availability of systems are key risks for the Group and central area of focus for the Committee.
UK Secured and buy-to-let Regular reviews were undertaken of the risks associated with the UK Secured portfolio, including specifically the buy-to-let segment.
Conclusion: The Group’s mortgage portfolio remains well balanced, with overall debt to value ratios having improved and concentration risks reduced. Management continues to take appropriate action to address the risks arising from these portfolios and the Committee will continue to review developments during the course of 2017.
The Committee continued to focus attention on key data initiatives within the Group. The Committee considered a number of reports on data risk throughout 2016 covering, amongst other topics, user access management, risk data aggregation and reporting and data privacy, all of which have impacts across the Group. Additionally, regular reporting on data risk, as a distinct risk type, has been introduced in 2016 in recognition of the growing importance of data as an asset to the Group as well as the forthcoming EU General Data Protection Regulation (GDPR).
Stress testing The review of stress testing exercises and their results continued to be a key area of focus during the year.
The Committee continued to provide oversight of the risks in the Commercial Banking portfolios via a regular update on the credit quality in key sectors such as Commercial Real Estate, Acquisition Finance and SME as well as oversight of large single name exposures.
Anita Frew 5 41 1 Ms Frew was unable to attend the Committee meeting in April 2016 due to a prior business commitment.
Responsible Business practices are fundamental building blocks of our strategy, and the Committee has made good progress in continuing to support the embedding of responsible business activities during 2016.
The Committee focuses its work on the three areas of People, Businesses and Communities. At each meeting we explore in depth the progress made towards achieving the Group's purpose of helping Britain prosper, through becoming the best bank for customers.
I would like to thank all the Board Directors and executives who attended and contributed to the Committee during the year. Most of all, I would like to recognise the tremendous contribution of our colleagues who have given their support to people, businesses and communities across the country, to help Britain prosper.
APRIL 2016 Review of campaign for the 2016 Plan and its impact on colleague and stakeholder engagement in order to identify opportunities to raise the profile of the Plan and the activities which underpin it
OCTOBER Detailed review of metrics and design of the 2016/17 Plan and outline of 2017 campaign
The panel membership comprised local colleagues, representatives from the SSE Dartington school and a member of South Gloucestershire Council. Each candidate ‘pitches’ their social business idea for three minutes before being interviewed by the panel.
Profit and dividends The consolidated income statement shows a statutory profit before tax for the year ended 31 December 2016 of £4,238 million (2015: £1,644 million).
Information incorporated by reference The following additional information forms part of the Directors’ report, and is incorporated by reference. Content Pages
Future developments Greenhouse gas emissions (additional information) Inclusion and diversity Engaging colleagues
The Company is party to a deed of covenant with each of the four Lloyds Foundations (the Foundations) which hold limited voting shares in the Company (the limited voting shares are further described in note 40 on page 234). Under the terms of the deeds of covenant, the Company makes an annual payment to each of the Foundations. In the event of a successful offer for more than 50 per cent of the issued ordinary share capital of the Company, each limited voting share would convert to an ordinary share under the terms of the Company’s articles of association. The payment obligation under the deeds of covenant would come to an end one year following the conversion of the limited voting shares.
Group, divisional and business unit operating plans covering a period of five years are produced and subject to rigorous stress testing on an annual basis. The planning process takes account of the Group’s business objectives, the risks taken to seek to meet those objectives and the controls in place to mitigate those risks to remain within the Group’s overall risk appetite.
The Group’s planning process comprises the following key stages: – Each year, divisional teams develop their operating plans which are based on Group and divisional targets. These targets are driven by the Group’s strategy, risk appetite and objectives in the context of the operating environment and external market commitments, which are revised annually by the Board.
Information relevant to the assessment can be found in the following sections of the annual report and accounts: – The Group’s principal activities, business and operating models and strategic direction are described in the strategic report on pages 1 to 31; – Emerging risks are disclosed on page 118; – The principal risks, including the Group’s objectives, policies and processes for managing credit, capital, liquidity and funding, are provided in the risk management section on pages 124 to 169; and – The Group’s approach to stress testing and reverse stress testing, including both regulatory and internal stresses, is described on page 119.
Based upon this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years to 31 December 2019.
Malcolm Wood Company Secretary 21 February 2017 Lloyds Banking Group plc Registered in Scotland Company number SC95000
– Executive Director single figure remuneration outcomes approximately 35 per cent lower than 2015, with 2014 Long-Term Incentive Plan awards vesting at 55 per cent of maximum. – Consistent 2 per cent base salary budget applied to all colleagues, including Executive Directors.
– To build a long-term ownership culture, all colleagues will, for the first time, receive an award of shares under the new Group Ownership Share Plan.
Further detail is set out in the ‘Summary of the remuneration review'.
Fair reward for colleagues The Committee’s focus goes beyond executive pay. I have engaged with the Group’s recognised unions, and I am keen to ensure that the interests of all colleagues are considered in the Committee’s deliberations. We are mindful of the relationship between pay for executives and more junior colleagues, and to that end have sought to ensure consistency of pay outcomes with a salary budget of 2 per cent applied across the whole Group. In order to ensure that the Committee’s approach to remuneration aligns to Group strategy, I have engaged the Responsible Business Committee in discussions on pay. This dialogue will continue during 2017.
Sharing in the Group’s performance As part of considering the structure of remuneration, the Committee concluded that it was important all colleagues should understand that they share in the overall performance of the Group alongside other stakeholders. The short-term variable remuneration element that supports this will be known as the ‘Group Performance Share plan'.
Building a long-term ownership culture The Group promotes the broadest possible share ownership by colleagues to build a culture of acting as stewards of the long-term interests of the Group.
The long-term incentive plan (LTIP) awards made in 2014 are proposed to vest at 55 per cent, reflecting performance in the period to 31 December 2016.
The Group’s approach to deferral of total variable remuneration ensures that both the short-term and long-term elements are subject to deferral in a way that results in a slower release of variable remuneration than the minimum regulatory requirements. In line with the new PRA remuneration requirements for PRA Senior Managers, the Group Ownership Share element is deferred over seven years with pro rata vesting between the third and seventh year.
Across all colleagues, less than 3.5 per cent of annual bonus plan awards are above £25,000 and relate to high performing colleagues at senior levels. The first £2,000 of any bonus award continues to be paid in cash in March 2017, with the balance deferred in shares which are released periodically over subsequent months and years.
– Net promoter score – FCA total reportable complaints per 1,000 accounts and Financial Ombudsman Service (FOS) uphold rate – Digital active customer base
Simple, affordable and motivating – Flexible and simple – Transparent and understood (by colleagues and other stakeholders) – Motivating awards which colleagues value
Shareholder alignment – Supports delivery of long-term, superior and sustainable returns – Promotes sound and effective risk management – Complies with regulations
– Performance excellence index – Employee engagement index – Inclusion & Diversity
The graphic below summarises the elements of the Executive Directors’ total remuneration package for 2017.EXECUTIVE DIRECTORS REMUNERATION
REMUNERATION AT A GLANCE How Lloyds Banking Group performed Key performance measures The table below illustrates outcomes against the Group’s key performance measures relevant to remuneration.
Long-term incentive plan outcome The Group has delivered a good financial performance over the performance period of the 2014 Long-Term Incentive Plan (LTIP) awards, continuing to transform the business for the benefit of its shareholders. Performance was measured over three financial years ended 31 December 2016. The performance conditions attached to these awards and actual performance are set out in the table below. At the end of the performance period, it has been assessed that awards will vest at 55 per cent of maximum. Executive Directors are required to retain any shares vesting for a further two years post vesting.
Directors’ fixed remuneration for 2017 Base salary 2017 base salaries will be as follows: Group Chief Executive: £1,220,000 (1 January 2017)
Long-term incentive ✔ ✔ ✔1 ✔1 1 Eligibility based on seniority, grade and role.
Operation The fixed share award will initially be delivered entirely in Lloyds Banking Group shares, released over five years with 20 per cent being released each year following the year of award. The Committee can, however, decide to deliver some or all of it in the form of cash.
Purpose and link to strategy Executive Directors are eligible to participate in HMRC-approved share plans which promote share ownership by giving employees an opportunity to invest in Group shares.
Operation Awards are granted under the rules of the 2016 Long-Term Incentive Plan approved at the AGM on 12 May 2016. Awards are made in the form of conditional shares or nil cost options. Award levels are set at the time of grant, in compliance with regulatory requirements, and may be subject to a discount in determining total variable remuneration under the rules set by the European Banking Authority.
The number of shares to be awarded may be calculated using a fair value or based on a discount to market value, as appropriate.
The Committee retains full discretion to amend the payout levels should the award not reflect business and/or individual performance. The Committee may reduce (including to zero) the level of the award, apply additional conditions to the vesting, or delay the vesting of awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate as a result of an event occurring before vesting. Awards may be subject to malus and clawback for a period of up to seven years after the date of award which may be extended to 10 years where there is an ongoing internal or regulatory investigation.
Performance measures Measures and targets are set by the Committee annually and are set out in the annual report on remuneration each year. At least 60 per cent of awards are weighted towards typical market (e.g. Total Shareholder Return) and/or financial measures (e.g. economic profit), with the balance on strategic measures.
25 per cent will vest for threshold performance, 50 per cent for on-target performance and 100 per cent for maximum performance.
Following the end of the relevant performance period, the Committee will disclose in the annual report on remuneration for the relevant year historic measure and target information, together with how the Group has performed against those targets, unless this information is deemed to be commercially sensitive, in which case it will be disclosed once it is deemed not to be sensitive.
Discretion in relation to Group Performance Share and Group Ownership Share plans The Committee retains discretion with regards to these plans. This relates to: – the timing, size and type of awards and holding periods, subject to policy maxima; – adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special dividends); – where qualitative performance measures are used and performance against those measures is not commensurate with the Group’s overall financial performance over the performance period; – adjustment of targets and measures if events occur which cause it to determine that the conditions are no longer appropriate. The Committee also retains the right to change performance targets and measures and the weighting of measures, including following feedback from regulators, shareholders and/or other stakeholders; and – amending the plan rules in accordance with their terms.
Illustration of application of remuneration policy The charts below illustrate possible remuneration outcomes under the following three scenarios: 1. The maximum that may be paid, assuming full Group Performance Share payout and full vesting under the Group Ownership Share plan.
2. The expected value of remuneration for performance midway between threshold and maximum, assuming 30 per cent of maximum Group Performance Share opportunity and 50 per cent vesting under the Group Ownership Share plan.
No share price growth has been assumed. The amounts are based on salaries as at 1 January 2017 (GCE and CRO) and 1 April 2017 (CFO) and implementation of the policy in 2017 as set out in the annual report on remuneration.
Benefits and pension Fixed share award Group Performance Share Group Ownership Share
Service agreements The service contracts of all current Executive Directors are terminable on 12 months’ notice from the Group and six months’ notice from the individual. The Chairman also has a letter of appointment. His engagement may be terminated on six months’ notice by either the Group or him.
Under his contract (dated 3 November 2010), António Horta-Osório (GCE) is entitled to an amount equivalent to base salary and pension allowance as a payment in lieu of notice if notice to terminate is given by the Group. If notice to terminate is given by the GCE, he is entitled to an amount equivalent to base salary if the Group chooses to make a payment in lieu of notice. Such payments in lieu will be made in monthly instalments subject to mitigation. He is also entitled to six months’ notice from the Group in the event of his long-term incapacity. As part of a buy-out of a pension forfeited on joining from Santander, the GCE is also entitled to the provision of a conditional unfunded pension commitment, subject to performance conditions as described further in the annual report on remuneration. In the event of long-term incapacity, if the GCE does not perform his duties for a period of at least 26 weeks (in aggregate over a 12 month period), the Group shall be entitled to terminate his employment by giving six months’ notice. In all other respects, the terms of the GCE’s contract in relation to payments for loss of office match those set out below for new directors.
Notice periods Newly-appointed Executive Directors will be employed on contracts that include the following provisions: – The individual will be required to give six months’ notice if they wish to leave and the Group will give 12 months’ notice other than for material misconduct or neglect or other circumstances where the individual may be summarily dismissed by written notice. In exceptional circumstances, new joiners will be offered a longer notice period (typically reducing to 12 months within two years of joining). – In the event of long-term incapacity, if the Executive Director does not perform their duties for a period of at least 26 weeks (in aggregate over a 12 month period), the Group shall be entitled to terminate the executive’s employment by giving three months’ notice. – At any time after notice to terminate is given by either the Group or the Executive Director, the Group may require the Executive Director to take leave for some or all of the notice period.
Awards will normally continue and be released at the normal time and the number of shares subject to the award in the current year will be reduced to reflect the date of termination except for (i) death where shares are released on the date of termination; or (ii) in the case of permanent disability the Committee determines that exceptional circumstances apply in which case shares may be released on the date of termination.
Change of control or merger N/A Awards will be payable on the date of the Change of Control and the number of shares subject to the award will be reduced to reflect the shorter accrual period. The Committee may decide that vested awards will be exchanged for (and future awards made over) shares in the acquiring company or other relevant company.
Other reason where the Committee determines that the executive should be treated as a good leaver
The cost of legal, tax or other advice incurred by an Executive Director in connection with the termination of their employment and/or the cost of support in seeking alternative employment may be met up to a maximum of £100,000. Additional payments may be made where required to settle legal disputes, or as consideration for new or amended post-employment restrictions.
The Group has applied a 2 per cent overall salary budget increase for the general population differentiated by performance and market position (with increases of around 4 per cent for strongly performing colleagues). Salary increases of 2 per cent are proposed for the Chief Financial Officer (CFO) and the Chief Risk Officer (CRO). As announced last year, for the first time since 2011 a salary increase was applied in 2016 for the Group Chief Executive to begin to adjust his base salary to the previously disclosed reference salary of £1,220,000 which was set relative to the market when he joined in 2011. After discussing the proposed increase with shareholders, the Remuneration Committee decided to stage the adjustment over two years, with an initial increase to £1,125,000 effective from 1 January 2016 and the second stage increase to £1,220,000 due to be implemented with effect from 1 January 2017. The form of the increase will follow that for 2016, with 2 per cent delivered in cash (in line with other colleagues) and the remainder in shares, held until the government has sold its shareholding in the Group. Salaries will therefore be as follows, effective dates shown below: GCE: £1,220,000 (1 January 2017)
Due to the GCE’s base salary being increased in line with his reference salary (effective from 1 January 2017), the concept of a separate reference salary will be removed. Reference salary will therefore no longer be used when calculating certain elements of long-term remuneration and the pension allowance. Instead, these elements will be calculated with reference to the GCE’s base salary.
Executive Directors are entitled to a pension allowance which they may choose to take as cash in lieu of pension contributions. The level of allowances has not been increased for 2017. GCE: 50 per cent of base salary less flexible benefits allowance CFO: 25 per cent of base salary CRO: 25 per cent of base salary
Group Performance Share plan Opportunity The maximum Group Performance Share opportunity is 140 per cent of base salary for the GCE and 100 per cent of base salary for other Executive Directors (unchanged from 2016). All assessments of performance are ultimately subject to the Committee’s judgement, but no award will be made if threshold performance for the financial measure is not met and/or the individual is rated ‘Developing performer’ or below. The threshold is set at 20 per cent below the Group’s underlying profit target.
Deferral For the 2017 performance year, the Group Performance Share opportunity will be awarded in a combination of cash (up to 50 per cent) and shares. 40 per cent will be released in the first year following award, 40 per cent will be released in the second year and the remaining 20 per cent will be released in the third year. Any shares released are subject to a further holding period in line with regulatory requirements and market practice.
Judgement on individual performance adjustment is informed by taking into account the severity of the issue, the individual’s proximity to the issue and the individual’s behaviour in relation to the issue. Individual adjustment may be applied through adjustments to BSC assessments and/or through reducing the bonus outcome. Awards are subject to clawback for a period of up to seven years after the date of award which may be extended to 10 years where there is an ongoing internal or regulatory investigation. The application of clawback will generally be considered when: – there is reasonable evidence of employee misbehaviour or material error; or – there is material failure of risk management at a Group, business area, division and/or business unit level.
Group Ownership Share plan Opportunity The maximum Group Ownership Share award for Executive Directors is 300 per cent of salary (unchanged from 2016).
4 Following changes to the amount of tax relief available on pension contributions in each year, Executive Directors may elect to receive some or all of their allowances as cash. The breakdown of payments made in cash and contributions into the pension scheme are shown below.
Each measure in the Group and divisional/functional BSC is assigned targets aligned to a five-point rating scale.
Ratings determined by comparison of results with targets Overall Group rating was Strong plus
Key performance factors considered by the Committee in arriving at the performance assessment for the Group included: Strong financial performance Underlying profit was £7.9 billion and statutory profit has more than doubled to £4.2 billion. Despite an additional PPI provision and the challenging macroeconomic environment, the Group remains strongly capital generative with a pro forma CET1 ratio of 13.8 per cent after increased dividend.
Effective cost leadership Cost management remains a strategic priority and the acceleration of cost initiatives in response to the lower interest rate environment has enabled the Group to reduce operating costs by 3 per cent. The market leading cost:income ratio also improved to 48.7 per cent.
Development and launch of the Customer Journey framework and strategy which will be the basis to manage the Group and its control environment in a customer centric way. Further reductions in the level of customer complaints. Net promotor score continued to improve and is now nearly 50 per cent higher than at the end of 2011.
Culture and reputation Accelerated progress towards the desired culture, developing new Management Information, further embedding the Group Customer First Committee and the work to establish the Customer Journey strategy.
Individual outcomes for Executive Directors (audited) The individual bonus awards for Executive Directors are determined in the same way as for colleagues across the Group, with outcomes based on annual bonus outcome, weighted by: 1. Individual performance 2. On-target award
António Horta-Osório The Group Chief Executive’s (GCE) individual performance assessment for 2016, as confirmed by the Committee, reflected the Group’s performance as outlined on page 103 and a number of other considerations including: Strong financial performance Improvement in market-leading cost:income ratio delivered, with statutory profit more than doubled and key balance sheet metrics strengthened.
With 12.5 million online and 8 million mobile banking customers, the Group operates the UK’s largest digital bank, and now meets over 60 per cent of customers’ banking needs digitally.
Continued successful delivery of the Group’s strategy enabling a significant reduction in the government shareholding to less than 5 per cent. UKFI no longer the Group’s largest shareholder, with £18.5 billion now having been returned to the UK taxpayer at a profit.
Management of operational risk strengthened through the development of a robust control framework for key risk categories.
Low risk culture and effective controls reflected in very low level of financial losses following EU Referendum result and other periods of market volatility.
Long-term awards made in March 2014 vesting for the period ended on 31 December 2016 (audited) Awards (in the form of conditional rights to free shares) in 2014 were made over shares with a value of 300 per cent of reference salary for the GCE and 275 per cent of salary for the CFO and CRO.
Actual: 0.46 10% Net promotor score 3rd place 1st place 10% Actual: 1st place
Loss of office payments and payments within the reporting year to past Directors (audited) There were no payments for the loss of office or any other payments made to former Directors during 2016.
Carolyn Fairbairn (retired October 2015) – 88 – – – 88 1 Car allowance.
Historical total shareholder return (TSR) performance The chart below shows the historical TSR of Lloyds Banking Group plc compared with the FTSE 100 as required by the regulations, rebased as at 31 December 2008. The FTSE 100 index has been chosen as it is a widely recognised equity index of which Lloyds Banking Group plc has been a constituent throughout this period.
Outstanding share awards Directors’ interests (audited) Shareholding guidelines Executive Directors were required to build up a holding in Lloyds Banking Group plc shares of value equal to 150 per cent of base salary (200 per cent for the GCE) within three years from the later of 1 January 2012 or their date of joining the Board. Following the introduction of the fixed share award in 2014, the gross annual value of this award was added to salary to determine the personal shareholding requirement.
In order to provide greater transparency in the measurement of the shareholding requirements, from 1 January 2017 the measure is to be focused on base salary only. There will be a consequent increase in the percentage required as a multiple of salary; however the number of shares required to be held will remain approximately the same. The new requirements are 350 per cent of base salary for the GCE and 250 per cent of base salary for the other Executive Directors.
2 Awards subject to performance under the LTIP had an expected value of 50 per cent of face value at grant (in line with the Remuneration Policy). Values are based on the 31 December 2016 closing price of 62.51 pence. Full face value of awards are £22,734,988 for António Horta-Osório, £12,242,610 for George Culmer and £9,381,538 for Juan Colombás. 3 Shareholdings held by António Horta-Osório and Deborah McWhinney are either wholly or partially in the form of ADRs. 4 Shares held as at date of retirement.
As a result of the above shareholdings, the position for each Executive Director is as follows: 2016 Shareholding requirement Current shareholding
Breakdown of shares interests and interests in share options (audited) Exercise periods
16/03/2016 173,707 Fixed Share Award 18/03/2016 8,256 Salary for shares 18/04/2016 2,803 Salary for shares 16/05/2016 1,437,096 Release of 2012 Deferred Bonus 16/05/2016 2,873 Salary for shares 17/06/2016 2,920 Salary for shares 17/06/2016 184,317 Fixed Share Award 28/06/2016 100,000 Share purchase 18/07/2016 3,377 Salary for shares 17/08/2016 3,482 Salary for shares 19/09/2016 3,330 Salary for shares 19/09/2016 210,206 Fixed Share Award 18/10/2016 3,549 Salary for shares 16/11/2016 3,069 Salary for shares 14/12/2016 2,994 Salary for shares 14/12/2016 189,000 Fixed Share Award
16/03/2016 97,276 Fixed Share Award 19/05/2016 210,244 Dividend Reinvestment 17/06/2016 103,218 Fixed Share Award 30/06/2016 50,000 Share purchase 19/09/2016 295,534 Release of 2013 Deferred Bonus 19/09/2016 117,715 Fixed Share Award 28/09/2016 113,779 Dividend Reinvestment 14/12/2016 105,840 Fixed Share Award
Lord Blackwell 50,000 05/05/2016 50,000 Share purchase 100,000 Alan Dickinson 100,000 29/06/2016 100,000 Share purchase 200,000 Anita Frew 300,000 29/06/2016 150,000 Share purchase 450,000 Simon Henry 100,000 30/06/2016 100,000 Share purchase 200,000 Dyfrig John3 27,385 – – – 27,385 Nick Luff 300,000 29/06/2016 100,000 Share purchase 400,000 Deborah McWhinney4 200,000 29/06/2016 50,000 Share purchase 250,000 Nick Prettejohn – 26/02/2016 69,280 Share purchase 69,280 Stuart Sinclair – – – – – Anthony Watson 476,357 29/06/2016 100,000 Share purchase 576,357 Sara Weller 200,000 04/05/2016 29/06/2016
Variable 1 Includes members of the Group Executive Committee and Senior Executive level colleagues. 2 Values shown reflect awards for which the performance period ended on 31 December 2016, including the 2014 LTIP and 2014 Commercial Banking Transformation Plan. Dividend equivalents are included where applicable. 3 Pension costs based on a percentage of salary according to level.
The Directors who served on the Committee during the year and their attendance at Committee meetings is set out in the table below.
The Committee appoints independent consultants to provide advice on specific matters according to their particular expertise. In May 2016, the Committee conducted a review of their independent advisers and appointed Kepler to advise the Committee following a competitive tendering process. Kepler has voluntarily signed up to the Remuneration Consultants’ Code of Conduct and is judged by the Committee to be independent. Kepler is not connected with the Group. Kepler’s fees for services to the Committee in 2016 were on a time and materials basis and amounted to £175,400. Kepler did not provide any other services to the Group. Mercer provides unrelated advice regarding pensions and investments to the Group.
This full risk management section provides a more in-depth picture of how risk is managed within the Group, detailing the Group’s emerging risks, approach to stress testing, risk governance, committee structure, appetite for risk (pages 116 to 122) and a full analysis of the primary risk drivers (pages 123 to 169) – the framework by which risks are identified, managed, mitigated and monitored.
Risk appetite Risk appetite is defined as ‘the amount and type of risk that the Group is prepared to seek, accept or tolerate.’
The Board Risk Appetite is aligned to the Risk Appetite Framework, and in turn the Risk Management Framework and Group Risk Principles.
– Market risk – 3.1 – – – – 3.1 1 Central Items include assets held outside the main operating divisions, including exposures relating to Group Corporate Treasury which holds the Group's liquidity portfolio, and Group Operations.
4 Threshold is presented on a fully loaded CRD IV basis. Threshold risk-weighted assets reflect the element of significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from CET1 capital. Significant investments primarily arise from the investment in the Group’s Insurance business.
– We continue to embed the strategic conduct agenda across all areas of the Group ensuring that the customer is at the heart of our business planning, whilst working closely with regulatory authorities and industry bodies to ensure that the Group can identify and respond to the evolving regulatory and legal landscape. – Programmes in place to deliver regulatory and legal change requirements.
Resolution: Plans are in place to deliver on bail-in-able debt (MREL) for the Group by 1 January 2022 (interim target 1 January 2020); uncertainty surrounds investor appetite/pricing as many banks will approach the same investor base over a similar period.
The Group uses scenario stress testing for: Risk identification: – To understand key vulnerabilities of the Group under adverse economic conditions.
The engagement of all required Risk and Finance areas is built into the preparation process, so that the appropriate analysis of each risk driver’s impact upon the business plans is understood and documented. The methodologies and modelling approach used for stress testing ensure that a clear link is shown between the macroeconomic scenarios, the business drivers for each area and the resultant stress testing outputs. All material assumptions used in modelling are documented and justified, with a clearly communicated review and sign-off process. Modelling is supported by expert judgement and is subject to the Group Model Governance Policy.
Governance Clear accountabilities and responsibilities for stress testing are assigned to senior management and the Risk and Finance functions throughout the Group. This is formalised through the Group Business Planning and Stress Testing Policy and Procedure, which are reviewed at least annually.
– The Policy framework is founded on Board-approved key principles for the overall management of risk in the organisation, which are aligned with Group strategy and risk appetite and based on a current and comprehensive risk profile that identifies all material risks to the organisation. The principles are underpinned by a hierarchy of policies which define mandatory requirements for risk management and control which are consistently implemented across the Group. – The risk committee governance framework is outlined below.
– Business lines (first line) have primary responsibility for risk decisions, identifying, measuring, monitoring and controlling risks within their areas of accountability. They are required to establish effective governance, and control frameworks for their business to be compliant with Group Policy requirements, to maintain appropriate risk management skills, mechanisms and toolkits, and to act within Group risk appetite parameters set and approved by the Board. – Risk Division (second line) is a centralised function providing oversight and independent constructive challenge to the effectiveness of risk decisions taken by business management, providing proactive advice and guidance, reviewing challenging and reporting on the risk profile of the Group and ensuring that mitigating actions are appropriate. – Group Audit (third line) provides independent and objective assurance designed to add value and improve the organisation’s operations. It helps the Group accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. Group Audit provides independent assurance to the Audit Committee and the Board that risks within the Group are recognised, monitored and managed within acceptable parameters. Group Audit is fully independent of the business and the Risk Division, and seeks to ensure objective challenge to the effectiveness of the risk governance framework.
Risk Division, headed by the Chief Risk Officer, consists of eight Risk Directors and their specialist teams. These teams provide oversight and independent challenge to business management and support senior management and the Board with independent reporting on risks and opportunities. Risk Directors, responsible for each risk type, meet on a regular basis under the chairmanship of the Chief Risk Officer to review and challenge the risk profile of the Group and to ensure that mitigating actions are appropriate.
RISK GOVERNANCE The risk governance structure below is integral to effective risk management across the Group. Risk Division is appropriately represented on key committees to ensure that risk management is discussed in these meetings. This structure outlines the flow and escalation of risk information and reporting from business areas and Risk Division to GEC and Board. Conversely, strategic direction and guidance is cascaded down from the Board and GEC.
Risk Division Committees and Governance Credit Risk – Executive Credit Approval Committee – Commercial Banking Credit Risk
Provides a Group-wide perspective on the progress of Group’s, Divisions’ and Functions’ implementation of initiatives which enhance the delivery of customer outcomes and customer trust, and set and promote the appropriate tone from the top to fulfil the Group’s vision to become the best bank for customers and Help Britain Prosper.
Conduct Review Committee Provides oversight and challenge in connection with the Group’s engagement with conduct review matters as agreed with the Group Chief Executive.
Recommends and implements the strategy and plans to deliver the Group’s aspiration to be a leader in responsible business as part of the objective of helping Britain prosper.
Group Capital Risk Committee Provides oversight of capital matters within the Group including the Group’s capital position, Pillar 2 requirements, regulatory reform and accounting developments specific to capital, and reviews regulatory submissions including the ICAAP and Recovery Plan prior to submission to GFRC.
The Group considers both reputational and financial impact in the course of managing all its risks and therefore does not classify reputational impact as a separate risk driver.
CREDIT RISK Definition Credit Risk is defined as the risk that parties with whom the Group has contracted fail to meet their financial obligations (both on or off balance sheet).
Exposures The principal sources of credit risk within the Group arise from loans and advances, contingent liabilities, commitments, debt securities and derivatives to customers, financial institutions and sovereigns. The credit risk exposures of the Group are set out in note 52 on page 261. Credit risk exposures are categorised as ‘retail’, arising primarily in the Retail, Consumer Finance and Run-off divisions, and some small and medium sized enterprises (SMEs) and ‘corporate’ (including larger SMEs, corporates, banks, financial institutions and sovereigns) arising primarily in the Commercial Banking, Run-off and Insurance Divisions and Group Corporate Treasury (GCT).
For regulatory capital purposes the Group’s rating systems assess probability of default and if appropriate, exposure at default and loss given default, in order to derive Risk Weighted Assets (RWAs) and regulatory Expected Loss (EL). If not appropriate, regulatory prescribed exposure at default and loss given default values are used in order to derive RWAs and EL.
Stress testing and scenario analysis: The Group’s credit portfolios are also subjected to regular stress testing, with stress scenario assessments run at various levels of the organisation. Exercises focused on individual Divisions and portfolios are performed in addition to the Group led and regulatory stress tests. For further information on the stress testing process, methodology and governance refer to page 119.
Frequent and robust credit risk oversight and assurance: Undertaken by independent Credit Risk Oversight functions operating within Retail and Consumer Credit Risk and Commercial Banking Risk which are part of the Group’s second line of defence. Their primary objective is to provide reasonable and independent oversight that credit risk is being managed with appropriate and effective controls.
Group Audit performs the third line of credit risk assurance. A specialist team within Group Audit, comprising experienced credit professionals, is in place to carry out independent risk based internal control audits, providing an assessment of the effectiveness of internal credit controls, across the full credit lifecycle including the raising of impairment provisions. These audits cover the diverse range of the Group’s businesses and activities, and include both ‘standard’ risk based audits and reviews as well as agreed upon procedures to respond to any emerging risks or regulatory requirement. The work of Group Audit therefore continues to provide executive, senior management and Board Audit Committee with assurance on effectiveness of credit risk controls, as well as appropriateness of impairments.
For UK Secured, the Group’s policy permits owner occupier applications with a Loan to Value (LTV) maximum of 95 per cent. Applications with an LTV above 90 per cent are subject to enhanced underwriting criteria, including higher scorecard cut-offs. Loans above £500,000 are subject to a range of further controls, including reduced maximum income multiples, and increased case review via manual underwriting.
Daily settlement limits: Settlement risk arises in any situation where a payment in cash, securities or equities is made in the expectation of a corresponding receipt in cash, securities or equities. Daily settlement limits are established for each relevant counterparty to cover the aggregate of all settlement risk arising from the Group’s market transactions on any single day.
Collateral The principal collateral types for loans and advances, contingent liabilities and derivatives with commercial and bank counterparties/customers are: – properties; – charges over business assets such as premises, inventory and accounts receivables; – financial instruments such as debt securities; – vehicles; – cash; and – guarantees received from third parties.
Collateral values are assessed at the time of loan origination. The Group requires collateral to always be realistically valued by an appropriately qualified source, independent of both the credit decision process and the customer, at the time of borrowing. In certain circumstances, for Retail residential mortgages this may include the use of automated valuation models based on market data, subject to accuracy criteria and loan to value limits. Collateral values are reviewed on a regular basis which will vary according to the type of lending, collateral involved and account performance. Such reviews are undertaken to confirm that the value recorded in the Bank’s systems remains appropriate and whether revaluation is required, considering for example, account performance, market conditions and any information available that may indicate that the value of the collateral has materially declined. In such instances, the Group may seek additional collateral. For Retail residential mortgages, the Group adjusts open market property values to take account of the costs of realisation and any discount associated with the realisation of the collateral when estimating credit losses.
Master netting agreements It is credit policy that a Group approved Master Netting Agreement must be used for all transactions and must be in place prior to trading. Any exceptions must be approved by the Credit Sanctioner. Although master netting agreements do not generally result in an offset of balance sheet assets and liabilities for accounting purposes, as transactions are usually settled on a gross basis, within relevant jurisdictions and for appropriate counterparty types they do reduce the credit risk to the extent that, if an event of default occurs, all trades with the counterparty may be terminated and settled on a net basis. The Group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period, since this is the net position of all trades under the master netting agreement.
Monitoring In conjunction with Risk Division, businesses identify and define portfolios of credit and related risk exposures and the key benchmarks, behaviours and characteristics by which those portfolios are managed and monitored in terms of credit risk exposure. This entails the production and analysis of regular portfolio monitoring reports for review by senior management. Risk Division in turn produces an aggregated review of credit risk throughout the Group, including reports on significant credit exposures, which are presented to the Divisional Risk Committees, Group Risk Committee and the Board Risk Committee.
For both categories, all decisions regarding an individual’s eligibility and any amounts payable under the scheme rest solely with the government. Payments are made directly to the Group by the Department of Work and Pensions. The Group estimates that customers representing approximately £1.8 billion of its mortgage exposures are receiving this benefit, including those who are also receiving other treatments for financial difficulty.
With the exception of small exposures in SME, BSU case officers manage stressed and doubtful assets in Commercial Banking and are part of the independent Risk Division. They are highly experienced and operate in a closely controlled and monitored environment, including regular oversight and close scrutiny by senior management. Distressed run-off assets are managed to the same standards by Client Asset Management (CAM).
A detailed assessment is undertaken for cases in BSU to assist in reducing and minimising risk exposure and to also highlight potential strategic options. A range of information is required to fully appraise and understand the customer’s business and cashflow (and therefore debt serviceability) and may involve the Group, in addition to using its own internal sector experts, engaging professional advisers to perform asset valuations, strategic reviews and where applicable, independent business reviews. The assessment may also involve: – critically assessing a customer’s ability to effectively manage the business in a distressed situation where a turnaround needs to be delivered; – analysis of market sector factors, i.e. products, customers, suppliers, pricing and margin issues; – performance review of operational areas that should be considered in terms of current effectiveness and efficiency and scope for improvements; – financial analysis to model plans and factor in potential sensitivities, vulnerabilities and upsides; and – determining the most appropriate corporate and capital structure suitable for the work-out strategy concerned.
The level of Commercial Banking Division BSU gross lending to customers reduced from £4.2 billion to £3.4 billion between 31 December 2015 and 31 December 2016. The net reduction of £0.8 billion in BSU managed lending in Commercial Banking was driven by returns to mainstream, disposals, write-offs and repayments.
Whilst the material portfolios have been reviewed for forbearance, some non-retail loans and advances in Commercial Banking and Run-off Divisions have not been reviewed on the basis that the level of unimpaired forbearance is relatively immaterial, or because the concept of forbearance is not relevant. These include Lloyds Bank Commercial Finance Ltd and The Agricultural Mortgage Corporation Plc.
Forbearance identification, classification and measurement All non-retail loans and advances on the watchlist are further categorised depending on the current and expected credit risk attaching to the customer and the transaction. All watchlist names are reviewed by the business and independent Risk function regularly and the classification is updated if required.
Classified as impaired during the year 1,947 671 425 111 3,154 3,401
Impact of disposal of business and asset sales – (33) (49) (410) (492) (3,403)
3 Includes £6.7 billion (December 2015: £5.7 billion) of lower risk loans sold by Commercial Banking and Retail to Insurance to back annuitant liabilities.
4 The fair value adjustments relating to loans and advances were those required to reflect the HBOS assets in the Group’s consolidated financial records at their fair value and took into account both the expected losses and market liquidity at the date of acquisition. The fair value unwind in respect of impairment losses incurred was £70 million for the year ended 31 December 2016 (31 December 2015: £97 million). The fair value unwind in respect of loans and advances is expected to continue to decrease in future years and will reduce to zero over time.
Retail – Asset quality remains strong across all portfolios, with stable new business quality and fewer loans entering arrears. – The impairment charge increased by £24 million to £373 million for 2016, an increase of 7 per cent compared to 2015. – The Overdrafts impairment charge increased by £12 million to £241 million, driven by a change to collections entry criteria. – The Secured impairment charge increased by £6 million to £104 million, reflecting a continued prudent approach to provisioning. – The Retail Business Banking impairment charge increased by £6 million to £27 million, following a revised modelling approach and an increase in lending balances. – Impairment provisions as a percentage of impaired loans decreased to 38.2 per cent from 39.2 per cent at the end of 2015.
1 Value of loans represents total gross book value of mortgages more than three months in arrears.
Treatment strategies are in place to help customers anticipate and plan for repayment of capital at maturity and support those who may have difficulty in repaying the principal amount. A dedicated specialist team supports customers who have passed their contractual maturity date and are unable to fully repay the principal. A range of treatments are offered such as full (or part) conversion to capital repayment, and extension of term to match the maturity dates of any associated repayment vehicles.
Overdrafts forborne loans and advances have reduced by £9 million in 2016 to £78 million. At 31 December 2016, Overdrafts loans and advances currently or recently subject to forbearance were 4.0 per cent (31 December 2015: 4.3 per cent) of total overdrafts loans and advances.
Further analysis of the Retail forborne loan balances is set out below: Table 1.14: UK Retail forborne loans and advances (audited)
3 December 2016 <£5m exposures include £9.4 billion within SME which has an LTV profile broadly similar to the >£5m exposures.
Impairment provisions as % of loans and advances which are forborne £m 20151 £m
Unimpaired loans and advances Unimpaired forborne loans and advances were £466 million at 31 December 2016 (31 December 2015: £986 million).
2 Impairment provisions as a percentage of impaired loans are calculated excluding loans in recoveries for Cards (31 December 2016: £115 million; 31 December 2015: £179 million) and Loans (31 December 2016: £164 million; 31 December 2015: £245 million).
The movements in forborne loans and advances during the year were: Table 1.26: Movement in Consumer Finance forborne loans and advances (audited)
Run-off Ireland retail lending At 31 December 2016, £156 million or 3.5 per cent (31 December 2015: £169 million or 4.2 per cent) of Irish retail secured loans and advances were subject to current or recent forbearance. Of this amount, £19 million (31 December 2015: £26 million) were impaired.
Unimpaired forborne loans and advances were £3 million at 31 December 2016 (31 December 2015: £9 million).
Classified as impaired during the year: Transferred to unimpaired: Exposures >£5m but still reported as forborne during the year – (13)
The Group Financial Stability Forum (GFSF) monitors developments within the Eurozone, carries out stress testing through detailed scenario analysis and completes appropriate due diligence on the Group’s exposures. The Group has pre-determined action plans that would be executed in certain scenarios which set out governance requirements and responsibilities for the key actions which would be carried out and cover risk areas such as payments, liquidity and capital, communications, suppliers and systems, legal, credit, delivery channels and products, employees and the impact on customers.
2 Ireland Retail exposures have increased by c.£0.4 billion as a result of the depreciation of sterling against the Euro c.£0.7 billion offset by asset reductions primarily driven by repayments of c.£0.3 billion.
At 31 December 2015 1 Excludes reverse repurchase exposure to Institutional funds secured by UK gilts of £2,679 million (2015: £1,955 million) on a gross basis.
Environmental risk management The Group ensures appropriate management of the environmental impact of its lending activities. The Group-wide credit risk principles require all credit risk to be incurred with due regard to environmental legislation and the Group’s Code of Business Responsibility.
Balance sheet linkages The information provided in table 1.33 (below) aims to facilitate the understanding of linkages between banking, trading, and insurance balance sheet items and the positions disclosed in the Group’s market risk disclosures.
Cash and balances at central banks 47,452 – 47,452 – Interest rate
Loans and receivables: Loans and advances to banks 26,902 – 5,583 21,319 Interest rate
The defined benefit pension schemes’ assets and liabilities are included under Other assets and Other liabilities in this table and note 36 on page 222 provides further information.
The Group’s trading book assets and liabilities are originated by Financial Markets within the Commercial Banking division. Within the Group’s balance sheet these fall under the trading assets and liabilities and derivative financial instruments. The assets and liabilities are classified as trading books if they have been acquired or incurred for the purpose of selling or repurchasing in the near future. These consist of government, corporate and financial institution bonds and loans/deposits and repos. Further information on these activities can be found under the Trading portfolios section on page 151.
Measurement Interest rate risk exposure is monitored monthly using, primarily: (i) Market value sensitivity: this methodology considers all repricing mismatches (behaviourally adjusted where appropriate) in the current balance sheet and calculates the change in market value that would result from an instantaneous 25, 100 and 200 basis points parallel rise or fall in the yield curve (subject to an appropriate floor).
Basis risk, foreign exchange, equity, and credit spread risks are measured primarily through scenario analysis by assessing the impact on profit before tax over a 12 month horizon arising from a change in market rates, and reported within the Board Risk Appetite on a monthly basis. Supplementary measures such as sensitivity and exposure limits are applied where they provide greater insight into risk positions. Frequency of reporting supplementary measures varies from daily to quarterly appropriate to each risk type.
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. Consistent with the Group’s strategy to deliver stable returns, GALCO seeks to minimise large reinvestment risk, and to smooth earnings over a range of investment tenors. The amount and duration of the hedging activity is reviewed regularly by GALCO, with current maximum duration of around four years.
Defined benefit pension schemes Exposures The Group’s defined benefit pension schemes are exposed to significant risks from their assets and liabilities. The liability discount rate provides exposure to interest rate risk and credit spread risk, which are partially offset by fixed interest assets (such as gilts and corporate bonds) and swaps. Equity and alternative asset risk arises from direct asset holdings.
Table 1.38 demonstrates the impact of the Group’s UK Recession stress scenario (with no diversification benefit) on Insurance’s portfolio; this is the most onerous scenario for Insurance out of the Group scenarios. The amounts include movements in assets, liabilities and the value of in-force business in respect of insurance contracts and participating investment contracts.
1 Restated. The most onerous scenario has changed to UK Recession from Fiscal Solvency.
Trading portfolios Exposures The Group’s trading activity is small relative to its peers and the Group does not have a programme of proprietary trading activities. The Group’s trading activity is undertaken solely to meet the financial requirements of commercial and retail customers for foreign exchange, credit and interest rate products. These activities support customer flow and market making activities.
Measurement Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturity. Note 52 on page 261 sets out an analysis of assets and liabilities by relevant maturity grouping. In order to reflect more accurately the expected behaviour of the Group’s assets and liabilities, measurement and modelling of the behavioural aspects of each is constructed. Divisional teams form a view of customer behaviour based on quantitative and qualitative analysis.
To assist in managing the balance sheet the Group operates a Liquidity Transfer Pricing (LTP) process which: allocates relevant interest expenses from the centre to the Group’s Banking businesses within the internal management accounts in a manner consistent with the Group Funding and Liquidity Policy; helps drive the correct inputs to customer pricing and supports the overall Group balance sheet strategy; and is consistent with regulatory requirements. LTP makes extensive use of behavioural maturity profiles, taking account of expected customer loan prepayments and stability of customer deposits, modelled on data gathered over several years.
Monitoring Liquidity is actively monitored at Group level. Daily monitoring and control processes are in place to address internal and regulatory liquidity requirements. Liquidity policies and procedures are subject to independent internal oversight by Risk.
Funding and liquidity management in 2016 During 2016 the Group has maintained its strong funding and liquidity position, with a loan to deposit ratio of 108.9 per cent.
Wholesale funding has decreased by £9.1 billion to £110.8 billion as excess liquidity is managed down; the amount with a residual maturity less than one year fell to £35.1 billion (£37.9 billion at 31 December 2015). The Group’s term funding ratio (wholesale funding with a remaining life of over one year as a percentage of total wholesale funding) is unchanged at 68 per cent. During 2016 the Group’s term issuance costs have remained broadly in line with other post-crisis years and significantly lower than levels seen during the economic downturn. The Group’s overall cost of wholesale funding has reduced as more expensive funding raised in previous years mature. The Group’s market capacity for term funding is considered across the planning horizon as part of the funding plan and the Group expects term funding requirements to remain stable.
8 The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
3 Consists of medium-term notes (£2.5 billion) and subordinated liabilities (£4.9 billion).
Held-to-maturity investments – – – – – 19,808 – – 19,808 19,808 1 The following assets are classified as unencumbered – cannot be used: assets held within the Group’s Insurance businesses which are generally held to either back liabilities to policyholders or to support the solvency of the Insurance subsidiaries; assets held within consolidated limited liability partnerships which provide security for the Group’s obligations to its pension schemes; assets pledged to facilitate the use of intra-day payment and settlement systems; and reverse repos and derivatives balance sheet ledger items.
2 Other comprises: items in the course of collection from banks, investment properties, goodwill, value in-force business, other tangible assets, tangible fixed assets, current tax recoverable, deferred tax assets, retirement benefit assets and other assets.
As part of the capital planning process, forecast capital positions are subjected to extensive stress analyses to determine the adequacy of the Group’s capital resources against the minimum requirements, including ICG. The PRA uses the outputs from some of these stress analyses as one of the inputs that inform the setting of a bank-specific capital buffer for the Group, known as the PRA Buffer. The PRA Buffer also takes into account the CCB, CCYB and any sectoral capital requirements that already apply to the Group. The PRA requires the PRA Buffer to remain confidential between the Group and the PRA.
The Group is able to accumulate additional capital through the retention of profits over time, which can be enhanced through cutting costs and reducing or cancelling dividend payments, by raising new equity via, for example, a rights issue or debt exchange and by raising additional tier 1 or tier 2 capital through issuing tier 1 instruments or subordinated liabilities. The cost and availability of additional capital is dependent upon market conditions and perceptions at the time. The Group is also able to manage the demand for capital through management actions including adjusting its lending strategy, risk hedging strategies and through business disposals.
During 2016 the Group has continued to simplify the Group’s internal capital structure and to ensure that profits generated by subsidiary entities can be more easily remitted to the Company. This included the court approved capital reduction by Lloyds Bank plc.
Analysis of capital position During 2016 the Group continued to strengthen its capital position with a fully loaded CET1 ratio, after accruing for foreseeable dividends, of 13.6 per cent and 13.8 per cent on a pro forma basis upon recognition of the dividend paid by the Insurance business in February 2017 in relation to its 2016 earnings (31 December 2015: 13.0 per cent pro forma). The accrual for foreseeable dividends includes both the recommended full year ordinary dividend of 2.55 pence per ordinary share and a special dividend of 0.5 pence per ordinary share.
The leverage ratio, after accruing for foreseeable dividends, increased from 4.8 per cent to 4.9 per cent (5.0 per cent on a pro forma basis), largely reflecting the increase in tier 1 capital.
The table below summarises the consolidated capital position of the Group. The Group’s Pillar 3 Report will provide a comprehensive analysis of the own funds of the Group.
Excess of expected losses over impairment provisions and value adjustments (602) (270) (602) (270)
1 For regulatory capital purposes, the Group’s Insurance business is deconsolidated and replaced by the amount of the Group’s investment in the business. A part of this amount is deducted from capital (shown as ‘significant investments’ in the table above) and the remaining amount is risk-weighted, forming part of threshold risk-weighted assets. The presentation of the deconsolidation of the Group’s insurance entities has been amended for 2016 with comparative figures restated accordingly.
Movement in treasury shares and employee share schemes 134 – – 134
Fully loaded risk-weighted assets 215,534 222,747 1 Threshold risk-weighted assets reflect the element of the significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from CET1 capital. Significant investments primarily arise from the investment in the Group’s Insurance business.
Movements in risk levels (Market risk only) – – – – 662 – 662
– Asset quality movements capture movements due to changes in borrower risk, including changes in the economic environment. Net reductions in credit risk-weighted assets of £3.1 billion primarily relate to model calibrations and a net change in credit quality, reflecting improvements in the economic climate, partly offset by increases in the valuation of centrally held strategic equity investments. – Foreign exchange movements reflect the depreciation of Sterling which has contributed to a £4.4 billion increase in credit risk-weighted assets.
During 2016, the Group was subject to the European Banking Authority’s Europe-wide stress test with the Group‘s results significantly above our minimum capital requirements. The concurrent UK stress test run by the Bank of England was also undertaken in 2016. As announced in November, the Group comfortably exceeded the capital thresholds set by the PRA and was not required to take any action as a result of this test.
Leverage ratio The table on the next page summarises the component parts of the Group’s leverage ratio. Further analysis will be provided in the Group’s Pillar 3 Report.
3 The average leverage ratio is based on the average of the month end tier 1 capital and exposure measures over the quarter (30 September 2016 to 31 December 2016). The average of 4.9 per cent compares to 4.8 per cent at the start and 4.9 per cent at the end of the quarter.
4 The average leverage ratio exposure measure is based on the average of the month end exposure measures over the quarter (30 September 2016 to 31 December 2016).
G-SIB indicators Although the Group is not currently classified as a Global Systemically Important Bank (G-SIB), by virtue of the Group’s leverage exposure measure exceeding €200 billion the Group is required to report G-SIB indicator metrics to the PRA. The Group’s indicator metrics used within the 2016 Basel G-SIBs annual exercise will be disclosed from April 2017, and the results are expected to be made available by the Basel Committee later this year.
FINANCIAL REPORTING RISK Definition Financial reporting risk is defined as the risk that the Group suffers reputational damage, loss of investor confidence and/or financial loss arising from the adoption of inappropriate accounting policies, ineffective controls over business or finance processes impacting financial, prudential regulatory, and tax reporting, failure to manage the associated risks of changes in taxation rates, law, corporate ownership or structure and the failure to disclose timely and appropriate information in accordance with regulatory requirements.
The Group also has in place an assurance process to support its prudential regulatory reporting and monitoring activities designed to identify and review tax exposures on a regular basis. There is ongoing monitoring to assess the impact of emerging regulation and legislation on financial, prudential regulatory and tax reporting.
Model Risk appetite considers the performance of the Group’s most material models.
As part of the RMF, the performance of models is regularly monitored to ensure they remain fit-for-purpose.
Materiality We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement account balances and disclosures and in evaluating the effect of misstatements, both individually and on the financial statements as a whole.
In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed over the reporting units by us, as the Group engagement team, or auditors within PwC UK and from other PwC network firms operating under our instruction (‘component auditors’). Almost all of our audit work is undertaken by PwC UK component auditors.
Where the work was performed by component auditors, we determined the level of involvement we needed to have in their audit work to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. This included regular communication with the component auditors throughout the audit, the issuance of instructions, a review of the results of their work on the areas of focus and formal clearance meetings.
Certain account balances (e.g. cash and balances at central banks) were audited by the Group engagement team.
Areas of focus We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
Refer to page 72 (Audit Committee Report), page 186 (Accounting Policies) and page 210 (Note 21 and Critical Accounting Estimates and Judgements).
The determination of impairment provisions remains a highly subjective and judgemental area. Furthermore, the Group is subject to significant regulatory scrutiny with respect to provisioning levels.
We understood and tested key controls and focused on: – the identification of impairment events and classification of forborne loans; – the governance over the impairment processes, including controls over unauthorised modifications to the models and the re-assessment by management that impairment models are still calibrated in a way which is appropriate for the impairment risks in the Group’s loan portfolios; – the transfer of data between underlying source systems and the impairment models that the Group operates; and
We critically assessed the criteria for determining whether an impairment event had occurred and therefore whether there was a requirement to calculate an impairment provision. We tested a sample of performing loans with characteristics that might imply an impairment indicator existed (e.g. a customer experiencing financial difficulty or in breach of covenant) as well as an additional sample of haphazardly selected performing loans to assess whether these loans had any impairment indicators that management had not identified.
Independent auditors’ report to the members of Lloyds Banking Group plc continued Area of focus How our audit addressed the area of focus
Refer to page 72 (Audit Committee Report), page 186 (Accounting Policies) and page 230 (Note 38 and Critical Accounting Estimates and Judgements).
Significant provisions have been made in respect of conduct matters in recent years, reflecting customer redress payments, operational costs and regulatory fines.
Given the number and volume of products sold by the Group historically, and the continued regulatory and public focus on the banking industry, there is a continuing risk that new conduct issues will emerge. Therefore, there is a financial reporting risk that such emerging risks and exposures are not appropriately identified and provided for.
We understood and tested the key controls and management’s processes for: – identifying emerging conduct risk exposures and assessing whether provisions or disclosures were necessary; and
We understood customer complaints received, and assessed the trends. We used this analysis to understand whether there were indicators of more systemic issues being present for which provisions or disclosures may have needed to be made in the financial statements.
For significant provisions made, we understood and challenged the provisioning methodologies and underlying assumptions used by management. For example, we challenged the basis that management used for forecasting the number of PPI complaints that will be received in the future. We also considered regulatory developments and management’s interactions with regulators.
Some of the economic and non-economic actuarial assumptions used in valuing insurance contracts are highly judgemental, in particular persistency (the retention of policies over time), longevity (the expectation of how long an annuity policyholder will live and how that might change over time), expenses (future expenses incurred to maintain existing policies to maturity), credit risk and illiquidity premium (adjustments made to the discount rate).
Small changes in each of these assumptions can result in material impacts to the valuation of insurance contract liabilities, the value of inforce assets and the related movements in the income statement.
Refer to page 72 (Audit Committee Report), page 186 (Accounting Policies) and page 226 (Note 36 and Critical Accounting Estimates and Judgements).
The valuations of the retirement benefit schemes are calculated with reference to a number of actuarial assumptions including discount rate, rate of inflation and mortality rates.
Because of the size of the schemes, small changes in these assumptions can have a significant impact on the financial statements.
The Group enters into derivative contracts in order to manage and hedge risks such as interest rate and foreign exchange rate risk. These arrangements create accounting mismatches which are addressed through hedge accounting, predominantly fair value hedges or cash flow hedges.
We assessed whether the forecast profits were appropriate by challenging both the underlying and economic assumptions, focusing on those directly impacting the adjusted profit figures, for example interest rates and gross domestic product. We used our independent benchmarking data to benchmark a number of the economic assumptions to external data sources where possible, and also assessed previous forecasts for evidence of bias.
We found that the both the utilisation period and the carrying value of the deferred tax asset together with the related disclosures are reasonable.
Refer to page 72 (Audit Committee Report), and page 242 (Note 48).
We found management’s judgements in respect of the Group’s positions on uncertain tax items to be reasonable.
We reviewed the accounting papers produced for each significant transaction in the year including any transaction documents or contracts to evaluate and assess the impact of the transaction on the Group.
While there is an ongoing programme of activities to address such control matters, their exercise during 2016 meant there was an increased risk that the data and reports from the affected systems were not reliable.
On the basis of our additional audit testing we were able to place reliance on the data and reports from in-scope applications.
In drawing our conclusion, we critically assessed the going concern assessment undertaken by management and approved by the Board or directors. As part of our assessment we have: – assessed and challenged the appropriateness of the stress scenarios used and their impact on the Group’s and parent company's capital and liquidity positions; – understood and challenged key economic and other assumptions used in both the capital and liquidity plan and the Group’s operating plan; and – substantiated the Group’s and parent company's unencumbered collateral position and potential to access central bank liquidity facilities.
OTHER REQUIRED REPORTING Consistency of other information and compliance with applicable requirements Companies Act 2006 reporting In our opinion, based on the work undertaken in the course of the audit: – the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and – the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
The directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency or liquidity of the Group Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to draw attention to in relation to: – the directors’ confirmation on page 83 of the Annual Report, in accordance with provision C.2.1 of the Code, that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity.
Movement in cash flow hedging reserve: Effective portion of changes in fair value taken to other comprehensive income 2,432 537 3,896
Other comprehensive income for the year, net of tax 1,574 (1,040) 3,278
Consolidated statement of changes in equity for the year ended 31 December
Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax – 1,197 – 1,197 – – 1,197
Further details of movements in the Group’s share capital, reserves and other equity instruments are provided in notes 40, 41, 42, 43 and 44.
Currency translation differences (tax: £nil) – (42) – (42) – – (42)
Cash and cash equivalents at end of year 53(D) 62,388 71,953 65,147
The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit operates as a venture capital business. These investments are designated at initial recognition at fair value through profit or loss. Otherwise, the Group’s investments in joint ventures and associates are accounted for by the equity method of accounting.
NOTE 2: ACCOUNTING POLICIES continued (F) Derivative financial instruments and hedge accounting Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS 39. All derivatives are recognised at their fair value. Derivatives are carried in the balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 49(3) (Financial instruments: Financial assets and liabilities carried at fair value) for details of valuation techniques and significant inputs to valuation models.
NOTE 2: ACCOUNTING POLICIES continued A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available security have been received or there is no realistic prospect of recovery and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses recorded in the income statement. For both secured and unsecured retail balances, the write-off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that forbearance is no longer appropriate. For commercial lending, a write-off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
The Group provides for potential tax liabilities that may arise on the basis of the amounts expected to be paid to tax authorities including open matters where Her Majesty’s Revenue and Customs (HMRC) adopt a different interpretation and application of tax law. Dependent on their complexity, provisions are based on management’s interpretation of the relevant tax legislation, precedents and guidance as well as external tax advice. The provision is the best estimate of the consideration expected to be required to settle the particular obligation taking into account management’s judgement of the relevant risks and uncertainties.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred tax is determined using tax rates that have been enacted or substantively enacted by the balance sheet date which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be utilised. Income tax payable on profits is recognised as an expense in the period in which those profits arise. The tax effects of losses available for carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. Deferred and current tax related to gains and losses on the fair value re‑measurement of available‑for‑sale investments and cash flow hedges, where these gains and losses are recognised in other comprehensive income, is also recognised in other comprehensive income. Such tax is subsequently transferred to the income statement together with the gain or loss.
– Insurance and participating investment contracts which are not unit-linked or in the Group’s with-profit funds A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognised. The liability is calculated by estimating the future cash flows over the duration of in-force policies and discounting them back to the valuation date allowing for probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life insurance and annuity benefits where future mortality is uncertain.
(N) Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other comprehensive income as qualifying cash flow or net investment hedges. Non-monetary assets that are measured at fair value are translated using the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non-monetary items held at fair value through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on available-for-sale non-monetary financial assets, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge.
The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty in these financial statements, which together are deemed critical to the Group’s results and financial position, are as follows: – Allowance for impairment losses on loans and receivables (note 21); – Valuation of assets and liabilities arising from insurance business (notes 24 and 32); – Defined benefit pension scheme obligations (note 36); – Recoverability of deferred tax assets (note 37); – Payment protection insurance and other regulatory provisions (note 38); and – Fair value of financial instruments (note 49).
Other income, net of insurance claims 1,053 1,987 1,338 1,755 (68) 6,065
Other segment items: Investments in joint ventures and associates at end of year 1 – 5 – 53 59 1 Net of profits on disposal of operating lease assets of £58 million.
Other segment items reflected in income statement above: Decrease in value of in-force business – – – (162) – (162)
Other segment items reflected in income statement above: Decrease in value of in-force business – – – (428) – (428)
Other income, net of insurance claims 7,993 121 (2,110) – 61 6,065 Total income, net of insurance claims 17,267 384 (212) – 61 17,500
6 Comprises the loss arising on the Group’s exchange and tender offers in respect of its ECNs in April 2014 (£1,362 million); market movements on the ECN embedded derivative (gain of £401 million); the effects of asset sales (gain of £138 million); volatile items (loss of £343 million); liability management (loss of £24 million); the past service pension credit of £710 million (which represented the curtailment credit of £843 million following the group’s decision to reduce the cap on pensionable pay partly offset by the cost of other changes to the pay, benefits and reward offered to employees); the amortisation of purchased intangibles (£336 million ); restructuring costs (£966 million); and TSB costs (£558 million); and the fair value unwind and other items (loss of £529 million).
Interest receivable on loans and receivables 2.87 2.98 3.12 15,627 16,693 18,254
Interest and similar expense: Deposits from banks, excluding liabilities under sale and repurchase transactions1 0.65 0.41 0.74 (68) (43) (86)
Liabilities under sale and repurchase agreements 0.46 0.57 2.61 (38) (34) (55)
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 2.70 per cent (2015: 2.76 per cent; 2014: 3.06 per cent).
Net income arising on assets held at fair value through profit or loss: Debt securities, loans and advances 4,771 451 4,805
Net income (expense) arising on liabilities held at fair value through profit or loss – debt securities in issue (154) 14 (75)
Change in insurance and participating investment contracts (note 32) (14,160) 2,898 (4,392)
Total operating expenses 12,277 15,387 13,885 1 On 11 March 2014 the Group announced a change to its defined benefit pension schemes, revising the existing cap on the increases in pensionable pay used in calculating the pension benefit, from 2 per cent to nil with effect from 2 April 2014. The effect of this change was to reduce the Group’s retirement benefit obligations recognised on the balance sheet by £843 million with a corresponding curtailment gain recognised in the income statement. This has been partly offset by a charge of £21 million following changes to pension arrangements for staff within the TSB business.
Performance-based compensation expense comprises: Awards made in respect of the year ended 31 December 312 280 324
NOTE 13: TAXATION (A) Analysis of tax charge for the year 2016 £m 2015 £m 2014 £m
Foreign tax: Current tax on profit for the year (20) (24) (39)
The Finance (No. 2) Act 2015 introduced an additional surcharge of 8 per cent on banking profits from 1 January 2016.
Tax credit on distributions to other equity holders 91 80 62 2016 million 2015 million 2014 million
NOTE 16: DERIVATIVE FINANCIAL INSTRUMENTS continued – Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency option gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of exchange on or before a specified future date. – Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make a specific payment should a negative credit event take place. The Group also used credit default swaps to securitise, in combination with external funding, £455 million of corporate and commercial banking loans at 31 December 2015; these arrangements were wound up during 2016. – 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.
Hedged forecast cash flows expected to occur: Hedged forecast cash flows affect profit or loss: There were no transactions for which cash flow hedge accounting had to be ceased in 2015 or 2016 as a result of the highly probable cash flows no longer being expected to occur.
Equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and other large individual value items. During 2015 and 2016 no contingent rentals in respect of finance leases were recognised in the income statement. There was no allowance for uncollectable finance lease receivables included in the allowance for impairment losses (2015: £nil).
NOTE 20: STRUCTURED ENTITIES The Group’s interests in structured entities are both consolidated and unconsolidated. Detail of the Group’s interests in consolidated structured entities are set out in: note 19 for securitisations and covered bond vehicles, note 36 for structured entities associated with the Group’s pension schemes, and below in part (A) and (B). Details of the Group’s interests in unconsolidated structured entities are included below in part (C).
NOTE 24: VALUE OF IN-FORCE BUSINESS Critical accounting estimates and judgements The value of in-force business asset (2016: £4,702 million; 2015: £4,219 million) represents the present value of future profits expected to arise from the portfolio of in-force life insurance and participating investment contracts. The valuation of this asset requires assumptions to be made about future economic and operating conditions which are inherently uncertain and changes could significantly affect the value attributed to this asset. The methodology used to value this asset and the key assumptions that have been made in determining the carrying value of the value of in-force business asset at 31 December 2016 are set out below.
Risk-free rate (financial options and guarantees)1 0.00 to 4.20 0.00 to 2.54
Balance sheet amount at 31 December 2015 4,361 1,342 3,170 4,106 12,979
Included in the amounts reported above are deposits of £219,106 million (2015: £230,110 million) which are protected under the UK Financial Services Compensation Scheme.
NOTE 32: LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS Insurance contract and participating investment contract liabilities are comprised as follows: Gross £m
(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. 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 (£194 million increase). – Change in expenses assumptions (£109 million decrease).
Change in provision for unearned premiums charged to income statement (57) 37
Net claims outstanding at 31 December 209 251 1 Of which an increase of £363 million (2015: £393 million) was in respect of current year claims and an increase of £3 million (2015: decrease of £23 million) was in respect of prior year claims.
4 This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued (ii) Amounts in the financial statements 2016 £m 2015 £m
Return on plan assets excluding amounts included in interest income 7,455 (879)
Debt instruments1: Fixed interest government bonds 5,797 – 5,797 4,841 – 4,841
Assumptions The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows: Discount rate 2.76 3.87
Life expectancy for member aged 60, on the valuation date: Life expectancy for member aged 60, 15 years after the valuation date: The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 at 31 December 2016 is assumed to live for, on average, 28.1 years for a male and 30.3 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years time at age 60.
NOTE 36: RETIREMENT BENEFIT OBLIGATIONS continued Effect of reasonably possible alternative assumptions
2 At 31 December 2016, the assumed discount rate is 2.76 per cent (2015: 3.87 per cent).
Benefits expected to be paid between 1 and 2 years 1,180 1,121
Benefits expected to be paid between 10 and 15 years 9,453 9,102
Benefits expected to be paid in more than 45 years 7,809 8,857
During the year ended 31 December 2016 the charge to the income statement in respect of defined contribution schemes was £268 million (2015: £233 million; 2014: £252 million), representing the contributions payable by the employer in accordance with each scheme’s rules.
The deferred tax asset is expected to be utilised over different time periods in each of the entities in which the losses arise. Under current UK tax law there is no expiry date for unused tax losses. Following the enactment of the Finance Acts in 2015 and 2016, there is a restriction imposed on the amount of banks’ profits that can be offset by certain carried forward tax losses for the purposes of calculating corporation tax liabilities. The additional restriction in 2016 has increased the period over which the Group expects to fully utilise its tax losses from 2025 to 2031.
NOTE 37: DEFERRED TAX continued The movement in the net deferred tax balance is as follows: 2016 £m 2015 £m
Income statement charge (note 13): Due to change in UK corporation tax rate and related impacts (201) (27)
Amount credited (charged) to equity: Post-retirement defined benefit scheme remeasurements 320 59
The provision is consistent with total expected reactive complaint volumes of 4.9 million (including complaints falling under the Plevin rules and guidance) in light of the FCA proposals reflected in the provision increase, which was equivalent to approximately 7,700 net complaints per week on average through to the proposed industry deadline of June 2019. Weekly complaint levels in the second half of 2016 have been approximately 8,300 versus approximately 8,600 in the first half, and are expected to vary significantly through to the proposed industry deadline.
The corporation tax changes enacted have resulted in a reduction in the Group’s net deferred tax asset at 31 December 2016 of £158 million, comprising a £201 million charge included in the income statement and a £43 million credit included in equity.
Other regulatory provisions Packaged bank accounts In the year ended 31 December 2016 the Group has provided an additional £280 million in respect of complaints relating to alleged mis-selling of packaged bank accounts raising the total amount provided to £505 million. As at 31 December 2016, £215 million of the provision remained unutilised. The total amount provided represents the Group’s best estimate of the likely future cost, however a number of risks and uncertainties remain in particular with respect to future volumes.
NOTE 39: SUBORDINATED LIABILITIES The movement in subordinated liabilities during the year was as follows: Preference shares £m
Issued during the year: 4.65% Subordinated Fixed Rate Notes 2026 (US$1,500 million) – – – – 1,061 1,061
4.939% Non-voting Non-cumulative Perpetual Preferred Securities – (32) – – – (32)
Primary Capital Undated Floating Rate Notes: 6.267% Non-Cumulative Callable Fixed to Floating Rate Preference Shares callable 2016 (319) – – – – (319)
Callable Floating Rate Subordinated Notes 2016 – – – – (143) (143)
Repurchases and redemptions during the year: 7.834% Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015 – (5) – – – (5)
6.50% Subordinated Fixed Rate Notes 2020 – – – – (764) (764)
Ordinary shares The holders of ordinary shares (excluding the limited voting ordinary shares), who held 99.9 per cent of the total ordinary share capital at 31 December 2016, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions of the Company’s articles of association) and on a winding up may share in the assets of the Company.
Retained profits are stated after deducting £495 million (2015: £740 million; 2014: £565 million) representing 730 million (2015: 943 million; 2014: 648 million) treasury shares held.
NOTE 46: SHARE-BASED PAYMENTS Charge to the income statement The charge to the income statement is set out below: 2015 £m 2014 £m
Executive and SAYE plans: Options granted in the year 16 12 29
During the year ended 31 December 2016 the Group operated the following share-based payment schemes, all of which are equity settled.
The weighted average fair value of SAYE options granted during 2016 was £0.13 (2015: £0.17). The fair values of the SAYE options have been determined using a standard Black-Scholes model.
NOTE 46: SHARE-BASED PAYMENTS continued Other share plans Lloyds Banking Group Long-Term Incentive Plan The Long-Term Incentive Plan (LTIP) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement in the performance of the Group over a three year period. Awards are made within limits set by the rules of the Plan, with the limits determining the maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times annual salary.
Weighted average expected life 3.2 years 1.9 years 3.0 years 0.8 years
UK shareholder litigation In August 2014, the Group and a number of former directors were named as defendants in a claim filed in the English High Court by a number of claimants who held shares in Lloyds TSB Group plc (LTSB) prior to the acquisition of HBOS plc, alleging breaches of duties in relation to information provided to shareholders in connection with the acquisition and the recapitalisation of LTSB. It is currently not possible to determine the ultimate impact on the Group (if any), but the Group intends to defend the claim vigorously.
Other commitments 62,697 57,809 1 year or over original maturity 40,074 44,691
Later than 1 year and not later than 5 years 855 885
Trading and other financial liabilities at fair value through profit or loss – 45,079 9,425 – – – – 54,504
Trading and other financial assets at fair value through profit or loss – 42,661 97,875 – – – – 140,536
Debt securities in issue – – – – – 82,056 – 82,056
Total trading and other financial assets at fair value through profit or loss 91,242 56,126 3,806 151,174
Total level 3 assets carried at fair value, excluding derivatives (recurring basis)
Trading and other financial assets at fair value through profit or loss
Unobservable inputs Significant unobservable inputs affecting the valuation of debt securities, unlisted equity investments and derivatives are as follows: – Interest rates and inflation rates are referenced in some derivatives where the payoff that the holder of the derivative receives depends on the behaviour of those underlying references through time. – Credit spreads represent the premium above the benchmark reference instrument required to compensate for lower credit quality; higher spreads lead to a lower fair value. – Volatility parameters represent key attributes of option behaviour; higher volatilities typically denote a wider range of possible outcomes. – Earnings multiples are used to value certain unlisted equity investments; a higher earnings multiple will result in a higher fair value.
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 31). Except as otherwise noted below, none of the liabilities shown in the table below have recourse only to the transferred assets.
Trading and other financial assets at fair value through profit or loss: Loans and advances to banks: Loans and advances to customers: Available-for-sale financial assets 56,524 – 56,524 – (21,475) 35,049
Related amounts where set off in the balance sheet not permitted3 Potential net amounts if offset of related amounts permitted £mAt 31 December 2015
The Group hedges part of the currency translation risk of the net investment in certain foreign operations using currency borrowings. At 31 December 2016 the aggregate principal of these currency borrowings was £695 million (2015: £670 million). In 2016, an ineffectiveness loss of £2 million before tax and £1 million after tax (2015: ineffectiveness gain of £5 million before tax and £4 million after tax) was recognised in the income statement arising from net investment hedges.
The Group’s main overseas operations are in the Americas and Europe. Details of the Group’s structural foreign currency exposures, after net investment hedges, are as follows: Functional currency of Group operations
Credit risk The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Information about the Group’s exposure to credit risk, credit risk management, measurement and mitigation can be found on pages 124 to 144.
Debt securities, treasury and other bills 50,398 – 50,398 46,886 – 46,886
2 Offset items comprise deposit amounts available for offset, and amounts available for offset under master netting arrangements, that do not meet the criteria under IAS 32 to enable loans and advances and derivative assets respectively to be presented net of these balances in the financial statements.
The analysis of lending between retail and commercial has been prepared based upon the type of exposure and not the business segment in which the exposure is recorded. Included within retail are exposures to personal customers and small businesses, whilst included within commercial are exposures to corporate customers and other large institutions.
Allowance for impairment losses on loans and advances to customers 2,412 3,033
Total loans and advances which are neither past due nor impaired 25,006 302,063 38,886 100,001 440,950 33,174
Total loans and advances which are past due but not impaired 111 8,233 393 463 9,089 –
Debt securities classified as loans and receivables An analysis by credit rating of the Group’s debt securities classified as loans and receivables is provided below: Investment grade1 £m Other2 £m Total £m
Other assets held at fair value through profit or loss: Bank and building society certificates of deposit 244 – 244 135 – 135
Total debt securities held at fair value through profit or loss 35,722 2,488 38,210 34,940 2,390 37,330
Total other assets held at fair value through profit or loss 35,742 2,488 38,230 35,014 2,390 37,404
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-to-value ratios has been estimated based upon the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowance for indexation error and dilapidations.
Other The majority of non-mortgage retail lending is unsecured. At 31 December 2016, impaired non-mortgage lending amounted to £972 million, net of an impairment allowance of £458 million (2015: £1,153 million, net of an impairment allowance of £448 million). The fair value of the collateral held in respect of this lending was £139 million (2015: £107 million). In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation and the value of collateral for each loan has been limited to the principal amount of the outstanding advance in order to eliminate the effects of any over-collateralisation and to provide a clearer representation of the Group’s exposure.
Unimpaired non-mortgage retail lending amounted to £39,864 million (2015: £39,279 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.
Reverse repurchase transactions At 31 December 2016 there were reverse repurchase agreements which were accounted for as collateralised loans with a carrying value of £8,304 million (2015: £nil), against which the Group held collateral with a fair value of £7,490 million (2015: £nil), all of which the Group was able to repledge. Included in these amounts were collateral balances in the form of cash provided in respect of reverse repurchase agreements of £8 million (2015: £nil). These transactions were generally conducted under terms that are usual and customary for standard secured lending activities.
Impaired secured commercial lending and associated collateral relates to lending to property companies and to customers in the financial, business and other services; transport, distribution and hotels; and construction industries.
Trading and other financial liabilities at fair value through profit or loss The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowing, where the secured party is permitted by contract or custom to repledge was £45,702 million (2015: £44,655 million).
Trading and other financial assets at fair value through profit or loss 20,168 14,903 7,387 2,914 817 1,680 6,011 97,294 151,174
Derivative financial instruments, trading and other financial liabilities at fair value through profit or loss 18,381 19,640 8,779 1,696 1,179 3,843 5,575 30,335 89,428
Derivative financial instruments, trading and other financial liabilities at fair value through profit or loss 24,326 14,191 5,070 1,625 806 4,020 5,135 22,991 78,164
Liabilities arising from non-participating investment contracts 22,777 – – – – 22,777
NOTE 53: CONSOLIDATED CASH FLOW STATEMENT (A) Change in operating assets 2016 £m 2015 £m £m
Net charge (credit) in respect of defined benefit schemes 287 315 (478)
(D) Analysis of cash and cash equivalents as shown in the balance sheet 2016 £m £m £m
NOTE 55: FUTURE ACCOUNTING DEVELOPMENTS The following pronouncements are not applicable for the year ending 31 December 2016 and have not been applied in preparing these financial statements. Save as disclosed below, the impact of these accounting changes is still being assessed by the Group and reliable estimates cannot be made at this stage.
With the exception of IFRS 9, which was endorsed in November 2016, as at 21 February 2017 these pronouncements are awaiting EU endorsement.
IFRS 9 Impairment Models For all material portfolios, IFRS 9 ECL calculation will leverage the systems, data and methodology used to calculate regulatory ‘expected losses’. The Group anticipates the definition of default for IFRS 9 purposes will be aligned to the Basel definition of default to ensure consistency across the Group. However, the IFRS 9 ECL models differ from the regulatory models in a number of ways, for example stage 2 assets under IFRS 9 carry a lifetime expected loss amount whereas regulatory models generate 12 month expected losses for non-defaulted loans.
LGD – Downturn LGD, appropriate to a severe by plausible economic downturn
Impact of IFRS 9 on the Group The adoption of IFRS 9 may result in an increase in the Group’s balance sheet provisions for credit losses and may therefore negatively impact the Group’s regulatory capital position. The extent of any increase in provisions will depend upon on a number factors including the composition of the Group’s lending portfolios and forecast economic conditions at the date of implementation. Whilst the Group is still refining its methodology and completing the development of the models required to calculate the provision, it is not possible to provide a reliable estimate of the impact of adopting IFRS 9. It is also too early to estimate the ongoing impact of the IFRS 9 impairment model on the financial results although the requirement to transfer assets between stages and to incorporate forward looking data into the expected credit loss calculation, including multiple economic scenarios, could result in impairment charges being more volatile when compared to the current IAS 39 impairment model.
The regulatory capital impact of IFRS 9 could be affected by changes to the regulatory rules. The Basel Committee on Banking Supervision has issued two papers on the impacts of IFRS 9 on regulatory capital, a consultation paper on the ‘Regulatory treatment of accounting provisions – interim approach and transitional arrangements’; and one discussing longer-term changes. It is not clear whether any transitional capital arrangements will be in place for 1 January 2018.
IFRS 9 Implementation Programme The Group has an established IFRS 9 programme to ensure a high quality implementation in compliance with the standard and additional regulatory guidance that has been issued. The programme involves Finance and Risk functions across the Group with Divisional and Group steering committees providing oversight. The key responsibilities of the programme include defining IFRS 9 methodology and accounting policy, development of ECL models, identifying data and system requirements, and establishing an appropriate operating model and governance framework. The programme is progressing in line with current delivery plans.
Minor amendments to other accounting standards During 2016, the IASB has issued amendments to IAS 7 Statement of Cash Flows (which require additional disclosure about an entity’s financing activities) and IAS 12 Income Taxes (which clarify when a deferred tax asset should be recognised for unrealised losses) together with a number of other minor amendments to IFRSs, which will be effective for annual periods beginning on or after either 1 January 2017 or 1 January 2018. These revised requirements are not expected to have a significant impact on the Group.
Value of employee services: Share option schemes, net of tax – – – 122 122 – 122
Value of employee services: Share option schemes, net of tax – – – 133 133 – 133
Value of employee services: Share option schemes, net of tax – – – 141 141 – 141
Details of the Company’s dividends are as set out in note 45 to the consolidated financial statements.
Other related party transactions Related party information in respect of other related party transactions is given in note 47 to the consolidated financial statements.
NOTE 9: FINANCIAL INSTRUMENTS continued The following reconciliation shows the movements in derivative financial instrument assets within level 3 portfolios: 2016 £m 2015 £m
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £1 million (2015: £1 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years.
Carrying value £m Fair value £m Level 2 £m Level 3 £m
Debt securities in issue 2,455 2,452 2,452 – – – – –
We have launched an innovative £1 billion Green Loan Initiative, incentivising green investment in the commercial real estate sector through discounted interest rates. We have completed the first deals and ultimately want to fund 10 million square feet of Britain’s real estate space to become energy efficient by 2020.
Annual general meeting (AGM) The AGM will be held at the Edinburgh International Conference Centre, The Exchange, Edinburgh EH3 8EE on Thursday 11 May 2017 at 11.00 am. Further details about the meeting, including the proposed resolutions and where shareholders can stream the meeting live, can be found in our Notice of AGM which will be available shortly on our website at www.lloydsbankinggroup.com
1 Despite changes to regulations which remove the requirement to issue interim management statements, Lloyds Banking Group still intends to issue these reports.
This Annual Report contains certain forward looking statements with respect to the business, strategy and plans of Lloyds Banking Group and its current goals and expectations relating to its future financial condition and performance. Statements that are not historical facts, including statements about Lloyds Banking Group’s or its directors’ and/or management’s beliefs and expectations, are forward looking statements. Words such as ‘believes’, ‘anticipates’, ‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ‘will’, ‘would’, ‘could’, ‘considered’, ‘likely’, ‘estimate’ and variations of these words and similar future or conditional expressions are intended to identify forward looking statements but are not the exclusive means of identifying such statements. By their nature, forward looking statements involve risk and uncertainty because they relate to events and depend upon circumstances that will or may occur in the future.
Cost:income ratio Operating costs as a percentage of total income net of insurance claims less operating lease depreciation calculated on an underlying basis.
Impaired loans and advances to customers adjusted to exclude Retail and Consumer Finance loans in recoveries expressed as a percentage of closing gross loans and advances to customers.
Required equity The amount of shareholders’ equity and non-controlling interests required to achieve a common equity tier 1 ratio of 12.0 per cent after allowing for regulatory adjustments and deductions.
Return on tangible equity Statutory profit after tax adjusted to add back amortisation of intangible assets, after tax, profit attributable to non-controlling interests and other equity holders divided by average tangible net assets.
Credit default swap A credit default swap is a type of credit derivative. It is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection. The entity selling protection receives premium or interestrelated payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
Encumbered assets Assets recognised on the Group’s balance sheet which have been pledged as collateral against an existing liability, and as a result are assets which are unavailable to the Group to secure funding, satisfy collateral needs or be sold to reduce potential future funding requirements.
Net asset value per ordinary share Shareholders‘ equity divided by the number of ordinary shares and limited voting ordinary shares in issue, adjusted to exclude shares held under certain employee share ownership plans.
Specialist mortgages Specialist mortgages include those mortgage loans provided to customers who have self-certified their income (normally as a consequence of being self-employed) or who are otherwise regarded as a sub-prime credit risk. New mortgage lending of this type has not been offered by the Group since early 2009.
Assets where there are no restrictions on their use to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, but are not readily realisable in the normal course of business in their current form.
Other 31 Describe ‘other risk’ types and discuss how each one is identified, governed, measured and managed. 145, 152-153, 166-169 32 Discuss publicly known risk events related to other risks. 145, 152-153, 166-169
% of share class held by immediate parent company (or by the Group where this varies) Notes 25 Gresham Finance Ltd 100% 1 A G Finance Ltd 100% 7 ii #
Capital Bank Insurance Services Ltd 100% 4 Capital Bank Leasing 1 Ltd 100% 2 Capital Bank Leasing 2 Ltd 100% 2 Capital Bank Leasing 3 Ltd 100% 2 Capital Bank Leasing 4 Ltd 100% 2 Capital Bank Leasing 5 Ltd 100% 2 Capital Bank Leasing 6 Ltd 100% 2 Capital Bank Leasing 7 Ltd 100% 2 Capital Bank Leasing 8 Ltd 100% 17 Capital Bank Leasing 9 Ltd 100% 2 Capital Bank Leasing 10 Ltd 100% 2 Capital Bank Leasing 11 Ltd 100% 2 Capital Bank Leasing 12 Ltd 100% 5 Capital Bank Property Investments (3) Ltd 100% 2 Capital Bank Property Investments (6) Ltd (in liquidation) 100% 13 Capital Bank Vehicle Management Ltd 100% 2 Capital Leasing (Edinburgh) Ltd 100% 17 Capital Leasing Ltd 100% 17 Capital Personal Finance Ltd 100% 4 Car Ownership Finance Ltd 100% 1 Cardnet Merchant Services Ltd 97.85% (100%) 1 ii, #
Cedar Holdings Ltd 100% 1 Central Mortgage Finance Ltd 100% 12 CF Asset Finance Ltd 100% 2 Chariot Finance Ltd 100% 1 Chartered Trust (Nominees) Ltd 100% 1 Charterhall (No. 1) Ltd (in liquidation) 100% 1 Charterhall (No. 2) Ltd 100% 1 Charterhall (No. 3) Ltd (in strike off) 100% 1 Cheltenham & Gloucester plc 99.99% (100%) 12 Cheshire Holdings Europe Ltd 100% 6 100% xii Chiswell Stockbrokers Ltd 100% 1 Clerical Medical (Dartford Number 2) Ltd 100% 20 Clerical Medical (Dartford Number 3) Ltd 100% 20 Clerical Medical Finance plc 99.99% (100%) 20 Clerical Medical Financial Services Ltd 99.99% (100%) 20 Clerical Medical Forestry Ltd 99.99% (100%) 20 Clerical Medical International Holdings B.V. 100% 21 Clerical Medical Investment Fund Managers Ltd 100% 4 Clerical Medical Managed Funds Ltd 99.99% (100%) 20 Clerical Medical Non Sterling Property Company SARL 100% 22 Clerical Medical Properties Ltd 99.99% (100%) 20 Cloak Lane Funding Ltd 100% 6 100% iv Cloak Lane Investments Ltd 100% 6 CM Venture Investments Ltd 100% 23 100% iv CMI Asset Management (Luxembourg) S.A (in liquidation) 99.99% 24 CMI Insurance (Luxembourg) S.A. (in liquidation) 99.99% (100%) 24 Conquest Securities Ltd 100% 1 iv 100% vi Corbiere Asset Investments Ltd 100% 1 i
Halifax Loans Ltd 100% 4 Halifax Mortgage Services (Holdings) Ltd 100% 4 Halifax Mortgage Services Ltd 100% 4 Halifax Nominees Ltd 100% 4 Halifax Pension Nominees Ltd 100% 29 Halifax Premises Ltd 100% 1 Halifax Share Dealing Ltd 100% 4 Halifax Vehicle Leasing (1998) Ltd 100% 4 HBOS Canada Inc. 100% 18 HBOS Capital Funding (Jersey) Ltd 100% 10 HBOS Covered Bonds LLP n/a 4 * HBOS Directors Ltd 100% 1 HBOS Final Salary Trust Ltd 100% 5 HBOS Financial Services Ltd 100% 20 HBOS Insurance & Investment Group Ltd 100% 20 HBOS International Financial Services Holdings Ltd 99.99% (100%) 20 HBOS Investment Fund Managers Ltd 100% 4 HBOS Management (Jersey) Ltd 100% 10 100% iv 100% vi HBOS Social Housing Covered Bonds LLP n/a 2 * HBOS Treasury Services Ltd 100% 20 HBOS UK Ltd 99.99% (100%) 5 Heidi Finance Holdings (UK) Ltd 100% 1 High Street Marketing Services S.A. (in liquidation) 100% 30 Highway Vehicle Management Ltd (in liquidation) 100% 13 Hill Samuel (USA), Inc. 100% 14 Hill Samuel Bank Ltd 100% 1 Hill Samuel Finance Ltd 100% 1 xi
Hill Samuel Leasing (No 2) Ltd (in liquidation) 100% 1 Hill Samuel Leasing Co. Ltd 100% 1 Hill Samuel Nominees Asia Private Ltd 100% 31 HL Group (Holdings) Ltd (in liquidation) 100% 4 Home Shopping Personal Finance Ltd 100% 4 Horizon Capital 2000 Ltd 100% 17 Horizon Capital Ltd 100% 17 Horizon Hotel Investments Ltd (in liquidation) 100% 78 Horizon Property Investments Ltd (in liquidation) 100% 78 Horizon Resources Ltd 100% 17 Horsham Investments Ltd 100% 6 Housing Growth Partnership GP LLP n/a 1 * Housing Growth Partnership LP n/a 1 * # Housing Growth Partnership Ltd 100% 1 i 100% ii Housing Growth Partnership Manager Ltd 100% 1 HSDL Nominees Ltd 100% 4 HVF Ltd 100% 2 Hyundai Car Finance Ltd 100% 7 i 100% ii IAI International Ltd 100% 1 IBOS Finance Ltd 100% 2 IBOS Securities n/a + * ICC Enterprise Partners Ltd (in liquidation) 100% 32 ICC Equity Partners Ltd (in liquidation) 100% 32 ICC ESOP Trustee Ltd 100% 33
Lloyds Nominees (Guernsey) Ltd 98% (100%) 37 Lloyds Offshore Global Services Private Ltd 99.99% (100%) 48 Lloyds Participacoes Ltda 99.99% (100%) 49 Lloyds Plant Leasing Ltd 100% 1 Lloyds Portfolio Leasing Ltd 100% 1 Lloyds Premises Investments Ltd 100% 1 Lloyds Project Leasing Ltd 100% 1 Lloyds Property Investment Company Ltd (in liquidation) 100% 13 Lloyds Property Investment Company No. 3 Ltd 100% 1 Lloyds Property Investment Company No. 4 Ltd 100% 1 Lloyds Property Investment Company No.5 Ltd 100% 1 Lloyds Secretaries Ltd 100% 1 Lloyds Securities Inc. 100% 50 Lloyds Trade & Project Finance Ltd (in strike off) 100% 1 Lloyds Trust Company (Gibraltar) Ltd 100% 42 Lloyds TSB Fomento Comercial Ltda 100% 49 Lloyds TSB Pacific Ltd 99.99% (100%) 51 Lloyds TSB Rail Capital Inc. 100% 14 Lloyds UDT Asset Leasing Ltd 100% 1 Lloyds UDT Asset Rentals Ltd 100% 1 Lloyds UDT Business Development Ltd 100% 1 Lloyds UDT Business Equipment Ltd 100% 1 Lloyds UDT Hiring Ltd 100% 1 Lloyds UDT Leasing Ltd 100% 1 Lloyds UDT Ltd 100% 1 Lloyds UDT Rentals Ltd (in liquidation) 100% 52 Lloyds Your Tomorrow Trustee Ltd 100% 1 London Taxi Finance Ltd 100% 1 i 100% ii London Uberior (L.A.S. Group) Nominees Ltd n/a 5 * Lothian Road LLC 100% 25 Lotus Finance Ltd 100% 81 i # LTGP Limited Partnership Incorporated n/a 37 * Lovat Funding Holdings Ltd (in liquidation) 100% 13 Maritime Leasing (No.7) Ltd (in liquidation) 100% 13 Maritime Leasing (No.11) Ltd (in liquidation) 100% 13 Maritime Leasing (No. 19) Ltd 100% 1 Meadowfield Investments Ltd 100% 5 Membership Services Finance Ltd 100% 4 Mitre Street Funding Ltd 100% 6 Moor Lane Holdings Ltd 100% 6 Moray Investments Ltd 100% 20 Morrison Street LLC 100% 25 Murrayfield LLC 100% 25 Nevis Leasing Ltd 74% 36 # Newfont Ltd 100% 20 NFU Mutual Finance Ltd 100% 2 i # 100% vii Nominees (Jersey) Ltd 100% 6 Nordic Leasing Ltd 100% 1 NWS 2 n/a + * NWS Trust Ltd 100% 5 Ocean Leasing (July) Ltd 100% 1 Ocean Leasing (No 1) Ltd 100% 1 Ocean Leasing (No 2) Ltd 100% 1 Omnistone Ltd (in liquidation) 100% 32 i 100% ii
Name of undertaking Notes Addison Social Housing Holdings Ltd 63 ARKLE Finance Trustee Ltd 10 ARKLE Funding (No. 1) Ltd 64 ARKLE Holdings Ltd 64 ARKLE Master Issuer plc 64 ARKLE PECOH Holdings Ltd 64 ARKLE PECOH Ltd 64 Cancara Asset Securitisation Ltd 65 Candide Financing 2006 BV 66 Candide Financing 2007 NHG BV 66 Candide Financing 2008-1 BV 66 Candide Financing 2008-2 BV 66 Candide Financing 2011-1 BV 66 Candide Financing 2012-1 BV 66 Celsius European Lux 2 SARL 24 Chepstow Blue Holdings Ltd 44 Chepstow Blue plc 44 Clerical Medical Non Sterling Arts FSA 67 Clerical Medical Non Sterling Arts LSA 67 Clerical Medical Non Sterling Guadalix Hold Co BV 68 Clerical Medical Non Sterling Guadalix Spanish Prop Co SL 69 Clerical Medical Non Sterling Megapark Hold Co BV 68 Clerical Medical Non Sterling Megapark Prop Co SA 69 Computershare Trustees (Jersey) Ltd 47 Coral Palm Ltd 83 Craig Financing Holdings Ltd 44 Deva Financing Holdings Ltd 44 Deva Financing plc 44 Dewcrown Ltd 83 Edgbaston RMBS 2010-1 plc 44 Edgbaston RMBS Holdings Ltd 44 Farnham Funding Ltd 82 Fontwell Securities 2016 Ltd 63 Gresham Receivables (No. 1) Ltd 65 Gresham Receivables (No. 3) Ltd 65 Gresham Receivables (No. 10) Ltd 65 Gresham Receivables (No.11) UK Ltd 71 Gresham Receivables (No. 12) Ltd 65 Gresham Receivables (No. 13) UK Ltd 71 Gresham Receivables (No. 14) UK Ltd 71 Gresham Receivables (No. 15) UK Ltd 71 Gresham Receivables (No. 16) UK Ltd 71 Gresham Receivables (No. 19) UK Ltd 71 Gresham Receivables (No. 20) Ltd 65 Gresham Receivables (No. 21) Ltd 65 Gresham Receivables (No. 22) Ltd 65 Gresham Receivables (No. 23) Ltd 65 Gresham Receivables (No. 24) Ltd 65 Gresham Receivables (No. 25) UK Ltd 71 Gresham Receivables (No. 26) UK Ltd 71 Gresham Receivables (No.27) UK Ltd 71 Gresham Receivables (No. 28) Ltd 65 Gresham Receivables (No. 29) Ltd 65 Gresham Receivables (No. 30) UK Ltd 71 Gresham Receivables (No. 31) UK Ltd 71 Gresham Receivables (No. 32) UK Ltd 71 Gresham Receivables (No. 33) UK Ltd 71 Gresham Receivables (No. 34) UK Ltd 71 Gresham Receivables (No. 35) Ltd 65 Gresham Receivables (No.36) UK Ltd 71 Gresham Receivables (No.37) UK Ltd 71 Gresham Receivables (No.38) UK Ltd 71 Gresham Receivables (No.39) UK Ltd 71 Gresham Receivables (No.40) UK Ltd 71 Gresham Receivables (No.41) UK Ltd 71 Gresham Receivables (No.42) Ltd 65 Gresham Receivables (No.44) UK Ltd 71 Gresham Receivables (No.45) UK Ltd 71 Gresham Receivables (No.46) UK Ltd 71 Guildhall Asset Purchasing Company (No 3) Ltd 65 Guildhall Asset Purchasing Company (No.11) UK Ltd 71 Hart 2014-1 Ltd 63 Headingley RMBS 2011-1 Holdings Ltd 44 Leicester Securities 2014 Ltd 73
Sandown Gold plc 72 SARL Coliseum 77 SARL Fonciere De Rives 77 SARL Hiram 77 SAS Compagnie Fonciere De France, 77 SCI Astoria Invest 77 SCI De L’Horloge 77 SCI Equinoxe 77 SCI Mercury Invest 77 SCI Millenium AP1 77 SCI Norli 77 SCI Rambuteau CFF 77 Stichting Candide Financing Holdings 66 Swan Funding 2 Ltd 63 The Hual Carolita Limited Partnership 74 The SAFA 0494 Limited Partnership (to be placed into liquidation) 75 Thistle Investments (AMC) Ltd 44 Thistle Investments (ERM) Ltd 44 Trinity Financing Holdings Ltd 44 Trinity Financing plc 44 Lloyds Bank Foundation for England & Wales • 79 The Halifax Foundation for Northern Ireland • 15 Lloyds Bank Foundation for the Channel Islands • 79 Lloyds TSB Foundation for Scotland • 80 Bank of Scotland Foundation • 5
• A charitable foundation funded but not owned by Lloyds Banking Group
% of share class held by immediate parent company (or by the Group where this varies) Registered office address (UK unless stated otherwise) Notes
Thread Real Estate Cary Towne Park LLC 50% Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States Thread Real Estate Golfview LLC 50% Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States Travellers Cheque Associates Ltd 36% Belgrave House, 76 Buckingham Palace Road, London, SW1W 9AX Tropical Marine Centre (2012) Ltd 35% Tropical Marine Centre, Solesbridge Lane, Chorleywood, Herts, WD3 5SX United House Group Holdings Ltd 41.5% 26 Kings Hill Avenue, Kings Hill, West Malling, Kent, ME19 4AE United Living Group Ltd 70% Media House, Azalea Drive, Swanley, Kent, BR8 8HU & Valad Canadian Partners LP n/a 44 Chipman Hill, Suite 100, St. John, NB E2L 2A9, Canada * Vocalink Holdings Ltd 14.29% (25.11%) 1 Angel Lane, London, EC4R 3AB Vulcan Topco Ltd 55.2% 2 Mountview Court, 310 Friern Barnet Lane, Wheststone, London, N20 0YZ & Whitefleet Ltd (in liquidation) 100% 1 More London Place, London, SE1 2AF i & Willoughby (873) Ltd 47.4% Parklands Industrial Estate, Forest Road, Denmead, PO7 6TJ Willoughby (880) Ltd 64.3% IMEX, 575-599 Maxted Road, Hemel Hempstead Industrial Estate,
DEVONSHIRE ASSETS MANAGED FUNDS PLC 20 Devonshire Conservative Real Return Fund 41.37%
RUSSELL INVESTMENT COMPANY PLC 15 Russell Euro Fixed Income Fund 25.73% Russell Sterling Bond Fund 27.52% Russell U.S. Bond Fund 53.59%
SCOTTISH WIDOWS OVERSEAS GROWTH INVESTMENT FUNDS ICVC 2 Global Growth Fund 52.39% European Growth Fund 89.24% American Growth Fund 88.68% Pacific Growth Fund 36.36% Japan Growth Fund 98.58%
SCOTTISH WIDOWS UK AND INCOME INVESTMENT FUNDS ICVC 2 UK Corporate Bond Fund 53.65% UK Growth Fund 63.32% Gilt Fund 96.72% High Income Bond Fund 25.32% Safety Plus ® Fund 72.01% Strategic Income Fund 61.80% Environmental Investor Fund 68.92% Ethical Fund 71.41%
Principal place of business for collective investment vehicles (1) Trinity Road, Halifax West Yorkshire, HX1 2RG (2) 15 Dalkeith Road Edinburgh EH16 5WL (3) 39/40 Upper Mount Street, Dublin, Ireland (4) 20 Churchill Place, Canary Wharf, London E14 5HJ (5) 80 route d’Esch, L-1470 Luxembourg (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
EC4V 4LA (12) Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH (13) JP Morgan Funds Limited, 3 Lochside View, Edinburgh Park, Edinburgh, EH12 9DH (14) Nordea Investment Funds S.A., 562 rue de Neudorf, L-2220 Luxembourg (15) 78 SIR JOHN ROGERSON'S QUAY, DUBLIN 2, IRELAND (16) SCHRODER UNIT TRUSTS LIMITED, 31 GRESHAM STREET, LONDON, EC2V 7QA (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
Ireland (20) GEORGE’S COURT, 54 -62 TOWNSEND STREET, DUBLIN 2, IRELAND (21) Thesis Unit Trust Management Limited, Exchange Building, St. John’s Street, Chichester,
* The undertaking does not have share capital + The undertaking does not have a registered office # In relation to Subsidiary Undertakings, an undertaking external to the Group holds shares ^ Shares held directly by Lloyds Banking Group plc & The Group holds voting rights of between 20% and 49.9%
(i) A Ordinary shares (ii) B Ordinary shares (iii) Deferred shares (iv) Preference shares (v) Preferred ordinary shares (vi) Non-voting shares (vii) C Ordinary shares (viii) N Ordinary shares (ix) Callable preference shares (x) Redeemable preference shares (xi) Ordinary limited voting shares (xii) Redeemable ordinary shares (xiii) Common stock
United States (26) 105 St Peters Street, St. Albans, AL1 3EJ (27) 1 Allee Scheffer, Luxembourg, L-2520, Luxembourg (28) SAB Formalities, 23 Rue de Roule, Paris, 75001, France (29) Rockspring, 166 Sloane Street, London, SW1X 9QF (30) Tronador 4890, 9th Floor, Buenos Aires, 1430, Argentina (31) 138 Market Street, #27-01/02, Capita Green, 048946, Singapore (32) McStay Luby, Dargan House, 21-23 Fenian Street, Dublin 2, Ireland (33) 124-127 St. Stephen’s Green, Dublin 2, Ireland (34) 21 St. Thomas Street, Bristol, BS1 6JS (35) De Entrée 254, 1101 EE, Amsterdam, Netherlands (36) 47 Esplanade, St. Helier, Jersey, JE1 0BD (37) Sarnia House, Le Truchot, St. Peter Port, Guernsey, GY1 4EF (38) 1 Rodney Square, 10th Floor, Tenth and King Street, Wilmington, DE 19801, United States (39) Bank of China, Tower 1, Garden Road Central, Hong Kong (40) 1 Vine Street, London, W1J 0AH (41) 39 Queens Road, Aberdeen, AB15 4ZN (42) Royal Ocean Plaza, Ocean Village, GX11 1AA, Gibraltar (43) 110 St. Vincent Street, Glasgow, G2 4QR (44) 35 Great St. Helen’s, London, EC3A 6AP (45) Charlton Place, Charlton Road, Andover, SP10 1RE (46) 22 Grenville Street, St. Helier ,Jersey, JE4 8PX (47) Queensway House, Hilgrove Street, St. Helier, Jersey, JE4 1ES (48) Unit 2, Level 2, Bagmane Tridib B-Wing, Bagmane Technology Park, Bangalore, 560093,
India (49) Av. Jurubatuba 73, 8th Floor, Sao Paulo, Brazil (50) Corporation Trust Centre, 1209 Orange Street, Wilmington, DE 19801, United States (51) 18th Floor, United Centre, 95 Queensway, Hong Kong (52) Finance House, Orchard Brae, Edinburgh (53) 55 Baker Street, London, W1U 7EU (54) 15 Dalkeith Road, Edinburgh, EH16 5BU (55) Lichtenauerlann 170, 3062ME, Rotterdam, Netherlands (56) Weena 340, 3012 NJ, Rotterdam, Netherlands (57) Caledonian Exchange, 19A Canning Street, Edinburgh, EH3 8HE (60) 44 Chipman Hill, Suite 100, St. John, NB E2L 2A9, Canada (61) 155 Bishopsgate, London, EC2M 3YB (62) 12 Peveril Buildings, Peveril Square, Douglas, Isle of Man, IM99 1JJ (63) 44 Esplanade, St. Helier, Jersey, JE4 9WG (64) Asticus Building 2nd Floor, 21 Palmer Street, London, SW1H 0AD (65) 26 New Street St Helier Jersey JE2 3RA (66) Fred. Roeskestraat 123, 1076 EE, Amsterdam, Netherlands (67) Avenue Louise 331-333, 1050 Brussels, Belgium (68) Naritaweg 165, 1043 BW, Amsterdam, Netherlands (69) Calle Pinar 7, 50Izquierda, 28006, Madrid, Spain (70) 2nd Floor Beaux Lane House, Mercer Street Lower, Dublin 2, Ireland (71) Wilmington Trust Sp Services (London) Limited, Third Floor, 1 King’s Arms Yard, London,
Registered office The Mound Edinburgh EH1 1YZ Registered in Scotland no SC95000