Our main business activities are retail and commercial banking, general insurance, and life, pensions and investments. We provide our services under a number of well recognised brands such as lloyds Bank, Halifax, Bank of Scotland, TSB and Scottish Widows and through a range of distribution channels including the largest branch network in the uK.
We are creating a simpler, more agile and responsive organisation and are making a big investment in our products and services. By becoming the best bank for customers we believe we can help Britain prosper and deliver strong and sustainable returns for our shareholders.
We have a strong capital position, with our pro forma fully loaded common equity tier 1 ratio now increased to 10.3 per cent despite legacy charges 2013 highlights 10.5m We have a strong digital presence: over 10.5 million internet banking users and 1.2 billion log ons in 2013.
We have a multi-brand strategy with five major financial services brands serving the needs of customers in the uK market.
Invested in our products and services for our customers, while further reducing costs and improving efficiency through our Simplification programme
Substantially strengthened our balance sheet, despite a charge for legacy business provisions totalling £3.5 billion, primarily relating to legacy Payment Protection Insurance business lowered risk by reducing non-core assets and our international presence, and by growing our customer deposits and reducing our reliance on funding from the wholesale markets
Substantial progress on strategic plan, enhancing service for customers whilst helping Britain prosper Continue to support the uK economy through lending to SMes and first-time buyers with active participation in the Funding for lending Scheme and Help to Buy
Group loan to deposit ratio improved to 113 per cent (31 December 2012: 121 per cent); core ratio improved to 100 per cent non-core asset reduction of £34.9 billion during the year, to £63.5 billion, ahead of plan and £2.6 billion capital accretive overall. non-retail non-core assets reduced to £24.7 billion
Strong leverage ratios of 4.1 per cent (pro forma CRD IV basis) and 4.5 per cent (pro forma Basel III 2014 basis)
Core return on risk-weighted assets increased from 2.54 per cent in 2012 to 3.26 per cent in 2013
Statutory profit before tax of £415 million; tangible net asset value per share of 48.5p Statutory profit before tax of £415 million (2012: loss of £606 million) including charge for legacy PPI business of £3,050 million
Guidance reflects confidence in the future 2014 full year Group net interest margin expected to stabilise at around the Q4 2013 level of 2.29 per cent, excluding impact of TSB disposal
To assess progress towards our aim of becoming the best bank for customers we measure customer satisfaction and are publicly committed to reducing complaints. Our colleagues are a key differentiator and we use an engagement survey to assess individual motivation and organisational processes.
Further detail on these measures is contained in the following pages.
How we measure performance We use a range of performance measures to track progress on our strategy of becoming the best bank for customers. This progress is measured through a number of key performance indicators which are shown opposite.
Alignment of remuneration with performance To ensure our employees act in the best interests of customers and shareholders, remuneration at all levels of the organisation is aligned to the strategic development and financial performance of the business and also takes into account specific risk management controls.
Variable remuneration including bonuses for all staff, including our executive Directors, is based on the performance of the individual, the business area and the Group as a whole. Performance is assessed against a balanced scorecard of objectives, reviewed on a regular basis, across five areas (customer, building the business, risk, people and finance). executive management are also eligible to participate in a long-Term Incentive Plan, which encourages delivery on long-term financial objectives including total shareholder return and the Group’s strategic objectives of becoming the best bank for customers and helping Britain prosper.
We continue to make excellent progress in reshaping the business through the reduction of our non-core assets which, having stood at £300 billion at the beginning of 2009, now stand at £64 billion.
When I became Chairman in September 2009, I knew we faced many challenges as a Group, not least from the integration of two large businesses during a challenging time for financial markets and the global economy. However, I was encouraged by the great potential I could see in the Group’s combined franchise, in the strength of its brands, and in the commitment of colleagues to do the best for customers. This was, is, and will continue to be, a bank focused on customers’ needs and building lasting relationships.
A key early decision was to issue new shares in the Group in December 2009 to ensure we avoided the need for the government to take a larger stake or for the Group to face substantial further capital headwinds. I acknowledge this was painful at the time for many existing shareholders but has subsequently proved to have been the right choice for shareholders financially, as well as ensuring strength and stability, and laying the foundations for subsequent progress.
We were also pleased that the first phase of the european Commission mandated business disposal, Project Verde, was successfully completed in September 2013, with TSB Bank launched onto the uK high streets. We continue to target an Initial Public Offering (IPO) of TSB Bank in 2014.
As a Group we are well positioned, having established a business model and strategy which is aligned with the economic and regulatory environment. We have a strong and experienced management team to lead the further development of the business. The Group is now profitable, with a strong balance sheet and solid prudential foundations on which to build sustainable growth by serving our customers well.
We are one of the largest community investors in the UK, providing £85 million per annum to worthy causes.
Supporting the UK economic recovery Our simple, uK focused, low risk retail and commercial business plays a leading role in reshaping the banking industry and rebuilding the trust that is so vital in providing effective support for the economy. We are helping Britain prosper through our participation in uK government schemes such as Help To Buy and Funding for lending, in the latter of which we have been the largest participant. I am particularly proud of our commitment to uK business since our performance is inextricably linked to that of the uK economy, and the companies that operate within it. Our SMe lending grew 6 per cent in 2013 in a market that contracted, while we exceeded our target of lending £1 billion to uK manufacturing companies three months ahead of schedule, a commitment we made in recognition of the fundamental role the manufacturing sector plays in the economy.
Actively supporting charitable causes has always been key to the Group and I am proud to say we have already exceeded our initial £2 million target of fundraising for our ‘Charity of the Year’ Alzheimer’s Society and Alzheimer Scotland, one year into our two year partnership with the charity. This will allow the delivery of the first phase of the live Well campaign, the first ever uK-wide dementia carers programme. Through our Community Fund, now in its second year, we are helping local people across the uK have a positive effect in their communities. In the past year the fund issued grants to over 1,500 local good causes in nearly 400 communities across the uK.
Within lloyds Banking Group we recognise the value of diversity in our colleagues. Having a broad and representative mix of backgrounds and experiences allows us to be more creative and maximise opportunities. The Group’s diversity networks enjoyed a successful year in 2013 with more events, increased membership, and a wider awareness among colleagues. The Group’s recent commitment to ensuring that women hold 40 per cent of our top jobs by 2020 further demonstrates the importance of diversity in the Group. The make-up of our workforce increasingly reflects the communities we serve, an important factor in helping the business to understand them better and help them to prosper.
In the light of the better results in 2013, the total bonus pool for the year has been increased by approximately 8 per cent to £395 million. This once again is significantly below on-target levels, but recognises the efforts of our employees in transforming the Group to a lower risk business and returning it to statutory profit.
In closing I would like to thank my fellow Board members, the senior leadership team and all colleagues for everything we have accomplished together at lloyds Banking Group in my years here. Throughout my time I have been deeply impressed by the collegiate approach taken by management and colleagues in delivering goals, and their desire to do the best for customers. They have executed our strategy with great commitment and enthusiasm. I have also had great support from our shareholders large and small and I am grateful to them for their advice.
This remains uppermost in our minds when applying the principles of the uK Corporate Governance Code published by the Financial Reporting Council. The Board aims to exceed these principles as we believe that good governance is a key contributor to the Group’s long-term success.
Our Board The Board has seen a number of changes this year, and in line with the provisions of the uK Corporate Governance Code and the interests of good corporate governance, all Directors are required to submit themselves for re-election on an annual basis. We are committed to ensuring we have the right balance of skills and experience within the Board, and we annually review its composition, and the diversity of backgrounds of its members.
Results overview We delivered a substantially improved financial performance in 2013. Group underlying profit more than doubled to £6,166 million when compared to 2012, reflecting improved profitability in the core business and a significant reduction in non-core losses.
On an underlying basis, the Group net interest margin increased 19 basis points to 2.12 per cent, total costs reduced 5 per cent to £9,635 million and the impairment charge fell by 47 per cent to £3,004 million, more than offsetting a fall in other income, which was down 2 per cent, mainly driven by the non-core asset reductions made in the year, which overall were capital accretive. As a result, the Group return on risk-weighted assets improved 137 basis points to 2.14 per cent.
On a statutory basis, the Group reported a profit before tax of £415 million, compared to a pre-tax loss of £606 million in 2012. Strong performance in our core business and reduced non-core losses were the main drivers behind the improvement which, together with gains on the sale of government securities of £787 million, was partly offset by charges of £3,455 million for legacy issues, principally Payment Protection Insurance (PPI). Our statutory result also included the costs of our Simplification programme and preparations for the TSB disposal (together £1,517 million), and losses on asset sales, including those from capital accretive non-core asset disposals, of £687 million.
We substantially strengthened our capital position, with our pro forma fully loaded common equity tier 1 ratio increasing by 2.2 percentage points to 10.3 per cent, despite the additional legacy charges during the year. This uplift was driven by capital generation in the core business, as well as management actions including the reshaping of our core business portfolio, the substantial reduction of non-core assets in a capital accretive manner and the payment of dividends of £2.2 billion to the Group by the Insurance business. We reduced non-core assets by £34.9 billion, while at the same time releasing approximately £2.6 billion of capital.
In acknowledgement of the significant progress we have made in improving the Group’s capitalisation and transforming its financial profile, the rating agencies Fitch and Standard & Poor’s upgraded lloyds Bank’s standalone rating to ‘bbb+’ in September and December 2013 respectively, and affirmed their long-term credit ratings on lloyds Bank at ‘A’.
We increased our provision for PPI by £1,800 million in the fourth quarter principally based on revised expectations for complaint volumes, uphold rates, and related administrative costs. Further detail on the provisions for legacy issues is given in the Summary of Group results on page 45.
Reshaping the Group to increase our focus on the UK and our core customers We made a number of asset disposals during 2013, including the sales of our shares in St. James’s Place and the announced disposal of our German life insurance operation, Heidelberger leben. We also continued to increase our focus on our core uK business and reduce our international presence, completing the sales of our Australian and Spanish banking businesses and have now exited, or announced the exit from, 21 countries or overseas branches since June 2011. Following completion of these exits, we will operate in nine countries, achieving our target of operating in 10 countries or fewer by the end of 2014.
Our Asset Finance business is the foundation of a newly created Consumer Finance division, which will also include our consumer and corporate credit card business. Bringing these business units together will increase management focus and allow us to capitalise on growth opportunities, continuing our good momentum in asset-backed lending and with the aim of growing our market presence in credit cards. Consumer Finance will work in close partnership with Retail and Commercial Banking to ensure we continue to offer our customers excellent customer service.
We have now fully automated the collection of maturity instructions from term deposit customers, reducing completion time by approximately 85 per cent, substantially reducing error rates and have completed the transfer of 1.7 million mortgage accounts to a single mortgage platform. Similarly, we have made great strides in delayering the organisation, increasing spans of control and simplifying the Group so that 98 per cent of employees are now within seven layers. During 2013 we also made significant progress in reducing the number of legal entities, which are now down to 929, a reduction of over 40 per cent since the start of the Simplification programme in 2011, and the number of Group suppliers was further reduced by 14 per cent to 9,066 in 2013, to around half the level at the start. Meanwhile we exited 19 non-branch properties in 2013, reducing the overall total to 161.
We are continuing to develop and grow our Halifax challenger brand, including extending its geographical reach into Scotland, and in 2013 Bank of Scotland began its first ever national campaign targeting lending to small and medium-sized enterprises (SMes). In Insurance, 2014 has already seen us relaunch the Scottish Widows brand, refining its focus on providing a more secure financial future for our customers and demonstrating our continued commitment to be a leader in the life planning and retirement market.
In Commercial Banking we continue to strengthen our capabilities and position ourselves for growth. In 2013, we launched a new Global Transaction Banking platform to support clients in payments, liquidity management and working capital financing, thereby deepening our client relationships by fulfilling a broader spectrum of their product needs.
September 2013 saw the introduction of a new industry-wide service to make it easier and quicker for customers to switch their current account. Key lloyds Banking Group brands are taking part in this scheme, which allows customers to switch their accounts within seven working days. During the course of the year switch-ins have exceeded switch-outs by approximately 144,000, particularly driven by switching into our challenger brand, Halifax. This is testament to some of the product innovations we have implemented, including loyalty schemes such as Halifax’s Cashback extras, and everyday Offers at lloyds Bank and Bank of Scotland, recognising and rewarding the faith placed in us by our customers to provide a consistent, high quality service.
Colleagues Our success relies on the dedication of colleagues, the service they provide to our customers and the long-term partnerships they build with them. Our stated aim of becoming the best bank for customers would not be possible without their talent and hard work. I would like to personally thank all colleagues for their tremendous efforts that have enabled us to move further and faster towards our goals in 2013.
We are committed to attracting, retaining and developing our people. Over 51,000 lloyds Banking Group customer facing colleagues have achieved the Chartered Banker Foundation Standard for Professional Bankers. This Standard enables bankers to demonstrate to colleagues and customers that they have the knowledge and skills to perform their role, that they take responsibility for acting ethically and professionally, and that they adhere to the Chartered Banker Code of Professional Conduct to deliver the best outcomes for our customers.
UK economic trends The UK economy started to grow again in 2013 As with many developed economies, the shift from rising debt in the pre-crisis decade to a period of debt repayment in recent years has proved a difficult transition for the uK economy. Many countries cutting back on private spending and government spending at the same time resulted in self-perpetuating cycles of weak growth and confidence, with exports unable to compensate for weak domestic demand.
However, progress on consumer and bank debt reduction has been greater in the uK than across much of europe, and consequently uK economic growth picked up significantly in 2013, much more so than in the eurozone. Business and consumer confidence increased as the eurozone economy stabilised, following the european Central Bank’s commitment to purchase government bonds of countries experiencing financing difficulties and from a slowdown in their mandated pace of government deficit reduction. uK consumers appear to have reduced their precautionary saving, and the appetite for unsecured credit, particularly for car purchase, increased, helping consumer spending growth to accelerate to 2.4 per cent in 2013, up from 1.5 per cent in 2012.
Recovery and resolution mechanisms The european Commission published the Recovery and Resolution Directive on 6 June 2012. This should come in to force on 1 January 2015. The Directive requires all firms to develop a recovery plan and contribute to a resolution fund. It also proposes new early intervention powers for supervisors and introduces new powers for regulators at resolution stage. This was in line with the recommendations of the Financial Stability Board. The uK has pre-empted the european legislative process, with firms already required to prepare recovery plans.
UK supervisory structure The Financial Services Act 2012 confirmed the responsibilities of the Financial Policy Committee for ‘macro-prudential regulation’ and formalised the replacement of the FSA with two new bodies for prudential and conduct regulation: the Prudential Regulation Authority and the Financial Conduct Authority. The new institutions came into being on 1 April 2013.
Other regulatory reforms The Group is also implementing a broader range of regulatory changes, which includes accounting standards, the Dodd-Frank Act, Benchmarks, Foreign Account Tax Compliance Act (FATCA), the updated Markets in Financial Instruments Directive Review, and updates to the Deposit Guarantee Scheme, amongst others.
Customer drivers 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. The expectations and demands of customers continue to rise.
Technological developments are already reshaping the banking industry and we expect this change to accelerate in the coming years. We anticipate an influx of new entrants, with business models that do not rely on expensive branch networks, offering innovative digital banking services. These new entrants are likely to have expertise and experience in digital product offerings, with strong funding positions, credible challenger brands, and in some cases pre-existing customer bases.
From a regulatory perspective, the new conduct regulator, the Financial Conduct Authority, has a competition duty giving it an explicit mandate to tackle competition issues, such as hurdles to switching or barriers to entry, swiftly and effectively.
Regulatory environment: uncertainty remains around the implementation of key elements of the proposals on ring-fencing.
Unlocking the Group’s potential Customers are at the heart of the organisation and by leveraging our strategic assets and capabilities effectively we believe we can help Britain prosper and deliver strong and sustainable returns for our shareholders.
Our business model lloyds Banking Group is a leading financial services group with a simple, low risk, customer focused, uK retail and commercial banking business model.
The foundations for providing effective customer service are: our range of iconic and distinct brands, our broad multi-channel distribution network, our financial strength, our efficient systems and processes, our high quality, committed colleagues and our uK focus.
Our focus on creating a simpler, more efficient and agile organisation is enabling us to provide a better product and service proposition at a fair price while delivering more efficient processes and reducing our cost base.
ultimately as a simple, low risk, customer focused uK retail and commercial bank, we can rebuild the trust of our customers and other stakeholders, help Britain prosper and deliver strong and sustainable returns for our shareholders.
Relationship focus using our cost advantage for the benefit of customers
Our vision Our aim is to be the best bank for customers and to create value for them by investing where we can make a real difference.
We are reshaping our business portfolio to fit our assets, capabilities and risk appetite. We are strengthening our balance sheet by continuing to reduce our non-core assets and applying a conservative approach to, and prudent appetite for, risk. We have reduced our international presence in order to focus on our core uK customers.
We are delivering our strategy though a clear action plan focused on reshaping our business portfolio to fit our assets, capabilities and risk appetite, strengthening our balance sheet and liquidity position, simplifying the Group to improve agility, efficiency and customer service and investing to be the best bank for customers. Our progress against this plan and the key priorities for 2014 are described on the next few pages.
In addition, we continue to refresh our operating structure and, from 2014, our unified Wealth business will be integrated into the Retail division to allow us to sharpen our focus on delivering value-added Wealth services to eligible retail customers. We have also moved our Business Banking unit into Retail, allowing us to manage customer relationships in a way which leverages existing Retail infrastructure, via branch, telephony and digital channels. Our Asset Finance business is the foundation of a newly created Consumer Finance division, which will also include our consumer and corporate credit card business. Bringing these business units together will increase management focus and allow us to capitalise on growth opportunities, continuing our good momentum in asset-backed lending and with the aim of growing our market presence in credit cards. We have also created a new Digital, Marketing and Customer Development function focusing our investment and ensuring our success in Retail is replicated by sharing digital product development across all divisions.
Key initiatives and progress in 2013 We made significant progress in reshaping our business to become a simpler, low risk, customer focused organisation in 2013. As a result we have already achieved a number of our original targets in this area ahead of schedule.
Continued reduction in non-core assets In 2013 we further reduced our assets, by £34.9 billion to £63.5 billion, significantly ahead of both our original £90 billion target and the revised £70 billion target, and ahead of the original 2014 target date. We have now reduced non-core assets by around £100 billion since the strategic review in June 2011, and these disposals continue to be capital accretive in aggregate.
Our international target of fewer than 15 countries, subsequently updated to fewer than 10 countries, has now been achieved with 21 countries now exited, or exit announced.
Priorities for 2014 Build on our strong capital position and further increase our capital ratios to support our dividend policy whilst ensuring evolving regulatory requirements are met.
Business disposals including the sale of St. James’s Place and uS residential mortgage-backed security portfolios
We have continued to improve our common equity tier 1 ratio, and expect to generate, prior to any dividends, fully loaded common equity tier 1 capital of around 2.5 percentage points over the next two years, and thereafter 1.5 -2 percentage points per annum.
We have now achieved our 100 per cent target for the core business.
The previous target of £1.9 billion of run rate savings by the end of 2014 has been further improved to £2.0 billion as the programme enters its final year. The savings are being achieved through a series of Simplification initiatives focused on operations and processes, sourcing, channels and products, and the creation of a more agile organisation.
Priorities for 2014 Further automation to streamline our key processes and operations.
Maintained focus on sourcing and further reduction in the number of suppliers.
We have increased our Simplification programme run rate cost savings target from £1.9 billion to £2.0 billion, having delivered £1,457 million of run rate cost savings by the end of 2013.
Our investment is subject to disciplined tests, including alignment with our strategy to be the best bank for customers, financial returns and fit to our risk appetite. The investment will primarily be focused on becoming the best bank for personal customers, becoming the best partner for our business customers and enhancing our insurance proposition.
new everyday banking propositions launched featuring cashback services to reward loyalty.
Return on risk-weighted assets increased to 4.11 per cent from 3.21 per cent in 2012, driven primarily by improved income and continuing effective credit risk management.
net interest income increased 5 per cent. Other income down 4 per cent. Total underlying income increased 3 per cent.
Total costs down 2 per cent to £4,096 million, primarily as a result of the Simplification programme and ongoing cost management activity.
Impairment reduced 13 per cent to £1,101 million, with unsecured remaining stable and secured charges decreasing.
Customer deposits increased 3 per cent driven by growth in relationship balances.
Played a leading role in the development of the uK retail bond market, becoming a market maker on the london Stock exchange for retail bond investors, providing the market with continuous pricing in bonds and gilts.
Core net interest margin increased 31 basis points through disciplined pricing of new business, in addition to reduced funding cost driven by increased high quality deposits contributing to a reduction in the Group’s requirement for wholesale funding.
non-core loans and advances to customers decreased by £15.8 billion, as a result of the Group’s asset reduction strategy.
With the reshaping of our international footprint and the move of Wealth into the Retail division, our Wealth, Asset Finance and International division will become Consumer Finance from 2014. This new division will include Credit Cards, Asset Finance and the european online deposit businesses.
Core underlying profits increased by 38 per cent to £632 million (86 per cent excluding St. James’s Place) driven by strong income growth in Wealth and Asset Finance, and cost savings.
Impairment charges reduced by £750 million to £730 million, including a reduction of £637 million in the Irish portfolio.
Core loans and advances to customers increased by 23 per cent driven by Asset Finance and primarily the uK motor finance business.
In Annuities, we began the delivery of our enhanced annuity proposition and continued to support our annuity strategy with the acquisition of attractive, higher yielding assets to match long duration liabilities.
2013 highlights underlying profit down 2 per cent to £1,090 million, driven by changes in intra group commission arrangements and run-off legacy creditor books, partly offset by lower claims and costs. Return on required equity up from 12 per cent to 13 per cent.
Building valuable relationships We have one strategy for delivering sustainable success – being the best bank for customers – and doing business responsibly is inherent in this strategy. António Horta-Osório, Group Chief Executive
With over 30 million individual and business customers and a presence in communities across the country, we are very well placed to serve the country’s households, businesses and communities, and to make a significant contribution to the future strength and prosperity of the uK. We have one strategy for delivering sustainable success – being the best bank for customers, and doing business responsibly is inherent in this strategy.
Certain sectors carry inherent social, ethical and environmental risks. Our policies and procedures support colleagues working in our relationship management and risk teams in understanding how to approach, assess and manage these risks. We are signatories to the equator Principles, which provide a framework for determining, assessing and managing environmental and social risk in project finance transactions. Our Code of Business Responsibility states that we do not finance any activities prohibited by International conventions supported by the uK government. You can read about our approach to managing environmental risk and the equator Principles in the risk management section on page 162.
Our focus on doing business responsibly is recognised by our continued presence in the FTSe4Good socially responsible investment index, our position in CDP (Carbon Disclosure Project) and our platinum status in the Business in the Community CR Index.
We’re the first uK bank to launch a plan like this. We’re doing it because we’re sure of our purpose: to be a responsible, sustainably successful business that helps Britain prosper. We also believe that the Helping Britain Prosper Plan is a way to rebuild trust with our customers by demonstrating that we’re focused on the issues they face. Customers will be able to see from the Plan that their concerns are also our concerns. Other stakeholders will be able to benchmark our future performance against the Plan.
For further details of the Plan, including how it was developed, please refer to our Responsible Business Report at www.lloydsbankinggroup-cr.com.
The Helping Britain Prosper Plan 1 We’ll help more customers get on the housing ladder – and more customers climb up it 1.1 number of first-time buyers supported through delivering the most comprehensive mortgage proposition in the uK mortgage market 1.2 Share of new build mortgages provided (for first-time buyers, second steppers and private rented)
6 We’ll be the banking Group that brings communities closer together to help them thrive 6.1 number of paid volunteer hours used by colleagues to support community projects 6.2 number of community organisations supported by our volunteers or funding 6.3 £ donated to the Bank’s Foundations to help tackle disadvantage 6.4 £ raised by colleagues for our Charity of the Year (including Matched Giving) to support those in need in our communities 800,000 (cumulative)
Increase our new lending support to uK manufacturing businesses by £1 billion.
Beat our commitment to lend £6.5 billion to 60,000 first-time buyers.
The best customer satisfaction ratings our high street brands have ever achieved.
Through our Simplification programme and continued focus on becoming the best bank for customers, our FCA reportable banking complaints continued to fall.
Supporting our customers We currently serve around 30 million individual and business customers. We want to provide them with the right products, setting the best service standards and achieving the best outcomes.
Encouraging enterprise and manufacturing For the second consecutive year, we’ve run the lloyds TSB enterprise Awards, inviting entries from British businesses run by university students or recent graduates. This year, 484 businesses entered and a total of 28 were awarded cash prizes or mentoring support. We will host the Awards again in 2014.
Supporting low carbon businesses As a potential source of funds and support for low carbon businesses we continue to support the uK government’s target to meet 15 per cent of the uK’s energy demand from renewable sources by 2020. As an active participant in the Project Finance Market, at the end of 2013 we were involved in renewable energy projects across the uK with a combined capacity of 3580MW, enough to power 3.5 million homes.
Helping ex-offenders make a fresh start In partnership with the national Offender Management Service, we offer more basic banking facilities to recent offenders and prisoners preparing for release, than any of our competitors. Basic accounts allow people in this situation to receive income payments, pay bills and purchase goods as they reintegrate back into society.
Tracking our brand and reputation We use the ‘net Promoter Score’ to track the reputation of our brands and overall customer satisfaction. nPS is a standard business metric based on the likelihood of customers recommending a brand to others. In 2013 our high street brands achieved an aggregate score of 55 per cent, an improvement from 49 per cent in 2012.
Protecting our customers’ best interests Our customers need to be sure that their money and personal details are safe with us. As one of Britain’s largest financial businesses we face hundreds, sometimes thousands, of cyber-threats every day. This is why we consistently invest in technology and colleague training to maximise security.
This year our whistleblowing service, a confidential service for colleagues worried about possible wrong-doing that may affect colleagues, customers or the Group, recorded 443 new contacts, compared with 532 last year. 53 per cent of these were resolved appropriately and advice was given to the remaining 47 per cent to raise concerns through other, more appropriate, routes.
At lloyds Banking Group, we want the diversity of our employee base to reflect the population of the uK and who our customers are: the better we reflect our marketplace, the better we can serve it. We also encourage our colleagues to work closely with the community to build lasting relationships that are the foundation for our business in the future.
Do even more to build a diverse workforce and inclusive workplace.
nurture the next generation of leaders, strengthening our succession and talent pipeline.
76 per cent of all executive vacancies filled from within lloyds Banking Group.
Increased the percentage of women on our Board to 27 per cent.
The Employee Engagement Index (EEI) measures the individual motiviation of colleagues whilst the Performance Excellence Index (PEI) measures how strongly colleagues believe the Group is committed to improving customer service.
% of colleagues who disclose they have a disability 1.5% 1.5%
Support for colleagues with disabilities We are committed to being a disability confident organisation, which provides equal opportunities for people with disabilities. We plan to launch a work experience programme for disabled people in 2014, following a successful pilot in 2013.
Developing future leaders In line with our commitment to bring in talented people, we’ve expanded the scope and scale of our Graduate Programme. We also doubled the number of colleagues participating in our Future executives Programme.
Remuneration We offer competitive salaries and aim to award competitive variable pay (bonus and incentives) relevant to particular roles.
As Britain’s largest retail and commercial bank, serving around 30 million customers, our brands are familiar on the high street and in almost every community. By supporting these communities, we can benefit many local people, build trust in our brands, and sow the seeds for future growth.
Aim Our brands are familiar on the high street in almost every local community. Through our community-focused programmes and investment activity we can benefit many local people and build trust in our brands.
last year the Group invested £85 million in a range of flagship programmes and initiatives. Despite the challenging economic environment the Group committed to keep its investment at this level for the period of its strategic plan.
Raised £2.5 million for our charity of the year, Alzheimer’s Society and Alzheimer Scotland, beating our year end target.
Investing in education, employability and enterprise The ability to manage money well is essential in 21st century Britain, and there are calls from many quarters to make financial education compulsory in schools. unfortunately many young adults lack the skills required to manage their money effectively. We’re doing what we can to help address this issue.
launched a review of our approach to responsible business in our supply chain.
Investor trust and their feedback are important considerations when formulating our ongoing strategy and a review of our investor interaction was undertaken in 2013 which provided positive feedback on our approach. Given the increasing focus within the business on operating sustainably and responsibly, we plan to deliver a series of investor presentations on our Helping Britain Prosper Plan in 2014.
Achievements in 2013 Achieved a reduction in energy use of 12.7 per cent against our 2009 baseline, resulting in cost avoidance of £8.7 million in 2013 and cost avoidance of £22 million since 2010.
Paper 20% reduction in paper consumption 75% 26,565 tonnes 27,220 tonnes
Business travel 20% reduction in our business travel 95% 315m kms 334m kms
Water 20% reduction in water consumption 90% 1,075,016 m3 1,059,999 m3
Risks are identified, managed and mitigated using our Risk Management Framework (see page 41). The principal risks we face, which could significantly impact the delivery of our strategy, are discussed on pages 133 to 196.
Customer focus Put our customers at the heart of our business through a clear conduct led approach and a strong understanding of all our stakeholders, supported by the codes of responsibility, applied to both current activities and historic legacy issues.
Operational agility evolve risk into an agile, flexible function that supports the business in its next phase of growth with effective working across the Group.
Risk governance Risk management strategy and risk appetite are developed and reviewed in tandem with Group strategy. The Group uses an enterprise-wide risk management framework to ensure a robust and consistent approach to risk management is applied across all business areas and all risk types in order to drive improvements in its risk profile in line with risk appetite.
Governance is maintained through delegation of authority from the Board, down through the management hierarchy, supported by a committee based structure designed to ensure that our risk appetite, policies, procedures, controls and reporting are fully in line with regulations, law, corporate governance and industry good-practice.
Our processes and infrastructure are being invested in to further improve our risk management capabilities
Conduct risk As a major financial services provider we face significant conduct risk, including selling products to customers which do not meet their needs; failing to deal with customers’ complaints effectively; not meeting customers’ expectations; and exhibiting behaviours which do not meet market or regulatory standards.
Product approval, review processes and outcome testing supported by conduct management information.
Continually review IT system architecture to ensure systems are resilient, readily available for our customers and secure from cyber attack.
now progressing the divestment of TSB through an Initial Public Offering subject to regulatory and european Commission approval, to ensure best value for our shareholders and certainty for our customers and colleagues.
Customer focused conduct strategy implemented to ensure customers are at the heart of everything we do.
A rates hedging programme is in place to reduce liability risk.
Credit assets and alternative assets are being purchased by the pension schemes as equities are sold.
Funding and liquidity risk Our funding and liquidity position is supported by a significant and stable customer deposit base. However, a deterioration in either our or the uK’s credit rating or a sudden and significant withdrawal of customer deposits would adversely impact our funding and liquidity position.
The legal, Regulatory and Mandatory Change Committee ensures we drive forward activity to develop plans for regulatory changes and track progress against those plans.
Impairment charge Asset quality ratio1 Commentary Through non-core asset reduction and effective risk management of both existing and new business, we have seen sustained improvements in credit quality and reduction in impairments.
Continue to effectively manage the Defined Benefit Pension Scheme to secure pensions provisions to members and minimise the impact on the Group.
Implement remaining non-core run-off and disposals to be net capital accretive.
We maintained our focus on cost control and efficiency, with total costs falling by 5 per cent to £9,635 million, in line with the upgraded guidance given in the first quarter of 2013. The impairment charge improved by 47 per cent to £3,004 million, driven by the reduction in non-core assets and the sustained improvement in Group asset quality.
Total costs fell by 5 per cent to £9,635 million driven by around £600 million of savings from Simplification initiatives, and the effect of disposals in the year, partly offset by staff related costs and inflation. Total costs include a bank levy charge of £238 million (2012: £179 million). We continue to expect costs in 2014 to reduce to around £9 billion, excluding TSB running costs.
Core costs fell 1 per cent to £9,149 million driven by strong cost management, benefits from the Simplification programme and the deconsolidation of St. James’s Place from the beginning of April. These reductions were partly offset by additional staff related costs, inflation and the increase in the bank levy. non-core costs fell 44 per cent due to the significant reduction in non-core assets.
The volume of PPI complaints continues to fall. Average monthly complaint volumes (excluding complaints where no PPI was held) reduced to approximately 37,000 in the fourth quarter of 2013, and were 24 per cent below volumes in the third quarter, and 56 per cent below the fourth quarter of 2012. While fourth quarter volumes fell in line with our revised end of third quarter expectations, following further statistical modelling and the results of the most recent customer survey, we are now forecasting a slower decline in future volumes than previously expected. The additional provision taken in the fourth quarter is based on the assumption that we will receive approximately a further 550,000 complaints. Together with an increase in administrative costs, this revised forecast for future complaint volumes accounts for approximately £1.1 billion of the £1.8 billion additional provision taken in the fourth quarter.
Since the commencement of the PPI redress programme in 2011 we estimate we have contacted, settled or provided for approximately 40 per cent of the policies sold since 2000, covering both customer-initiated complaints and actual and expected proactive mailings undertaken by the Group. The proactive mailings arise from a detailed Past Business Review, carried out by the Group as agreed with the Financial Conduct Authority (FCA), as a result of which the Group is contacting customers identified as having the highest likelihood of required redress. These mailings are expected to be substantially complete by the end of the first half of 2014. In terms of customer-initiated complaints, the fourth quarter monthly average run-rate of approximately 37,000 complaints is around 70 per cent below its peak and complaints have declined in each of the last six quarters.
The total amount provided for PPI represents our best estimate of the likely future costs, albeit a number of risks and uncertainties remain, in particular complaint volumes, uphold rates, average redress costs, the scope and cost of proactive mailings and remediation, and the outcome of the FCA enforcement Team investigation. The cost of these factors could differ materially from our estimates, with the risk that a further provision could be required.
The Group’s total capital ratio under prevailing rules improved to 20.8 per cent, with £25.4 billion of tier 1 and tier 2 securities contributing to the £54.8 billion capital base.
excludes balances relating to margins of £2.2 billion (31 December 2012: £4.5 billion) and settlement accounts of £1.3 billion (31 December 2012: £1.5 billion).
The liquidity Coverage Ratio (lCR) is expected to become the Pillar 1 standard for liquidity in the uK in 2015, and the PRA has the ability to impose firm-specific liquidity requirements. The european Commission is to adopt further legislation by 30 June 2014 to specify the definition, calibration, calculation, and phase-in of the lCR for implementation in 2015. The Group expects to meet the new requirements ahead of the implementation dates.
The significant reduction of non-core assets and the balance sheet strengthening undertaken in the year supports the Group in becoming a lower risk bank with a stronger and more sustainable earnings outlook.
Key balance sheet items at 31 December 2012 £bn £bn £bn £bn £bn £bn loans and advances to customers1 343.3 134.7 33.4 0.7 512.1 excludes reverse repos.
Underlying basis In order to present a more meaningful view of business performance, the results of the Group and divisions are presented on an underlying basis. The key principles adopted in the preparation of the underlying basis of reporting are described below.
loans and advances to customers excluding reverse repos divided by customer deposits excluding repos.
Key balance sheet items at 31 December 2012 £bn £bn £bn £bn £bn £bn loans and advances to customers1 317.3 102.0 5.3 0.7 425.3 excludes reverse repos.
Key balance sheet items at 31 December 2012 £bn £bn £bn £bn £bn £bn
Retail 2013 financial highlights underlying profit increased 18 per cent to £3,749 million, driven by improved margins, reduced costs and favourable impairments.
net interest income increased 5 per cent. Margin performance was strong, increasing 15 basis points to 2.23 per cent in 2013 from 2.08 per cent in 2012, driven by improved deposit mix and a favourable funding environment, more than offsetting reduced lending rates.
Other income down 4 per cent, with lower income from bancassurance and protection following the Retail Distribution Review in 2012, partially offset by the benefit of a revised commission arrangement in relation to the home insurance book.
Impairment reduced 13 per cent to £1,101 million, with the unsecured book remaining stable and secured charges decreasing largely due to lower impaired loan balances.
loans and advances to customers were broadly in line with 2012 at £341.9 billion. Gross new mortgage lending increased £10.7 billion to £36.9 billion, contributing to core lending balances returning to growth in the third quarter, increasing further in the fourth quarter.
Fi na nc ia l re su lt s Summary of Group results 45 Divisional results 56 Other financial information 66 Five year financial summary 68
Core underlying income grew by 5 per cent to £4,924 million driven by SMe, Mid Markets and Financial Institutions underpinned by strong performances in Transaction Banking and lDC and a resilient performance in Financial Markets and Capital Markets products. Income continues to be well balanced across the four client segments.
Core lending increased by 7 per cent driven by a 6 per cent increase in SMe, and a strong performance in Mid Markets and Global Corporates resulting in an 8 per cent increase in Other Commercial Banking. This has been achieved whilst reducing risk-weighted assets resulting in improved capital efficiency.
Key balance sheet items loans and advances to customers4 109.5 102.0 7 16.9 32.7 (48)
Total cost reductions of 13 per cent (8 per cent excluding St. James’s Place). Savings from the run-down of non-core businesses, from simplification of the organisational structure in both Wealth and Asset Finance, and optimisation of our direct channel customer service in Wealth, enabled investment in building our customer propositions in uK Wealth and Asset Finance.
Risk-weighted assets reduced by 28 per cent driven by sales and repayments of non-core assets within Asset Finance and Ireland.
Key balance sheet items loans and advances to customers2 6.5 5.3 23 17.7 28.1 (37)
General Insurance income net of claims – – 457 – 457 572
Full 2012 comparator tables for the profit and cash disclosures can be found on the lloyds Banking Group investor site.
Cash invested in new business (261) (3) – (21) (285) (264)
Cash generated from General Insurance – – 374 – 374 409
Underlying profit (loss) before tax 357 445 297 (9) 1,090 1,107
2012 comparative figures have been amended to reflect the effect of the continuing consolidation of operations across the Group. To ensure a fair comparison of the 2013 performance, 2012 direct costs have been restated with an equivalent offsetting increase in recharges to divisions.
– Information Technology savings were offset by increased costs from delivering Group Strategic Initiatives, such as Transaction Banking Transformation and Digital Transformation, which generate income and cost benefits in other Divisions.
– Group Property costs decreased by 2 per cent as we continued to consolidate the Group’s property portfolio with savings offsetting the costs of rebranding the Branch network.
– We continue to streamline our internal operations and have reduced the number of suppliers by a further 1,467 this year, bringing the total down from over 18,000 at the start of Simplification to 9,066, well ahead of our original target of 10,000 by the end of 2014.
– Total underlying income in 2013 includes the £540 million gain on the sales of shares in St. James’s Place.
Average interest-earning banking assets are calculated gross of related impairment allowances, and relate solely to customer and product balances in the banking businesses on which interest is earned or paid.
In 2013 the Group’s statutory result before tax included positive insurance and policyholder interests volatility totalling £668 million compared to positive volatility of £312 million in 2012.
Investments backing annuity liabilities 3.83 3.89 equities and property 5.58 5.48 uK government bonds 2.58 2.48
Basic earnings (loss) per ordinary share (1.2)p (2.1)p (4.3)p (0.5)p 7.3p
Restated in 2013 for IAS 19 (Revised) and IFRS 10; see note 1 on page 212.
Chairman of the nomination & Governance Committee Member of the Remuneration Committee and the Risk Committee
Skills and experience: Sir Winfried has substantial experience of leading complex international boards in the uK and the uS. His background spans a range of sectors, including banking and capital markets, finance and government regulation and public policy. Sir Winfried is a highly respected leader with the proven experience and judgement who has led the Board of lloyds Banking Group during a period of significant progress over the past four years. Sir Winfried has a BA in Commerce from the university of the Witwatersrand, a Doctorate in Science, Honoris Causa, from City university and was made a Johnson Honorary Fellow of the university of Oxford.
David Roberts Deputy Chairman and Independent Director Joined the Board in March 2010
Former appointments: David joined Barclays in 1983 and held various senior management positions culminating in executive Director, member of the Group executive Committee and Chief executive, International Retail and Commercial Banking, a position which he held until December 2006. He is a former non-executive Director of BAA and Absa Group and was Chairman and Chief executive of BAWAG P.S.K. AG.
Sir Winfried Bischoff Chairman (retiring on 3 April 2014) Joined the Board in September 2009
Member of the Audit Committee, the Risk Committee and the nomination & Governance Committee
Skills and experience: lord Blackwell has extensive insurance, banking, regulatory and public policy experience gained from senior positions in a wide range of industries. lord Blackwell’s deep financial services knowledge and experience, leadership qualities and credibility with key stakeholders, made him the unanimous choice of the Board to succeed Sir Winfried as Chairman of lloyds Banking Group. lord Blackwell has an MA in natural Sciences from the university of Cambridge, and a Ph.D in Finance and economics and an MBA from the university of Pennsylvania.
External appointments: Anita is the Chairman of Victrex plc, having previously been its Senior Independent Director, and is a Senior Independent Director of Aberdeen Asset Management and IMI.
Former appointments: Dyfrig was a Director of HSBC Bank PlC from 2003 to 2009, Chief executive Officer from 2006 to 2009 and Deputy Chairman from 2008 to 2009. Prior to joining the Board of HSBC Bank PlC, he held a number of senior roles including Group Managing Director and member of the Group Management Board. until recently he was a Board member of the Wales Millennium Centre.
Skills and experience: nick is a chartered accountant and has significant financial experience in the uK listed environment having served in a number of senior finance positions within a range of sectors. His background and experience enables him to fulfil the role of Audit Committee Chair and, for SeC purposes, the role of Audit Committee Financial expert. nick is a Mathematics graduate from the university of Oxford.
External appointments: nick is currently the Group Finance Director of Centrica. He will step down from the Centrica Board before the end of 2014 to take up a new position as Chief Financial Officer of Reed elsevier.
Former appointments: nick was previously Finance Director of The Peninsular & Oriental Steam navigation Company and Chief Financial Officer of P&O Princess Cruises plc. until December 2010, he served as a non-executive Director and was the Audit Committee Chair of QinetiQ Group. nick started his career with KPMG where he qualified as a chartered accountant in 1991.
Skills and experience: George is a chartered accountant and has deep operational and financial expertise including strategic and financial planning and control. He has worked in financial services in the uK and overseas for over 20 years. With a strong background in insurance and shareholder advocacy, his skills and experience enhance the Board and strengthen further the senior management team. George is a chartered accountant and has a History degree from the university of Cambridge.
The Group benefits from the depth and diversity of experience within the management team. The complementary skill sets across the team strengthen the Group’s ability to effectively adjust to changing market environments, deliver on our strategic plan and become the best bank for customers. Brief biographies of the members of the Group executive Committee (GeC) are outlined opposite.
Andrew qualified as a Chartered Accountant with Deloitte & Touche. He is a member of the South African Institute of Chartered Accountants, the Chartered Institute of Management Accountants and is a Chartered Global Management Accountant. He is also a member of the Association of Corporate Treasurers. Andrew sits on the board of the Global Financial Markets Association and on the Advisory Board of the university of Cambridge Programme for Sustainability leadership. He is also a member of the Prince of Wales’s uK Corporate leaders Group.
George Culmer Chief Financial Officer George joined the Board as an executive Director in May 2012.
Her last role was executive Director for Retail Distribution and a Board Director at Santander uK. She previously worked at Barclays for almost 20 years in various senior roles including Director of Barclays and Woolwich Retail networks and Managing Director of Barclays Small Business Banking. Alison attended university in Scotland and the uSA and has an MBA from Cambridge university’s Judge Institute.
Miguel-Ángel Rodríguez-Sola Group Director, Digital, Marketing and Customer Development Miguel was appointed Group Director, Digital, Marketing and Customer Development in September 2013. Previously, he was Group Strategy Director and Commercial and Shared Services Director for the Retail Division. Before joining lloyds Banking Group in 2011, Miguel worked for over six years at the Santander Group in Spain, the uSA and from 2008 in the uK. In the uK he was responsible for the Corporate and SMes Division and later for the Retail Products and Marketing Division and for customer service.
Matthew Young Group Corporate Affairs Director Matt joined lloyds Banking Group in February 2011 as Group Corporate Affairs Director. He has responsibility for internal and external Communications, Public Affairs, Regulatory Developments, Community Investment including the Group’s Archives and Museums. Prior to joining the Group, he was the Communications Director at Santander uK and has also held senior positions with Abbey national and natWest.
Dividends The Directors do not propose to pay a final dividend in respect of the year ended 31 December 2013. Further information on ordinary dividends is shown in note 49 on page 293 and is incorporated into this report by reference.
Branches, future developments and financial risk management objectives and policies The Group provides a wide range of banking and financial services through branches and offices in the uK and overseas. Information about future developments, internal control and financial risk management systems in relation to financial reporting and financial risk management objectives and policies in relation to the use of financial instruments can be found in the following sections of the annual report, which are incorporated into this report by reference: Pages
Internal control and financial risk management systems in relation to financial reporting 123 to 196 and page 87
Sir Winfried Bischoff will retire from the Board on 3 April 2014 and will be succeeded as Chairman by lord Blackwell.
Appointment and retirement of Directors The appointment of Directors is governed by the Company’s articles of association, the uK Corporate Governance Code and the Companies Act 2006. The Company’s articles of association may only be amended by a special resolution of the shareholders in a general meeting.
Juan Colombás and Dyfrig John have been appointed to the Board since the 2013 annual general meeting and will therefore stand for election at the forthcoming annual general meeting. In the interests of good governance and in accordance with the provisions of the uK Corporate Governance Code, all of the other Directors will retire and those willing to serve again will submit themselves for re-election at the forthcoming annual general meeting.
The powers of the Directors, including in relation to the issue or buy back of the Company’s shares, are set out in the Companies Act 2006 and the Company’s articles of association. The Directors were granted authorities to issue and allot shares and to repurchase shares at the 2013 annual general meeting. Shareholders will be asked to renew the authorities at the 2014 annual general meeting.
The Company did not repurchase any of its shares during the year (2012: none).
Research and development activities During the ordinary course of business the Group develops new products and services within the business units.
Employees lloyds Banking Group is committed to providing employment practices and policies which recognise the diversity of its workforce. The Group will not unfairly discriminate in the recruitment or employment practices on the basis of any factor which is not relevant to individuals’ performance including sex, race, disability, age, sexual orientation or religious belief. The Group works hard to ensure lloyds Banking Group is inclusive for all colleagues.
To support the Group in this aim, lloyds Banking Group belongs to a number of major uK employment equality campaign groups, including the Business Disability Forum, The Age and employment network, Stonewall and Race for Opportunity. Involvement with these organisations enables the Group to identify and implement best practice for staff. lloyds Banking Group has a range of programmes to support colleagues who become disabled or acquire a long-term health condition. These include a workplace adjustment programme to provide physical *
Lloyds Banking Group Annual Report and Accounts 201376 equipment or changes to the way a job is done. The Group also runs residential Personal and Career Development Programmes to help colleagues deal positively with the impact of a disability and the colleague disability network, Access, provides peer support.
employees are kept closely involved in major changes affecting them through such measures as team meetings, briefings, internal communications and opinion surveys. There are well established procedures, including regular meetings with recognised unions, to ensure that the views of employees are taken into account in reaching decisions.
lloyds Banking Group is committed to providing employees with comprehensive coverage of the economic and financial issues affecting the Group. The Group has established a full suite of communication channels, including an extensive face-to-face briefing programme, which allows it to update employees on performance and any financial issues throughout the year.
Statement of directors’ responsibilities The Directors are responsible for preparing the annual report, the directors’ remuneration report and the financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare financial statements for each financial year. under that law, the Directors have prepared the Group and parent Company financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the european union. under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Company and Group for that period. In preparing these financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; make judgements and accounting estimates that are reasonable and prudent; and state whether applicable IFRSs as adopted by the european union have been followed.
Marc Boston Company Secretary 5 March 2014 lloyds Banking Group plc Registered in Scotland
Finally, I would like to thank each of the Directors for their commitment throughout 2013 and their support during the period of my chairmanship. Our high standards of corporate governance are driven by the Board and embedded in the thinking and processes of the business. The Group is now profitable with a strong balance sheet and a solid prudential foundation on which to build a sustainable future.
The role of the Company Secretary The Company Secretary is responsible to the Board and provides comprehensive practical support and guidance to Directors both as individuals and as a collective, with particular emphasis on supporting the non-executive Directors in maintaining the highest standards of probity and corporate governance. The Company Secretary is also responsible for communicating with shareholders as appropriate and ensuring that due regard is paid to their interests. All Directors, including non-executive Directors, have access to the services of the Company Secretary in relation to the discharge of their duties.
ensures the Directors receive timely and relevant information and are kept advised of key developments.
Is a conduit, as required, for the views of other non-executive Directors on the performance of the Chairman.
Attends sufficient meetings with major shareholders and financial analysts to understand issues and concerns.
Deputy Chairman ensures continuity of effective Board Chairmanship during any change of chairmanship.
Supports the Chairman in representing the Board and acting as spokesman.
Is the Chairman’s point of contact with governmental and other institutions.
Scrutinises the performance of management in meeting agreed goals and objectives.
Executive Director Makes and implements decisions in all matters affecting the operations, performance and strategy of the Group’s business, under the leadership of the Group Chief executive.
Responsible for the successful leadership and management of the Risk and Finance divisions.
The following table provides an overview of the matters reserved to the Board of lloyds Banking Group plc. A full schedule of all matters reserved to the Board can be found on our website at www.lloydsbankinggroup.com.
Subsidiary governance The Group conducts the majority of its business through a number of subsidiary entities. The Boards of the four main bank companies, lloyds Banking Group plc, lloyds Bank plc, HBOS plc and Bank of Scotland plc, comprise the same Directors. The Board meetings for these companies are held concurrently with the agenda split between the companies to allow decisions to be taken and scrutinised by the appropriate Board.
Risk management Approves the Group’s risk appetite and risk management framework.
Reviews annually the effectiveness of the Group’s risk management and internal control systems.
Approves large transactions, equity investments and disposals, and intra group guarantees.
Finance, statutory and regulatory requirements Approves financial statements, dividends and significant accounting changes.
The establishment of TSB Bank plc Following the european Commission’s ruling in 2009 requiring the Group to divest part of its business, the Group created a fresh competitor on Britain’s high streets in TSB Bank, which was launched in September 2013. The creation of TSB Bank required the Group to balance its oversight obligations with the need to deliver an independently functioning bank. A governance structure was agreed by the Board of lloyds Banking Group plc to ensure this was achieved. Three governance stages were identified to progress TSB Bank’s transition to a fully independent stand alone bank: Wholly-owned subsidiary While TSB Bank remains a wholly owned subsidiary of the Group it will operate in line with the Group’s risk appetite and over-arching strategic goals. Should TSB Bank need access to Group information in order to carry out its responsibilities, any conflicts are managed in accordance with existing Group guidance. In accordance with the mandate set with the TSB Bank Board, TSB Bank management will run TSB Bank but have reporting lines to their Group counterparts.
until recently, the Board operated with two executive Directors: the Group Chief executive and the Chief Financial Officer. As a reflection of the importance of risk management in decisions taken by the Board, Juan Colombás, the Chief Risk Officer, was appointed to the Board in november 2013 as an additional executive Director. His appointment has increased the number of executive Directors on the Board to three.
More information on Board and Committee composition and the appointment process is set out in the nomination & Governance Committee Report on pages 89 and 90. The Directors’ biographies are set out on pages 70 and 71.
Election and re-election All Directors appointed to the Board since the annual general meeting in 2013 will stand for election at the 2014 annual general meeting. All other Directors will retire and those willing to serve again will submit themselves for re-election at the annual general meeting. Biographies of all current Directors are set out on pages 70 and 71. Details of the Directors seeking election or re-election at the annual general meeting are set out in the notice of Meeting.
Following the announcement by our Chairman, Sir Winfried Bischoff, of his intention to retire before the 2014 annual general meeting, a committee of the Board was established, led by Anthony Watson, to oversee the search and selection of his successor. A job specification was prepared and with the assistance of Odgers Berndtson (who has no connection with the Group), a comprehensive long-list of potential candidates was drawn up which, based on the attributes required and the skills, availability and experience of the candidates, was reduced to a short-list of candidates. each of the candidates was interviewed and assessed by the members of the Committee with updates on progress reported to the nomination & Governance Committee and the Board.
On 2 December 2013, the Group announced that lord Blackwell would be appointed as Chairman of the Group following the retirement of Sir Winfried Bischoff on 3 April 2014. The appointment received unanimous Board approval. lord Blackwell has been a Director on the Board of lloyds Banking Group since June 2012 where he has been a member of the Group’s Audit and Board Risk Committees. He has also been the Chairman of Scottish Widows since September 2012. lord Blackwell has broad experience in banking, insurance and management consultancy. His external ex perience, together with his experience and knowledge of lloyds Banking Group and existing relationships with the Board, make him ideally placed to ensure a seamless handover as Chairman. Since the announcement of lord Blackwell’s appointment to the role of Chairman, he has taken steps to ensure that he can adequately meet the time commitments of the role. lord Blackwell meets the independence criteria set out in the Code on appointment. His biography can be found on page 70.
Developing diversity The Board recognises that senior management is a group from which future directors may be selected. To improve the diversity in these roles, the Group has implemented a variety of initiatives which include: – the Senior Women leadership Programme; – Footprints in the Snow, a senior women’s role model programme; – mandatory diverse shortlists for senior appointments; – Sponsoring leadership Programme, where women and colleagues from ethnic minorities are sponsored in their career by senior executives; – the Breakthrough Women’s network, which provides support and networking opportunities for over 4,000 women across the Group; and
Directors are responsible for notifying the Chairman and Company Secretary as soon as they become aware of actual or potential conflict situations. In addition, conflicts are monitored as follows: – the Directors are required to complete a conflicts questionnaire on appointment and annually thereafter; – changes to the commitments of all Directors are reported to the nomination & Governance Committee and the Board; and – a register of potential conflicts and time commitments is regularly reviewed and authorised by the Board to ensure the authorisation status remains appropriate.
If any potential conflict arises, the articles of association permit the Board to authorise the conflict, subject to such conditions or limitations as the Board may determine. In situations where a potential conflict arises, the Director will excuse themselves from any meeting or discussion and all material in relation to that matter will be restricted including Board papers and minutes.
Time commitments non-executive Directors are required to devote such time as is necessary for the effective discharge of their duties. On average, this equates to 35-40 days per annum (including attendance at Committee meetings). For Committee Chairs, this increases to 45-50 days with the Senior Independent Director and Deputy Chairman spending considerably more than 50 days on the Company’s business. non-executive Directors may be expected to relinquish other appointments to ensure that they can meet the time commitments of their role. Fees paid to non-executive Directors reflect the time commitment and responsibilities of the role. non-executive Directors do not receive share options or other performance related pay. executive Directors are restricted to taking on no more than one non-executive director role in a FTSe 100 company. The Chairman is required to commit to this being his primary role, limiting his other commitments to ensure he can spend as much time as the role requires. The Chairman’s biography can be found on page 70.
Professional development The Board receives regular refresher training and information sessions throughout the year to address current business or emerging issues. This is done under the leadership of the Chairman and is delivered through a variety of business updates, including sessions on: – capital and liquidity (including stress testing requirements); – the approved persons regime; – accounting developments; and – credit rating agency developments.
Prior to each Board meeting the Chairman reviews the agenda and time allocation with the Group Chief executive, the Company Secretary and other Directors as appropriate. The Group Chief executive holds a separate Board paper review meeting to review the individual papers. That meeting is held with the Chief Financial Officer and Company Secretary, and authors of the main papers, as required.
Effective use of the Board’s time To ensure that there is sufficient time for the Board to discuss matters of a material nature, Board dinners and/or breakfast meetings are held prior to each scheduled Board meeting. This allows the Directors greater time to discuss their views and, where relevant, form a consensus ahead of the meeting. These pre-meetings are normally attended by all members of the Board but often the pre-meetings are held without the executive Directors present and separately, at least once a year, without the Chairman in attendance.
Juan Colombás3 – – – – – – – – – – – –
Deep dives have been replaced by bespoke training sessions on specific topics as required. A structured approach to continuing development was introduced in 2013, which included a series of workshops and focused training sessions.
Following an external review in 2012 by Independent Audit, who has no connection to the Group, the Group conducted an internal review in 2013. Overseen by the nomination & Governance Committee, the 2013 review considered the following areas: strategy; risk and control; planning and performance; Board composition and size; culture and dynamics; relationships between management and independent Directors; governance; the Board’s calendar and agenda; the quality and timeliness of information; support for Directors and Committees; and other matters.
The evaluation of the Chairman was led by the Senior Independent Director through questionnaires and interviews for those who wanted to discuss anything further. The reviews concluded that the performance of the Board, its Committees, the Chairman and each of the Directors continues to be effective.
2013 evaluation outcomes The findings of the 2013 effectiveness review stressed the progress made under the Chairman’s leadership with strong support from experienced Committee Chairs. It identified a number of key strengths including the quality of risk oversight and risk reporting, improved Board dynamics and strongly performing Committees. Inevitably, it also identified areas for further efficiencies and effectiveness as set out below.
Matters considered The quality and timeliness of Board and Committee papers.
The appointment of Dyfrig John in January 2014 has bolstered the depth and breadth of uK retail banking experience on the Board. Further searches continue.
Investor Relations has primary responsibility for managing day-to-day communications with investors. Supported by the Group Chief executive, Chief Financial Officer, and other members of the senior management team, they achieve this through a combination of briefings to analysts and institutional investors (both at results briefings and throughout the year), as well as individual discussions with institutional investors.
The Company Secretary oversees communications with retail shareholders. The Group’s annual general meeting provides an opportunity to meet the Group’s Directors and to hear more about the strategy of the Group. Shareholders are encouraged to attend the annual general meeting and to raise any questions at the meeting or in advance, using the email address shown in the Annual General Meeting pack which will be sent to shareholders in due course.
Board effectiveness review – the Committee considered progress against the 2012 action plan and its approach for 2013. Following an external review in 2012, it undertook an internal review in 2013, with a view to reverting to an external review in 2014 under the new Chairman of the Board. Details of the effectiveness review can be found on page 86.
Corporate governance – the Committee monitored proposed changes in regulations and ensured that plans were in place to mitigate any risks arising.
Salz Review analysis – the Committee oversaw an analysis of the Group’s performance against the 34 Salz recommendations. Details can be found on page 90.
Committee purpose and responsibilities The purpose of the nomination & Governance Committee is to keep the Board’s governance, composition, skills, experience, knowledge, independence and succession arrangements under review and to make appropriate recommendations to the Board to ensure the Company's arrangements are consistent with the highest corporate governance standards. The key responsibilities of the Committee are set out in the table below and examples of how it discharged its responsibilities in 2013 follow. A full list of responsibilities is detailed in the Committee’s terms of reference, which can be found on our website at www.lloydsbankinggroup.com.
Reviews the role, including capabilities and time commitment, of the Chairman, Deputy Chairman, Senior Independent Director, non-executive Directors, the Group Chief executive and executive Directors.
The search for additional directors with relevant banking, finance and risk experience continues, as well as for a Director to replace lord Blackwell as Chairman of Scottish Widows. A description of the Board’s policy on diversity is set out on page 83. The biographies of Mr luff, Mr Colombás and Mr John can be found on pages 70 and 71. The JCA Group assisted with the search for nick luff and Dyfrig John and are assisting with the search for the Chairman of Scottish Widows. JCA Group is not connected with the Group.
Salz Review Following the publication of the Salz Review ‘An Independent Review of Barclays’ Business Practices’ in April 2013, the Chairman requested that the nomination & Governance Committee oversee a full analysis of the Group’s performance against the 34 Salz recommendations with reporting to the Board. The assessment provided assurance that the practices criticised in the Salz Review were not prevalent within the Group. The Group is seeking to embed a customer centric culture, which includes changing the way the Group measures colleague performance and incentivises them. The corporate culture is expressed through the Group’s Values and Code of Personal Responsibility. The cultural change programme is focussed on changing the way the Group measures colleague performance and incentivises them. It is supplemented by a Group-wide cultural assessment that is helping measure progress and build momentum as we help our 94,000 colleagues adapt to new ways of working by focusing on achieving successful outcomes for our customers rather than successful sales figures.
The Committee continues to be satisfied with the effectiveness of the external audit. Reviewing the audit plan with PricewaterhouseCoopers llP (PwC) enabled the Committee to ensure audit work focused on key risk areas and helped identify areas where improvements could be made to the focus of their work. In light of concerns expressed by the Financial Reporting Council on aspects of the quality of audits of financial institutions, the Committee ensured that the work done by the external auditor on loan impairments addressed the areas of concern and understood more the audit work undertaken on key IT systems. looking forwards, a key issue for the Committee in 2014 will be when to conduct a tender for the external audit, taking into account the recommendations and requirements of various regulatory bodies on the subject.
The Audit Committee spent extensive time in 2013 considering the significant judgements in the Group’s financial reporting, including reviewing the assumptions made by management in determining the provision for PPI redress. Nick Luff Chairman, Audit Committee www.lloydsbankinggroup.com
Financial reporting Monitors the integrity of the financial statements of the Group and reviews the critical accounting policies.
Reviews and challenges, where necessary, the actions, estimates and judgements of management, in relation to the interim and annual financial statements.
Agrees the policy on the employment of former employees of the external auditor.
Monitors the effectiveness of the external audit by a formal annual assessment and also the results of any reviews published by the Financial Reporting Council’s Audit Quality Review.
Considers the major findings of any significant internal audit, and management’s response.
Whistleblowing Reviews arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters.
Group Audit provided assurance to the Audit Committee that the process was undertaken in a controlled manner using reasonable, consistent and supportable assumptions and inputs. In 2013, the Audit Committee concluded that the processes followed by management in determining the provision for PPI redress were appropriate, although they will be considered periodically against actual claims experience.
Key assumptions challenged by the Audit Committee included the criteria for determining when a loan was impaired (particularly as it related to the Group’s strategy) and whether previous provisions were appropriate when these subsequently changed for loans that were already impaired.
Group Audit performed work to assess the effectiveness of impairment governance and processes and reported their findings to the Audit Committee. The audits considered whether management oversight, review processes and key judgements were adequately supported by quantitative analysis and detailed management information. The work carried out by Group Audit considered the basis for adjustments and calibrations to model output results and found these to be reasonable and supported by observed performance.
The Audit Committee was satisfied that the impairment provisions were appropriate. The disclosures relating to impairment provisions are set out in note 54: ‘Financial risk management’ on pages 327 to 349 of the financial statements.
The Audit Committee was satisfied that the value and disclosures made in respect of retirement benefit obligations were appropriate. The relevant disclosures are set out in note 41: ‘Retirement benefit obligations’ on pages 271 to 279 of the financial statements.
Group Audit During 2013 the Audit Committee monitored the effectiveness of Group Audit and their audit programme, approving the audit plan and budget and confirming that appropriate resources were in place to execute the plan effectively. Group Audit carried out over 400 audits in 2013 of varying size and complexity. Certain thematic audits focused on the Group’s embedding of the risk appetite, the integrity of the risk management framework, customer outcomes, corporate culture, business applications and strategic risks. A number of these audits supported the Group’s implementation of the new CIIA Code recommendations. The overall findings from Group Audit are presented to the Audit Committee with specific review of the findings from the most significant audit activity.
The Committee considers each year whether to put the external audit to tender. With the current audit partner required to rotate off the audit after the 2015 audit, the Committee is considering whether to conduct a tender in the second half of 2014, with a view to appointing a new audit firm, or reappointing PwC, with effect from 1 January 2016, subject to shareholder approval at the AGM in 2015. A final decision will be made during the year, after consideration of the requirements of proposed eu legislation that may restrict the period for which PwC could be reappointed before a mandatory change of auditor is required.
Timothy T Ryan 3/3 1 number of meetings held during the period the member held office. 2 The views of the Directors who are unable to attend meetings are provided to the Committee Chairman for representation at the meeting.
Chairman’s overview I am pleased to report the Board Risk Committee fulfilled its responsibilities and met its key objectives, whilst the annual Board effectiveness review concluded the Committee continued to operate effectively. The Committee maintains an appropriate balance of its scheduled review of key risks, whilst maintaining a dynamic approach so that emerging risks are appropriately escalated and considered and management actions and plans are constructively challenged. The Committee continued its focus on improving the quality of the information presented to it in order to better understand the current and emerging risks facing the Group, as well as ensuring the Group’s risk management frameworks, policies, practices and procedures remain appropriate for the risks faced, and are fully embedded within the business. The development of a suitable ‘risk culture’ remains a critical component of effective risk management and the Committee will continue to oversee management’s efforts in this regard.
In 2013, the uK economy continued to recover against a background of tight fiscal policy, restrictive credit conditions, weak consumer purchasing power and muted global growth. In addition, the regulatory and political environment tightened, with increased focus on conduct risk. notwithstanding these external challenges, I am pleased to report the Group’s strategy and risk discipline has led to a safer, low risk bank.
Committee purpose and responsibilities The purpose of the Board Risk Committee is to monitor the Group’s compliance with the Board’s approved risk appetite, risk management framework and risk culture. The key responsibilities of the Board Risk Committee are set out in the table below and examples of how it discharged its responsibilities follow. A full list of responsibilities is detailed in the Committee’s terms of reference, which can be found on our website at www.lloydsbankinggroup.com.
Provides input into the alignment of executive remuneration to risk performance.
Risk principles and policy Reviews new and material amendments to the risk principles and policy, recommended by the Group Chief executive and Chief Risk Officer.
Reviews the appointment, resignation or dismissal of the Chief Risk Officer.
Board risk appetite The Committee reviewed each of the Board risk appetite statements and metrics and recommended the risk appetite to the Board as part of its annual review.
Stress testing The Committee reviewed the results of the application of economic stress test scenarios against the five year operating plan and approved risk appetite limits. The Committee also received regular reports from the Group Chief economist on the macro-economic outlook.
Cyber risk The Board Risk Committee also reviewed and agreed levels of risk appetite, strategy and planned investment to deal with changes in the cyber risk landscape.
Risk management framework review The Chief Risk Officer provides the Board Risk Committee with an annual review of the status of the Group’s governance and internal control framework for endorsement and recommendation to the Board. The 2013 review was for the first time conducted against the nine components of the Group’s risk management framework (see Risk Overview, page 40), which include the arrangements for the cascade of delegated authority from the Board to its Committees and the Group Chief executive, and the status of the risk governance and Group policy frameworks.
Committee composition, skills and experience The Committee is comprised of non-executive Directors from a wide background to provide a balanced and independent view on remuneration matters. The Chairman, Anthony Watson, has over 40 years experience in the investment industry related sectors and is well placed to lead the Committee. Remuneration Committee meetings are attended by Deloitte llP who act as the Group’s remuneration consultant. Deloitte is not connected with the Group.
Executive remuneration Determines and approves the contracts of employment, the terms of any performance related pay schemes and subsequently, individuals’ performance against targets, in respect of the Group Chief executive, the Company Secretary, Code Staff and any individual whose total compensation exceeds £750,000 per annum.
Remuneration policy Reviews annually the report from the Group HR Director on the operation of the Remuneration Governance Policy and its effectiveness.
Commissions an annual review of the risks arising from the Group's remuneration policies.
The Directors’ remuneration report on pages 100 to 122 summarises the amounts awarded to executive management and to be awarded in accordance with the policy, together with various other information to help shareholders understand the Committee’s decisions over the past year. Many of the changes to the report under the new regulations are technical in nature and did not require substantial Committee involvement however, some sensitive disclosures did require the Committee’s guidance.
effective management of remuneration governance and risk allows the Group to attract and retain individuals of the required calibre to deliver the Group’s business strategy, drive appropriate behaviour from colleagues and avoid unexpected risks.
Statement by the Chairman of the Remuneration Committee On behalf of the Board and as Chairman of the Group’s Remuneration Committee, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2013, which, in accordance with the new reporting regulations, is split into two parts: – The Directors’ Remuneration Policy, setting out the framework within which we operate and which will be subject to a binding vote.
Changes in our pay structure in 2014 Recent european regulatory changes have introduced a cap on the variable element of remuneration at 100 per cent of fixed remuneration which may be increased to 200 per cent, but only with shareholder approval. The Committee strongly believes in pay for performance, in providing a competitive package that allows us to attract and retain the key talent necessary to deliver the strategy set by the Board, and in ensuring that fixed costs are properly managed.
Key changes for Executive Directors for 2014: – Base salary for the Chief Risk Officer has been increased to reflect his additional responsibilities as a member of the Board; salaries for other executive Directors are unchanged.
The Committee sought to achieve an appropriate balance by applying collective adjustments to the bonus pool and individual adjustments to bonus awards where necessary. A number of legacy issues were taken into account – for example, the additional provision for PPI and the substantial fine levied by the Financial Conduct Authority in respect of past controls around incentives. The Committee considered other factors, such as affordability in the context of our overall financial results. The impact of these considerations was to apply a significant reduction to what the overall bonus pool would have been. The Committee determined that a bonus pool of £395 million was appropriate and represents 6 per cent of pre-bonus underlying Profit (compared to 12 per cent in the prior year). The average value of bonus per employee is approximately £4,500.
Considerations of stakeholders’ views We are committed to maintaining regular dialogue with our stakeholders and take careful consideration of their views when making our decisions.
We continue to believe that the remuneration policies and practices fairly reward our directors, support the delivery of the Group’s strategy and the delivery of shareholder value. I therefore hope you will support the resolutions relating to remuneration at the forthcoming Annual General Meeting.
The policy set out below will formally apply, subject to shareholder approval, from the date of the Annual General Meeting in 2014. It is currently intended that approval of the remuneration policy will be sought at three year intervals unless amendments to the policy are required in which case further shareholder approval will be required.
Formal consultation on the remuneration of executive Directors is not undertaken with employees. However, surveys are undertaken semiannually on employee engagement and discussion on the Group’s remuneration approach takes place with union representatives during the annual pay review cycle and on relevant employee reward matters.
Operation The Fixed Share Award will be delivered in lloyds Banking Group shares, released over five years with 20 per cent being released each year following the year of award.
Operation executive Directors are entitled to participate in the Group’s defined contribution scheme with company contributions set as a percentage of salary.
Core benefits include a company car or car allowance, private medical insurance, life assurance and other benefits that may be selected through the Group’s flexible benefits plan.
Operation executive Directors may participate in these plans in line with HMRC guidelines currently prevailing (where relevant), on the same basis as other eligible employees.
Operation Measures and targets are set annually and awards are determined by the Committee after the year end based on performance against the targets set. The annual bonus may be delivered partly in cash and partly deferred into cash, shares, notes or other debt instruments including contingent convertible bonds. Deferral levels are set at the time of award and in compliance with regulatory requirements (which currently require that at least 60 per cent of variable pay is deferred and at least 50 per cent of variable pay is paid in shares or other instruments). Deferred awards normally vest after three years and the Committee may adjust awards in the event of any variation of share capital, demerger, special dividend or distribution or amend the terms of the plan in accordance with the plan rules.
The Committee retains full discretion to amend the payout levels should the award not reflect business and/or individual performance. The Committee may reduce (including to zero) the level of the award, apply additional conditions to the vesting, or delay the vesting of awards to a specified date or until conditions set by the Committee are satisfied, where it considers it appropriate as a result of an event occurring before vesting. executive Directors are required to hold the shares which vest for a further two years.
Measures and targets are set annually by the Committee and limited details can therefore be provided in the remuneration policy. Further details on the metrics in place for the awards made in 2013, and those on which the 2014 awards will be based, are provided in the Implementation Report.
The Committee may make awards on hiring an external candidate to ‘buy-out’ remuneration arrangements forfeited on leaving a previous employer. In doing so the Committee will take account of relevant factors including any performance conditions attached to these awards, the form in which they were granted (e.g. cash or shares) and the timeframe of awards. Any such award made will be made in accordance with the PRA’s Remuneration Code and made on a comparable basis to those forfeited.
Notice to be given by the Group Date of service agreement
Death Accrued up until date of termination (current year). Deferred bonus paid on death in cash, unless the Committee determines otherwise.
Pro-rated award (for months worked) released to estate as soon as practicable after date of death. Performance conditions will not apply.
If any annual bonus is to be paid to the executive Director for the current year, this will be determined on the basis of performance for the period of actual service, rather than the full notice period (and so excluding any period of leave required by the Group).
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.
2014 fee levels are stated in the Implementation Report. Any increases normally take effect from 1 January of a given year.
During 2013, the Committee met 10 times and considered the following principal matters: – Review of remuneration arrangements for senior executives
Committee members are thanked for their commitment during the last year and attendance at meetings.
One particular element of feedback from proxy voting agencies was that they were looking for more information on the determination of the bonus payments. We have provided greater detail in this year’s report.
This has led the Committee to carry out a fundamental review of the remuneration structure for Directors and other Code Staff. It is proposed to operate our policy in the following way in 2014: Base salary Salaries for executive Directors effective from 1 January 2014 are as follows: Group Chief executive (GCe): £1,061,000
The actual levels of award set for 2014 are as follows (which will be released in shares over a five year period): GCe: £900,000
The CRO’s benefits in respect of relocation end in January 2014.
Opportunity The maximum annual long-term incentive award for executive Directors is 300 per cent of salary.
The following table provides a breakdown of these measures and the targets applicable.
Cost:income ratio Set relative to 2016 targets Threshold: 48.9% Maximum: 46.5%
The annual non-executive Director fees were reviewed in 2013 and increased as listed below with effect from 1 July 2013: Basic fee £65,000 £65,000
Board Risk Committee membership £15,000 £20,000 nomination & Governance Committee membership* £5,000 £5,000
Conditional pension buy-oute 732 – – – – – 732 –
The long-term incentive vesting was confirmed by the Remuneration Committee at its meeting on 20 February 2014. The closing share price on that date of 81.13 pence has been used to calculate the value.
António Horta-Osório The maximum annual bonus opportunity of the Group Chief executive (GCe) was 225 per cent of basic salary. For 2013, the Group outperformed the financial targets as shown above. The balanced scorecard used to inform the decisions of the Committee is the overall Group’s scorecard. The GCe’s balanced scorecard assessment for 2013, as confirmed by the Committee on 23 January 2014, reflected a number of considerations in 2013, including: – Successful implementation of the Group’s strategy of becoming the best bank for customers.
– Strengthening the balance sheet and reducing risk: pro forma fully loaded common equity tier 1 ratio increasing by 2.2 percentage points to 10.3 per cent.
– Further progress in the simplification programme: cost savings of approximately £0.6 billion realised in 2013.
– SMe lending grew 6 per cent in 2013 in a market that contracted, while our target of lending £1 billion to uK manufacturing companies was exceeded three months ahead of schedule.
The Committee agreed a balanced scorecard rating for 2013 of ‘Strong plus’ for the GCe. This is one of the highest ratings on the Group’s performance scale, surpassed only by a ‘Top minus’ or ‘Top’ rating.
– Substantially completed work to transform the balance sheet, by strengthening our funding, liquidity and capital position, and reducing non-core assets.
Juan Colombás The maximum bonus opportunity of the Chief Risk Officer (CRO) was 200 per cent of basic salary. For 2013, the Group outperformed the financial targets as shown above. The balanced scorecard used to inform the decisions of the Committee is the overall scorecard for the Risk Division. The CRO’s balanced scorecard assessment for 2013, as confirmed by the Committee on 23 January 2014, reflected a number of considerations in 2013, including: – excellent progress across a range of Risk metrics – non-core reductions, impairments, capital and liquidity management.
– Good progress in delivering the Risk transformation, which is ahead of plan.
– Maintaining high level of responsiveness to our regulators with whom we strive for a strong working relationship.
Application of the Committee’s judgement using a purely mechanical assessment of the financial and BSC performance measures for the GCe, CFO and CRO would have resulted in bonuses close to maximum levels.
Adjusted for movements in staff numbers and other impacts to ensure a like for like comparison.
Total shareholder return indices – Lloyds Banking Group and FTSE 100
Dec 2009 Dec 2008 Dec 2010 Dec 2012Dec 2011 Dec 2013
A summary of transactions undertaken in the year, including share plan awards vested plus open market purchases and sales made by Directors, is shown on page 122.
As a result of the above shareholdings, the position for each executive Director is as follows: Shareholding requirement Current shareholding Requirement met
Shares owned outright plus vested but unexercised options have been used to calculate current shareholding figures.
none of those who were Directors at the end of the year had any other interest in the capital of lloyds Banking Group plc or its subsidiaries. The register of Directors’ interests, which is open to inspection, contains full particulars of Directors’ shareholdings and options to acquire shares in lloyds Banking Group plc.
Customer satisfaction (FCA reportable banking complaints per 1,000 customers excluding PPI)
Juan Colombás 235,499 – – – 235,499 – 15/6/2011 30/3/2021 a
Lloyds Banking Group Annual Report and Accounts 2013120 none of the other directors at 31 December 2013 had options to acquire shares in lloyds Banking Group plc or its subsidiaries.
Lloyds Banking Group long-term incentive plan (audited) The following table shows conditional shares awarded under the plan. Further information regarding this plan can be found on pages 111 and 120.
Additional disclosures emoluments of the eight highest paid senior executives* The following table sets out the emoluments of the eight highest paid senior executives (excluding executive Directors) in respect of the 2013 performance year.
Variable pay in respect of performance year 2013. lTIP values shown reflect awards for which the performance period ended on 31 December 2013. Pension costs based on a percentage of salary according to level.
* Includes members of the Group executive Committee and Senior executive level colleagues.
The Risk Overview (pages 40 to 43) provides a summary of Risk Management within the Group. It highlights the important role of risk as a strategic differentiator, risk achievements in 2013 and priorities for 2014 along with a brief overview of the Group’s risk governance structure and the principal risks faced by the Group and key mitigating actions.
This full risk management section provides a more in-depth picture of how risk is managed within the Group, detailing the Group’s appetite for risk (page 124), emerging risks (page 126), approach to stress testing, risk governance and committee structure (pages 127 to 132) and a full analysis of the primary risk drivers (pages 133 to 196) – the framework by which risks are identified, managed, mitigated and monitored.
– The Group optimises performance by allowing business units to operate within approved risk appetite and limits.
– An aggregate view of the Group’s overall risk profile, key risks and management actions, and performance against risk appetite, is reported to and discussed monthly at the Group Risk Committee (and as a subset at the Group Asset and liability Committee), with regular reporting to the Board Risk Committee and the Board.
Wealth, Asset Finance & International comprises uK and international wealth businesses, uK and international asset finance and online deposit businesses along with international retail business
Emerging risks The Group considers the following to be risks that have the potential to increase in significance and affect the performance of the Group.
– Continue work to prepare for the FCA approach on consumer credit regulation.
Ring-fencing and resolution planning Ring-fencing legislation and final rules on Resolution Planning will impact the Group’s strategy and the capacity/cost to serve customers effectively. The dimensions of the ring-fence may challenge the Group’s future shape and the scope of its activities while an effective Resolution Plan may prompt structural change in order to make the Group more resolvable in a crisis. Without a robust Resolution Plan, the Group could face higher costs of capital/liquidity. Key mitigating actions – Ongoing engagement with HM Treasury, PRA and the Boe on the evolving uK regulatory framework, and impact of eu Directives.
– Support the Internal Capital Adequacy Assessment Process (ICAAP) and setting of Individual Capital Guidance (ICG).
At least on an annual basis, the Group conducts a detailed macroeconomic stress testing exercise based on the five-year operating plan, which is supplemented with higher-level refreshes of the stress testing exercise when necessary. The exercise aims to highlight the key vulnerabilities of the Group to adverse changes in the economic environment and to ensure that there are adequate financial resources in the event of a downturn. The exercise includes a range of economic scenarios, including the ‘PRA Anchor Scenarios’ (these are the PRA’s published supervisory recommended scenarios for the uK, details of which are publicly available on the Bank of england’s website). Ad hoc stress testing exercises are also undertaken to assess emerging risks, as well as in response to regulatory requirements. The Group also takes part in regular external, industry-wide stress testing exercises, such as those run by the european Banking Authority and will take part in the forthcoming uK-wide Bank of england stress testing exercise.
– Finance teams in the business prepare and review finance related stress testing results including, but not limited to, income, margins, costs, lending and deposit volumes.
– Credit Risk and Market Risk teams prepare and review risk-related stress outputs, including, but not limited to, impairment charges, risk-weighted assets, expected loss, probability of default, loss given default and trading losses.
Reverse stress testing Reverse stress testing is used to explore the vulnerabilities of the Group’s strategies and plans to extreme adverse events, and to help improve contingency planning. The scenarios used in such a stress test are those that would cause a failure in the business model. Where reverse stress testing reveals plausible scenarios with an unacceptably high risk when considered against the Group’s risk appetite, the Group will undertake measures to prevent or mitigate that risk, which are then reflected in strategic plans.
Th ird li ne o f d ef en ce –
The components of the RMF can be found in the Risk Overview on page 41.
Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the Corporate Governance section on pages 78 to 99, for further information on Board committees.
Provides strategic and senior oversight over design, launch and management of products including new product approval, annual product reviews and management of risk in the back book.
Role of the Board and senior management – key responsibilities of the Board and senior management include: – setting risk appetite and approval of the RMF; – approval of Group-wide risk principles and policies; – the cascade of delegated authority (e.g. to Board sub-committees and the Group Chief executive); – effective oversight over risk management consistent with the risk appetite.
– Group Audit (third line) provides independent, objective assurance and consulting activity 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.
Risk identification, measurement and control – the process for risk identification, measurement and control is integrated into the overall framework for risk governance. Risk identification processes are forward-looking to ensure emerging risks are identified. Risks are captured in comprehensive risk logs/registers, and measured using robust and consistent quantification methodologies. The measurement of risks includes the application of sound stress testing and scenario analysis, and considers whether relevant controls are in place before risks are incurred.
Lloyds Banking Group Annual Report and Accounts 2013134 loans and advances, contingent liabilities, commitments, debt securities and derivatives also expose the Group to refinance risk. Refinance risk is the possibility that an outstanding exposure cannot be repaid at its contractual maturity date. If the Group does not wish to refinance the exposure then there is refinance risk if the obligor is unable to repay by securing alternative finance. This may be because the borrower is in financial difficulty, or because the terms required to refinance are outside acceptable market appetite at the time. Refinance risk exposures are managed in accordance with the Group’s existing credit risk policies, processes and controls, and are not considered to be material given the Group’s prudent and through the cycle credit risk appetite. Where refinance risk exists (such as in the interest only retail mortgage portfolio and the Commercial Banking non-core book) exposures are minimised through intensive account management and are impaired where appropriate.
In its principal retail portfolios, exposure at default and loss given default models are also in use. They have been developed internally and use statistical analysis combined, where appropriate, with external data and subject matter expert judgement.
Internal control Credit principles and policy: Risk Division sets out the credit principles and policy according to which credit risk is managed. Principles and policies are reviewed regularly, and any changes are subject to a review and approval process. Policies, where appropriate, are supported by lending guidelines, which also define the responsibilities of lending officers and provide a disciplined and focused benchmark for credit decisions. These policies and lending guidelines define chosen target market and risk acceptance criteria. Risk Division also use early warning indicators to help anticipate future areas of concern and allow the Group to take early and proactive mitigating actions. Risk oversight teams monitor credit performance trends, review and challenge exceptions to planned outcomes, and test the adequacy of credit risk infrastructure and governance processes throughout the Group. This includes tracking portfolio performance against an agreed set of key risk indicators. Oversight and reviews are also undertaken by Group Audit and Credit Risk Assurance.
Controls over rating systems: The Group has established an independent team in the Risk Division that sets common minimum standards, designed to ensure risk models and associated rating systems are developed consistently, and are of sufficient quality to support business decisions and meet regulatory requirements. Internal rating systems are developed and owned by the Risk Division. line management takes responsibility for ensuring the validation of the rating systems, supported and challenged by an independent specialist group function.
Additional mitigation for commercial customers Individual credit assessment and independent sanction: With the exception of low exposures on SMe customers where relationship managers have some limited delegated sanctioning authority, credit risk in commercial customer portfolios is subject to individual credit assessments, which consider the strengths and weaknesses of individual transactions and the balance of risk and reward. exposure to individual counterparties, groups of counterparties or customer risk segments is controlled through a tiered hierarchy of delegated sanctioning authorities and limit guidelines. Approval requirements for each decision are based on a number of factors including the transaction amount, the customer’s aggregate facilities, credit risk ratings and the nature and term of the risk. The Group’s credit risk appetite criteria for counterparty underwriting is generally the same as that for assets intended to be held over the period to maturity.
It is the Group’s policy that collateral should always be realistically valued by an appropriately qualified source, independent of both the credit decision process and the customer, at the time of borrowing. Collateral is reviewed on a regular basis and will vary according to the type of lending and collateral involved. For 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. In order to minimise the credit loss, the Group may seek additional collateral from the counterparty as soon as impairment indicators are identified for the relevant individual loans and advances.
Assistance is provided through trained colleagues in branches and dedicated telephony units, and via online guidance material. For those customers requiring more intensive help, assistance is provided through dedicated support units where tailored repayment programmes can be agreed. Customers are actively supported and referred to free money advice agencies when they have multiple credit facilities, including those at other lenders, that require restructuring. Within the Collections and Recoveries functions, the sharing of best practice and alignment of policies across the Group has helped to drive more effective customer outcomes and achieve operational efficiencies.
– Reduced payment arrangements: a temporary arrangement for customers in financial distress where arrears accrue at the contractual payment, for example short-term arrangements to pay.
Commercial customers early identification, control and monitoring are key in order to support the customer and protect the Group. All non-retail loans and advances (core and non-core) in Commercial Banking are reviewed at least annually by the independent Risk Division (and more frequently where required). As part of the Group’s established Credit Risk Classification system, every loan and advance in the good book is categorised as either ‘good’ or ‘watchlist’. This complements the Group’s risk rating tools and is designed to identify and highlight portfolio levels of asset quality as well as individual problem credits. All watchlist names are reviewed by the business and Risk Division at least once a month, and the
Customers requiring intensive care are transferred at an early stage to one of the Group’s BSus (or Customer Support for smaller Commercial Banking small and medium-sized enterprises with debt facilities below £1 million). The over-arching aim of the BSu is to provide support and work with each customer to try and resolve the issues, to restore the business to a financially viable position and thereby bring about a business turnaround. This may involve debt restructuring and forbearance.
Income statement information set out in the credit risk tables is on an underlying basis (see page 52).
Impairment charge as a % of average advances 0.57% 1.02% (45)bp
Non-core impairment charge 1,483 3,778 61 non-core impairment charge as a % of average advances 1.61% 3.08% (147)bp
Wealth, Asset Finance and International 6,610 406 6.1 99 24.4 Reverse repos and other items 2,779
Impairment provisions (4,274) Fair value adjustments3 (552) Total core 436,966 Non-core
Impairment charge as a % of average advances 0.32% 0.36% (4)bp
Impaired loans and provisions Retail impaired loans decreased by £1,133 million to £7,187 million compared with 31 December 2012 and, as a percentage of closing loans and advances to customers, decreased to 2.1 per cent from 2.4 per cent at 31 December 2012. Impairment provisions as a percentage of impaired loans (excluding unsecured loans in recoveries) are stable at 32.5 per cent.
Arrears The value of mortgages greater than three months in arrears (excluding repossessions) decreased by £819 million to £8,818 million at 31 December 2013 compared to £9,637 million at 31 December 2012.
Specialist lending is closed to new business and is in run-off.
Interest only balances as a % of total mortgage book 41.0% 44.6%
For existing interest only mortgages, a contact strategy is in place throughout the term of the mortgage to ensure that customers are aware of their obligation to repay the principal upon maturity of the loan. The weighted-average term to maturity of the interest only balances included in the table above is 13 years; mortgages totalling £12,003 million are due to mature in the next five years, with mortgages totalling £1,846 million due to mature in the next 12 months. Treatment strategies exist to help customers who may not be able to fully repay the full amount of principal balance at maturity. Of the residential interest only mortgages which have missed the payment of principal at the end of term, balances of £959 million remain at 31 December 2013 (£523 million at 31 December 2012). The average loan to value of these accounts is 27.3 per cent at 31 December 2013 (27.0 per cent at 31 December 2012). Of these accounts, 7.4 per cent are impaired (7.2 per cent at 31 December 2012).
Impairment charge as a % of average advances 0.83% 1.85% (102)bp
Impaired loans and provisions Commercial Banking impaired loans reduced substantially by 38.6 per cent to £14,714 million compared with 31 December 2012. As a percentage of closing loans and advances to customers, impaired loans reduced to 11.1 per cent from 16.6 per cent at 31 December 2012, despite a reducing portfolio. Impairment provisions as a percentage of impaired loans improved to 43.6 per cent from 41.7 per cent at 31 December 2012 driven by increased provisions made on a number of existing impaired connections and the disposal of impaired loans with lower coverage.
SMe’s control and monitoring activities have continued to play a fully effective role in identifying and supporting customers showing early signs of financial stress. As part of this, the Group’s dedicated SMe Business Support function continues to work with customers through their difficulties.
The real estate business within the Group’s Mid Markets portfolio is focused predominantly on unquoted private real estate portfolios. Credit quality continues to improve and the number of new non-performing customers continues to reduce. new business propositions are being written under robust policy parameters and in line with agreed risk appetite, with particular focus on cashflow. Tenant default is an area of potential focus particularly when the lending is supported by secondary or tertiary assets.
The majority of funding and risk management activity is transacted with investment grade counterparties including Sovereign central banks and much of it is on a collateralised basis, such as repos and swaps facing a Central Counterparty (CCP). Bilateral derivative transactions with Financial Institution counterparties are typically collateralised under a credit support annex in conjunction with the ISDA Master Agreement. The Group continues to consolidate its counterparty risk via CCPs as part of an ongoing move to reduce bilateral counterparty risk by clearing standardised derivative contracts.
non-core The non-core portfolio includes elements of the Corporate Real estate and Specialist Finance portfolios which are classified as non-core.
Ship Finance gross drawn lending (excluding leasing) totalled £1,074 million (net £965 million) as at 31 December 2013. This portfolio still suffers some stress due to volatile asset values and ongoing financial restructures. As a consequence, impairment charges are running at similar levels to those experienced in 2012, however continued strategic disposals through 2013 have materially de-risked the residual portfolio.
Core UK Direct Real Estate Approximately three quarters of loans and advances relate to commercial real estate with the remainder mostly residential real estate. A large element of the residential exposure is to professional landlords in the Group’s SMe business where performance has been good. Approximately two thirds of the core commercial real estate portfolio was originated under heritage lloyds TSB credit risk criteria. The Group’s risk appetite requires it to look first at the underlying cash flows as part of credit assessment, alongside key requirements for good quality counterparties and a well spread tenant profile.
At 31 December 2013 exposures > £5 million: At 31 December 20121 exposures > £5 million: Restated to reflect a change in methodology from registered address of borrower to location of underlying collateral.
Gross drawn lending in the non-core Acquisition Finance portfolio totalled £836 million (net £667 million) as at 31 December 2013. Impairment charges in the non-core Acquisition Finance portfolio continue to decline significantly, reflecting further material reductions in the size of the portfolio and stabilising market conditions. Disposals of £1,566 million (net book value) were achieved during 2013.
– In the Irish retail mortgage portfolio, impairment provisions as a percentage of impaired loans decreased to 63.4 per cent (31 December 2012: 71.2 per cent), driven by the sale of a portfolio of non performing mortgages.
International: latin America and Middle east 46 36 78.3 31 86.1
Ireland retail loans and advances to customers decreased to £5,944 million in 2013 from £6,656 million at 31 December 2012. Impaired loans as a percentage of loans and advances decreased to 16.9 per cent from 23.0 per cent at 31 December 2012. In the Irish retail mortgage portfolio impairment provisions as a percentage of impaired loans decreased to 63.4 per cent (from 71.2 per cent at 31 December 2012). These decreases have all been driven by the sale of a portfolio of non performing mortgages.
The most significant contribution to impaired loans in Ireland is the Commercial Real estate portfolio. 92.3 per cent of the portfolio is now impaired compared to 90.7 per cent at 31 December 2012. The impairment provisions as a percentage of impaired loans increased in the year to 74.2 per cent from 69.9 per cent 31 December 2012 reflecting the continued deterioration in commercial real estate prices in Ireland.
Secured loan to value analysis – Ireland Retail Mortgages The average loan to value (lTV) on the Irish mortgage portfolio decreased to 102.3 per cent at 31 December 2013 compared with 113.8 per cent at 31 December 2012. The percentage of loans and advances with an indexed lTV in excess of 100 per cent decreased to 53.8 per cent at 31 December 2013, compared with 63.1 per cent at 31 December 2012. The table below shows the lTV distribution of the retail mortgage portfolio.
Table 1.21: Actual and average LTVs across the Ireland Retail mortgage portfolio
Other international Total impaired loans decreased to £212 million at 31 December 2013 compared to £299 million at 31 December 2012, driven by the sale of the Spain retail portfolio. In the netherlands impairment provisions as a percentage of impaired loans increased to 52.3 per cent from 51.9 per cent at 31 December 2012.
Identified indirect exposure information is also taken into account when setting limits and determining credit risk appetite for individual counterparties. This forms part of the Group’s credit analysis undertaken at least annually for counterparty and sector reviews, with interim updates performed as necessary. Interim updates would usually be triggered by specific credit events such as rating downgrades, sovereign events or other developments such as spread widening. examples of indirect risk which have been identified are: european Banking groups with lending and other exposures to certain eurozone countries; corporate customers with operations or significant trade in certain european jurisdictions; major travel operators known to operate in certain eurozone countries; and international banks with custodian operations based in certain european locations.
The Group has included certain amounts on a net basis to better reflect the overall risk to which the Group is exposed. The gross IFRS reported values for the exposures to eurozone countries are detailed in the following tables. Derivative balances are included within exposures to financial institutions or corporates, as appropriate, at fair value adjusted for master netting agreements at obligor level and net of cash collateral in line with legal agreements. exposures in respect of reverse repurchase agreements are included on a gross IFRS basis and are disclosed based on the counterparty rather than the collateral (repos and stock lending are excluded); reverse repurchase exposures are not, therefore, reduced as a result of collateral held. Reverse repurchase exposures to institutional funds secured by uK gilts are excluded from all eurozone exposures as detailed in the footnotes. exposures to central clearing counterparties are shown net.
For multi-country asset backed securities exposures, the Group has reported exposures based on the largest country exposure. The country of exposure for asset backed securities is based on the location of the underlying assets which are predominantly residential mortgages not in the domicile of the issuer.
In addition to the exposures detailed above, the Group has the following exposures to sovereigns, financial institutions, asset backed securities, corporates and personal customers in the following eurozone countries: Table 1.24: Other Eurozone Exposures
Risk appetite The Group has no appetite for systemic unfair customer outcomes arising from any of its activities: through product design, sales or other after sales processes. This appetite is reviewed and approved annually by the Board. To achieve this, the Group has policies, processes and standards which provide the framework for businesses and colleagues to operate in accordance with the laws, regulations and voluntary codes which apply to the Group and its activities.
Risk appetite The Group’s overall appetite for market risk is reviewed and approved annually by the Board. With the support of the Group Asset and liability Committee, the Group Chief executive allocates this risk appetite across the Group. Individual members of the Group executive Committee ensure that market risk appetite is further cascaded to an appropriate level within their areas of responsibility.
Defined benefit pension schemes The Group’s defined benefit pension schemes are exposed to significant risks from the constituent parts of their assets and from the present value of their liabilities, primarily real interest rate, credit spread and equity risk. Interest rate risk arises from the liability discount rate, with partial offsets from fixed interest assets such as gilts and corporate bonds, and swaps. Credit spread risk also arises from the liability discount rate, with partial offsets from the credit portfolio. equity risk arises from direct equity holdings.
Table 1.26: Market risk linkages to the balance sheet for trading portfolios and Banking activity items
Trading and other financial assets at fair value through profit or loss 142,683 42,376 note 17
Derivative financial instruments 33,125 25,531 note 18 loans and advances to customers 495,281 – note 20
Trading and other financial liabilities at fair value through profit or loss 43,625 38,319 note 34
Banking activities The Group’s banking activities expose it to the risk of adverse movements in interest rates, credit spreads, exchange rates and equity prices, with little or no exposure to commodity risk. The volatility of market values can be affected by both the transparency of prices and the amount of liquidity in the market for the relevant asset or liability.
Pipeline and pre hedge risk arises where new business volumes are higher or lower than forecasted, requiring the business to unwind or execute additional hedging at rates which may differ to what was expected.
– Sensitivity based measures (e.g. sensitivity to 1 basis point move in interest rates).
Defined benefit pension schemes Management of the assets is the responsibility of the Trustees of the schemes who are responsible for setting the investment strategy and for agreeing funding requirements with the Group. The difference between assets and liabilities determines whether there is a surplus or deficit. Any deficit must be met by the Group with additional funding agreed with the Trustees as part of a triennial valuation process.
Trading portfolios Based on the 1-day 95 per cent confidence level, assuming positions are held overnight and using observation periods of the preceding 300 business days, the VaR for the years ended 31 December 2013 and 2012 based on the Group’s global trading positions is detailed in table 1.28.
The risk of loss measured by the VaR model is the potential loss in earnings given the confidence level and assumptions noted above. The total and average trading VaR does not assume any diversification benefit across the five risk types. The maximum and minimum VaR reported for each risk category did not necessarily occur on the same day as the maximum and minimum VaR reported as a whole. The Group internally uses VaR as the primary measure for all trading book positions arising from short term market facing activity. Trading book VaR (1-day 99 per cent) is compared daily against both forecast and actual profit and loss.
1-day 99 per cent VaR charts for 2013 for lloyds Bank, HBOS and lloyds Banking Group models can be found in the Group’s Pillar III Disclosures.
The fall in net interest income sensitivity reflects further structural hedging against margin compression undertaken in 2013, and a revision of the assumptions as to how variable retail savings would reprice in a rising rate scenario.
Trading portfolios and banking activities Trading is restricted to a number of specialist centres, the most important centre being the treasury and trading business in london. These centres also manage market risk in the wholesale non-trading portfolios, both in the uK and internationally. The level of exposure is strictly controlled and monitored within approved limits. Active management of the wholesale portfolios is necessary to meet customer requirements and changing market circumstances.
Insurance portfolios Ongoing monitoring is in place to track market risks. This includes monitoring the progression of market risk capital against risk appetite limits, as well as the sensitivity of profit before tax to combined market risk stress scenarios and in year market movements. Asset/liability matching positions and hedges in place are actively monitored and if necessary rebalanced to be within certain tolerances. In addition market risk is controlled via approved investment policies and mandates.
Exposures The principal operational risks to the Group are: – IT systems and resilience risk arising from failure to develop, deliver and maintain effective IT solutions; – Information security risk arising from information leakage, loss or theft; – external fraud arising from an act of deception or omission; – Cyber risk arising from malicious attacks on the Group via technology, networks and systems; and
– Terrorist acts, other acts of war or hostility, geopolitical, pandemic or other such events and responses to those acts/events may create economic and political uncertainties, which could have a material adverse effect on uK and international macroeconomic conditions generally, and more specifically on the Group’s results of operations, financial condition or prospects in ways that cannot necessarily be predicted.
In 2013, the highest frequency of events occurred in external fraud (61.96 per cent) and execution, delivery and process management (24.58 per cent). Clients, products and business practices accounted for 39.66 per cent of losses. execution, delivery and process management accounted for 38.64 per cent of losses. losses in both categories are driven by legacy issues (excluding PPI).
The table overleaf shows high level loss and event trends using Basel II categories.
Damage to physical assets 0.81 0.32 0.45 0.24 employee practices and workplace safety 0.61 0.14 0.36 0.10 execution, delivery and process management 24.58 24.90 38.64 27.19
Definition Funding risk is defined as the risk that the Group does not have sufficiently stable and diverse sources of funding or the funding structure is inefficient. liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.
Risk appetite Funding and liquidity risk appetite for the banking business is set, reviewed and approved annually by the Board with the support of the Group Asset and liability Committee (GAlCO). Funding and liquidity risk is managed separately for the banking and Insurance businesses. Risk is reported against appetite through various metrics that enable the Group to manage liquidity and funding constraints. The Group Chief executive, assisted by GAlCO, regularly reviews performance against risk appetite.
The Group’s funding and liquidity position is underpinned by its significant customer deposit base, and is supported by strong relationships with corporate customers and certain wholesale market segments to supplement its retail deposit base. A substantial proportion of the retail deposit base is made up of customers’ current and savings accounts which, although mostly repayable on demand, have traditionally in aggregate provided a stable source of funding. Additionally, the Group accesses the short-term wholesale markets to raise interbank deposits and to issue certificates of deposit and commercial paper to meet short-term obligations. Funding concentration by counterparty is not considered significant for the Group. Where concentrations do exist (for example, maturity profile); these are limited by the internal risk appetite and considered manageable.
To assist in managing the balance sheet the Group operates a lTP Policy which: – Allocates relevant interest expenses from GCT 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
Relevant interest expenses allocated via lTP include term funding spreads incurred over a three month lIBOR benchmark and the cost of funding and holding liquid asset reserves. lTP makes extensive use of behavioural maturity profiles, taking account of expected customer loan prepayments and stability of customer deposits. Such behavioural maturity assumptions are subject to formal governance, reviewed at least annually, and founded on analysis and evidence of actual customer behaviour using historical data gathered over several years.
For further information on the Group’s 2013 stress testing results refer to page 177.
In 2009 the Group entered into a number of eu State aid related obligations, one of which was reductions in certain parts of its balance sheet by the end of 2014. The Group achieved the asset reduction commitment ahead of the mandated completion date and has received formal confirmation that it has been released from this commitment from the european Commission.
excludes £0.1 billion (31 December 2012: £5.1 billion) of reverse repurchase agreements.
The Group’s definition of wholesale funding aligns with that used by other international market participants; including interbank deposits, debt securities in issue and subordinated liabilities.
Table 1.34: Analysis of 2013 total wholesale funding by residual maturity (audited)
In addition the Group retained internally £38.3 billion (31 December 2012: £58.7 billion) of notes secured with £49.3 billion (31 December 2012: £71.9 billion) of assets.
Total notes issued externally from secured programmes (asset backed securities and covered bonds) have fallen from £68.7 billion (assets encumbered £103.2 billion, pro-rated by programme) at 31 December 2012 to £49.3 billion (assets encumbered £81.2 billion, pro-rated by programme). A total of £45.9 billion (31 December 2012: £85.0 billion) of notes issued under securitisation and covered bond programmes have also been retained internally, most of which are held to provide a pool of collateral eligible for use at central bank liquidity facilities. This reduction in retained notes partially reflects the Group’s increased use of whole loans as eligible collateral at central banks.
The Group uses secured transactions to manage short-term cash and collateral needs. Further details on repo and collateral pledges are available in note 54: Financial risk management. Internally held notes, encumbered through repo activity or assets pledged, are included in these disclosure amounts. Details on the assets within asset-backed commercial paper (ABCP) conduits are available in note 22: Structured entities.
Risk appetite Capital risk appetite is set by the Board, reflecting the Group’s strategic plans, regulatory capital constraints and market expectations. It includes a number of minimum capital ratios in normal and stressed conditions as well as a specific measure for the Insurance business, set by the Insurance Board, taking account of the need to maintain regulatory solvency including appropriate management buffers. The Board and the Group Chief executive, assisted by the Group Asset and liability Committee and the Group Risk Committee, regularly review performance against the risk appetite. A key metric is the Group’s common equity tier 1 (CeT1) capital ratio which the Group currently aims to maintain in excess of 10 per cent.
– under the January 2014 revised Basel III leverage ratio framework, the Group’s fully loaded leverage ratio is estimated to improve significantly to 4.5 per cent on a pro forma basis including tier 1 instruments, and 3.8 per cent including only CeT1 capital resources.
Less: deductions from tier 1 50 per cent of material holdings (3,859) (46)
Pension movements: Implementation of IAS 19R2 (1,258) – – – (1,258)
The material holdings deduction from capital, predominantly relating to the Group’s investment in its Insurance businesses, has reduced by £3,407 million during the period reflecting payment by the Insurance businesses to the banking group of dividends totalling £2,155 million, elements of the Group’s subordinated debt holdings in the Insurance business that have been repaid following the issuance of external subordinated debt in the period and the disposal of the Group’s holding in St. James’s Place.
Risk type analysis of risk-weighted assets: Foundation Internal Ratings Based (IRB) approach 82,870 80,612
– Disposals include risk-weighted asset reductions arising from the sale of assets, portfolios and businesses. Disposals reduced risk-weighted assets by £20.7 billion, primarily reflecting non-core disposals in Commercial Banking and Wealth, Asset Finance and International.
Within the categories above, risk-weighted asset movements can arise as a result of credit risk exposures becoming adjustments to capital resources, through expected losses, rather than being risk-weighted.
A number of final draft CRD IV implementing and regulatory technical standards have already been issued by the european Banking Authority (eBA) with a number of other draft standards currently being taken through respective consultation processes. The Group has not reflected the impact of these draft standards in its CRD IV estimates, though it does not currently believe that these would make a material difference to the capital position outlined below.
The transitional arrangements reflect the requirements of policy statement PS7/13, issued by the PRA on 19 December 2013. This differs from the Group’s previously published statements, which allowed for the transitional phasing of CeT1 deductions consistent with the FSA’s previous policy guidance. This has resulted in a material reduction in the transitional CeT1 capital bringing this close to the fully loaded position.
Pro forma core/common equity tier 1 capital ratio2 n/a 10.3% 10.3%
31 December 2012 comparatives have not been restated to reflect the implementation of IAS 19R and IFRS 10.
Goodwill and intangible assets deductions 292 – – 292 excess of expected losses over impairment provisions 406 – – 406 eligible provisions – – 349 349
Subordinated debt movements: Restructuring to ensure CRD IV compliance – – 932 932
Includes the impact to other comprehensive income and the movement in the retirement benefit asset.
Common equity tier 1 capital resources have decreased by £9,938 million in the period, £9,167 million on a pro forma basis. This is substantially due to a £10,979 million adjustment relating to updated transitional phasing, reflecting PRA policy statement PS7/13 which has accelerated the phasing in of deductions (including deferred tax, significant investments and excess expected losses) to CeT1 bringing this close to the fully loaded position. Movements in CeT1 capital include those reflected under prevailing rules at 31 December 2013 on page 181. Incremental to these are increases largely driven by the £2,155 million in dividends from the Insurance business partially offset by negative valuation movements on available for sale assets.
Total capital resources have decreased by £3,349 million in the period, £2,578 million on a pro forma basis. excluding the impact of updated transitional phasing, total capital increased by £1,036 million, largely reflecting movements in CeT1 resources described above.
Leverage ratio The Basel III reforms include the introduction of a leverage ratio framework designed to reinforce risk based capital requirements with a simple, transparent, non-risk based ‘backstop’ measure. The leverage ratio is defined as tier 1 capital divided by the exposure measure. The Basel Committee will test the proposed 3 per cent minimum requirement for the leverage ratio and have proposed that final calibrations, and any further adjustments to the definition of the leverage ratio, will be completed by 2017, with a view to migrating to a Pillar I treatment on 1 January 2018.
In addition to the calculation basis specified by the PRA, the Group’s leverage ratio at 31 December 2013 is shown in the table below on a final CRD IV rules basis and estimated in accordance with the revised Basel III leverage ratio framework issued on 12 January 2014. In each case the ratio is presented on a ‘transitional’, ‘fully loaded’ and ‘fully loaded including tier 1 instruments’ basis. The inclusion of tier 1 instruments for the latter basis refers to the full recognition of tier 1 instruments that will become ineligible once the transitional phase has elapsed.
Removal of accounting value for derivatives and securities financing transactions (61,686) (61,686) (61,686)
exposure measure determined in accordance with the original December 2010 Basel III leverage ratio framework as interpreted through the July 2012 Basel III Quantitative Impact Study instructions and related guidance and as required by the PRA.
Statutory basis: Assets are generally valued on a basis consistent with that used for accounting purposes (with the exception that, in certain cases, the value attributed to assets is limited) and which follows a market value approach where possible. If the market is not active, the Group establishes a fair value by using valuation techniques. liabilities are calculated using a projection of future cash flows after making prudent assumptions about matters such as investment return, expenses and mortality. Discount rates used to value the liabilities are set with reference to the risk adjusted yields on the underlying assets in accordance with the PRA rules. Other assumptions are based on recent actual experience, supplemented by industry information where appropriate. The assessment of liabilities does not include future bonuses for with-profits policies that are at the discretion of management, but does include a value for policyholder options likely to be exercised.
Regulatory capital requirements each life insurance company must retain sufficient capital to meet the regulatory capital requirements mandated by the PRA; the basis of calculating the regulatory capital requirement is given below. except for Scottish Widows and Clerical Medical, the regulatory capital requirement is a combination of amounts held in respect of actuarial reserves, sums at risk and maintenance expenses (the long-Term Insurance Capital Requirement) and amounts required to cover various stress tests (the Resilience Capital Requirement). The regulatory capital requirement is deducted from the available capital resources to give statutory excess capital.
The realistic excess capital is calculated as the difference between realistic assets and realistic liabilities of the With-Profit Fund with a further deduction to cover various stress tests (the Risk Capital Margin). In circumstances where the realistic excess capital position is less than the statutory excess capital, the company is required to hold additional capital to cover the shortfall. Any additional capital requirement under this test is referred to as the With-Profits Insurance Capital Component.
Held within the long-term funds – – 6,139 – 181 6,320
Shareholders’ funds: Held outside the long-term funds 6 1,791 562 2,359
Available capital resources for With-Profit Funds are presented in the table on a realistic basis as this is more onerous than on a regulatory basis.
Scottish Widows was created following the demutualisation of Scottish Widows Fund and life Assurance Society in 2000. The terms of the demutualisation are governed by a Court-approved Scheme of Transfer (the ‘Scheme’) which, inter alia, created a With-Profits Fund and a non-Participating Fund and established protected capital support for the with-profits policyholders in existence at the date of demutualisation. Much of that capital support is held in the non-Participating Fund and, as such, the capital held in that fund is subject to the constraints noted below. The requirements of the Scheme sit alongside Scottish Widows’ published Principles and Practices of Financial Management of With-Profit business.
The most significant economic assumptions included in the model are: – Risk-free yield. The risk-free yield is defined as spot yields derived from swap yield curves.
Monitoring Business unit risk exposure is reported to Risk Division where it is aggregated at Group level and a report prepared. The report forms the basis of challenge to the business at the monthly Group Compliance and Conduct Risk Committee. This committee may escalate matters to the Chief Risk Officer, or higher committees. The report also forms the basis of the regulatory sections in the Group’s consolidated risk reporting.
Definition People risk is defined as the risk that the Group fails to lead, manage and enable colleagues to deliver to customers, shareholders and regulators leading to reductions in earnings and/or value.
Measurement People risk is measured through a series of quantitative and qualitative indicators, aligned to key sources of people risk for the Group. In addition to risk appetite measures, people risks and controls are monitored across individual Divisions and business units. Divisional metrics are calibrated against the Group’s risk appetite and monitored on a monthly basis via the Group’s risk reporting structure.
– ensuring compliance with legal and regulatory requirements related to Approved Persons and the Remuneration Code, and embedding compliant and appropriate colleague behaviours in line with Group policies, values and its people risk priorities.
The Group has a Disclosure Committee which assists the Group Chief executive and Chief Financial Officer in fulfilling their disclosure responsibilities under relevant listing and other regulatory and legal requirements. In addition, the Audit Committee reviews the quality and acceptability of the Group’s financial disclosures. For further information on the Audit Committee’s responsibilities relating to financial reporting see pages 91 to 92.
For further information on Corporate Governance see pages 78 to 99.
The financial reporting framework that has been applied in their preparation comprises applicable law and IFRSs as adopted by the european union and, as regards the Parent Company, as applied in accordance with the provisions of the Companies Act 2006.
Consolidated financial statements 204 Notes to the consolidated financial statements 212 Parent company financial statements 366 Notes to the parent company financial statements 369
For the Group’s individually financially significant reporting units a full scope audit was performed over their complete financial information. Other reporting units were selected so that we obtained appropriate coverage across all account balances and performed audit work to cover the areas of focus we identified, and which are set out below. The level of coverage obtained was determined by our risk assessment for each account balance. For the other reporting units selected, either a full scope audit of their financial information or specified procedures over individual account balances were performed.
We read and assessed the appropriateness of the disclosure made, in particular, in respect of contingent liabilities.
As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the Group’s and Parent Company’s financial statements using the going concern basis of accounting. The going concern basis presumes that the Group and Parent Company have adequate resources to remain in operation, and that the directors intend them to do so, for at least one year from the date the financial statements were signed. In drawing this conclusion, the directors have considered: – the regulatory capital position of the Group which is critical to the market maintaining confidence in the Group’s ability to absorb losses that it may occur in a market stress; and
This is an area of focus of our audit and we have concluded that the directors’ use of the going concern basis is appropriate. However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the Group’s and the Parent Company’s ability to continue as a going concern. 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: – critically assessed and challenged the appropriateness of the stress scenarios used and their impact on the Group’s capital and liquidity position; – understood and assessed key economic and other assumptions used in both the capital and liquidity plan and the Group’s five year operating plan; and
Opinions on other matters prescribed by the Companies Act 2006 In our opinion: – 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
Other matters on which we are required to report by exception
Directors’ remuneration under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law have not been made, and under the listing Rules we are required to review certain elements of the report to shareholders by the Board on directors’ remuneration. We have no exceptions to report arising from these responsibilities.
On page 77 of the Annual Report, as required by the Code Provision C.1.1, the directors state that they consider the Annual Report taken as a whole to be fair, balanced and understandable and provides the information necessary for members to assess the Group’s performance, business model and strategy. On page 92, as required by C.3.8 of the Code, the Audit Committee has set out the significant issues that it considered in relation to the financial statements, and how they were addressed. under ISAs (uK & Ireland) we are required to report to you if, in our opinion: – the statement given by the directors is materially inconsistent with our knowledge of the Group acquired in the course of performing our audit; or
– the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee.
Our responsibilities and those of the directors As explained more fully in the Statement of directors’ responsibilities set out on page 77, the directors are responsible for the preparation of the Group and Parent Company financial statements and for being satisfied that they give a true and fair view.
Fi na nc ia l st at em en ts Independent auditors’ report 198
Lloyds Banking Group Annual Report and Accounts 2013204 £ million £ million £ million
Movement in cash flow hedging reserve: effective portion of changes in fair value taken to other comprehensive income (1,229) 116 916 net income statement transfers (550) (92) 70
Other comprehensive income for the year, net of tax (2,533) (2,563) 2,711
(loss) profit for the year – – (838) (838) 36 (802)
Retained profits £ million Total £ million non-controlling interests £ million
Post-retirement defined benefit scheme remeasurements, net of taxation – – (1,645) (1,645) – (1,645)
Currency translation differences (tax: nil) – (84) – (84) – (84)
Lloyds Banking Group Annual Report and Accounts 2013210 note £ million £ million £ million
Acquisition of businesses, net of cash acquired 55(e) (6) (11) (13)
Net cash (used in) provided by investing activities (15,609) 15,232 6,932
Cash and cash equivalents at beginning of year 101,058 85,889 62,300
Annual Report and Accounts 2013212 nOTeS TO THe COnSOlIDATeD FInAnCIAl STATeMenTS
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties, available-for-sale financial assets, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative contracts. As stated on page 74, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the financial statements.
Other presentation and disclosure changes In addition to the accounting policy changes discussed above, on 1 January 2013 the Group adopted the following new standards and amendments to standards which impact the presentation and disclosures in these financial statements; none of these standards has had a material impact on the primary financial statements.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2013 and which have not been applied in preparing these financial statements are given in note 57.
The acquisition method of accounting is used to account for business combinations by the Group. The consideration for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition related costs are expensed as incurred except those relating to the issuance of debt instruments (see (e)(5) below) or share capital (see (R)(1) below). Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair value at the acquisition date.
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 and are initially recorded at
Brands (which have been assessed as having finite lives) 10-15 years
(3) Loans and receivables loans and receivables include loans and advances to banks and customers and eligible assets including those transferred into this category out of the fair value through profit or loss or available-for-sale financial assets categories. loans and receivables are initially recognised when cash is advanced to the borrowers at fair value inclusive of transaction costs or, for eligible assets transferred into this category, their fair value at the date of transfer. Financial assets classified as loans and receivables are accounted for at amortised cost using the effective interest method (see (D) above) less provision for impairment (see (H) below).
(2) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement.
portfolio is likely to generate were it to become impaired. The loss emergence period is determined by local management for each portfolio and the Group has a range of loss emergence periods which are dependent upon the characteristics of the portfolios. loss emergence periods are reviewed regularly and updated when appropriate. In general the periods used across the Group vary between one month and twelve months based on historical experience. unsecured portfolios tend to have shorter loss emergence periods than secured portfolios.
(L) Employee benefits Short-term employee benefits, such as salaries, paid absences, performance-based cash awards and social security costs are recognised over the period in which the employees provide the related services.
The accounting for share-based compensation is set out in (M) below.
(N) Taxation Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there is both a legal right of offset and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
– Insurance and participating investment contracts which are unit-linked liabilities for unit-linked insurance contracts and participating investment contracts are stated at the bid value of units plus an additional allowance where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Changes in the value of the liability are recognised in the income statement through insurance claims. Benefit claims in excess of the account balances incurred in the period are also charged through insurance claims. Revenue consists of fees deducted for mortality, policy administration and surrender charges.
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 Group’s total deferred tax asset includes £6,338 million (2012: £7,034 million) in respect of trading losses carried forward. The tax losses have arisen in individual legal entities and will be used as future taxable profits arise in those legal entities, though substantially all of the unused tax losses for which a deferred tax asset has been recognised arise in Bank of Scotland plc and lloyds Bank plc.
At 31 December 2013, the Group carried total liabilities arising from insurance contracts and participating investment contracts of £82,777 million (2012: £82,953 million). The methodology used to value these liabilities is described in note 36. elements of the liability valuations require assumptions to be made about future investment returns, future mortality rates and future policyholder behaviour and are subject to significant management judgement and estimation uncertainty. The key assumptions that have been made in determining the carrying value of these liabilities are set out in note 36.
Fair value of financial instruments In accordance with IFRS 13 Fair Value Measurement, the Group categorises financial instruments carried on the balance sheet at fair value using a three level hierarchy. Financial instruments categorised as level 1 are valued using quoted market prices and therefore there is minimal judgement applied in determining fair value. However, the fair value of financial instruments categorised as level 2 and, in particular, level 3 is determined using valuation techniques including discounted cash flow analysis and valuation models. These valuation techniques involve management judgement and estimates the extent of which depends on the complexity of the instrument and the availability of market observable information.
Note 4: Segmental analysis lloyds Banking Group provides a wide range of banking and financial services in the uK and in certain locations overseas.
The segmental results and comparatives are presented on an underlying basis, the basis reviewed by the chief operating decision maker.
The Group’s activities are organised into four financial reporting segments: Retail; Commercial Banking; Wealth, Asset Finance and International; and Insurance.
Other segment items: Additions to tangible fixed assets 143 67 1,732 378 683 3,003
Total underlying income, net of insurance claims 18,478 446 (668) (144) – 693 18,805
Comprises the payment protection insurance provision (£3,050 million) and other regulatory provisions (£405 million).
Total underlying income, net of insurance claims 20,517 (1,890) (312) (173) 50 194 18,386
Comprises the effects of asset sales (gain of £2,547 million), volatile items (loss of £748 million), liability management (loss of £229 million), Simplification costs related to severance, IT and business costs of implementation (£676 million), eC mandated retail business disposal costs (£570 million), the amortisation of purchased intangibles (£482 million) and the past service pensions credit (£250 million, see note 11).
Comprises the payment protection insurance provision (£3,575 million) and other regulatory provisions (£650 million).
Comprises the effects of asset sales (gain of £284 million), volatile items (loss of £738 million), liability management (gain of £1,295 million), integration and Simplification costs related to severance, IT and business costs of implementation (£1,282 million), eC mandated retail business disposal costs (£170 million) and the amortisation of purchased intangibles (£562 million).
Comprises the payment protection insurance provision (£3,200 million) and other regulatory provisions (£175 million).
Interest receivable on loans and receivables 3.27 3.38 3.63 20,417 22,636 25,168
Total interest and similar income 3.19 3.31 3.58 21,163 23,548 26,316
Gains less losses on disposal of available-for-sale financial assets (note 47) 629 3,547 343
– On 31 December 2013, the Group completed the sale of its Australian operations (which principally comprise Capital Finance Australia limited, a provider of motor and equipment asset finance, and BOS International (Australia) limited, a corporate lending business) generating a profit on sale of £49 million.
Change in assets arising from reinsurance contracts held (48) (186) 451
Change in assets arising from reinsurance contracts held – – –
life insurance and participating investment contracts gross claims can also be analysed as follows: Total life insurance gross claims (8,495) (8,719) (8,622)
A non-life insurance claims development table is included in note 36.
Advertising and promotion 313 314 398 uK bank levy 238 179 189
Acquisition due diligence and other work performed in respect of potential venture capital investments 2.1 0.7 1.0
Impairment losses on loans and receivables: loans and advances to customers 2,725 5,125 8,020
Share of income statement amounts: Share of post-tax results 7 34 31 36 (6) – 43 28 31
(A) Analysis of tax (charge) credit for the year £m £m £m uK corporation tax: Current tax on profit for the year (226) (181) (93)
Tax (charge) credit thereon at uK corporation tax rate of 23.25 per cent (2012: 24.5 per cent; 2011: 26.5 per cent) (96) 148 994
Further factors affecting the life business2: Derecognition of deferred tax on policyholder tax credit – (583) (146)
Weighted average number of ordinary shares in issue – diluted 71,009 69,841 68,470
Other liabilities liabilities of disposal groups classified as held for sale 7,302 214
Trading and other financial assets at fair value through profit or loss 5,040 –
Debt securities: Bank and building society certificates of deposit 1,491 – 1,491 3,166 228 3,394
Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS 39. Derivatives are held at fair value on the Group’s balance sheet. A description of the methodology used to determine the fair value of derivative financial instruments and the effect of using reasonably possible alternative assumptions for those derivatives valued using unobservable inputs is set out in note 53.
The principal derivatives used by the Group are as follows: – Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference rate, applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the right, but not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on 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 uses credit default swaps to securitise, in combination with external funding, £828 million (2012: £2,829 million) of corporate and commercial banking loans.
– 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.
Derivatives designated as fair value hedges: Interest rate swaps 154,657 4,707 1,044
Options written 115,516 – 4,051 embedded equity conversion feature – 1,421 –
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 2013 or 2012 as a result of the highly probable cash flows no longer being expected to occur.
Agriculture, forestry and fishing 6,051 5,531 energy and water supply 4,414 3,321
Gross investment in finance leases, receivable: not later than 1 year 557 1,271 later than 1 year and not later than 5 years 1,736 2,049 later than 5 years 4,542 6,232 unearned future finance income on finance leases (2,330) (3,027)
Commitments for expenditure in respect of equipment to be leased – (18)
Notes in issue £m loans and advances securitised £m notes in issue £m
Motor vehicle loans – – 1,039 1,086 less held by the Group (38,288) (58,732)
Social housing loan-backed 2,536 1,800 2,927 2,400 less held by the Group (7,606) (26,320)
Cash deposits of £13,500 million (2012: £19,691 million) held by the Group are restricted in use to repayment of the debt securities issued by the structured entities, the term advances relating to covered bonds and other legal obligations. Additionally, the Group had certain contractual
Note 22: 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 21 for securitisations and covered bond vehicles, note 41 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).
Debt securities classified as loans and receivables: Asset-backed securities 299 300 – 599
Debt securities Total £m £m £m £m exchange and other adjustments (379) (1) (8) (388)
Charge to the income statement (note 12) 2,725 – 1 2,726
Direct operating expenses arising from investment properties that generate rental income 59 42
The fair value of investment properties is measured using the market approach and incorporates the income approach where appropriate. The fair value of investment property is generally measured using observable inputs. Whether investment properties are categorised as level 2 or 3 (see note 53 (4) for details of levels in the fair value hierarchy) depends on the extent of the adjustments made to observable inputs and this depends on the investment property concerned. Investment property is compared to property for which there is observable market data about its realisable value on disposal. Adjustments to this observable data are applied, if necessary, for specific characteristics of the property, such as the nature, location or condition of the specific asset. If such information is not available, alternative valuation methods using unobservable inputs, such as discounted cash flow analysis or recent prices in less active markets are used. For investment property under construction, the value on disposal is considered to be at the point at which the property is fully constructed. Adjustments are made for the costs and risks associated with construction. Investment property under construction for which fair value is not yet reliably measurable is valued at cost, until the fair value can be reliably measured.
The movement in the value of in-force insurance and participating investment contracts over the year is as follows: 2013 £m 2012 £m exchange and other adjustments 21 (28)
A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. Further information on options and guarantees can be found on page 191.
The table below shows the resulting range of yields and other key assumptions at 31 December for uK business: %
Risk-free rate (value of in-force annuity business) 0.64 to 5.06 3.25
Risk-free rate (financial options and guarantees) 0.21 to 3.45 0.22 to 3.56
All risk-free rates at 31 December 2013 are quoted as the range of rates implied by the relevant swap curve.
Lapse (persistency) and paid-up rates lapse and paid up rates assumptions are reviewed each year. The most recent experience is considered along with the results of previous analyses and management’s views on future experience. In determining this best estimate view, a number of factors are considered, including the credibility of the results (which will be affected by the volume of data available), any exceptional events that have occurred during the period under consideration and any known or expected trends in underlying data. The pensions lapse assumptions have been strengthened due to persistency experience and to make allowance for the impact of the Office of Fair Trading review on fairness of legacy pension charges. The impact of these changes has been to decrease the value of in-force business by £158 million.
Maintenance expenses Allowance is made for future policy costs explicitly. expenses are determined by reference to an internal analysis of current and expected future costs. explicit allowance is made for future expense inflation. For German business appropriate cost assumptions have been set in accordance with the rules of the local regulatory body.
The core deposit intangible is the benefit derived from a large stable deposit base that has low interest rates, and the balance sheet amount at 31 December 2013 shown above will be amortised, in accordance with the Group’s accounting policy, on a straight line basis over its remaining useful life of four years.
Accumulated depreciation and impairment: exchange and other adjustments (8) (77) 52 (33)
In addition, total future minimum sub-lease income of £19 million at 31 December 2013 (£30 million at 31 December 2012) is expected to be received under non-cancellable sub-leases of the Group’s premises.
Costs deferred, net of amounts amortised to the income statement (19) 80 exchange and other adjustments – 1
Note 32: Deposits from banks £m £m liabilities in respect of securities sold under repurchase agreements 1,874 23,368
Savings and investment accounts 265,422 261,573 liabilities in respect of securities sold under repurchase agreements 2,978 4,433
Trading and other financial liabilities at fair value through profit or loss 43,625 33,392
liabilities designated at fair value through profit or loss primarily represent debt securities in issue which either contain substantive embedded derivatives which would otherwise need to be recognised and measured at fair value separately from the related debt securities, or which are accounted for at fair value to significantly reduce an accounting mismatch.
Note 36: Liabilities arising from insurance contracts and participating investment contracts Insurance contract and participating investment contract liabilities are comprised as follows: Gross £m
Change in liabilities charged to the income statement (note 10) 3,425 859 4,284 186 4,470
Change in liabilities charged to the income statement (note 10) 7,238 (2,054) 5,184 48 5,232 liabilities for insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the PRA’s realistic capital regime (realistic liabilities) and non-profit fund liabilities, accounted for using a prospective actuarial discounted cash flow methodology, as follows: With-profit fund £m
The realistic assessment is carried out using a stochastic simulation model which values liabilities on a market-consistent basis. The calculation of realistic liabilities uses best estimate assumptions for mortality, persistency rates and expenses. These are calculated in a similar manner to those used for the value of in-force business as discussed in note 28.
Note 36: Liabilities arising from insurance contracts and participating investment contracts (continued)
(iii) Assumptions Key assumptions used in the calculation of with-profit liabilities, and the processes for determining these, are: Investment returns and discount rates The realistic capital regime dictates that with-profit fund liabilities are valued on a market-consistent basis. This is achieved by the use of a valuation model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant swap curve, adjusted for credit risk. Further information on significant options and guarantees is given on page 191.
– Move to swap curves to derive risk-free rates (£174 million increase).
(2) Non-life insurance Gross non-life insurance contract liabilities are analysed by line of business as follows: £m £m
Change in provision for unearned premiums charged to income statement (note 8) (72) 7 (65)
Cash paid for claims settled in the year (385) – (385)
Non-life insurance all risks – gross £m £m £m £m £m £m £m £m
Current estimate in respect of above claims 286 186 483 493 353 382 349 2,532
Current estimate of claims relating to general insurance business acquired in 2009 388 256 – – – – – 644
Note 38: Liabilities arising from non-participating investment contracts The movement in liabilities arising from non-participating investment contracts may be analysed as follows: Gross Reinsurance Net £m £m £m
Changes in existing business 526 12 538 exchange and other adjustments (26) – (26)
The Group has agreed certain changes to early retirement and commutation factors in two of its principal defined benefit pension schemes, resulting in a cost of £104 million recognised in the Group’s income statement in the year ended 31 December 2013. In 2012, there was a net credit of £250 million following a decision to link discretionary pension increases in certain schemes to the Consumer Price Index (note 11).
The Group operates a number of funded and unfunded pension arrangements, the majority, including the three most significant schemes, are funded schemes in the uK. All schemes are operated as separate legal entities under trust law by the trustees. All uK schemes are funded in compliance with the Pensions Act 2004. A valuation exercise is carried out for each scheme at least every three years, whereby scheme assets are measured at market value and liabilities (‘Technical Provisions’) are measured using prudent assumptions, if a deficit is identified a recovery plan is agreed and sent to the Pensions Regulator for review. The outcome of this valuation process, including agreement of any recovery plans, is agreed between the Group and the scheme Trustee. The Group’s overseas defined benefit pension schemes are subject to local regulatory arrangements.
Corporate and other debt securities 153 478 1,289 835 243 85 3,083
Mezzanine debt funds 108 111 long-term equity funds 84 114 emerging market equity funds 1,018 1,051 emerging market debt funds 1,142 705
Current service cost 351 360 380 net interest amount 22 (60) (20)
Benefits expected to be paid between 1 and 2 years 1,009 970
Benefits expected to be paid between 35 and 45 years 16,374 15,508
Benefits expected to be paid in more than 45 years 11,403 11,096
For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 30 June 2008; this valuation has been updated to 31 December 2013 by qualified independent actuaries. The principal assumptions used were as set out above, except that the rate of increase in healthcare premiums has been assumed at 6.90 per cent (2012: 6.50 per cent).
Restatement (notes 1 and 56) 139 exchange and other adjustments 7 (14)
Deferred tax assets and liabilities are comprised as follows: £m £m
Payment protection insurance Following the unsuccessful legal challenge by the BBA against the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS), the Group made provisions totalling £6,775 million in 2011 and 2012 against the costs of paying redress to customers in respect of past sales of PPI policies, including the related administrative expenses.
– Average redress – the average redress paid per policy has been relatively stable, but remains higher than expected by approximately £160 per policy due to the product and age mix of the complaints. This has resulted in an additional provision of £135 million.
An enforcement Team of the FCA is investigating the Group’s governance of third party suppliers and potential failings in the PPI complaint handling process. A provision of £50 million has been made in respect of the likely administration costs of responding to the FCA’s inquiries. It is not possible at this stage to make any assessment of what, if any, additional liability may result from the investigation.
Customer initiated complaints since origination (m) 2.5 0.5 0.1 = £200m
Proactive Mailing: – number of policies (m)2 1.66 1.19 0.1 = £45m
The percentage of complaints where the Group finds in favour of the customer. This is a blend of proactive and customer initiated complaints. The 80 per cent uphold rate is based on the latest six months to December 2013.
Litigation in relation to insurance branch business in Germany Clerical Medical Investment Group limited (CMIG) has received a number of claims in the German courts, relating to policies issued by CMIG but sold by independent intermediaries in Germany, principally during the late 1990s and early 2000s. Following decisions in July 2012 from the Federal Court of Justice (FCJ) in Germany the Group recognised a further provision of £150 million in its accounts for the year ended 31 December 2012 bringing the total amount provided to £325 million. During the half-year to 30 June 2013 the Group has charged a further £75 million with respect to this litigation increasing the total provision to £400 million. The remaining unutilised provision as at 31 December 2013 is £246 million.
Other regulatory matters In the course of its business, the Group is engaged in discussions with the PRA, FCA and other uK and overseas regulators and governmental authorities in relation to a range of matters; a provision is held against the costs expected to be incurred as a result of the conclusions reached. In 2013 the provision was increased by a further £200 million, in respect of matters affecting the Retail, Commercial, and Wealth and Asset Finance businesses, bringing the total amount charged to £300 million of which £75 million had been utilised at 31 December 2013. This increase reflects the Group’s assessment of a limited number of matters under discussion, none of which currently is individually considered financially material in the context of the Group.
Other provisions include those arising out of the insolvency of a third party insurer, which remains exposed to asbestos and pollution claims in the uS. The ultimate cost and timing of payments are uncertain. The provision held of £37 million at 31 December 2013 represents management’s current best estimate of the cost after having regard to actuarial estimates of future losses.
Floating Rate undated Subordinated Step-up notes (e300 million) a 16 13 6.05% Fixed to Floating Rate undated Subordinated notes (e500 million) a, c 8 5 5.375% undated Fixed to Floating Rate Subordinated notes (uS$1,000 million) – 9 8.625% Perpetual Subordinated notes (£200 million) – 22 4.875% undated Subordinated Fixed to Floating Rate Instruments (e750 million) 79 70
6% undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million) 10 10
Total Enhanced Capital Notes 8,938 8,947 a Interest is payable quarterly in arrears at a rate of 3 month euribor plus 3.1 per cent per annum.
Number of shares number of shares number of shares £m £m £m
Share issuances In 2013 the Group issued 713 million new ordinary shares (2012: 479 million shares; 2011: nil) in relation to payment of coupons in the year on certain hybrid capital securities that are non-cumulative; the remaining 312 million shares issued in 2013 were in respect of employee share schemes (2012: 1,137 million shares; 2011: 652 million shares).
The Company has entered into deeds of covenant with the Foundations under the terms of which the Company makes annual donations. The deeds of covenant can be cancelled by the Company at nine years notice, at which point the limited voting ordinary share capital would convert into ordinary shares. Such notice has been given to the lloyds Bank Foundation for Scotland.
Income statement transfers (note 5) (550) (92) 70 £m £m £m
Retained profits are stated after deducting £480 million (2012: £158 million; 2011: £33 million) representing 578 million (2012: 301 million; 2011: 58 million) treasury shares held.
Deferred bonus plans Bonuses in respect of the performance in 2013 of employees within certain of the Group’s bonus plans have been recognised in these financial statements in full. The amounts to be settled in shares are included within the total charge to the income statement detailed above.
Lloyds Banking Group executive share option schemes The executive share option schemes were long-term incentive schemes available to certain senior executives of the Group, with grants usually made annually. Options were granted within limits set by the rules of the schemes relating to the number of shares under option and the price payable on the exercise of options. The last grant of executive options was made in August 2005. These options were granted without a performance multiplier and the maximum limit for the grant of options in normal circumstances was three times annual salary. Between March 2004 and August 2004, the aggregate value of the award based upon the market price at the date of grant could not exceed four times the executive’s annual remuneration and, normally, the limit for the grant of options to an executive in any one year would be equal to 1.5 times annual salary with a maximum performance multiplier of 3.5.
For options granted in 2004 The performance condition was linked to the performance of lloyds Banking Group plc’s total shareholder return (calculated by reference to both dividends and growth in share price) against a comparator group of 17 companies including lloyds Banking Group plc.
The weighted average share price at the time that the options were exercised during 2013 was £0.65. no options were exercised in 2012. The weighted average remaining contractual life of options outstanding at the end of the year was 2.9 years (2012: 0.8 years).
The awards were granted in recognition that the executives’ outstanding awards over shares in their previous employing company lapsed on accepting employment with the Group.
The weighted average share price at the time the options were exercised during 2013 was £0.75. no options were exercised in 2012.
Participants are not entitled to any dividends paid during the vesting period.
The options outstanding under the HBOS Share Option Plan and St James’s Place Share Option Plan at 31 December 2013 had exercise prices in the range of £0.5183 to £5.80 (2012: £0.5183 to £5.80) and a weighted average remaining contractual life of 0.2 years (2012: 1.1 years).
If the compounded annual growth rate of adjusted eP reached 57 per cent per annum, 25 per cent of this element of the award, being the threshold, would vest. If the compounded annual growth rate of adjusted eP reached 77 per cent per annum, 100 per cent of this element would vest.
If the ATSR reaches 30 per cent per annum, 100 per cent of this element will vest.
(vi) SME lending: relevant to 5 per cent of the award. Performance will be measured by reference to the movement in lending to SMes relative to the market as reported by the Bank of england over the three year period ending 31 December 2015.
The weighted average fair value of the share awards granted in 2013 was £0.34 (2012: £0.24). The fair values of the majority of share awards granted have been determined using a standard Black-Scholes model. The fair values of the remaining share awards have been determined by Monte Carlo simulation.
The performance conditions for share-based awards made in June 2012 are as follows: (i) Profitability: relevant to 40 per cent of the award. The performance target is based on a cumulative three year profit before tax. If cumulative profit before tax reaches a specified target level, 100 per cent of this element will vest. If cumulative profit before tax reaches 90 per cent of the target level, 25 per cent of this element of the award, being the threshold, will vest. If cumulative profit before tax reaches 110 per cent of the target level, 200 per cent of this element of the award, being the maximum, will vest.
For awards made to SWIP’s Code Staff (as defined by FSA), a fourth performance condition was set, relating to an internal measure of operational risk. This additional measure is relevant to 15 per cent of the award for these individuals, with a corresponding 5 per cent reduction in each of the weightings for the other three measures described above. As with the other measures, this performance condition has a target value at which 100 per cent of the award will vest, a maximum value at which 200 per cent of the award will vest, and a threshold value at which 25 per cent of the award will vest.
The performance conditions for share-based awards made in June 2013 are as follows: (i) Profitability: relevant to 35 per cent of the award. The performance target is based on a cumulative three year profit before tax. If cumulative profit before tax reaches a specified target level, 100 per cent of this element will vest. If cumulative profit before tax reaches 80 per cent of the target level, 25 per cent of this element of the award, being the threshold, will vest. If cumulative profit before tax reaches 120 per cent of the target level, 200 per cent of this element of the award, being the maximum, will vest.
(ii) Investment performance: relevant to 35 per cent of the award. The performance target is based on the percentage of SWIP funds achieving at or above benchmark performance (on a competitor median or index basis) over the three year period. If 50 per cent of funds exceed benchmark performance, 25 per cent of this element of the award, being the threshold, will vest. If 55 per cent of funds exceed benchmark performance, 100 per cent of this element, being the target, will vest. If 70 per cent of funds exceed benchmark performance, 200 per cent of this element of the award, being the maximum, will vest.
The number of shares awarded relating to matching shares in 2013 was 19,870,495 (2012: 36,158,343), with an average fair value of £0.63 (2012: £0.34), based on market prices at the date of award.
Weighted average expected life 3.1 years 1.0 years 3.0 years 3.0 years
Advanced (includes loans of appointed key management personnel) 2 3 1
Placed (includes deposits of appointed key management personnel) 29 39 17
Withdrawn (includes deposits of former key management personnel) (26) (35) (15)
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between 2.5 per cent and 23.9 per cent in 2013 (2012: 2.5 per cent and 29.95 per cent; 2011: 1.09 per cent and 27.5 per cent).
Funding for Lending In August 2012, the Group announced its support for the uK Government’s Funding for lending Scheme and confirmed its intention to participate in the scheme. The Funding for lending Scheme represents a further source of cost effective secured term funding available to the Group. The initiative supports a broad range of uK based customers, providing householders with more affordable housing finance and businesses with cheaper finance to invest and grow. In november 2013, the Group entered into extension letters with the Bank of england to take part in the extension of the Funding for lending Scheme until the end of January 2015. The extension of the Funding for lending Scheme focuses on providing businesses with cheaper finance to invest and grow. At 31 December 2013, the Group had drawn down £8.0 billion under the Funding for lending Scheme. A further £2.2 billion was drawn in January 2014, which under the Funding for lending rules counts as funding from the 2013 scheme capacity. This figure includes £0.2 billion drawn by Sainsbury’s Bank plc. As a result of the Group’s holding in the joint venture, Sainsbury’s Bank plc was part of the Group for Funding for lending purposes for the period to 31 January 2014.
Pension funds The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2013, customer deposits of £145 million (2012: £129 million) and investment and insurance contract liabilities of £4,728 million (2012: £4,569 million (restated)) related to the Group’s pension funds.
Collective investment vehicles The Group manages 210 (2012: 244) collective investment vehicles, such as Open ended Investment Companies (OeICs) and of these 145 (2012: 136) are consolidated. The Group invested £2,472 million (2012: £1,563 million) and redeemed £2,189 million (2012: £1,690 million) in the unconsolidated collective investment vehicles during the year and had investments, at fair value, of £3,291 million (2012: £6,479 million) at 31 December. The Group earned fees of £277 million from the unconsolidated collective investment vehicles during 2013 (2012: £325 million).
Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including purported class action suits, in the uS in connection with their roles as panel banks contributing to the setting of uS Dollar lIBOR. The claims have been asserted by plaintiffs claiming to have had an interest in various types of financial instruments linked to uS Dollar lIBOR. The allegations in these cases, the majority of which have been coordinated for pre-trial purposes in multi-district litigation proceedings (MDl) in the uS District Court for the Southern District of new York (the ‘District Court’), are substantially similar to each other. The lawsuits allege violations of the Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act (RICO) and the Commodity exchange Act (CeA), as well as various state statutes and common law doctrines. Certain of the plaintiffs’ claims have been dismissed by the District Court, various motions directed to the sufficiency of their pleading of certain claims are still pending, and many of these cases have been stayed by order of the District Court.