Annual Report and Accounts 2011Annual Report and Accounts 2011 How to use this report. Our Annual Report pdf has a number of features to help you find the information you need
Lloyds Banking Group is a leading UK based financial services group providing a wide range of banking and financial services, primarily in the UK, to personal and corporate customers.
Our aim is tO becOme the best bank fOr custOmers We are creating a simpler, more agile and responsive organisation, and are making a big investment in products and services.
– Conservative approach to, and prudent appetite for, risk fully embedded across the business
– New Wealth propositions developed covering 80 per cent of customers, and processes simplified
– Combined businesses profit before tax increased 21 per cent to £2,685 million in 2011
– Core combined businesses profit before tax increased 3 per cent to £6,349 million
Income decreased 10 per cent to £21,123 million, reflecting subdued lending demand and continued customer deleveraging in the core, a smaller non-core portfolio, and a lower margin
Total costs fell 4 per cent, primarily driven by Integration and Simplification related savings and lower bonus accruals, partially offset by inflationary pressures and UK bank levy and FSCS costs
– As a consequence, also expect the attainment of our return on equity target to be delayed beyond 2014
– Given expectation of further deposit growth, expect to reach medium-term Group loan-to-deposit ratio target of 130 per cent or below by the end of 2012, two years ahead of plan
– The benefit from fair value unwind to reduce to approximately £0.5 billion
Includes the gains from liability management exercises, the net effect of banking volatility, changes in the fair valuation of the equity conversion feature of the Group’s Enhanced Capital Notes, net derivative valuation adjustments and gains or losses on disposals of assets which are not part of normal business operations.
In order to reflect the impact of the acquisition of HBOS, the amortisation of purchased intangible assets has been excluded; and the unwind of acquisition-related fair value adjustments is shown as one line in the combined businesses income statement.
In order to better present business performance the effects of liability management, volatile items and asset sales are shown on a separate line in the combined businesses income statement and the following items, not related to acquisition accounting, have also been excluded: – integration, simplification and EC mandated retail business disposal costs; – volatility arising in insurance businesses; – insurance gross up; – provision in relation to German insurance business litigation; – payment protection insurance provision; – customer goodwill payments provision; – curtailment gains and losses in respect of the Group’s defined benefit pension schemes; and
We have made good progress in reducing our loan-to-deposit ratio, thereby strengthening our balance sheet.
Commercial Commercial serves in excess of a million small and medium-sized enterprises and community organisations with a turnover of up to £15 million. Customers range from start-up enterprises to established corporations, with a range of propositions aligned to customer needs. Commercial comprises Commercial Banking and Commercial Finance, the invoice discounting and factoring business.
Wealth and International Wealth and International focuses on the private banking and asset management businesses of the Group and also operates the Group’s international business.
Broad multi-channel distribution The Group operates a comprehensive multi-channel distribution network, enabling our customers to access products and services at any time and in a style which suits their individual preferences.
We accelerated the EC mandated disposal, the transaction known as ‘Verde’, and made significant progress in strengthening the balance sheet and our funding position whilst delivering a resilient underlying trading performance. We took responsible position on Payment Protection Insurance (PPI), continue to improve switching for current accounts and have made excellent progress, with more to come, in reducing the number of complaints. As a result we believe the Group is in a stronger position as we move into 2012.
It is our intention to do so when the financial position of the Group and market conditions permit and after regulatory capital requirements are defined and prudently met. At this time those requirements remain unclear and although we have made good progress against our strategic priorities during the year we are not yet able to forecast when we will be able to resume dividend payments.
For this reason I am pleased to note that our involvement in Project Merlin has been successful: We met and continue to exceed our agreed lending levels. We provided £45.3 billion of committed gross lending to UK businesses in 2011, and helped 124,000 new start up businesses. All of this has been achieved while acting as a responsible lender. We have more than delivered on our promise to provide gross new lending for credit-worthy UK businesses and have pledged yet more lending for the UK economy in 2012.
Remuneration The Remuneration Committee undertook a further review of executive remuneration in 2011. Anthony Watson, the chairman of the Remuneration Committee, comments on detailed aspects of our remuneration policy elsewhere in this Report. I want to give shareholders some additional explanation of our philosophy and the deliberations underlying incentive compensation for 2011 and for the 2009-2011 Long-Term Incentive Plan.
Remuneration remains an important issue for our stakeholders and the Group. As we are primarily a retail and commercial bank the awards under our Group bonus schemes in 2011 are a very small percentage of our revenues at less than 2 per cent, and at less than 12.5 per cent of the profits before tax and bonus on a Combined Businesses basis. Additionally, compensation fell this year in total and average terms. The bonuses paid, greater than half in shares, averaged less than £3,900 per employee. We firmly believe that remuneration policy at all levels, including senior executives, needs to incentivise staff to deliver strong, sustainable growth whilst reflecting the work required to reshape the business to fit the new, challenging environment. We also need, however to be mindful of public concerns about equality and that remuneration reflects financial results. In asking not to be considered for a bonus in 2011, António made a principled decision with regard to his remuneration, a decision the Board fully supported.
I am pleased that we were able to announce that George Culmer will join us as our new Group Finance Director in time for the annual general meeting on 17 May 2012 His knowledge and experience of insurance and his track record as a highly regarded FTSE 100 Finance Director will be of great value to us.
I would also like to thank Helen Weir and Archie Kane, who left the Group in 2011, for their significant contribution to the Group over many years. Helen was Group Finance Director and then led our Retail business. Archie was the Group Executive Director of our successful Insurance business, Scottish Widows.
Sara Weller joined as a Non-Executive Director on 1 February 2012. Her background in retail and in the application of new technology such as the internet directly support our strategy.
Finally, Truett Tate, Executive Director for Wholesale, has retired from the Group. He made a major contribution in a number of senior roles since joining the Group in 2003. He is the quintessential client advocate and in addition he was a great ambassador for many of our corporate responsibility and charitable programmes. I enjoyed working with him and we wish him well for the future.
Community The principal means by which Lloyds Banking Group can benefit society and the communities where we operate is to be a successful business. Lloyds Banking Group plays a part in the lives of nearly everyone in the UK, as a supplier of financial services, a major employer, and a customer. We look after the financial needs of over 30 million retail and business customers. In addition we employ 100,000 people and are a significant buyer of goods and services to support our business. We therefore have a relationship with nearly every home and with many businesses in the UK. We have a presence in most communities and our brands are well recognised across the country. At a time when the banking sector is under increased public scrutiny, we acknowledge our responsibility to provide the proper flow of credit to the economy by delivering simple products, great customer service and secure banking every day. We do this for more customers and businesses than any other bank in the UK.
We also continue to invest actively in the communities where we operate both directly through our community giving programme, and indirectly through our charity activities and staff giving days. In 2011, we invested £85 million in local communities, including support for financial inclusion and donations through the Group’s charitable foundations. Over the last 25 years, the Group has contributed in excess of £510 million through its Foundations. Our new programmes supporting financial literacy, Money for Life, and our funding of university places through Lloyds Scholars show our continued commitment to support our communities.
A commitment to good Governance The Board and I place great importance on Corporate Governance. Not just because of increasing focus on this area, but because good governance is in the best interests of the company. The Board is ultimately responsible for the Group’s success through setting strategy, devising sound governance arrangements, and establishing the values and standards of the Group. Throughout the year ending 31 December 2011, the Group complied with all relevant provisions of the Financial Reporting Council’s UK Corporate Governance Code. This is an important base level but in undertaking its responsibilities the Board seeks to exceed these minimum standards, as we believe that good governance is a key contributor to the Group’s long term success.
As a Group we are committed to meeting the regulatory and other requirements that apply to this topic, including the FSA Code, and more generally improving the transparency of remuneration disclosure. We always look to align reward with the Group’s long term performance and the interests of its shareholders. We fully endorse a stringent deferral process, as an important element of this alignment. We maintain an open dialogue with our major shareholders to help ensure appropriate remuneration policies are developed, and that shareholder concerns are taken into account.
2011 results overview The results reflect our focus on rapidly improving the Group’s risk profile and further strengthening the balance sheet, through improving the Group’s capital and funding position and making substantial progress on non-core asset reductions, deposit growth, and our funding programme.
The benefits from the improvements we achieved in the Group’s funding mix, increasing deposit balances and reducing the proportion of wholesale funding, were most clearly evident in our core net interest margin. This declined by only 6 basis points to 2.42 per cent, despite the impact of higher funding costs, the effect of refinancing a significant amount of government and central bank facilities and lower interest rates in general. However, our Group net interest margin declined by 14 basis points to 2.07 per cent, in line with guidance, given that it reflected the full impact of these effects on our predominantly wholesale funded non-core business.
Mark joined the Group in March 2009 as Director, Group Operations and Integration. He is a career banker having started his career in 1981 with NatWest. Over the past 15 years, Mark has run scale banking and technology operations, including complex change programmes.
Antonio joined the Group in March 2011. Previously at Santander, Antonio was CFO for the UK business and managed the Wealth and Intermediaries businesses, and performed in several other international roles since joining Santander in 1998. Prior to this Antonio worked for Arthur Andersen in the financial sector whilst he was also a Professor at the Universidad Europea de Madrid.
António joined the Board in January 2011 as an Executive Director and become Group Chief Executive in March 2011. Further details can be found on page 173.
Given our UK-focused strategy to capitalise on the strength of our capabilities in the UK, we have also committed to reduce our international presence from 30 countries to less than 15 by 2014. To date we have announced the exit from operations in seven countries.
Simplifying the Group is a cornerstone of our strategy, not only in its delivery of cost savings, but also importantly in simplifying our products and services from the customer’s point of view, and allowing us to increase investment in our franchise. We have now commenced the delivery of the simplification initiatives set out in our strategy, and by the end of 2011 had achieved initial run rate savings of £242 million in the first six months of the programme. We have also greatly improved our cost management through instituting a rigorous process overseen by a Cost Board, which has helped the Group drive significant reductions in our operating expenses.
We have also begun to invest behind increasing our share of capitallight business in our corporate and commercial businesses. Key successes included the launch of ‘Arena’, our online foreign exchange and money market deposit platform and our UK government bond market making operation in our Wholesale business. In Insurance, our focus on UK customer needs delivered a 23 per cent increase in LP&I UK protection sales (PVNBP), which now account for 22 per cent (2010: 13 per cent) of bancassurance sales.
Further details on the good progress we have made against our strategic initiatives in each business are given in each of the divisional reviews in this document.
The banking industry has faced much criticism in recent years and we recognise that significant work is required to rebuild trust with customers and other stakeholders.The financial services sector does however have a fundamental role to play in society in supporting both individuals and businesses through the provision of financial and payment services, and can be instrumental in helping the economy prosper and grow. The industry can help ensure the future strength and economic well being of the UK and its people and given our strategic assets we aim to play an important part in this.
As a member of the Business Finance Taskforce, we have led work to improve SME customer relationships through mentoring and a right to appeal and have agreed to contribute £300 million to the Business Growth Fund to provide better access to equity finance.
While the results of the colleague engagement survey we conducted in the second half of the year reflected both the challenging external environment and the work that remains to be done in ensuring Lloyds Banking Group is a great place to work, the progress we have made during the year reflects the strong capabilities and dedication of our people which will continue to support the delivery of our strategy.
EC mandated business disposal (Project Verde) Following our decision early in 2011 to accelerate Project Verde, we have made good progress, and, having reviewed the formal offers for the Verde business, the preferred bidder for the business is The Co-operative Group. Any final transaction will be subject to regulatory approval and certain other conditions. The Group will continue to progress an IPO as an alternative to a direct sale. We remain on track to complete the transfer of the business before the end of 2013.
It is our intention to do so when the financial position of the Group and market conditions permit, and after regulatory capital requirements are defined and prudently met. At this time those requirements remain unclear and although we have made good progress against our strategic priorities during the year we are not yet able to forecast when we will be able to resume dividend payments, although we continue to strive to recommence them as soon as possible.
We expect the Government to provide further details of its plans in the spring of 2012 and to outline which of the proposals it intends to progress to legislation. We will continue to work with HM Treasury and our regulators in the coming months ahead of the publication of the final white paper.
Economic outlook While the outlook for the UK economy remains uncertain, and vulnerable to developments in the Eurozone, we believe the most likely scenario is for further weakness in the first half of 2012 followed by a relatively modest recovery in the second half resulting in broadly flat real GDP for the year as a whole, with further modest recovery in 2013. As a result, we expect UK base rates to remain at current levels into 2013, and unemployment to rise from current levels to peak at around 9 per cent in 2013. However, we expect inflation (CPI) to fall from current high levels to below 3 per cent in 2012 and possibly below 2 per cent in 2013. UK property prices are likely to reflect the weak economic environment, with house prices remaining broadly flat in 2012 and 2013 and commercial property prices likely to be marginally weaker in 2012, and marginally stronger in 2013.
In relation to our balance sheet, this progress includes the £53 billion reduction in non-core assets achieved in the year and the 60 basis point increase in our core tier 1 ratio to 10.8 per cent. As regards our income targets, we have reduced our asset quality ratio (impairment as a percentage of average advances) by 39 basis points to 1.62 per cent, a significant step towards our target of 50 to 60 basis points. The positive strong momentum of our Simplification programme, with £242 million of run-rate cost savings already achieved at the end of 2011, means that we are now increasing our target cost savings from this programme by £200 million, to £1.9 billion (from £1.7 billion) by the end of 2014, and to £1.7 billion from £1.5 billion in 2014.
Given the economic outlook, in 2012, on a combined businesses basis, we expect income to be lower than in 2011, given further non-core asset reductions, subdued demand in the core business leading to a broadly stable core book, higher wholesale funding costs, and interest rates likely to remain at low levels for longer. We retain significant capacity to grow core assets subject to demand and to maintaining our prudent appetite for risk. Our banking net interest margin, as expected, was marginally below 2 per cent in the fourth quarter of 2011. We expect our full year banking net interest margin to be below 2 per cent in 2012, falling year-on-year by approximately the same amount in 2012 as in 2011, as a result of continued higher wholesale funding costs, the repricing of interest earning assets and higher costs from the spread between base rates and LIBOR. We expect the benefit from fair value unwind to reduce to approximately £0.5 billion in 2012. However, we expect a further reduction in costs, and a similar reduction in Group impairment in 2012 as seen in 2011, as a result of further asset quality improvements across the divisions, with the largest improvement coming from International.
We expect to continue to strengthen our balance sheet in 2012, by a further reduction in non-core assets of approximately £25 billion, through targeting further deposit growth of around 3 per cent (based on a continuation of current market conditions), by strengthening our funding position, with approximately 50 per cent of our term wholesale funding target for 2012 already completed, and by further improving our core tier 1 ratio. Growth in customer deposits remains a key part of our funding strategy, and, assuming a continuation of current trends, we would expect to reach our medium-term Group loan-to-deposit ratio target of 130 per cent or below by the end of 2012, two years ahead of plan.
While the Group welcomes the increased clarity provided by the Government’s initial response, significant uncertainty remains over key elements of the reforms, including what activities could be allowed inside the ‘ring-fenced bank’, the extent of depositor preference of other creditors and measures that could see some categories of wholesale funding ‘bailed-in’ in the instance of resolution.
Greater clarity on the Independent Commission on Banking’s recommendations was given during the year but uncertainty over key elements of the reform proposals still remain.
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However, whilst a definitive solution to the Eurozone crisis remains lacking there continues to be a high risk that ongoing uncertainty around the Eurozone economic outlook, the survival of the Euro currency and the availability of credit could cause a significant recession in the UK and Ireland. Such a scenario would likely result in higher UK corporate failures, a second leg of falling property prices, albeit by less than during the 2008-9 recession, and rising commercial tenant defaults. Irish property prices would also fall by more than currently expected. In turn, this would have a negative impact on the Group’s income, funding costs and impairment charges.
In the competitive open market in which we operate there is an increasing range of products and services available to customers, and with the current public scrutiny of banks the expectations and demands of customers continue to increase.
Access to convenient branches remains important for many customers but demand for a quality multi-channel banking proposition is now more prevalent and the provision of effective telephone, digital and mobile channels is increasingly important. Service remains one of the key drivers of customer satisfaction and customers are less accepting of poor service given the competitive nature of the market.
As highlighted above, there are some clear customer trends emerging but we recognize that every customer, whether they be retail or corporate, has their own personal needs and has to be treated individually. It is clear that different customer segments have different demands and the opportunity exists to differentiate service for varied segments but fundamentally the customer has a choice and will select the provider that can most effectively service their personal needs.
A UK focused strategy to be the best bank for customers, which will deliver strong, stable and sustainable returns for our shareholders. We are looking to create a more agile, efficient and responsive customer focused organisation with a real focus on operating sustainably and responsibly. We will reshape and simplify the business and invest a portion of the savings realised from the simplification initiatives in customer related growth initiatives. Whilst focusing on core markets which offer strong returns and attractive growth we will maintain a prudent approach to risk and further strengthen the Group’s balance sheet and liquidity position.
Key initiatives and progress in 2011 Significant progress has already been made this year in reshaping our business, particularly with regard to embedding new risk processes and reducing non-core assets.
We have continued to take a disciplined approach to the management and reduction of our non-core assets. Our non-core commercial real estate and corporate loans are managed on a day-to-day basis by a dedicated workout unit reporting to our Risk function, while non-strategic activities are managed by dedicated teams until run-off or sale.
We will continue to divest or run off non-core assets and are targeting a reduction in our non-core assets to less than or equal to £90 billion by the end of 2014, and for them to account for less than or equal to £65 billion of risk-weighted assets by that time. We are also targeting non-core run-off and disposals to be net capital generative over the period 2012 to 2014.
A prudent appetite for risk We have now fully embedded across the business a conservative approach to, and prudent appetite for, risk, and have in place disciplined controls over the risk profile of all new business. We have also reviewed our existing portfolios and confirmed them as adequately provisioned.
The intended reduction of non-core assets and the prudent management of risk should result in an improvement in the Group’s asset quality ratio to 50 to 60 basis points by the end of 2014, with the core business expected to be at the bottom end of this range. In 2011 we have made excellent progress, with our asset quality ratio dropping from 201 to 162.
Priorities for 2012 Continue to carefully and effectively run down our non-core assets taking into consideration risk and value
Key initiatives and progress in 2011 The integration programme initiated at the time of the HBOS acquisition was substantially completed during the year, with a run rate of more than £2 billion per annum of cost savings and other operational efficiencies now achieved, in line with target. This was a significant achievement, particularly the successful migration of nearly 30 million customer accounts to a single operating platform. The implementation of a single operating platform for our key product areas means the Group is now in a strong position to undertake further simplification initiatives, as outlined below.
Simplification initiatives The Group is now targeting a further £1.7 billion of sustainable annual total cost savings in 2014, and by leveraging our prior experience from integration, this can be completed in a cost and time efficient manner. We have made strong initial progress with run-rate cost savings of £242 million at end 2011. The main initiatives now being progressed are: Operations and processes: We are conducting an end-to-end redesign of our processes, which will include significant process automation, and will materially reduce the number of IT applications. This will improve the customer experience (for example through accelerating the fulfilment of requests and reducing errors), increase productivity and reduce risk, complexity and costs.
More agile organisation: We have already made good progress in creating a more agile organisation through delayering our management structure and centralising control functions, but further developments including the creation of a simpler legal structure still need to be progressed. Our focus will be on reduction in middle management, bringing our top team closer to the customers and front-line staff.
Aim We are targeting further cost saving and investment initiatives to attain a cost:income ratio of 42–44 per cent.
Although the cost:income ratio increased in 2011 we continue to believe the cost savings and investment initiatives will deliver a cost:income ratio of 42-44 per cent.
Key initiatives and progress in 2011 Much of the additional investment we intend to make in the business will be derived from the cost savings delivered from the simplification initiatives, which have yet to occur. Despite this we have already made significant investments in 2011, including the revitalisation of Halifax as a challenger brand and the implementation of a new e-solution for foreign exchange trading and money market deposits for our Corporate customers.
We will also invest in Lloyds TSB and Bank of Scotland as leading relationship brands in UK retail banking. We will be focused on recognising and rewarding our customers’ loyalty, and we will invest in our branches, in new channels such as mobile banking, and services like Money Manager.
In Wealth, our goal is to be the primary Wealth advisor to our UK mass affluent, affluent and high net worth customers. We will invest in new coverage models to better meet our customers’ service needs, electronic capabilities such as an improved on-line channel and an execution-only service, and a new investment platform incorporating Scottish Widows’ and third-party products. We will also refocus our International business on UK expatriates and others with UK connections.
In both businesses, our goal will be to increase our share of capitallight services, including risk and cash management, general insurance, pensions and wealth for SMEs, and transaction banking, debt financing, and rates business for UK corporates and institutions.
Increased liquidity as a proportion of wholesale funding with a maturity less than a year
Priorities for 2012 Further simplify our systems, processes and products, making it easier and more convenient for customers to bank with us, thereby improving the overall experience
We have developed a comprehensive customer experience program measuring customer service at key touch points and likelihood to recommend through the cross industry Net Promoter Score metric.
RelAtionships And Responsibility Customers sMes are a particularly important source of job creation and growth in the UK. our Commercial business is focused on serving these customers, and we demonstrated our support for sMe customers in 2011 with year on year net lending growth of 3 per cent in this business area. this compared favourably with the negative growth in sMe lending across the industry reported in the latest available market statistics from the bank of england. As part of this growth we increased our advances to manufacturing businesses through invoice finance by 30 per cent net. in 2012, we have pledged to make at least £12 billion of gross new lending available to sMes, with a further pledge to deliver positive net lending growth, to help stimulate growth and improve confidence in the sector. We support corporate and commercial customers throughout the economic cycle to ensure their financial health, viability and growth and our business support Unit (bsU) specifically helps businesses in financial difficulties. since 2009 the bsU has restructured facility for around 10,000 businesses and has protected more than 250,000 UK jobs. We are also simplifying processes and improving transparency for the benefit of customers. We have successfully piloted a re-egineering of our lending processes, halving the time to fulfil lending to customers, and intend to roll this out by the end of 2012 and launched simpler fixed charge money transmission Monthly price plan tariffs.
Treating Customers fairly Central to our aim of building deep and lasting customer relationships is our determination to treat customers fairly and ensure we are transparent in dealings with them. We conduct regular monitoring to check that we are complying with our robust customer treatment policies and are achieving fair outcomes for customers. Customer outcomes are an important component in colleague reward and remuneration. our approach to fair customer treatment takes into consideration product, sales and after sales: – products: we have strengthened our framework for developing and managing our product range, including the introduction of new product governance processes and a comprehensive risk assessment tool that centres on fair customer treatment.
Financial Inclusion We aim to lead the banking sector in reaching those who are financially excluded and equip them with the confidence and capability to manage their money effectively
We also encourage our people to contribute to our leading corporate and social responsibility practices; a strong part of our culture. employees raised £1.4 million for save the Children, a partnership that will run until June 2012.
Growing talent is a key priority, we need to motivate and nurture a developing pool of talent that drives our business in a way that is sustainable and realistic in the current climate.
All of this goes hand in hand with giving people equal access to a variety of opportunities and making our business work closely with our surrounding communities to build relationships and share skills.
this year we delivered a significant milestone in our integration when we harmonised terms and conditions for most employees in the Group. in addition, over 83,000 employees selected benefits available through our Flexible benefits plan. We implemented our new defined Contribution pension scheme, ‘your tomorrow’, which was awarded the pension Quality Mark plus – the highest quality mark available from the national Association of pension Funds.
secondly, rebuild confidence and trust in our leadership by increasing the time leaders spend listening and talking to colleagues across all areas of our business.
thirdly, drive customer focus at all levels in our organisation to stimulate ongoing quality and improvement. to do this, we must ensure we keep telling our colleagues about the changes that will be implemented as a result of the survey and continue to do all we can to make lloyds banking Group a great place to work.
A strong focus has been to support colleagues through the changes needed to successfully complete our integration programme; this has included providing training to over 16,000 colleagues in our branches to ensure they were fully prepared to work with the new customer systems and applications following the biggest migration of customer data in europe.
We remain committed to supporting a range of programmes linked to professional qualifications or relevant external certification and have reviewed our policy to ensure equality and consistency for all colleagues.
Embedding responsible business We established a new Responsible business steering Group in 2011 to drive our new responsible business strategy. it comprises the following business leaders from across the Group: Anita Frew, non-executive director Matt young, director, Group Corporate Affairs eva eisenschimmel, Managing director, Customers, brands, digital and telephone banking stephen pegge, director, sMe Markets in Commercial paul baker, director, Group property Kate Guthrie, hR director, insurance philip Grant, Managing director, UK Wealth paul turner, director, Community & sustainable business the steering Group meets every two months and will report to the board and Group executive Committee twice a year. in 2012, we are also setting up an independent panel of experts and opinion formers to provide thought leadership and challenge to the Group.
in 2011 we developed a new responsible business strategy which aims to help build thriving communities, and, in so doing, rebuild trust and pride in the Group. our vision is to be recognised by shareholders, customers and colleagues as making a real difference.
over half of children in the most disadvantaged areas fall behind at the age of five compared to just over a quarter of children from better off areas, and many never catch up. teachers report a 10 per cent improvement in reading, writing and maths among children enrolled on FAst programmes, after just eight weeks. As well as improving children’s academic performance, the programme has also been credited with improving children’s behaviour and bringing children and parents closer together.
Environmental responsibility in 2011, we introduced a set of market leading long-term environmental targets under our environmental Action programme to significantly reduce our environmental footprint. We aim to reduce paper, water and business travel by 20 per cent; ensure that less than 20 per cent of waste is sent to landfill; and reduce energy use by 30 per cent by 2020. We publish a standalone, data-driven Climate and environment Report on an annual basis which details progress we have made against our targets, and this is available from the lloyds banking Group website. last year, we achieved the Carbon trust standard for our entire UK operations, which recognises our robust approach to measuring, managing and reducing our carbon emissions. We also reduced our use of energy by 1 per cent, our use of water by 3 per cent and paper use by 7 per cent in 2011 compared with 2010. our overall carbon footprint reduced by 1 per cent in 2011 compared with 2010.
We recognise that our influence extends well beyond the size of our organisation. our asset management business, scottish Widows investment partnership (sWip), has over £140 billion invested around the world and is committed to using its influence to encourage best practice in corporate governance and management of sustainability risks. sWip has also launched a new sustainability strategy across its entire £8.5 billion property portfolio.
We have improved the accuracy of energy data for the 2010 reporting years, replacing estimates with actual data. We have also changed our method for reporting car travel data in 2011 and have applied this method to historical data.
We aim to set an example and demonstrate the highest standards of integrity in the way we do business. in 2012 we will explore opportunities to increase transparency of our management of social, environmental and ethical risks. We also plan to launch a new, group wide code of ethics, linked to the Group’s values, setting out values, principles and commitments to stakeholders that underpin the way we do business.
Andrew Clark, a Relationship director in our Commercial business and a Making a difference Award winner, volunteers as a Community First Responder and also a st. John Ambulance member. last year Andrew secured £8,000 for his responder team and attended 156 calls ranging from falls to strokes, chest pains, fitting, difficulty breathing and cardiac arrests, being on call for a total of 600 hours.
As the Official Partner of the London 2012 Ticketing programme, we are helping to ensure customers and communities have access to information about tickets to the Olympic and Paralympic Games. Our Official London 2012 Ticket Guides were available in all of our branches.
Background Lloyds Banking Group is proud to be the official banking and insurance partner for the London 2012 Olympic and Paralympic Games, the biggest sporting event ever staged in the UK.
The week had a positive impact on the students’ attitudes towards sport and many particularly enjoyed trying new sports. They developed team-working skills and created a great atmosphere around the school.
As the chosen bank to the Olympic Delivery Authority and LOCOG, we are proud of our role in supporting the development of the Olympic Park and other Games venues.
National School Sport Week Delivered in partnership with the Youth Sport Trust, Lloyds TSB National School Sport Week (with Bank of Scotland and sportscotland in Scotland) uses the excitement of the London 2012 Games to inspire more young people to do more sport.
We provide resources to schools to help them plan activities leading up to and during the week and in 2011 over 4 million young people took part. 48 per cent of secondary school pupils and 42 per cent of primary school pupils said they have joined or would like to join a new sports team or club in school after taking part in National School Sport Week.
In partnership with SportsAid, the UK’s leading charity for identifying and supporting young talented athletes, we committed to supporting more than 1,000 of these future stars of Team GB and ParalympicsGB by the time of the London 2012 Games.
London 2012 Trackside: Bringing London 2012 closer to our customers Trackside, launched in February 2011, is a customer exclusive programme giving Lloyds TSB and Bank of Scotland personal customers chances to win tickets to the London 2012 Games and opportunities to meet Olympians and Paralympians, as well as ensuring customers are the first to hear about our latest London 2012 news and offers. Registered customers receive regular e-newsletters and in 2011 we gave away more than 1,100 pairs of tickets to the 2012 Games to these personal customers.
Performance in line with our expectations The Group delivered a combined businesses profit of £2,685 million in 2011 broadly in line with our expectations despite the challenging external environment, with the core business delivering a resilient performance, and non-core results reflecting the substantial reductions in non-core assets achieved in the year. In line with our strategy, we continued to further reduce the risk in our balance sheet, strengthening our core tier 1 capital ratio, significantly reducing non-core assets and improving our funding position.
Profit before tax increased by 21 per cent. Excluding the effects of liability management, volatile items and asset sales, the combined businesses profit before tax increased by 22 per cent to £2,022 million. A significant improvement in impairment was partly offset by reductions in income, principally as a result of non-core asset reductions to further strengthen the balance sheet, as well as higher funding costs.
Profit before tax included the unwind of £1,943 million of acquisition-related fair value adjustments, around £250 million lower than previously anticipated as a more cautious outlook for certain US securities resulted in the deferral of positive fair value unwind. Going forward, over the medium-term, and in line with previous guidance, declining fair value unwind benefits are expected to accrue, with the benefit expected to be approximately £0.5 billion in 2012.
Core business profit before tax was £6,349 million compared to £6,152 million in 2010. Excluding liability management, volatile items and asset sales, core business profit before tax decreased by 6 per cent, principally reflecting higher funding costs and a decline in average interest-earning assets as a result of subdued market conditions.
Excluding liability management, volatile items and asset sales, total income, net of insurance claims decreased by 10 per cent, reflecting non-core asset reductions undertaken to strengthen the balance sheet, subdued lending demand, continued customer deleveraging in our core business, a lower banking net interest margin and lower treasury and trading income. The asset reductions, which resulted in losses of £649 million, were primarily non-core asset sales (including losses on treasury assets of £758 million, which were largely offset by a related fair value unwind, included elsewhere in the income statement).
Comparison of fourth quarter 2011 income with third quarter 2011 income
Net interest income fell 8 per cent to £2,816 million, when compared to the third quarter of 2011. This principally reflected a 2 per cent reduction in average interest-earning banking assets in the quarter, mainly driven by non-core asset reductions, and an 8 basis point fall in net interest margin to 1.97 per cent.
Retail’s impairment charge reduced by 28 per cent, with a reduction in the unsecured charge more than offsetting an increase in the secured charge. As a percentage of average loans and advances to customers, the impairment charge decreased to 0.54 per cent, from 0.74 per cent in 2010. Credit performance remained strong with fewer assets entering arrears compared to 2010, in both the secured and unsecured portfolios. Retail’s coverage ratio fell from 31.8 per cent to 30.8 per cent as a result of the smaller unsecured collections portfolio.
Retail’s unsecured impairment charge for 2011 was £1,507 million, a decrease of 39 per cent, compared to the same period in 2010. This reflected continued improving new business quality and portfolio trends as a result of our conservative risk appetite, with a focus on lending to existing customers. This focus on improving business quality has resulted in the level of early arrears for accounts acquired since 2009 being at pre-recession levels. Unsecured impaired loans decreased to £2.4 billion from £3.0 billion at 31 December 2010 as a result of tighter credit policy across the lifecycle, including stronger controls on customer affordability. Impairment provisions as a percentage of impaired loans in collections increased to 86.5 per cent at 31 December 2011 from 82.5 per cent at 31 December 2010.
In Commercial, the impairment charge decreased by £79 million, or 21 per cent, to £303 million in 2011 reflecting the benefits of the low interest rate environment, which has helped maintain defaults at a lower level, and the continued application of our prudent credit risk appetite. Portfolio metrics including delinquencies and assets under close monitoring remain above benign environment levels. The impairment charge as a percentage of average loans and advances to customers improved to 1.06 per cent in 2011 compared to 1.24 per cent in 2010 and impairment provisions as a percentage of impaired loans reduced from 34.7 per cent to 30.2 per cent.
Proportion of wholesale funding with maturity of greater than one year 55% 50%
The Group also continues to maintain a strong liquidity position, considerably in excess of current regulatory requirements. Our primary liquidity portfolio at the end of the year was £94.8 billion, in line with the level at December 2010. This represents approximately 133 per cent of our money market funding positions as at the end of December 2011 and is approximately 84 per cent of all wholesale funding with a maturity of less than a year, providing a substantial buffer in the event of continued market dislocation. In addition to this primary liquidity, the Group continues to hold more than £100 billion of secondary liquidity.
The Integration programme has now delivered run-rate recurring savings of £2,054 million per annum as at the end of 2011, at an aggregate expensed cost of £3,846 million. The Simplification programme is well underway and achieved annual run-rate savings of £242 million in 2011. Further details on the Integration and Simplification programmes are given on page 96.
Payment protection insurance Our review of the compliance with applicable sales standards in respect of PPI continues to make good progress and we continue to believe that the provision of £3.2 billion we took in the first half of 2011 in respect of the anticipated costs of contact and/or redress, including administration expenses, is adequate and that we are appropriately provided. Costs incurred in 2011 against this provision amounted to £1,045 million.
Taxation The tax credit for 2011 was £828 million. This reflects a lower effective tax rate than the UK statutory rate primarily due to the effect on deferred tax of the reduction in the UK corporation tax rate to 26 per cent with effect from 1 April 2011 and to 25 per cent with effect from 1 April 2012, offset by the net movement in deferred tax recognised for losses.
Central items Group 2011 £m £m £m £m £m £m £m
Total income, net of insurance claims 9,194 4,059 1,697 2,025 2,277 1,871 21,123
The net credit in 2011 of £1,943 million is mainly attributable to a reduction in the impairment charge of £1,693 million as losses reflected in the acquisition balance sheet valuations of the lending and securities portfolios have been incurred.
Central items Group 2010 £m £m £m £m £m £m £m
Other costs include FSCS costs and impairment of tangible fixed assets.1
2011 highlights Profit before tax decreased by 9 per cent to £3,636 million
Effects of liability management, volatile items and assets sales 48 –
Share of results of joint ventures and associates 11 17 (35)
Customer deposit growth was 5 per cent, against a market that experienced minimal growth. This strong performance reflected the compelling customer proposition Retail has developed, and was driven by strong tax‑free cash ISA balance growth. This strong deposit growth, in addition to the issuance of debt securities backed by Retail assets, provided ongoing support to the Group funding position.
Simplifying the Bank We’re taking decisive steps towards becoming a simpler organisation. Retail has already made good progress with the recent integration which delivered a common banking platform across the majority of customers and accounts, additional details are provided on page 96. We are now investing in our infrastructure to ensure our systems support future simplification of the business and improve our capabilities. This includes the further development of Risk and Finance systems to make decision‑making more agile and enable us to compete more effectively in our chosen markets.
Retail recognises the importance of the branch for many customers and has made a commitment to maintain the same number of branches for the next three years, including pledging that it will not close a branch if it’s the last in a community. Retail has also commenced a significant investment programme across the Lloyds TSB branch network. The programme targets upgrading branch interiors, increasing the opening hours in branches, simplifying the advisor role structure and improving the queuing experience. Pilots of the revised branch design and roles have delivered strong improvements in customer advocacy and new product sales.
We believe investing in our colleagues and deepening the pool of talent in the Group will ensure we continue to be an employer of choice. This includes investing in training Academies and professional qualifications to support colleagues’ development.
Net interest income reduced by 13 per cent compared to 2010. One of the main drivers was the increase in wholesale funding costs which were not matched by average customer rates. Net interest margin in 2011 decreased by 22 basis points to 2.09 per cent. Income growth was also constrained by muted demand for credit. Previous de‑risking of the lending portfolio, with a resulting reduction in unsecured balances, also contributed to the reduction in income albeit with a proportionately greater reduction in impairment. Net interest margin, minus impairment rate, remained stable reflecting progress in de‑risking the balance sheet. Finally, increased competition for deposits and strong balance growth resulted in an increase in the average rate paid on customer deposits.
Operating expenses and other costs fell by 4 per cent compared to 2010 and the cost‑income ratio was 48.3 per cent. Operating expenses benefited from our integration activities, the start of our simplification programme, and other day‑to‑day cost management activities to offset inflation. We continue to invest in the Retail business to improve products and services for our customers including our digital platforms and our branches. During 2011 Retail successfully completed a major milestone in the Integration programme, the consolidation of its main Retail product systems, which is discussed in greater detail on page 96. This now creates a solid platform to deliver the simplification programme.
Balance sheet progress Total customer balances remained stable at £599.9 billion as Retail continued to maintain its relationships with customers. The mix of these balances continued to move towards customer deposits as customers continued to reduce their personal indebtedness and Retail continued to make strong progress in attracting savings balances. This change in customer balance composition has additionally supported the Group’s funding although it has also contributed to a reduction in income and profit.
Loans and advances to customers decreased by £10.9 billion, or 3 per cent, to £352.8 billion, compared to 31 December 2010. This was driven by reduced customer demand for new credit, existing customers continuing to reduce their personal indebtedness, non‑core lending run off and Retail maintaining a conservative approach to risk. The reduction in lending to customers was in part due to the repayment of unsecured debt where balances reduced by £2.7 billion, or 10 per cent. Secured balances reduced by £8.2 billion, or 2 per cent, of which £1.9 billion was a reduction in non‑core mortgage balances. The proportion of mortgages on standard variable rate, or equivalent products, now stands at 56 per cent and is expected to remain broadly stable in 2012.
Wholesale Banking and Markets businesses are grouped into three areas, coverage and product, with a support function providing centralised coordination of critical business processes and activities.
Product comprises Capital Markets, Portfolio Management, Trading, Structured Corporate Finance, Transaction Banking, Structured Transactions Group and Lloyds Development Capital. These product units work alongside the coverage teams to provide specialised lending, access to capital markets and multi product financing solutions to WBM’s customers. In addition, these units provide access to financial markets in order to meet the Group’s balance sheet management requirements, and provide trading infrastructure to support execution of customer driven risk management transactions.
Bank of the Year – 7 years running We won Best Bank of the Year for the 7th consecutive year at the Real FD/CBI Excellence Awards. This highlights the consistent support we provide to businesses through the full course of the economic cycle.
Strategic focus Wholesale’s strategic goal is to be recognised as the UK’s leading, through-the-cycle, partner to UK companies and institutions, with the clear objective of supporting our customers’ success. We will strengthen the franchise by retaining and deepening our recurring, multi-product customer relationships, building on deep insight into our customers’ needs and by offering a broad range of lending, deposit, risk management, debt capital market and transaction banking products. This strategy will enable us to grow our capital light revenues and continue to be a significant provider of financial support to the UK economy.
In 2011 Wholesale reduced non-core assets by £35 billion significantly contributing towards the reduction of the Group’s wholesale funding requirement. Whilst this has meant the loss of associated income, it has resulted in a material improvement in the profile of the Group’s balance sheet, both in terms of risk and absolute size. Further, in total, these asset sales were in line with the net book value.
2011 highlights Profit before tax was £828 million compared to £2,514 million in 2010, with lower income as the balance sheet was materially strengthened through targeted asset reductions, partially offset by reduced impairment and lower costs. Excluding the impacts of asset sales and derivative valuation adjustments, profit before tax reduced £649 million or 30 per cent, in the context of a challenging economic and market environment.
The impairment charge decreased by 29 per cent, reflecting continued strong risk management and the low interest rate environment.
Against its strategic objectives, Wholesale continued to deepen its customer relationships through a measured build out of products and capabilities in support of the needs of the existing customer base. With the majority of integration now completed, a new, simpler organisational structure was implemented. Alongside enhanced product capabilities in areas including debt capital markets, money markets, interest rate management and foreign exchange, a transaction banking transformation programme was initiated in the year, to build an enhanced cash management, payments and trade customer offering.
Financial performance Profit before tax was £828 million compared to a profit before tax of £2,514 million in 2010. Income reduced by £2,467 million and fair value unwind fell, partially offset by lower costs and a significant decrease in the impairment charge, and the elimination of losses in joint venture businesses.
The profit performance was significantly impacted by the impact of net derivative valuation adjustments and asset disposals net of associated fair value. Excluding these effects profit before tax was £1,506 million.
Non-core profit before tax was £146 million compared to a profit of £462 million in 2010, reflecting the effect of lower income from the continued downward management of the balance sheet, partially offset by lower costs, a continued significant decrease in impairments net of fair value unwind and elimination of losses in the joint venture businesses.
Non-core income decreased to £500 million compared to £1,733 million in 2010, due to losses on asset disposals (offset by a related fair value unwind included elsewhere in the income statement), a significantly lower balance sheet from the continuing successful asset reduction programme, lower margin due to higher wholesale funding costs and reduced income as the non-core Asset Finance businesses were run down or sold.
Fair value unwind decreased £875 million to £2,174 million, reflecting the lower impairments in the loan book, reduced release on the smaller non-core treasury asset book and a risk based approach to release on certain treasury assets given market conditions, partially offset by favourable exchange rate movements. The fair value unwind predominantly relates to non-core portfolios.
Of which repos represent £7.1 billion (31 December 2010: £10.2 billion).
Profit before tax and fair value unwind was £275 million, compared to £380 million in 2010. The £105 million reduction was largely due to a decrease in income.
Operating expenses decreased by £132 million, or 12 per cent, to £984 million. This reflected an £88 million, or 11 per cent, decrease in depreciation charges on assets held under operating leases largely from a lower fleet size. Other costs decreased by £44 million, or 13 per cent, reflecting strong cost management and savings achieved from integration.
Commercial serves in excess of 1.1 million small and medium-sized enterprises and community organisations from start-up to those with a turnover of up to £15 million, as well as providing asset based finance to business of all sizes.
Total income increased by 7 per cent – Net interest income grew by 11 per cent – Other operating income decreased by 2 per cent
Loans and advances to core customers increased by 3 per cent against a contracting market
Commercial has focused on strengthening its customer relationships and supporting SMEs through the cycle demonstrated by: – Sustainable franchise growth – Supporting customers through responsible lending – Improving cross-sales
Incorporates the methodology cha nges outlined in the October 2011 announcement (New Allocation Methodologies for Funding Costs and Capital).
This deposit balance growth, the beneficial effect of the consequently larger funding surplus, and a more favourable deposit mix were the key drivers behind the 47 basis point increase in banking net interest margin
– Other operating income decreased by 2 per cent, reflecting subdued levels of business activity in the early part of the year and reduced levels of money transmission income reflecting the greater use of electronic banking facilities by customers.
Supporting the full range of customer needs has resulted in balanced growth of deposits and lending, which has strengthened the balance sheet maintaining the funding surplus. The benefit of close relationship support through the cycle is evidenced in the improvement in credit quality.
Simplifying the Bank Commercial has made good progress with simplification, with the majority of customers now on a single banking platform. Simpler organisational structures and processes have been delivered with the benefit of lower back office staffing requirements.
Commercial’s commitments to customers are made in the SME Charter which has been refreshed and extended to encourage enterprise, provide clear and fair pricing, access to finance and support for communities. As part of this, Commercial has committed to lend £12 billion to customers in 2012. This will be supported by at least 200 customer networking events which have proved to be a key platform for recruitment and customer support.
– Awarded Asset Financer of the Year (January 2011) – Credit Today Awards.
The Wealth business comprises private banking and asset management. Wealth’s private banking operations cater to the full range of wealth clients from affluent to Ultra High Net Worth within the UK, Channel Islands and Isle of Man, and internationally. Our private banking business operates under the Lloyds TSB and Bank of Scotland brands.
Total income decreased by 8 per cent – Net interest income was 21 per cent lower – Banking net interest margin reduced by 20 basis points – Other income increased by 7 per cent
– Other income increased by 7 per cent, with foreign exchange benefits in International, partly offset by the impact of lower funds under management in the Wealth businesses driven by market conditions together with a shift in customer investments from funds under management to deposits.
The impairment charge reduced by 23 per cent. Following higher charges in 2010, especially in the fourth quarter as the economic environment in Ireland deteriorated, the rate of impaired loan migration has slowed. The coverage ratio increased from 53 per cent to 61 per cent reflecting further provisions in the year, particularly in Ireland.
Fair value unwind decreased by 48 per cent, reflecting accelerated unwind of fair value adjustments in 2010 in line with actual levels of impairment losses experienced, particularly in Ireland and Australia.
In the International businesses, the priority is to maximise value in the medium term. The immediate focus is on close management of the lending portfolios, particularly in Ireland, and reducing assets where appropriate. At the same time, International is delivering operational efficiencies and rightsizing the cost base to fit the reshaped business models.
Balance sheet progress Net loans and advances to customers decreased by £11.5 billion to £43.8 billion, as we continued to focus management action on de-risking the balance sheet. The reduction of £11.5 billion reflects net repayments (including asset sales) of £6.0 billion, additional impairment provisions of £4.6 billion mainly within the International businesses and foreign exchange movements of £0.9 billion.
Total income increased by 2 per cent to £1,344 million. Excluding non-recurring gains on sale, which were recognised in the first half of 2010, income increased by 5 per cent.
Operating expenses and other costs increased by 1 per cent to £1,055 million. Benefits from cost saving initiatives across the Wealth businesses have been offset by increased regulatory and one-off costs and the impact of the stronger Swiss Franc in the International Wealth business. Excluding the impact of foreign exchange and one-off costs, operating expenses reduced by 3 per cent.
Customer deposits increased by £0.4 billion, or 1 per cent, to £27.2 billion.
Within International, our key focus has been to strengthen the balance sheet through material and targeted reductions in non-core assets and diversifying sources of funding through international deposit raising. Loans and advances to customers reduced by 24 per cent (including £5.2 billion of net repayments and asset sales) and customer deposits increased by 147 per cent to £14.8 billion.
General Insurance: The General Insurance business is a leading distributor of home insurance in the UK, with products sold through the branch network, direct channels and strategic corporate partners. The business also has brokerage operations for personal and commercial insurances. It operates primarily under the Lloyds TSB, Halifax and Bank of Scotland brands.
Total income, net of insurance claims, increased by 2 per cent
Capital management initiatives in 2011 have resulted in £2.3 billion mitigation of the potential impact of Capital Requirements Directive IV (CRD IV). The capital position of the UK life insurance group under the Insurance Groups Directive (IGD) remains strong with an estimated capital surplus of £3.7 billion.
Scottish Widows was awarded Defined Contribution (Bundled Services) Provider of the Year in the Pension and Investment Provider Awards 2011 and Best Group Pension Provider in the Corporate Adviser Awards 2012.
The business continues to make good progress in improving the profitability of the customer focused product set. In 2011, the Life, Pensions and Investments EEV new business margin improved to 4.0 per cent (from 3.5 per cent in 2010) and the focus on value over volume will continue as Insurance grows a business that is focused on developing long term relationships with customers. The General Insurance business also focuses on generating value with a targeted participation and underwriting strategy in attractive market segments and efficient and effective management of claims. This value is demonstrated by a combined ratio of 69 per cent in 2011.
The Simplification programme will deliver further improvements through the provision of simpler systems and processes.
A Group Strategic Initiative is investing in building lasting relationships with our bancassurance customers through the introduction of new advice models, enhanced products and access to new direct channels.
Selective participation in the important Intermediary and Direct channels will be supported by investment in new and enhanced product propositions and improved channels to market.
Total new business profit increased by £64 million, or 24 per cent, to £331 million. The increase is primarily attributable to strong sales of corporate pensions through the intermediary channel, the continued growth of our protection business in the bancassurance channel as we help more customers and address the sizeable protection gap that exists in the UK and reduction in lower margin business following the launch of the integrated bancassurance proposition in June 2010.
LP&I UK margin on an EEV basis increased to 4.2 per cent in 2011 from 3.7 per cent in 2010. The improved margin reflects the strategic choices made in respect of product and channel propositions. The Internal Rate of Return (IRR) on new business remains in excess of 16 per cent.
Existing business profit has decreased by £72 million, or 12 per cent, to £539 million. The decrease predominantly reflects higher interest payments following capital restructuring initiatives, a reduction in the assumed rate of return, and lower levels of shareholder net assets following capital repatriation initiatives in 2010.
The capital position of the UK life insurance companies remains robust. Following the legal entity reorganisation of the Insurance division in July 2011, there is now one insurance group reporting under the Insurance Groups Directive (IGD) with an estimated capital surplus of £3.7 billion. This compares with £1.3 billion and £1.6 billion for the Scottish Widows and HBOS Insurance groups, respectively, at the end of 2010.
New business An analysis of the present value of new business premiums for business written by the Insurance division, split between the UK and European Life, Pensions and Investments Businesses is given below: Present value of new business premiums (PVNBP)
Funds under management The table below shows the funds of the Life, Pensions and Investment companies within the Insurance division. These funds are predominantly managed within the Group by the Wealth and International division.
Financial performance 2011 direct costs decreased by £308 million, or 10 per cent, to £2,665 million reflecting the continued focus on cost management and the delivery of integration synergy savings and simplification benefits.
information technology costs decreased by 14 per cent, with integration savings offsetting inflationary rises.
in 2011, volatile items comprised changes in fair valuation of the equity conversion feature of the Group’s enhanced capital notes of £(5) million (2010: £(620) million) and banking volatility of £3 million (2010: £347 million). there were no asset sales in either 2011 or 2010 taken in central items.
Operating expenses and other costs increased by £152 million to £259 million primarily due to Financial services compensation scheme costs of £161 million (Group total: £179 million) and bank levy costs of £189 million, £55 million of which has been attributed to non-core, partly offset by lower pension costs held centrally.
Profit before tax and fair value unwind 6,977 6,541 fair value unwind (628) (389)
Share of results of joint ventures and associates 10 14 (29)
Share of results of joint ventures and associates 10 – – 1 – (1) 10
Share of results of joint ventures and associates 17 2 – – (10) 5 14
effects of liability management, volatile items and asset sales (677) (144)
costs: Share of results of joint ventures and associates 17 (105)
Share of results of joint ventures and associates 1 14 – 2 – – 17
Share of results of joint ventures and associates – (97) – (8) – – (105)
Profit before tax and fair value unwind 435 (2,563) 32 (5,482) 131 – (7,447)
Key balance sheet and other items £bn £bn £bn £bn £bn £bn £bn
Liability management gains liability management gains arose on transactions undertaken in both 2010 and 2011. As a result of transactions in 2011 the Group has recognised gains of £1,295 million (2010: gain of £423 million). in December 2011, the Group carried out an exercise allowing the holders of certain lloyds tSB Bank and hBoS securities to exchange their securities (exchange Securities) for other securities issued by lloyds tSB Bank.
in December 2011, the Group decided to defer payment of non-mandatory coupons on certain securities and, instead, settle them using an Alternative coupon Satisfaction mechanism on their contractual terms. this change in expected cashflows resulted in a gain of £126 million in net interest income from the recalculation of the carrying value of these securities.
– the market leading mortgage Sales Platform, already in use in halifax and Bank of Scotland branches, was successfully rolled out to 800 lloyds tSB mortgage advisors in england and Wales
organisation – focusing on how the Group is structured and the way we work.
channels and Products – simplifying our products whilst continuing to improve and innovate our channels.
the programme is well underway having achieved £178 million of Simplification and other cost savings in 2011, equivalent to an annual run-rate saving of £242 million. the programme is now targeting £1.7 billion of savings in 2014, an increase of £0.2 billion over previous guidance.
Simplification costs of £185 million were incurred in the year and have been excluded from the combined businesses results.
Average interest-earning banking assets, which are calculated gross of related impairment allowances, and average interest-bearing banking liabilities relate solely to customer and product balances in the banking businesses on which interest is earned or paid. funding and capital balances including debt securities in issue, subordinated debt, repos and shareholders’ equity are excluded from the calculation of average interest-bearing banking liabilities. however, the cost of funding these balances allocated to the banking businesses is included in banking net interest income.
All narrative is unaudited unless otherwise stated. Tables are both audited and unaudited as stated. The audited information is required to comply with the requirements of relevant International Financial Reporting Standards.
Governance – the group’s approach to risk is founded on a robust control framework and a strong risk management culture which guides the way all employees approach their work, behave and make decisions promptly.
Risk Appetite – the Board takes the lead by establishing the ‘tone at the top’ and approving group risk appetite which is then cascaded throughout the group in terms of policies, authorities and limits. the Board ensures that senior management implements policies and procedures designed to promote professional behaviour and integrity.
– it seeks to maximise value for shareholders over time by aligning risk appetite with corporate strategy, assessing the impact of emerging risks and developing risk tolerances and mitigating strategies.
Risk Culture: Build and leverage on our strong risk culture of business ownership
Our continued focus on our conduct risk agenda to ensure we are achieving the best outcomes for our customers is completely aligned with being the best bank for customers.
– the group’s approach to risk management ensures that business units remain accountable for risk.
Board Level Reporting – the group continues to enhance its capabilities by providing to the Board both qualitative and quantitative data including stress testing analysis on risks associated with strategic objectives.
– the Risk function oversees the performance assessment of business areas and senior staff to ensure adherence to the group’s risk and control frameworks and oversees that performance has been achieved within risk appetite.
State funding and state aid Hm treasury currently holds approximately 40.2 per cent of the group’s ordinary share capital. United kingdom Financial investments Limited (UkFi) as manager of Hm treasury’s shareholding continues to operate in line with the framework document between UkFi and Hm treasury managing the investment in the group on a commercial basis without interference in day-to-day management decisions. there is a risk that a change in government priorities could result in the framework agreement currently in place being replaced leading to interference in the operations of the group, although there have been no indications that the government intends to change the existing operating arrangements.
the subsequent agreement (known as ‘merlin’) between five major Uk banks (including the group) and the government in relation to gross business lending capacity in the 2011 calendar year was subject to a similar set of criteria. the group delivered in full its share of the commitments by the five banks, both in respect of lending to smes in respect of overall gross business lending. the group has made a unilateral lending pledge for 2012 as part of its publicly announced sme charter.
Risk governance the embedding of integrated governance, risk and control frameworks throughout the group has continued, through a consistent approach to risk appetite, policies, delegated authorities and governance committee structures.
– the Group Model Governance Committee is responsible for setting the framework and standards for model governance across the group, including establishing appropriate levels of delegated authority and principles underlying the group’s risk modelling framework, specifically regarding consistency of approach across business units and risk types. it approves risk models other than a small number defined as highly material to the group, which are approved by the group Risk Committee. this also meets FsA BiPRU requirements regarding the governance and approval for internal Ratings Based models, including internal Assessment models, market Risk VaR and Advanced measurement approach models.
Risk management oversight the Chief Risk Officer oversees and promotes the development and implementation of consistent group wide governance risk and control frameworks. the Chief Risk Officer, supported by the Risk Directors, provides objective challenge to the group’s senior management. the group executive Committee and the Board receive regular briefings and guidance from the Chief Risk Officer to ensure awareness of the overarching risk management framework and a clear understanding of their accountabilities for risk and internal control.
Risk management framework the group’s risk management principles and framework cover all the types of risk which could impact on its banking and insurance businesses.
Clear and consistent risk identification is undertaken using a common risk language to define and categorise risks (see table 1.3), also supporting risk aggregation and standardised reporting.
the group carries out stress testing of its liquidity position against a range of scenarios, including those prescribed by the FsA. the group’s liquidity risk appetite is also calibrated against a number of stressed liquidity metrics. the group’s stress testing framework considers these factors, including the impact of a range of economic and liquidity stress scenarios over both short and longer term horizons. internal stress testing results at 31 December 2011 show that the group has liquidity resources representing more than 130 per cent of modelled outflows from all wholesale funding sources, corporate deposits and rating dependent contracts under the group’s severe liquidity stress scenario. in 2011, the group has maintained its liquidity levels in excess of the iLg regulatory minimum (FsA’s individual Liquidity Adequacy standards) at all times. Funding projections show the group will achieve the proposed Basel iii liquidity and funding requirements in advance of expected implementation dates. the group’s stress testing shows that further credit rating downgrades may reduce investor appetite for some of the group’s liability classes and therefore funding capacity. in the fourth quarter of 2011, the group experienced downgrades in its long-term rating of between one and two notches from three of the major rating agencies. the impact that the group experienced following the downgrades was consistent with the group’s modelled outcomes based on the stress testing framework. the group has materially reduced its wholesale funding in recent years and operates a well diversified funding platform which together lessen the impact of stress events. the group’s borrowing costs and issuance in the capital markets are dependent on a number of factors, and increased cost or reduction of capacity could materially adversely affect the group’s results of operations, financial condition and prospects. in particular, reduction in the credit rating of the group or deterioration in the capital markets’ perception of the group’s financial resilience, could significantly increase its borrowing costs and limit its issuance capacity in the capital markets. As an indicator over the last 12 months the spread between an index of A rated long term senior unsecured bank debt and an index of similar BBB rated bank debt, both of which are publicly available, has ranged between 60 and 115 basis points. the applicability to and implications for the group’s funding cost would depend on the type of issuance, and prevailing market conditions. the impact on the group’s funding cost is subject to a number of assumptions and uncertainties and is therefore impossible to quantify precisely. Downgrades of the group’s long term debt rating could lead to additional collateral posting and cash outflow. A hypothetical simultaneous two notch downgrade of the group’s long-term debt rating from all major rating agencies, after initial actions within management’s control, could result in an outflow of £11 billion of cash, £4 billion of collateral posting related to customer financial contracts and £24 billion of collateral posting associated with secured funding. these effects do not take into account additional management and restructuring actions that the group has identified that could materially reduce the amount of required collateral postings under derivative contracts related to its own secured funding programmes. the downgrades that the group experienced in the fourth quarter of 2011 did not significantly change its borrowing costs, reduce its issuance capacity or require significant collateral posting. the group notes the February 2012 announcement from moody’s placing the ratings of 114 european financial institutions, including Lloyds Banking group, on review for downgrade. even in the case of a simultaneous two notch downgrade from all rating agencies, the group would remain investment grade. At 31 December 2011, the group had £202 billion of highly liquid unencumbered assets in its liquidity portfolio which are available to meet cash and collateral outflows. this liquidity is available for deployment at immediate notice, subject to complying with regulatory requirements, and is a key component of the group’s liquidity management process.
the group term funding ratio (wholesale funding with a remaining life of over one year as a percentage of total wholesale funding) improved to 55 per cent (50 per cent at 31 December 2010) due to good progress in new term issuance and a reduction in short term money market funding the wholesale funding position includes debt issued under the legacy government Credit guarantee scheme, for which the last maturity will occur in 2012.
total wholesale funding reduced by £47 billion to £251 billion, with the volume with a residual maturity less than one year falling £36 billion to £113 billion.
Regulatory Principal Risks Regulatory exposure is driven by the significant volume of current legislation and regulation within the Uk and overseas with which the group has to comply, along with new or proposed legislation and regulation which needs to be reviewed, assessed and embedded into day-to-day operational and business practices across the group. this is particularly the case in the current market environment, which continues to witness high levels of government and regulatory intervention in the banking sector.
Independent Commission on Banking the government appointed an independent Commission on Banking (iCB) to review possible measures to reform the banking system and promote stability and competition. the iCB published its final report on 12 september 2011 putting forward recommendations to require ring-fencing of the retail activities of banks from their investment banking activities and additional capital requirements beyond those required under current drafts of the Capital Requirements Directive iV. the Report also makes recommendations in relation to the competitiveness of the Uk banking market, including enhancing the competition remit of the new Financial Conduct Authority (FCA), implementing a new industry-wide switching solution by september 2013, and improving transparency. the iCB, which following the final report was disbanded, had the authority only to make recommendations, which the government could choose to accept or reject.
the iCB specifically recommended in relation to the group’s eC mandated branch disposal (Project Verde), that, to create a strong challenger in the Uk banking market, the entity which results from the divestment should have a share of the personal current account (PCA) market of at least 6 per cent (although this does not need to arise solely from the current accounts acquired from the Company) and a funding position at least as strong as its peers. the iCB did not specify a definitive timeframe for the divested entity to achieve a 6 per cent market share of PCAs but recommended that a market investigation should be carefully considered by competition authorities if ‘a strong and effective challenger’ has not resulted from the Company’s divestment by 2015. the iCB did not recommend explicitly that the Company should increase the size of the Project Verde disposal agreed with the european Commission but recommended that the government prioritise the emergence of a strong new challenger over reducing market concentration through a ‘substantially enhanced’ divestment by the group.
the government published its response to the iCB recommendations on 19 December 2011. the government supported the recommendation that an entity with a larger share of the PCA market than the 4.6 per cent originally proposed might produce a more effective competitor. in relation to the group’s announcement that it was to pursue exclusive negotiations with the Co-operative group, the government commented that such a transaction would deliver a significant enhancement of the PCA market share, with the share divested by the group combining with the Co-operative group’s existing share to create a competitor with approximately 7-8 per cent. the government also stated that the execution of the divestment is a commercial matter, and it has no intention of using its shareholding to deliver an enhancement.
New Regulatory Regime On 27 January 2012, the government published the Financial services Bill. the proposed new Uk regulatory architecture will see the transition of regulatory and supervisory powers from the FsA to the new Financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA). the PRA will be responsible for supervising banks, building societies and other large firms. the FCA will focus on consumer protection and market regulation. the Bill is also proposing new responsibilities and powers for the FCA. the most noteworthy are the proposed greater powers for the FCA in relation to competition and the proposal to widen its scope to include consumer credit. the Bill is expected to take effect in early 2013.
in April 2011, the FsA commenced an internal reorganisation as a first step in a process towards the formal transition of regulatory and supervisory powers from the FsA to the new FCA and PRA in 2013. Until this time the responsibility for regulating and supervising the activities of the group and its subsidiaries will remain with the FsA. On 2 April the FsA will introduce a new ‘twin peaks’ model and the intention is to move the FsA as close as possible to the new style of regulation outlined in the Bill. there will be two independent groups of supervisors for banks, insurers and major investment firms covering prudential and conduct. (All other firms (ie those not dual regulated) will be solely supervised by the conduct supervisors.)
Risk Definition Regulatory risk is the risk of reductions in earnings and/ or value, through financial or reputational loss, from failing to comply with the applicable laws, regulations or codes.
Regulatory (continued) Anti Bribery the Bribery Act 2010 came fully into force on 1 July 2011. it enhances previous laws on bribery and is supported by some detailed guidance issued by the ministry of Justice on the steps a business needs to take to embed ‘adequate procedures’ to prevent bribery. A company convicted of failing to have ‘adequate procedures’ to prevent bribery could receive an unlimited fine. the group operates a group wide AntiBribery Policy, applicable to all of its businesses, operations and employees, which incorporates the requirements of the Uk Bribery Act 2010.
Sanctions the group takes very seriously its responsibilities for complying with legal and regulatory sanctions requirements in all the jurisdictions in which it operates. in order to assist adherence to relevant economic sanctions legislation, the group has enhanced its internal compliance processes including those associated with customer and payment screening. the group has continued the delivery of a programme of staff training regarding policies and procedures for detecting and preventing economic sanctions non-compliance.
US Regulation significant regulatory initiatives from the Us impacting the group include the Dodd-Frank Act (which imposes specific requirements for systemic risk oversight, securities market conduct and oversight, bank capital standards, arrangements for the liquidation of failing systemically significant financial institutions and restrictions to the ability of banks to engage in proprietary trading activities known as the ‘Volcker Rule’). the Act will have both business and operational implications for the group within and beyond the Us. in addition the Foreign Account tax Compliance Act requires non-Us financial institutions to enter into disclosure agreements with the Us treasury and all non-financial non-Us entities to report and or certify their ownership of Us assets in foreign accounts or be subject to 30 per cent withholding tax.
New Regulatory Regime the group continues to work closely with the regulatory authorities and industry associations to ensure that it is able to identify and respond to regulatory changes and mitigate against risks to the group and its stakeholders.
– equity market movements and changes in credit spreads impact the group’s results.
the group’s trading activity is small relative to our peers and is not considered to be a principal risk. the average 95 per cent 1-day trading Value at Risk (VaR) was £6 million for the year to 31 December 2011.
there remains a high level of scrutiny regarding the treatment of customers by financial institutions from regulatory bodies, the press and politicians. the FsA in particular continues to drive focus on conduct of business activities through its supervision activity.
there is a risk that certain aspects of the group’s business may be determined by regulatory bodies or the courts as not being conducted in accordance with applicable laws or regulations, or fair and reasonable treatment in their opinion. the group may also be liable for damages to third parties harmed by the conduct of its business.
the group actively engages with regulatory bodies and other stakeholders in developing its understanding of current customer treatment concerns.
Risk Definition the risk of reductions in earnings or value through financial or reputational loss arising from ineffectively leading colleagues responsibly and proficiently, managing people resource, supporting and developing colleague talent, or meeting regulatory obligations related to our people.
Insurance Risk Principal Risks the major sources of insurance risk are within the insurance businesses and the group’s defined benefit staff pension schemes (pension schemes). insurance risk is inherent in the insurance business and can be affected by customer behaviour. insurance risks accepted relate primarily to mortality, longevity, morbidity, persistency, expenses, property and unemployment. the primary insurance risk of the group’s pension schemes is related to longevity.
Mitigating Actions the group takes many mitigating actions with respect to this principal risk, key examples include: insurance risk is reported regularly to appropriate committees and boards.
Actuarial assumptions are reviewed in line with experience and in-depth reviews are conducted regularly. Longevity assumptions for the group’s pension schemes are reviewed annually together with other iFRs assumptions. expert judgement is required.
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.
Less than one year: greater than one year: the table below summarises the group’s term issuance during 2011. the challenge of meeting the group’s 2011 issuance plan in a very volatile market was successfully accomplished by the ability of the group to access a diverse range of markets and currencies, both in unsecured and secured form.
the group’s level of encumbrance arising from external issuance of securitisation and covered bonds has remained broadly constant, reflecting the maturity and stability of the group’s utilisation of this form of term funding, and the established cycle of redemptions and new issuance. total notes issued externally from secured programmes (ABs and covered bonds) have increased from £71.1 billion at 31 December 2010 to £74.1 billion, reflecting gross issuance of £14.9 billion in 2011. A total of £118.5 billion (2010: £143.6 billion) of notes issued under securitisation and covered bond programmes have also been retained internally, the bulk of which are held to provide a pool of collateral eligible for use at central bank liquidity facilities. A small proportion of the retained collateral has been pledged in bilateral financing transactions.
table 1.9: Reconciliation of Group funding figure from table 1.4 to the balance sheet (audited)
Debt securities in issue 189.9 – (4.8) 185.1 total wholesale funding 251.2 14.4
the group’s stress testing shows that further credit rating downgrades may reduce investor appetite for some of the group’s liability classes and therefore funding capacity. in the fourth quarter of 2011, the group experienced downgrades in its long-term rating of between one and two notches from three of the major rating agencies. the impact that the group experienced following the downgrades was consistent with the group’s modelled outcomes based on the stress testing framework. the group has materially reduced its wholesale funding in recent years and operates a well diversified funding platform which together lessen the impact of stress events.
At 31 December 2011, the group had £202 billion of highly liquid unencumbered assets in its liquidity portfolio which are available to meet cash and collateral outflows, as illustrated in the table below. this liquidity is available for deployment at immediate notice, subject to complying with regulatory requirements, and is a key component of the group’s liquidity management process.
the guidance issued by the Basel Committee is still subject to final ratification by the eU and the methodology is likely to be refined on the basis of feedback from banks and regulators during the observation period. the actions already announced to right size the balance sheet are expected to ensure compliance with the future minimum standards. these standards are expected to be 100 per cent for both ratios by their respective effective dates.
Hybrid capital securities coupon payments since 31 January 2010, the group has been prohibited under the terms of an agreement with the european Commission, from paying discretionary coupons and dividends on certain of its hybrid capital securities. this prohibition ended on 31 January 2012. We recommenced payments on certain hybrid capital securities from 31 January 2012. Future coupons and dividends on these hybrid capital securities will only be paid subject to, and in accordance with, the terms of the relevant securities.
measurement the group’s regulatory capital is divided into tiers depending on level of subordination and ability to absorb losses. Core tier 1 capital as defined in the FsA letter to the British Bankers’ Association in may 2009, comprises mainly shareholders’ equity and non-controlling interests, after deducting goodwill, other intangible assets and 50 per cent of the net excess of expected loss over accounting provisions and certain securitisation positions. Accounting equity is adjusted in accordance with FsA requirements, particularly in respect of pensions and Available-for-sale assets. tier 1 capital, as defined by the european Community Banking Consolidation Directive as implemented in the Uk by the FsA’s general Prudential sourcebook (genPRU), is core tier 1 capital plus tier 1 capital securities less 50 per cent of material holdings in financial companies. tier 2 capital, defined by genPRU, comprises qualifying subordinated debt and some additional provisions and reserves after deducting 50 per cent of the excess of expected loss over accounting provisions, and certain securitisation positions and material holdings in financial companies. total capital is the sum of tier 1 and tier 2 capital after deducting investments in subsidiaries and associates that are not consolidated for regulatory purposes. in the case of Lloyds Banking group, this means that the net assets of its life assurance and general insurance businesses and the non-financial entities that are held by our private equity (including venture capital) businesses, are excluded from its total regulatory capital.
the first of these, in July 2011, sought to assess the resilience of european banks to severe shocks and their specific solvency in hypothetical stress events under certain restrictive conditions. the stress test was carried out based on common methodology and key common assumptions. the assumptions and methodology were established to assess banks’ capital adequacy against a 5 per cent core tier 1 capital benchmark. As a result of the assumed shock the estimated consolidated core tier 1 ratio of the group was 7.7 per cent at the worst point of the stress in 2012.
Additional measures which have been used to manage the group’s capital position include seeking to strike an appropriate balance of capital held within its insurance and banking subsidiaries and through improving the quality of its capital through liability management exercises. Regulatory requirements are primarily controlled through the quality and volume of lending but are also affected through the modelling approaches used to determine risk weighted assets and expected losses.
monitoring Capital is actively managed and regulatory ratios are a key factor in the group’s budgeting and planning processes. Capital raised takes account of expected growth and currency of risk assets. Capital policies and procedures are subject to independent oversight. Regular reporting of actual and projected ratios, including those that would occur under stressed scenarios, is made to the senior Asset and Liability Committee, the group Asset and Liability Committee, the group Risk Committee and the Board.
Less: deductions from tier 2 50% excess of expected losses over impairment (720) –
the reduction of Wholesale risk weighted assets of £32,398 million primarily reflects the balance sheet reductions including treasury asset sales and the run down in other non-core asset portfolios. this has been partly offset by an increase in market risk weighted assets, as a result of the implementation of CRD iii.
Risk weighted assets within Wealth and international have reduced by £11,436 million as a result of asset run-off and write off and foreign exchange movements.
integration of model activity previously undertaken on a separate heritage basis was largely completed in 2010 and there have been no significant migrations to iRB methodologies during 2011. in common with other banking groups operating on an iRB basis we anticipate moving some activity that is currently measured on the standardised approach over to an iRB methodology. these changes will take place primarily during 2012 and 2013.
tier 2 capital tier 2 capital has decreased in the period by £4,016 million reflecting the increase in excess of expected losses over impairment, as noted above, and a reduction in eligible provisions. in addition, dated subordinated debt has also reduced in the period, partly due to amortisation and partly due to a capital restructuring exercise in December 2011, which resulted in a net overall redemption of dated subordinated debt.
the movements in core tier 1 and total capital in the period are shown below: table 1.14: Movements in core tier 1 and total capital during the year (audited)
Capital ratios for Lloyds tsB Bank group reflect a restructuring of internal capital undertaken in the period, which has significantly strengthened the core tier 1 and tier 1 positions. Capital ratios in both entities have benefited from a reduction in risk-weighted assets in the period.
Held within the long-term funds – – 6,592 – 312 6,904
Held within the long-term funds – – 8,029 – 401 8,430
Other life insurance businesses except as described above capital held in Uk non Profit Funds is potentially transferable to other parts of the group, subject to meeting the regulatory requirements of these businesses. there are no prior arrangements in place to allow capital to move freely between life insurance entities or other parts of the group.
Movements in regulatory capital the movements in the group’s available capital resources in the life business can be analysed as follows: table 1.17: Movements in available capital resources (unaudited)
Changes in estimations and in demographic assumptions used to measure life assurance liabilities (24) 41 289 91 (6) 391
new business and other factors 12 (304) (80) 43 22 (307)
Uk Life shareholder Funds Available capital in the Uk Life shareholder Funds has increased from £2,486 million at 31 December 2010 to an estimated £3,677 million at 31 December 2011. the main cause of the increase was the impact of capital transactions supporting the purchase of Clerical medical by scottish Widows.
Overseas life business Available capital has decreased during 2011 due to a significant dividend payment which was only partially offset by profits emerging on new and in force business.
Assets held in excess of those backing reserves are invested predominantly in cash and cash like instruments. the investment strategy is determined in line with the policy of Lloyds Banking group to minimise both the profit volatility and the working capital (defined as available capital less minimum required capital) required to ensure all capital requirements continue to be met under a range of stress tests.
Definition the risk of reputational damage, loss of investor confidence and/or financial loss arising from the adoption of inappropriate accounting policies, ineffective controls over financial, prudential regulatory and tax reporting, failure to manage the associated risks of changes in taxation rates, law, ownership or corporate structure and the failure to disclose accurate information about the group on a timely basis.
monitoring Financial reporting risk, prudential regulatory reporting risk, tax risk and disclosure risk are all actively monitored at business unit and group levels. there are specific programmes of work undertaken across the group to support: – annual assessments of (1) the effectiveness of internal controls over financial reporting and (2) the effectiveness of the group’s disclosure controls and procedures, both in accordance with the requirements of the Us sarbanes Oxley Act; – annual certifications by the senior Accounting Officer with respect to the maintenance of appropriate tax accounting arrangements, in accordance with the requirements of the 2009 Finance Act.
Risk appetite Credit risk appetite is set at Board level and is described and reported through a suite of metrics derived from a combination of accounting and credit portfolio performance measures, which include the use of various credit risk rating systems as inputs. these metrics are supported by more detailed appetite metrics at Divisional and business level and by a comprehensive suite of policies, sector caps, product and country limits to manage concentration risk and exposures within the group’s approved risk appetite.
Exposures the principal sources of credit risk within the group arise from loans and advances to retail customers, financial institutions, sovereigns and corporate clients. the credit risk exposures of the group are set out in note 56 to the financial statements on page 322. Credit risk exposures are categorised as ‘retail’, arising primarily in the Retail and Wealth and international Divisions, ‘commercial’ and ‘corporate’, ‘financial institutions’ or ‘sovereigns’ arising in the Wholesale, Commercial and Wealth and international Divisions.
the quality definition of both retail and non-retail counterparties/exposures is largely based on the outcomes of credit risk (probability of default – PD) models. the group operates a significant number of different rating models, typically developed internally using statistical analysis and may use management judgement – retail models rely more on the former; non-retail models include more of the latter, especially in the larger corporate and more specialised lending portfolios. internal data is supplemented with external data in model development, where appropriate.
in non-retail portfolios the PD models segment counterparties into a number of rating grades, with each grade representing a defined range of default probabilities, and there are a number of different model rating scales. Counterparties/exposures migrate between rating grades if the assessment of the PD changes. the modelled PDs ‘map’ to a (non-retail) master scale which enables the consolidation of credit risk information, and it is this that forms the basis for the iFRs credit quality characterisation.
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 at least annually, and any changes are subject to a review and approval process. Policies, where appropriate, include lending guidelines, which define the responsibilities of lending officers and provide a disciplined and focused benchmark for credit decisions. these policies and procedures define chosen target market and risk acceptance criteria. these have been and will continue to be fine-tuned as appropriate and include the use of early warning indicators to help anticipate future areas of concern and allow us to take early and proactive mitigating actions.
the group’s approach to underwriting applications for unsecured products in Retail takes into account the total unsecured debt held by a customer and their affordability. the group rejects any application for an unsecured product where a customer is registered as bankrupt or insolvent, or has a County Court Judgment registered at a CRA used by the group. in addition, for credit cards the group rejects any applicant with total unsecured debt greater than £50,000 registered at the CRA; or revolving debt-to-income ratio greater than 75 per cent; or total unsecured debt-to-income ratio greater than 100 per cent. For unsecured personal loan applications, we reject any applicant with total unsecured debt greater than £50,000 registered at the CRA. Rules around refinancing of debt have also been made more stringent since 2009 as a result of the application of rules relating to the total unsecured debt held by a customer and the group’s approach in assessing affordability. this has resulted in fewer customers being eligible to refinance unsecured debt.
Cross-border and cross-currency exposures: the Board sets country risk appetite. Within these, country limits are authorised by the country limits panel, taking into account economic, financial, political and social factors. group policies stipulate that these limits must be consistent with, and support the approved business and strategic plans of the group.
Collateral held as security for financial assets other than loans and advances is determined by the nature of the instrument. Debt securities, treasury and other eligible bills are generally unsecured, with the exception of asset-backed securities and similar instruments, which are secured by portfolios of financial assets. Collateral is generally not held against loans and advances to financial institutions, except where securities are held as part of reverse repurchase or securities borrowing transactions or where a collateral agreement has been entered into under a master netting agreement. Derivative transactions with wholesale counterparties are typically collateralised under a Credit support Annex in conjunction with the isDA master Agreement.
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 in accordance with business unit credit policy, which 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.
master netting agreements Where it is efficient and likely to be effective (generally with counterparties with which it undertakes a significant volume of transactions), the group enters into master netting agreements. Although master netting agreements do not generally result in an offset of balance sheet assets and liabilities, as transactions are usually settled on a gross basis, they do reduce the credit risk to the extent that, if an event of default occurs, all amounts with the counterparty are terminated and settled on a net basis. the group’s overall exposure to credit risk on derivative instruments subject to master netting agreements can change substantially within a short period, since it is affected by each transaction subject to the agreement.
Retail Assets the group’s aim in offering forbearance and other assistance to retail customers in financial distress is to benefit both the customer and the group by: discharging the group’s regulatory and social responsibilities to support its customers and act in their best long-term interests; and bringing customer facilities back into a sustainable position which, for residential mortgages, also means keeping customers in their homes.
– Homeowner mortgage support scheme: this is a government medium-term initiative that enables borrowers affected by temporary reductions in income to access reduced payments for a period of up to two years. the government provides a partial guarantee to the group whilst a customer participates in the plan. Decisions on eligibility, principally whether the group expects the borrower’s earnings to recover fully, initially rest with the group and must be made on the basis of detailed information received from an independent fee-free advisor. After a year, the customer must undergo a further full assessment made by the advice agency. the customer must pay at least 30 per cent of the interest due. Any shortfall in payments made during the period covered by the scheme is collected through increased payments over the remaining term. the scheme was closed to new customer applications in April 2011 by the Department of Communities and Local government.
the over-arching aim of BsU is to work with each customer to try and resolve the issues, to restore the business to a financially viable position and facilitate a business turnaround. this could be through a number of channels, including providing advice on how to develop and implement turnaround strategies, and considering potential restructuring of debt and forbearance. this may involve using turnaround professionals, for example accountants and valuers.
BsU Relationship managers are highly experienced and operate in a closely controlled and monitored environment, including regular oversight and ongoing close scrutiny by senior management. exposure is minimised through a combination of appropriate forbearance, asset sales, restructuring and work-out strategies.
One of the components of the approach to forbearance and early identification of issues used for wholesale assets is our Credit Risk Classification Policy, which is designed to identify and highlight portfolio levels of asset quality as well as individual problem credits. this policy includes our good book/mainstream early warning process identifying “special mention” and “sub standard” cases. this process seeks to ensure that Relationship managers act promptly to identify, and highlight to senior management, customers that have the possibility to become higher risk in the future. Customers classified as special mention/sub standard are subject to additional controls and regular monitoring routines, including oversight by BsU and the independent Credit sanctioning function.
– 2012 sme Charter: Our 2012 sme Charter details our commitment to supporting Uk business and incorporates our pledge to support any viable business through temporary difficulties and into recovery. As part of our commitment to this, we issue a Letter of Concern to customers when we have concerns about their business or the group’s relationship with them. this aims to generate early dialogue between the customer and the group, so that a joint approach to the situation can be agreed with them.
Overview – the group achieved a significant reduction in its impairment charge in 2011 to £9,787 million (from £13,181 million in 2010), due primarily to lower corporate real estate and real estate related charges in Wholesale, lower charges in the irish portfolio together with strong Retail performance. All divisions experienced impairment charge reductions by over 20 per cent from 2010.
– the group’s more difficult exposures are being managed successfully in the current challenging economic environment by the Wholesale Business support Units and Retail Collection and Recovery Units. the group’s exposure to ireland has been closely managed, with a dedicated Uk-based business support team in place to manage the winding down of the irish book.
– Divestment strategy is focused on balance sheet reduction and disposal of higher risk positions.
in addition to the possibility of further economic deterioration, financial market instability represents an additional downside risk. Uncertainty over the best way forward for the highly indebted eurozone persists and poses a serious threat to the global economic recovery, with political instability and contagion to other eurozone countries increasing in the last quarter of 2011. Financial markets are expected to remain dislocated and volatile, with the risk of contagion unlikely to dissipate in the near term, and this continues to place strains on funding markets at a time when many financial institutions (in particular) have material ongoing funding needs.
the group’s Wholesale leveraged finance portfolios and its commercial real estate and real estate related property lending portfolios remain particularly vulnerable, especially in the significant secondary and tertiary asset lending book. the impact of further economic weakness will also be felt in the traditional lending portfolios in Corporate and Commercial. in addition, the irish economic outlook remains challenging and the property market depressed, and both these factors could further adversely impact the wholesale and retail irish portfolios.
However, despite the downside risks, against its base case economic assumptions, the group expects the total impairment charge in 2012 to reduce by a similar percentage amount to the reduction in 2011, reflecting the stabilisation of its portfolios and proactive risk management activities.
table 1.29: Impairments on Retail loans and advances – core (unaudited)
table 1.30: Impairments on Retail loans and advances – non-core (unaudited)
the number of customers going into arrears reduced throughout 2011 in comparison with 2010. specialist lending remains closed to new business and this book has been in run-off since 2009.
Value of debt represents total book value of mortgages in arrears.
– Whilst subdued Uk economic conditions and weaker consumer confidence is evident in a number of sectors, the reduction in the impairment charge also reflects continued strong risk management and the low interest rate environment, helping to maintain defaults at a lower level.
impairment charge – core Core impairments during 2011 were higher compared to 2010, which is primarily attributable to a few specific cases reflecting the nature of impairments in a wholesale portfolio.
impaired loans and provisions Wholesale’s impaired loans reduced by £3,902 million to £27,756 million compared with 31 December 2010. the reduction is due to new impaired assets mainly in the Corporate Real estate Business support Unit being more than offset by write-offs on irrecoverable assets, the sale of previously impaired assets, net repayments and transfers back to good book. Furthermore, the flow of assets into impaired status reduced during the year compared to 2010. impairment provisions also reduced as a result of write-offs and a lower impairment rate on newly impaired assets especially in the corporate real estate and real estate related portfolios. As a result of this, impairment provisions as a percentage of impaired loans reduced to 41.6 per cent from 46.9 per cent at 31 December 2010.
table 1.35: Impairments on Wholesale loans and advances – core (unaudited)
Corporate Real estate Business support Unit the Corporate Real estate Business support Unit has continued to make strong progress executing on its active asset management programme for the complex portfolio of over 1800 cases it manages. this has resulted in a further fall in the impairment total to £1,273 million (2010: £2,427 million), after the peak experienced in 2009.
– impairment coverage has increased in ireland to 62 per cent from 54 per cent, primarily reflecting further falls in the commercial real estate market during 2011, and further vulnerability exists.
table 1.44: Impairments on Wealth and International loans and advances (audited)
Impaired loans £m Provisions £m gross loans £m impaired loans £m Provisions £m the most significant contribution to impairment in ireland is the Commercial Real estate portfolio. impairment provisions provide 63 per cent coverage on impaired commercial real estate loans. mortgage lending at the year end comprised 99 per cent of the retail portfolio with impaired loans of £1.4 billion and impairment coverage of 70 per cent.
the group manages its exposures to individual countries through authorised country limits which take into account economic, financial, political and social factors. in addition, the group manages its direct risks to the selected countries by establishing and monitoring risk limits for individual banks, financial institutions and corporates. indirect risk is taken into account, where it is determined that counterparties have material direct exposures to the selected countries.
in addition to direct sovereign exposures, the group maintains deposit balances with a number of european Central banks for regulatory and liquidity management purposes. For the selected countries, the group has a central bank balance with spain of £35 million (2010: £44 million).
Available for sale: Country of exposure for asset backed securities are based on the location of the underlying assets.
Within the asset backed securities exposures, the underlying assets are primarily residential mortgages. no impairments are held against these exposures. significant exposure reductions were achieved during 2011, primarily through asset sales.
Available for sale: AFs reserve – – – – – –
ireland – see page 155 for further details on irish exposures.
Retail exposures within spain are predominantly secured residential mortgages, where about half of the borrowers are expatriates. impaired lending represents 6 per cent (31 December 2010: 6 per cent) of the portfolio, with a coverage ratio of 49 per cent (31 December 2010: 31 per cent). see page 155 for further details on irish exposures.
Colleagues are trained in environmental risk management as part of our standard credit risk training course, and the team provides bespoke training to teams upon request. supporting this training, a range of documents are provided to all colleagues online including environmental risk theory, procedural guidance, and information on environmental legislation and sector-specific environmental impacts.
Project Finance: equator Principles Lloyds Banking group is a signatory to the equator Principles. these support our approach to assessing and managing environmental and social issues in project finance. Project finance is often used to fund the development and construction of major infrastructure and industrial projects. the equator Principles are applicable to project finance transactions above Us$10 million and provide a framework to support responsible decision-making.
Projects are categorised depending on the level of perceived risk and magnitude of impact they pose, in relation to a set of criteria issued by the international Finance Corporation (iFC).
Lending officers are responsible for undertaking initial classification of transactions that qualify under the equator Principles. their assessments are subject to further review by our in-house environmental Risk team, and for higher risk transactions by our equator Principles Review group, comprising experts from both our Risk and Project Finance teams. this ensures that each transaction is compliant and is consistent with our environmental risk policy. We provide a range of training and support materials to our risk and transactional staff to ensure that they are familiar with the requirements of the Principles.
Exposures 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.
– Unit-linked liabilities are matched with the same assets that are used to define the liability but future fee income is dependent upon the performance of those assets. (this forms part of the Value of in-force business, see note 30 to the financial statements on page 260).
– For other insurance liabilities the aim is to invest in assets such that the cash flows on investments will match those on the projected future liabilities. it is not possible to eliminate risk completely as the timing of insured events is uncertain and bonds are not available at all of the required maturities. As a result, the cash flows cannot be precisely matched and so sensitivity tests are used to test the extent of the mismatch.
Measurement the following market risk measures are used for risk reporting and setting risk appetite limits and triggers: – Value at Risk (VaR): for short term liquid positions a 1-day 95 per cent VaR is used; for structural positions a 1-year 95 per cent VaR is used
table 1.61: VaR trading assets and other treasury positions (see ‘Measurement’ page 164) (audited)
non-trading market risk in non-trading books consists almost entirely of exposure to changes in interest rates including the margin between interbank and central bank rates. this is the potential impact on earnings and value that could occur when, if rates fall, liabilities cannot be re-priced as quickly or by as much as assets; or when, if rates rise, assets cannot be re-priced as quickly or by as much as liabilities.
Risk exposure is monitored monthly using, primarily, market value sensitivity. this methodology considers all re-pricing mismatches in the current balance sheet and calculates the change in market value that would result from a set of defined interest rate shocks. Where re-pricing maturity is based on assumptions about customer behaviour these assumptions are also reviewed monthly.
Pension schemes management of the assets of the group’s defined benefit pension schemes is the responsibility of the scheme trustees, who also appoint the scheme Actuaries to perform the triennial valuations. the group monitors its pensions exposure holistically using a variety of metrics including accounting and economic deficits and contribution rates. these and other measures are regularly reviewed by the group Asset and Liability Committee and the group market Risk Committee and used in discussions with the trustees, through whom any risk management and mitigation activity must be conducted.
Banking – non-trading activities interest rate risk arising from the different repricing characteristics of the group’s non-trading assets and liabilities, and from the mismatch between interest rate insensitive assets and interest rate sensitive liabilities, is managed centrally. matching assets and liabilities are offset against each other and interest rate swaps are also used to manage the residual exposure to within the non-traded market Risk Appetite.
the corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled within the trading Risk Appetite and any residual risk is hedged in the market.
market risk in the group’s retail portfolios and in the group’s capital and funding activities is managed centrally within limits defined in the detailed group policy for interest rate risk in the banking book, which is reviewed and approved annually.
money laundering and sanctions the risk of reductions in earnings and/or value, through financial or reputational loss, associated with failure to comply with prevailing regulatory obligations on activities related to money laundering, sanctions and counter terrorism, these losses may include censure, fines or the cost of litigation.
Mitigation the group’s operational risk management framework consists of the following key components: – identification and categorisation of the key operational risks facing a business area, including defining risk appetite.
the group has adopted a formal approach to operational risk event escalation. this involves the identification of an event, an assessment of the materiality of the event in accordance with a risk event impact matrix and appropriate escalation.
Monitoring Ongoing monitoring is in place to track the progression of insurance risks. this normally involves monitoring relevant experiences against expectations (for example claims experience, option take up rates, persistency experience, expenses, non-disclosure at the point of sale), as well as evaluating the effectiveness of controls put in place to manage insurance risk. Reasons for any significant divergence from experience are investigated and remedial action is taken.
Risk appetite Business risk appetite is encapsulated in the group’s budget and medium-term plan, which are sanctioned by the Board on an annual basis. Divisions’ and business units’ plans are aligned to the group’s overall business risk appetite.
Mitigation As part of the annual business planning process, the group develops a set of management actions to prevent or mitigate the impact on earnings in the event that business risks materialise. Additionally, business risk monitoring, through regular reports and oversight, results in corrective actions to plans and reductions in exposures where necessary.
Joined the Board in January 2005. Held a number of senior and general management appointments in Vodafone from 1984 to 2006 including a directorship of that company from 1996, Group Chief Operating Officer from 2001 and Deputy Chief Executive Officer from 2005. Previously held positions in Philips from 1978 to 1982 and Mars GB from 1982 to 1984. A Non-Executive Director of Acer Incorporated (Taiwan), De La Rue, Digicel Group and Emobile (Japan), a Director of Sky Malta, a member of the Altimo International Advisory Board and a senior adviser to UBS and CVC Capital Partners in relation to the global telecommunications sector. Deputy Chairman of BUMI. Pro Chancellor of University of Bath. A former Chairman of The Sage Group. Aged 63.
Joined the Board in March 2010. Executive Director, member of the Group Executive Committee and Chief Executive, International Retail and Commercial Banking at Barclays until December 2006. Joined Barclays in 1983 and held various senior management positions, including Chief Executive, Personal Financial Services, and Chief Executive, Business Banking. Was also a Non-Executive Director of BAA until June 2006 and a Non-Executive Director of Absa Group Limited, one of South Africa’s largest financial services groups, until October 2006. From 2007 to 2009 he was also the Chairman and Chief Executive of BAWAG P.S.K. AG, the second largest retail bank in Austria. Non-Executive Chairman of The Mind Gym. Aged 49.
David L Roberts Independent Director (Deputy Chairman from 17 May 2012)
Joined the Board and was appointed Chairman in September 2009. Previously Chairman of Citigroup Inc. from December 2007 to February 2009. He joined J Henry Schroder & Co in January 1966 and became Managing Director of Schroders Asia in 1971. Group Chief Executive of Schroders in 1984 and Chairman in 1995. Following the acquisition of Schroders’ investment banking business by Citigroup in 2000, became Chairman of Citigroup Europe before being appointed acting Chief Executive Officer of Citigroup in 2007 and subsequently as Chairman in the same year. A Non-Executive Director of Eli Lilly and Company, and The McGraw Hill Companies Inc. in the United States. He is a member of Akbank International Advisory Board and Chairman of the Advisory Council of TheCityUK. Aged 70.
Joined the Board in January 2011 as an Executive Director and became Group Chief Executive in March 2011. Started his career at Citibank Portugal where he was head of capital markets. At the same time, was an assistant professor at Universidade Catolica Portuguesa. Then worked for Goldman Sachs in New York and London. In 1993, joined Grupo Santander as Chief Executive of Banco Santander de Negocios Portugal and then became Chief Executive Officer of Banco Santander Brazil. In 2000, became Chief Executive Officer of Santander Totta, and Chairman from 2006 until 2011, as well as Executive Vice President of Grupo Santander and a member of its Management Committee. Joined Santander UK, as a Non-Executive Director in November 2004 and from August 2006 until November 2010, was its Chief Executive. Formerly a Non-Executive Director of the Court of the Bank of England. A Non-Executive Director of Fundação Champalimaud in Portugal. Aged 48.
Remuneration Committee To set the principles and parameters of remuneration policy for the Group, and to oversee remuneration policy and outcomes for those colleagues covered by the scope of the Committee.
Financial risk management objectives and internal control policies 99 to 170 and page 186
Mr A Horta-Osório (became Group Chief Executive on 1 March 2011) 17 January 2011
Directors’ conflicts of interest The Board, as permitted by the Company’s articles of association, has authorised all potential conflicts of interest that have been declared by individual directors. Decisions regarding these conflicts of interest could be and were only taken by directors who had no interest in the matter. In taking the decision, the directors acted in a way they considered, in good faith, would be most likely to promote the Company’s success. The directors have the ability to impose conditions, if thought appropriate, when granting authorisation. Any authorities given are reviewed at least every 15 months. No director is permitted to vote on any resolution or matter where he or she has an actual or potential conflict of interest. The Board confirms that no material conflicts were reported to it during the year.
Change of control The Company is not party to any significant contracts that are subject to change of control provisions in the event of a takeover bid.
Essential business contracts There are no persons with whom the Group has contractual or other arrangements that are considered essential to the business of the Group.
Each of the directors, whose names and functions are listed on pages 172 and 173 of this annual report, confirm that, to the best of his or her knowledge: – the Group financial statements, which have been prepared in accordance with IFRSs as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and Group; and
Auditors and audit information Each person who is a director at the date of approval of this report confirms that, so far as the director is aware, there is no relevant audit information of which the Company’s auditors are unaware and each director has taken all the steps that he or she ought to have taken as a director to make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of the Companies Act 2006.
The Chairman has overall responsibility for leadership of the Board and for ensuring that the Board devotes its attention to the right matters. He oversees the content of the agendas which are finalised at Board Agenda Review meetings involving the Chairman, Group Chief Executive and Company Secretary. The Deputy Chairman and Senior Independent Director also attend. Details of the matters reserved to the Board are set out in the Board Governance Framework which is explained further below.
All Directors, including Non-Executive Directors, have access to the services of the Company Secretary in relation to discharging their duties as a director, or as a member of any Board Committee. The appointment, and removal, of the Company Secretary is a matter reserved for the Board as a whole. In addition, the Group provides access, at its expense, to the services of external advisers in order to assist directors in their role, wherever this is deemed necessary.
Board effectiveness As Chairman, Sir Winfried Bischoff leads the ongoing review of the Board’s effectiveness. The Nomination & Governance Committee, which he also chairs, oversees the process and makes recommendations to the Board as appropriate. To ensure a broad representation of independent views including perspectives from each of the Committees, membership of the Nomination & Governance Committee comprises the Deputy Chairman, the Senior Independent Director, the Chairmen of the Audit, Remuneration and Risk Committees and one other independent NonExecutive Director. The Group Chief Executive also attends meetings as appropriate.
The annual Board evaluation is instrumental in identifying any new skills requirements, as well as possible shortcomings, gaps and inefficiencies. As part of its longer term succession plans, the Board has identified a need for at least two new Non-Executive Directors: one with substantial insurance experience and another with in-depth accounting and financial expertise to continue to meet the FRC and SEC’s ‘financial expert’ criteria.
The Group aims over time to be a leader in its approach to gender diversity. It will continue to focus on diversity and inclusion in order to build a diverse talent pipeline so that there is an appropriate number of talented women ready to make the next move in their careers.
Non-Executive Directors The Nomination & Governance Committee is responsible for leading and overseeing appointments to the Board. The process of identification of potential new Non-Executive Directors, is undertaken on a rolling basis alongside the continuous review of the composition of the Board. Where appropriate, this is conducted with the support of an executive search firm.
Group Chief Executive succession and interim arrangements On 1 March 2011, António Horta-Osório was appointed Group Chief Executive replacing Eric Daniels who retired on 28 February 2011. Consistent with his contractual entitlement to notice, Eric Daniels remained employed by the Group until the end of September 2011.
The Board kept in close contact with António during his absence. Prior to his return to work, the Board followed a rigorous process to ensure that it was in the best interests of the Group and its shareholders for António to return as Group Chief Executive. This process involved independent medical assessment as well as individual meetings between António and each Board member. As a result of this process, the Board concluded that António was fit to return to work on 9 January 2012. To avoid a recurrence and to assist him in adjusting to the role, the Board agreed to an initiative from António to restructure and reduce his direct reporting lines in order to strengthen the accountabilities of his senior management team. The new structure was announced on 1 February 2012.
Retirements The following retirements took place in the course of the year: – Eric Daniels: see Group Chief Executive succession above; – Archie Kane: Group Executive Director, Insurance who retired at the Company’s general meeting on 18 May 2011; and
– Helen Weir: Group Executive Director, Retail who stepped down at the Company’s general meeting on 18 May 2011.
Election and re-election As indicated in 2010, in the interests of good corporate governance and in accordance with provisions of the Code now in force, Directors will retire voluntarily and submit themselves for re-election at the annual general meeting. Biographies of the career experience of the current directors are set out on pages 172 to 173. To assist in the voting process, details of the Directors seeking re-election at the annual general meeting are set out in the notice of meeting sent to all shareholders.
– a bespoke induction plan prepared in consultation with the Chairman, tailored to the individual needs of the director, to the specific role that they will carry out, and their skills/experience to date.
Board training The Board receives regular refresher training and information sessions to address current business or emerging issues. In the course of 2011, Non-Executives Directors undertook approximately two days of training, including nine hours of structured training during Board meetings. This is delivered through a variety of means, including sessions on matters such as capital and liquidity (including stress testing requirements); regulatory updates for approved persons; accounting development updates and updates on credit rating agency developments. In addition, the Audit Committee arranged a series of ‘deep dives’ to which all Board members were invited, and which provided an in-depth review of the operations of each of the business divisions and of the latest accounting standards and operating methodologies. Sessions were delivered for several business areas amounting to three and a half days in total.
Shareholder engagement The Board recognises the importance of promoting mutual understanding between the Company and its shareholders through greater engagement. In 2011, there was regular dialogue with institutional shareholders with more than 400 equity investor meetings undertaken in the year. Many of these meetings were undertaken by senior management (primarily the Group Chief Executive and Group Finance Director) or Board members. The Chairman has also attended a number of meetings with shareholders to discuss governance and strategic direction. Anthony Watson, as Chairman of the Remuneration Committee, regularly meets the larger shareholders to discuss executive remuneration issues while the Senior Independent Director separately meets with a range of major shareholders.
Investor Relations has primary responsibility for managing day-to-day communications with institutional shareholders. Supported by the Group Chief Executive and Group Finance Director, they achieve this through a combination of briefings to analysts and institutional shareholders (both at results briefings and throughout the year), as well as site visits and individual discussions with institutional shareholders.
Attendance at meetings The attendance of Directors at Board meetings and at meetings of the Audit, Nomination & Governance, Remuneration and Risk Committees of which they were members during 2011 is shown in the table. In addition, the Audit Committee arranged five half day and one full day ‘deep dive’ meetings during 2011 which were open to, and attended by, other members of the Board.
Numbers in brackets show the maximum number of meetings that each Director could have attended in 2011 including ad hoc meetings or those called at short notice.
Number of meetings during the year 9 7 16 8 7 4 12 6 1
Board committees The tables below set out a summary of the membership and role of each of the Board Committees, along with the activities they performed during 2011. There is a standing invitation for all Non-Executive Directors to attend Committee meetings of which they are not members. All Committee terms of reference are displayed on the website, www.lloydsbankinggroup.com or are available from the Company Secretary.
Members Anita Frew Lord Leitch (until 29 February 2012) David Roberts Tim Ryan Anthony Watson
– reviewed Board composition including the Group’s response to the Davies Review and diversity targets; – oversaw the search and selection process for new non executive directors and the Group Finance Director; – oversaw the Board Evaluation process including formulation of the action plan; – reviewed the Governance Framework to ensure consistency with the Group Strategic Review, organisational changes and emerging developments; and
Members Sir Winfried Bischoff Sir Julian Horn-Smith (until 17 May 2012) Lord Leitch (until 29 February 2012) David Roberts Tim Ryan Sara Weller (from 1 February 2012)
Compliance with the British Bankers’ Association Code for Financial Reporting Disclosure In September 2010, the British Bankers’ Association published a Code for Financial Reporting Disclosure (the ‘Disclosure Code’). The Disclosure Code sets out five disclosure principles together with supporting guidance. The principles are that UK banks: commit to providing high quality, meaningful and decision-useful disclosures; commit to ongoing review of, and enhancement to, their financial instrument disclosures for key areas of interest; will assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of such guidance; will seek to enhance the comparability of financial statement disclosures across the UK banking sector; and will clearly differentiate in their annual reports between information that is audited and information that is unaudited.
There is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company. This process has been in place for the year under review and up to the date of the approval of the annual report and is regularly reviewed by the Board. Information regarding the main features of the internal control and risk management systems in relation to the financial reporting process is given within the Risk Management Report on pages 99 to 170.
During 2011, a thorough Strategic Review of the business was conducted by the Board, which is now in its implementation phase. Following this review, the Remuneration Committee has worked towards translating our new strategic objectives into meaningful metrics against which to measure performance.
We have continued to be mindful of the need to exercise restraint as part of the effective governance of executive pay. In particular, we have focused on the need to manage aggregate variable pay in the prevailing environment. This has been demonstrated through a number of decisions made in the last twelve months including not increasing fixed pay, as others in the market have done, and the decision by the Group Chief Executive not to be considered for a bonus for 2011.
The Committee believes the LTIP will be more motivational by introducing measures with clear milestones and outcomes that can be communicated regularly, providing a sense of purpose and achievement throughout the life of the plan. The Committee recognises that core financial measures remain an important element for top management to ensure alignment with shareholders. Accordingly, it is proposed that Economic Profit and Absolute Total Shareholder Return targets remain in place for Executive Directors, but at a reduced level, with a significant percentage of LTIP based on balanced scorecard measures.
As a Committee we are also keen to maintain alignment between our senior executives and shareholders so that executives share the same experience in terms of Company and share price performance. As such, we will continue to operate a stringent deferral policy to ensure senior executives experience variability in remuneration dependent on Company performance.
The final point I want to touch on is the importance of risk in the formulation and evaluation of our remuneration policies and practices. Given the events in the financial services sector over the past few years, the impact of risk underpins every decision we make as a Committee, manifested through our use of economic profit to measure performance and therefore determine remuneration levels. We consider risk when making decisions on remuneration outcomes and re-consider the Group’s experience when deferred awards come to vest, demonstrated by the adjustment made to 2010 bonus awards.
The Committee is dedicated to ensuring that remuneration policies and practices set out in this Report are well placed to support the successful delivery of the business strategy going forward. This Report will be tabled for shareholder approval at the AGM, which I hope you will support.
The Committee recognises the attention which Bank remuneration receives and is very aware both of the importance of getting the right balance between the linkage of rewards to performance and the competitive process; recruiting, retaining and motivating staff as well as a more widely perceived concept of fairness for all involved.
The members of the Committee during 2011 were as follows: – Anthony Watson (chairman)
Our policy is intended to ensure that our remuneration offer is both cost effective and enables us to attract and retain Executive Directors and senior management of the highest calibre, motivating them to perform to the highest standards.
Our executives’ annual incentives are based on stretching performance objectives and targets in the Group Balanced Scorecard. This Balanced Scorecard is derived from the Medium Term Plan which defines the financial and non-financial targets within our agreed risk appetite over a three year period.
We also have non-financial measures of performance against risk objectives in both the annual and long-term plans for executives.
For the 2011 annual incentive plan we continue to align the award to long-term prudent risk management by deferring 100 per cent of the award for Executive Directors, which is subject to malus. Executive Directors are also required to retain any shares vesting from LTIP awards for a further 2 years, after allowing for tax and national insurance requirements. For other employees, the immediate cash bonus award is limited to £2,000 with a percentage of larger bonuses being subject to deferral and malus. If the performance is unsustainable during the deferral period some or all of the award may be forfeited.
We have a robust governance framework with an independent Remuneration Committee reviewing all compensation decisions for senior executives. This approach to governance and review is cascaded through the organisation. We also ensure that all control function employees are assessed and their remuneration determined jointly by the relevant business Director and the control function Director. Senior risk and compliance officers are also reviewed by the Remuneration Committee.
Summary Following extensive consultation with shareholders, the Remuneration Committee is proposing a package for Executive Directors for 2012 that is closely based on the structure and principles applied in previous years as follows: Element Level/design for 2012 Key purpose
Base salary Base pay should be set relative to FTSE 20 and banking sector competitors
Alignment with Group performance Motivation of executives Pay for performance Alignment with sound risk management
Economic Profit Payout range set relative to 2014 targets Threshold: £160 million Maximum: £1,653 million
Non-core assets at end of 2014 Threshold: <= £95 billion Maximum: <= £80 billion
Customer satisfaction (FSA reportable complaints per 1,000 customers over 3 years)
The maximum annual incentive opportunity is 200 per cent (225 per cent for the Group Chief Executive) of base salary for the achievement of exceptional performance targets.
Consistent with the aim of ensuring that short-term financial results are only rewarded if they promote sustainable growth, the 2011 annual incentive is subject to deferral in shares until at least 2014. This deferred amount is subject to malus if the performance that generated the incentive is found to be unsustainable.
Long-term incentive award The current LTIP rules allow for awards to be made of up to 400 per cent of base salary. Under normal circumstances, awards can be made of up to 300 per cent of salary with the additional 100 per cent available for circumstances that the Remuneration Committee deems to be exceptional. In 2011, awards were made of up to 300 per cent of base salary to the Executive Directors and 420 per cent for the Group Chief Executive. The award for Mr Horta-Osório was made in order to facilitate his appointment as Group Chief Executive. In 2012, the committee intends to make an award of 275 per cent of salary to Mr Horta-Osório. Mr Tookey and Mr Tate are not eligible to receive an award following Mr Tookey’s resignation and Mr Tate’s retirement from the Group.
Details of pension contributions and accruals are shown on page 197.
Following changes to the amount of tax relief available on pension contributions in each year, Directors may elect to receive some or all of their allowances as cash. Contributions into the pensions scheme shown on page 197 are commensurately reduced.
One-off payments comprise a contractual cash payment to António Horta-Osório as part of the buyout of his benefits from his previous employer, an allowance to Tim Tookey to reflect his additional responsibilities as Interim Group Chief Executive and a tax planning allowance for Eric Daniels.
Defined contribution scheme members During the year to 31 December 2011 the Group has made the following contributions to the defined contribution scheme: Pension contributions
Directors’ interests (audited) The beneficial interests, of those who were directors at 31 December 2011 in ordinary shares of Lloyds Banking Group were: Number of shares
e Exercisable to the extent that the performance condition was satisfied.
The market price for a share in the Company at 1 January 2011 and 31 December 2011 was 65.70p and 25.91p, respectively. The range of prices between 1 January 2011 and 31 December 2011 was 21.84p to 69.61p.
Lloyds TSB 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 202 and 203.
Former Directors who served during 2011 a Award vested at 29 per cent for Tim Tookey as he was not a director at the time the award was made. The ‘vested during the year’ figure includes 4,796 dividend shares accumulated prior to the stopping of dividend payments. The closing market price of the Group’s ordinary shares on the date of release was 58.54p.
Mr Daniels’ LTIP and Integration Awards will continue, but will be pro-rated to reflect the number of months employed during each performance period. For the awards made on 8 April 2009, this will be 33 months and for the award made on 26 March 2010, this will be 21 months.
March and April 2008 For 50 per cent of the award (the ‘EPS Award’) – the percentage increase in earnings per share of the Group (on a compound annualised basis) over the relevant period needed to be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the Retail Prices Index over the same period. If it was less than 3 per cent per annum, the EPS Award would lapse. If the increase was more than 3 per cent but less than 6 per cent per annum, then the proportion of shares released would be on a straight line basis between 17.5 per cent and 100 per cent. The relevant period commenced on 1 January 2008 and ended on 31 December 2010.
For the other 50 per cent of the award (the ‘TSR Award’) – the Group’s TSR needed to exceed the median of a comparator group (13 companies) over the relevant period by an average of 7.5 per cent per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award would vest where the Group’s TSR was equal to median and vesting would occur on a straight line basis in between these points. Where the Group’s TSR was below the median of the comparator group, the TSR Award would lapse. The relevant period commenced on 6 March 2008 (the date of award) and ended on 5 March 2011.
Tim Tookey was not an Executive Director when his award was made in 2008, and as such his award vested at 29 per cent on the same basis as other award recipients below the Group Executive Committee level.
Emoluments of the eight highest paid senior executives (unaudited) Emoluments of the eight highest paid senior executives can be found on the Group's website at www.lloydsbankinggroup.com
Report of the independent auditors on the consolidated financial statements 206
Notes to the consolidated financial statements 216 1. Basis of preparation 2. Accounting policies 3. Critical accounting estimates and judgements 4. Segmental analysis 5. Net interest income 6. Net fee and commission income 7. Net trading income 8. Insurance premium income 9. Other operating income 10. Insurance claims 11. Operating expenses 13. Investments in joint ventures and associates 14. Gain on acquisition in 2009 15. Loss on disposal of businesses in 2010 16. Taxation 17. Earnings per share 18. Trading and other financial assets at fair value through profit or loss 19. Derivative financial instruments 20. Loans and advances to banks 21. Loans and advances to customers 22. Securitisations and covered bonds 23. Special purpose entities 24. Debt securities classified as loans and receivables 25. Allowance for impairment losses on loans and receivables 26. Available-for-sale financial assets 27. Held-to-maturity investments 28. Investment properties 29. Goodwill 30. Value of in-force business 31. Other intangible assets 32. Tangible fixed assets 33. Other assets 34. Deposits from banks 35. Customer deposits 36. Trading and other financial liabilities at fair value through profit or loss 37. Debt securities in issue 38. Liabilities arising from insurance contracts and participating investment contracts 39. Life insurance sensitivity analysis 40. Liabilities arising from non-participating investment contracts 41. Unallocated surplus within insurance businesses 42. Other liabilities 43. Retirement benefit obligations 44. Deferred tax 45. Other provisions 46. Subordinated liabilities 47. Share capital 48. Share premium account 49. Other reserves 50. Retained profits 51. Ordinary dividends 52. Share-based payments 53. Related party transactions 54. Contingent liabilities and commitments 55. Financial instruments 56. Financial risk management 57. Consolidated cash flow statement 58. Future accounting developments 59. Approval of financial statements 205 Annual Report and Accounts 2011
Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
– we have not received all the information and explanations we require for our audit; or
Other matter We have reported separately on the parent company financial statements of Lloyds Banking Group plc for the year ended 31 December 2011 and on the information in the Directors’ Remuneration Report that is described as having been audited.
Currency translation differences: Currency translation differences, before tax (84) (129) 162
Trading and other financial assets at fair value through profit or loss 18 139,510 156,191
Loans and receivables: Loans and advances to banks 20 32,606 30,272
Trading and other financial liabilities at fair value through profit or loss 36 24,955 26,762
Movements in revaluation reserve in respect of available-for-sale financial assets, net of tax – 2,248 – 2,248 – 2,248
Issued to Lloyds TSB Foundations 41 – – 41 – 41
Value of employee services: Other employee award schemes – – 35 35 – 35
Disposal of businesses, net of cash disposed 57(F) 298 428 411
Net cash provided by (used in) investing activities 6,932 (2,398) 50,823
Net cash (used in) provided by financing activities (3,242) 566 16,052
(i) Amendment to IAS 32 Financial Instruments: Presentation – ‘Classification of Rights Issues’. Requires rights issues denominated in a currency other than the functional currency of the issuer to be classified as equity regardless of the currency in which the exercise price is denominated.
(ii) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. Clarifies that when an entity renegotiates the terms of its debt with the result that the liability is extinguished by the debtor issuing its own equity instruments to the creditor, a gain or loss is recognised in the income statement representing the difference between the carrying value of the financial liability and the fair value of the equity instruments issued; the fair value of the financial liability is used to measure the gain or loss where the fair value of the equity instruments cannot be reliably measured.
(iii) Improvements to IFRSs (issued May 2010). Amends IFRS 7 Financial Instruments: Disclosure to require further disclosures in respect of collateral held by the Group as security for financial assets and sets out minor amendments to other standards as part of the annual improvements process.
(1) Subsidiaries Subsidiaries include entities over which the Group has the power to govern the financial and operating policies which generally accompanies a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group; they are de‑consolidated from the date that control ceases. Details of the principal subsidiaries are given in note 9 to the parent company financial statements.
The treatment of transactions with non‑controlling interests depends on whether, as a result of the transaction, the Group loses control of the subsidiary. Changes in the parent’s ownership interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions; any difference between the amount by which the non‑controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to the owners of the parent entity. Where the group loses control of the subsidiary, at the date when control is lost the amount of any non‑controlling interest in that former subsidiary is derecognised and any investment retained in the former subsidiary is remeasured to its fair value; the gain or loss that is recognised in profit or loss on the partial disposal of the subsidiary includes the gain or loss on the remeasurement of the retained interest.
Brands (which have been assessed as having finite lives) 10‑15 years
Financial assets are derecognised when the contractual right to receive cash flows from those assets has expired or when the Group has transferred its contractual right to receive the cash flows from the assets and either: – substantially all of the risks and rewards of ownership have been transferred; or
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the Group establishes a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Refer to note 3 (Critical accounting estimates and judgements: Fair value of financial instruments) and note 55(3) (Financial instruments: Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.
For unsecured personal lending portfolios, the impairment trigger is generally when the balance is two or more instalments in arrears or where the customer has exhibited one or more of the impairment characteristics set out above. While the trigger is based on the payment performance or circumstances of each individual asset, the assessment of future cash flows uses historical experience of cohorts of similar portfolios such that the assessment is considered to be collective. Future cash flows are estimated on the basis of the contractual cash flows of the assets in the cohort and historical loss experience for similar assets. Historical loss experience is adjusted on the basis of current observable data about economic and credit conditions (including unemployment rates and borrowers’ behaviour) to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.
retail balances, the write‑off takes place only once an extensive set of collections processes has been completed, or the status of the account reaches a point where policy dictates that forbearance is no longer appropriate. For wholesale lending, a write‑off occurs if the loan facility with the customer is restructured, the asset is under administration and the only monies that can be received are the amounts estimated by the administrator, the underlying assets are disposed and a decision is made that no further settlement monies will be received, or external evidence (for example, third party valuations) is available that there has been an irreversible decline in expected cash flows.
(I) Investment property Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital appreciation or both. The Group’s investment property primarily relates to property held for long‑term rental yields and capital appreciation within the life insurance funds. Investment property is carried in the balance sheet at fair value, being the open market value as determined in accordance with the guidance published by the Royal Institution of Chartered Surveyors. If this information is not available, the Group uses alternative valuation methods such as discounted cash flow projections or recent prices. These valuations are reviewed at least annually by an independent valuation expert. Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be measured at fair value. Changes in fair value are recognised in the income statement as net trading income.
(L) Pensions and other post-retirement benefits The Group operates a number of post‑retirement benefit schemes for its employees including both defined benefit and defined contribution pension plans. A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, dependent on one or more factors such as age, years of service and salary. A defined contribution plan is a pension plan into which the Group pays fixed contributions; there is no legal or constructive obligation to pay further contributions.
(3) Liability adequacy test At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities net of related deferred cost assets and value of in‑force business. In performing these tests current best estimates of discounted future contractual cash flows and claims handling and policy administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to the income statement, initially by writing off the relevant assets and subsequently by establishing a provision for losses arising from liability adequacy tests.
The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short‑term balances due from reinsurers as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured contracts and in accordance with the terms of each reinsurance contract and are regularly reviewed for impairment. Premiums payable for reinsurance contracts are recognised as an expense when due within insurance premium income. Changes in the reinsurance recoverable assets are recognised in the income statement through insurance claims.
(P) Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in sterling, which is the Company’s functional and presentation currency.
Individual impairment allowances are generally established against the Group’s wholesale lending portfolios. The determination of individual impairment allowances requires the exercise of considerable judgement by management involving matters such as local economic conditions and the resulting trading performance of the customer, and the value of the security held, for which there may not be a readily accessible market. In particular, significant judgement is required by management in the current economic environment in assessing the borrower’s cash flows and debt servicing capability together with the realisable value of collateral. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment allowances and consequently these allowances can be subject to variation as time progresses and the circumstances of the customer become clearer.
Valuation techniques for level 2 financial instruments use inputs that are largely based on observable market data. Level 3 financial instruments are those where at least one input which could have a significant effect on the instrument’s valuation is not based on observable market data. Determining the appropriate assumptions to be used for level 3 financial instruments requires significant management judgement.
Recoverability of deferred tax assets At 31 December 2011 the Group carried deferred tax assets on its balance sheet of £4,496 million (2010: £4,164 million) and deferred tax liabilities of £314 million (2010: £247 million) (note 44). This presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally enforceable right of offset. Note 44 presents the Group’s deferred tax assets and liabilities by type. The largest category of deferred tax asset relates to tax losses carried forward.
In making this assessment account is taken of business plans, the five year board approved operating plan and the following future risk factors: – The expected future economic outlook as set out in the Group Chief Executive’s Statement; – The retail banking business disposal as required by the European Commission; and
Under current UK tax law there is no expiry date for unused tax losses.
The effect on the Group’s profit before tax and shareholders’ equity of changes in key assumptions used in determining the life insurance assets and liabilities is set out in note 39.
Payment protection insurance The Group has charged a provision of £3,200 million in respect of payment protection insurance (PPI) policies as a result of discussions with the FSA and a judgment handed down by the UK High Court (see note 45 for more information).
During 2011 the chief operating decision maker has commenced reviewing the results of the Group’s Commercial business separately to the Wholesale segment. As a consequence, the Group’s activities are now organised into five financial reporting segments: Retail, Wholesale, Commercial, Wealth and International, and Insurance. The comparatives for 2009 include the pre‑acquisition results of HBOS for the period from 1 January 2009 to 16 January 2009.
During the third quarter of 2011, the Group implemented a new approach to its allocation methodologies for funding costs and capital that ensures that the cost of funding is more fully reflected in each segment’s results. The new methodology is designed to ensure that funding costs are allocated to the segments and that the allocation is more directly related to the size and behavioural duration of asset portfolios, with a similar approach applied to recognise the value to the business from the Group’s growing deposit base. Comparative figures have been restated. The impact of this restatement on the year ended 31 December 2010 was to reduce net interest income and profit before tax in Retail by £730 million, in Wholesale by £404 million, in Commercial by £48 million and in Wealth and International by £126 million; and to increase net interest income and profit before tax in Insurance by £224 million, in Group Operations by £11 million and in Central items by £1,073 million.
Wealth and International was created to give increased focus and momentum to the Group’s private banking and asset management activities and to closely co‑ordinate the management of its international businesses. Wealth comprises the Group’s private banking, wealth and asset management businesses in the UK and overseas. International comprises corporate, commercial, asset finance and retail businesses, principally in Australia and Continental Europe.
Insurance provides long‑term savings, investment and protection products distributed through the bancassurance, intermediary and direct channels in the UK. It is also a distributor of home insurance in the UK with products sold through the retail branch network, direct channels and strategic corporate partners. The business consists of Life, Pensions and Investments UK; Life, Pensions and Investments Europe; and General Insurance.
Other income (net of fee and commission expense) 1,649 3,335 446 1,197 2,687 (7) 9,307
Share of results of joint ventures and associates 11 14 – 3 – (1) 27
Other income (net of fee and commission expense) 1,607 3,974 457 1,123 2,799 (24) 9,936
Other segment items: Additions to tangible fixed assets 126 1,703 5 20 585 777 3,216
Share of results of joint ventures and associates (6) (720) – (21) (22) 2 (767)
Other segment items: Additions to tangible fixed assets 65 2,960 9 53 255 487 3,829
Effects of liability management, volatile items and asset sales (74) – – – – (74)
Customer goodwill payments provision and loss on disposal of businesses £m
Loans and advances to banks 0.78 0.72 1.18 628 512 769
Lease and hire purchase receivables 5.13 6.74 6.01 742 626 852
Included within interest and similar income is £1,405 million (2010: £1,288 million; 2009: £971 million) in respect of impaired financial assets. Net interest income also includes a charge of £70 million (2010: charge of £932 million; 2009: charge of £121 million) transferred from the cash flow hedging reserve (see note 49).
Total net gains arising on assets and liabilities held at fair value through profit or loss 146 12,394 15,647
A non‑life insurance claims development table is included in note 38.
During 2011, the Group has reviewed the analysis of certain cost items and as a result has reclassified some items of expenditure; comparatives for 2010 have been restated accordingly.
Fees payable for the audit of the Company’s current year annual report 1.7 1.9 2.2
Audits of the unconsolidated Open Ended Investment Companies managed by the Group 0.6 0.8 0.6
Impairment losses on loans and receivables: Loans and advances to banks – (13) (3)
Note 14: Gain on acquisition in 2009 On 16 January 2009, the Group acquired 100 per cent of the ordinary share capital of HBOS plc, which together with its subsidiaries undertakes banking, insurance and other financial services related activities in the UK and in certain overseas locations.
The above income tax credit (charge) is made up as follows: £m £m £m
(B) Factors affecting the tax credit (charge) for the year A reconciliation of the credit (charge) that would result from applying the standard UK corporation tax rate to (loss) profit before tax to the actual tax credit (charge) for the year is given below: £m £m £m
Deferred tax on tax losses not previously recognised 332 – –
Effect of results of joint ventures and associates 8 (25) (211)
Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, which has been calculated after deducting 10 million (2010: 8 million; 2009: 10 million) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.
Loans and advances to banks 1,355 – 1,355 2,734 – 2,734
Other financial assets at fair value through profit or loss include the following assets designated into that category: (i) financial assets backing insurance contracts and investment contracts of £118,890 million (2010: £129,702 million) which are so designated because the related liabilities either have cash flows that are contractually based on the performance of the assets or are contracts whose measurement takes account of current market conditions and where significant measurement inconsistencies would otherwise arise; (ii) loans and advances to customers of £124 million (2010: £109 million) which are economically hedged by interest rate derivatives which are not in hedge accounting relationships and where significant measurement inconsistencies would otherwise arise if the related derivatives were treated as trading liabilities and the loans and advances were carried at amortised cost; and
(iii) private equity investments of £1,850 million (2010: £1,733 million) that are managed, and evaluated, on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.
Note 19: Derivative financial instruments The Group holds derivatives as part of the following strategies: – Customer driven, where derivatives are held as part of the provision of risk management products to Group customers; – To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy adopted by the Group is to utilise a combination of fair value, cash flow and net investment hedge approaches as described in note 56; and
– 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: Options written 657 – 9
Debt securities classified as available‑for‑sale financial assets (note 26): Asset‑backed securities 1,436 2,587 – 4,023
Other special purpose entities During 2009, the Group established Lloyds TSB Pension ABCS (No 1) LLP and Lloyds TSB Pension ABCS (No 2) LLP and transferred approximately £5 billion of assets, primarily comprising notes in certain of the Group’s securitisation programmes, in aggregate to these entities. Further details are provided in note 43.
Included within asset‑backed securities are £2,867 million (31 December 2010: £9,392 million) managed by the Wholesale division. Further information on these exposures is provided in note 56.
All assets have been individually assessed for impairment. The criteria used to determine whether an impairment loss has been incurred are disclosed in note 2(H).
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,016 million (31 December 2010: £2,016 million), £1,836 million, or 91 per cent of the total (2010: £1,836 million, 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance division and £170 million, or 8 per cent of the total (2010: £170 million, 8 per cent of the total) to Asset Finance in the Group’s Wholesale division.
The acquired value of in‑force non‑participating investment contracts includes £329 million (2010: £356 million) in relation to OEIC business.
The risk‑free rate assumed in valuing the non‑annuity in‑force business is the 15 year government bond yield for the appropriate territory. The risk‑free rate assumed in valuing the in‑force asset for the UK annuity business is presented as a single risk‑free rate to allow a better comparison to the rate used for other business. That single risk‑free rate has been derived to give the equivalent value to the UK annuity book, had that book been valued using the UK gilt yield curve increased to reflect the illiquidity premium described above.
Balance sheet amount at 31 December 2010 1,439 1,734 5,017 8,190
Liabilities in respect of securities sold under repurchase agreements 7,996 11,145
Included in the amounts reported above are collateral balances in the form of cash provided in respect of repurchase agreements amounting to £323 million (2010: £122 million).
Lapse rates (persistency) Lapse rates refer to the rate of policy termination or the rate at which policyholders stop paying regular premiums due under the contract.
(i) Business description The Group principally writes the following types of life insurance contracts within its non‑profit funds. Shareholder profits on these types of business arise from management fees and other policy charges.
Unit-linked business – This includes unit‑linked pensions and unit‑linked bonds, the primary purpose of which is to provide an investment vehicle where the policyholder is also insured against death.
Cash paid for claims settled in the year (467) 11 (456)
Defined benefit schemes The Group has established a number of defined benefit pension schemes in the UK and overseas, the three most significant being the defined benefit sections of the Lloyds TSB Group Pension Schemes No’s 1 and 2 and the HBOS Final Salary Pension Scheme. These schemes provide retirement benefits calculated as a percentage of final salary depending upon the length of service; the minimum retirement age under the rules of the schemes at 31 December 2011 was generally 55 although certain categories of member are deemed to have a contractual right to retire at 50.
The latest full valuations of the two Lloyds TSB schemes were carried out as at 30 June 2008; the latest full valuation of the HBOS scheme was carried out as at 31 December 2008. The results have been updated to 31 December 2011 by qualified independent actuaries. The last full valuations of other Group schemes were carried out on a number of different dates; these have been updated to 31 December 2011 by qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.
Net amount recognised in the balance sheet 1,131 479 £m £m
Rate of increase for pensions in payment 2.80 3.20 Years Years
In 2010 the Group made changes to the terms of its principal UK defined benefit pension schemes, all future increases to pensionable salary will be capped each year at the lower of: Retail Prices Index inflation; each employee’s actual percentage increase in pay; and 2 per cent of pensionable pay. In addition to this, during the second half of 2010 there was a change in the commutation factors in certain defined benefit schemes. The combined effect of these changes was a reduction in the Group’s defined benefit obligation of £1,081 million and a reduction in the Group’s unrecognised actuarial losses of £171 million, resulting in a net curtailment gain of £910 million recognised in the income statement in 2010 and an equivalent reduction in the balance sheet liability.
On 23 March 2011, the Government announced that the corporation tax rate applicable from 1 April 2011 would be 26 per cent. This change passed into legislation on 29 March 2011. In addition, the Finance Act 2011, which passed into law on 19 July 2011, included legislation to reduce the main rate of corporation tax from 26 per cent to 25 per cent with effect from 1 April 2012. The change in the main rate of corporation tax from 27 per cent to 25 per cent has resulted in a reduction in the Group’s net deferred tax asset at 31 December 2011 of £394 million, comprising the £404 million charge included in the income statement and a £10 million credit included in equity.
The proposed further reductions in the rate of corporation tax by 1 per cent per annum to 23 per cent by 1 April 2014 are expected to be enacted separately each year. The effect of these further changes upon the Group’s deferred tax balances and leasing business cannot be reliably estimated at this stage.
On 1 July 2008, the Financial Ombudsman Service (FOS) referred concerns regarding the handling of PPI complaints to the Financial Services Authority (FSA) as an issue of wider implication. On 29 September 2009 and 9 March 2010, the FSA issued consultation papers on PPI complaints handling. The FSA published its Policy Statement on 10 August 2010, setting out evidential provisions and guidance on the fair assessment of a complaint and the calculation of redress, as well as a requirement for firms to reassess historically rejected complaints which had to be implemented by 1 December 2010.
Other The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases where the original sales processes have been found to be deficient. During 2011 management has again reviewed the adequacy of the provisions held having regard to current complaint volumes and the level of payments being made. At 31 December 2011 the remaining such provisions held relate to past sales of a number of products, including mortgage endowment policies, sold through the branch networks.
During December 2011, the Group completed the exchange of certain subordinated debt securities issued by Lloyds TSB Bank plc and HBOS plc for new subordinated debt securities issued by Lloyds TSB Bank plc by undertaking an exchange offer on certain securities which were eligible for call before December 2012. This exchange resulted in a gain on the extinguishment of the existing securities of £599 million being the difference between the carrying amount of the securities extinguished and the fair value of the new securities issued together with related fees and costs.
7.875% Non‑cumulative Preference Shares callable 2013 (US$1,250 million) b 249 277 7.875% Non‑cumulative Preference Shares callable 2013 (e500 million) b 150 182 6.0884% Non‑cumulative Fixed to Floating Rate Preference Shares callable 2015 (£745 million) b 10 9 5.92% Non‑cumulative Fixed to Floating Rate Preference Shares callable 2015 (US$750 million) b 11 9 6.267% Non‑cumulative Fixed to Floating Rate Preference Shares callable 2016 (US$1,000 million) b 301 269 6.3673% Non‑cumulative Fixed to Floating Rate Preference Shares callable 2019 (£335 million) b 2 2 6.475% Non‑cumulative Preference Shares callable 2024 (£186 million) b 38 34 6.413% Non‑cumulative Fixed to Floating Rate Preference Shares callable 2035 (US$750 million) b 131 113 6.657% Non‑cumulative Fixed to Floating Rate Preference Shares callable 2037 (US$750 million) b 26 5 9.25% Non‑cumulative Irredeemable Preference Shares (£300 million) b 262 235 9.75% Non‑cumulative Irredeemable Preference Shares (£100 million) b 36 30
Total preference shares 1,216 1,165 a Since 2004, the Company has had in issue 400 6 per cent non‑cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the rights to a fixed rate non‑cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company. The holder of the 400 25p 6 per cent preference shares has waived its right to payment for the period from 1 March 2010 to 1 March 2012.
d The fixed rate on this security was reset from 7.627 per cent to 3 months Euribor plus 2.875 per cent with effect from 9 December 2011.
9.375% Perpetual Subordinated Bonds (£50 million) a 17 16 5.75% Undated Subordinated Step‑up Notes (£500 million) 3 3 6.5% Undated Subordinated Step‑up Notes callable 2029 (£450 million) a – –
Floating Rate Primary Capital Notes (US$250 million) a, b 118 118
b These securities are callable at specific dates as per the terms of the securities at the option of the issuer and with approval from the FSA. In November 2009, as part of the state aid restructuring plan, the Group agreed not to exercise any call options on these instruments for the two year period from 31 January 2010 to 31 January 2012.
Floating Rate Enhanced Capital Notes due 2020 (e53 million) a 38 41 7.875% Enhanced Capital Notes due 2020 (US$408 million) 313 288 11.04% Enhanced Capital Notes due 2020 (£736 million) 861 872 7.5884% Enhanced Capital Notes due 2020 (£732 million) 681 694 6.385% Enhanced Capital Notes due 2020 (e662 million) 503 525 6.439% Enhanced Capital Notes due 2020 (e711 million) 548 562 8% Fixed to Floating Rate Undated Enhanced Capital Notes callable 2020 (US$1,259 million) b 687 674 9.125% Enhanced Capital Notes due 2020 (£148 million) 157 158 12.75% Enhanced Capital Notes due 2020 (£57 million) 73 75 7.869% Enhanced Capital Notes due 2020 (£597 million) 588 589 7.625% Enhanced Capital Notes due 2020 (e226 million) 184 189 7.875% Enhanced Capital Notes due 2020 (US$986 million) 629 631 11.125% Enhanced Capital Notes due 2020 (£39 million) 44 45 8.5% Undated Enhanced Capital Notes callable 2021 (US$277 million) b 153 150 14.5% Enhanced Capital Notes due 2022 (£79 million) 114 115 9.875% Enhanced Capital Notes due 2023 (£57 million) 63 67 11.25% Enhanced Capital Notes due 2023 (£95 million) 106 115 10.5% Enhanced Capital Notes due 2023 (£69 million) 67 79 11.875% Enhanced Capital Notes due 2024 (£35 million) 45 45 7.975% Enhanced Capital Notes due 2024 (£102 million) 96 98 16.125% Enhanced Capital Notes due 2024 (£61 million) 97 99 15% Enhanced Capital Notes due 2029 (£68 million) 108 111 9% Enhanced Capital Notes due 2029 (£107 million) 112 112 8.5% Enhanced Capital Notes due 2032 (£104 million) 105 105
Total Enhanced Capital Notes 9,085 9,235 a Interest is payable quarterly in arrears at a rate of 3 month EURIBOR plus 3.1 per cent per annum.
d These securities were issued in December 2011 as a result of an exchange offer.
On 5 November 2010 the Company cancelled all of its deferred shares and an amount of £4,086 million was credited to the capital redemption reserve.
(3) Share capital and control There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and: – certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws); – pursuant to the UK Listing Authority’s listing rules where directors and certain employees of the Company require the approval of the Company to deal in the Company’s shares; and
Note 51: Ordinary dividends No dividends were paid on ordinary shares during 2010 or 2011 and the directors do not propose to pay a final dividend in respect of 2011; in November 2009, as part of the restructuring plan that was a requirement for European Commission approval of state aid received by the Group, the Group agreed to suspend the payment of coupons and dividends on certain of the Group’s preference shares and preferred securities, for the two year period from 31 January 2010 to 31 January 2012. Consequently, the terms of these instruments prevented the Company from making dividend payments on ordinary shares during the year.
Deferred bonus plans Bonuses in respect of the performance in 2011 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.
For options granted in 2005 The same conditions applied as for grants made up to August 2004, except that: – 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 15 companies including Lloyds Banking Group plc; – if the performance condition was not met at the end of the third subsequent year, the options would lapse; and
– the full grant of options became exercisable only if the Group was ranked in the top four places of the comparator group. A sliding scale applied between fourth and eighth positions. If Lloyds Banking Group was ranked below the median (ninth or below) the options would lapse.
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 fair value of options granted in the year was £0.38. The weighted average share price at the time that the options were exercised during 2011 was £0.54. The weighted average remaining contractual life of options outstanding at the end of the year was 9.6 years.
The performance conditions for awards made in March, April and August 2008 are as follows: (i) For 50 per cent of the award (the EPS Award) – the percentage increase in earnings per share of the Group (on a compound annualised basis) over the relevant period needed to be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the Retail Prices Index over the same period. If it was less than 3 per cent per annum the EPS Award would lapse. If the increase was more than 3 per cent but less than 6 per cent per annum then the proportion of shares released would be on a straight line basis between 17.5 per cent and 100 per cent. The relevant period commenced on 1 January 2008 and ended on 31 December 2010.
(ii) For the other 50 per cent of the award (the TSR Award) – it was necessary for the Group’s total shareholder return (calculated by reference to both dividends and growth in share price) to exceed the median of a comparator group (13 companies) over the relevant period by an average of 7.5 per cent per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award would vest where the Group’s total shareholder return was equal to median and vesting would occur on a straight line basis in between these points. Where the Group’s total shareholder return was below the median of the comparator group, the TSR Award would lapse. The relevant period commenced on 6 March 2008 and ended on 5 March 2011.
If the absolute improvement in adjusted EP reaches 100 per cent, 25 per cent of this element of the award, being the threshold, will vest. If the absolute improvement in adjusted EP reaches 202 per cent, 100 per cent of this element will vest.
The EPS and EP performance measures applying to this 2009 LTIP award were set on the basis that the Group would enter into the Government Asset Protection Scheme. As the Group is not participating in the Government Asset Protection Scheme, in June 2010 the Remuneration Committee approved restated performance measures on a basis consistent with the EPS and EP measures used for the 2010 LTIP awards.
(ii) Integration Balanced Scorecard: The release of the remaining 50 per cent of the shares will be dependent on the outcome of a Balanced Scorecard of non‑financial measures of the success of the integration in each of 2009, 2010 and 2011. The Balanced Scorecard element will be broken down into three equally weighted tranches. The tranches will be crystallised and banked for each year of the performance cycle subject to separate annual performance targets across the four measurement categories of Building the Business, Customer, Risk and People and Organisation Development.
If the adjusted EP reaches £567 million, 25 per cent of this element of the award, being the threshold, will vest. If the adjusted EP reaches £1,234 million, 100 per cent of this element will vest.
The fair value of the share awards granted in 2011 was £0.54 (2010: £0.61).
Free shares An award of shares may be made annually to employees based on a percentage of each employee’s salary in the preceding year up to a maximum of £3,000. The percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at the time of award. The shares awarded are held in trust for a mandatory period of three years on the employee’s behalf, during which period the employee is entitled to any dividends paid on such shares. The award is subject to a non‑market based condition: if an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the shares awarded will be forfeited.
Aggregate contributions in respect of key management personnel to defined contribution pension schemes were £0.2 million (2010: £0.4 million).
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 1.09 per cent and 27.5 per cent in 2011 (2010: 0.5 per cent and 17.90 per cent; 2009: 1.28 per cent and 24.90 per cent).
From 1 January 2011, in accordance with IAS 24 (Revised), UK Government‑controlled entities became related parties of the Group. The Group regards the Bank of England and entities controlled by the UK Government, including The Royal Bank of Scotland Group plc, Northern Rock (Asset Management) plc and Bradford & Bingley plc, as related parties.
Lending commitments The formal lending commitments entered into in connection with the Group’s proposed participation in the Government Asset Protection Scheme have now expired and in February 2011, the Company (together with Barclays, Royal Bank of Scotland, HSBC and Santander) announced, as part of the ‘Project Merlin‘ agreement with HM Treasury, its capacity and willingness to increase business lending (including to small and medium‑sized enterprises) during 2011.
At 31 December 2011 there were loans and advances to customers of £5,185 million (2010: £5,660 million) outstanding and balances within customer deposits of £88 million (2010: £151 million) relating to other joint ventures and associates.
Meanwhile, the European Commission is pursuing an investigation with a view to deciding whether arrangements adopted by Visa for the levying of the MIF in respect of cross‑border payment transactions also infringe European Union competition laws. In this regard Visa reached an agreement with the European Commission to reduce the level of interchange for cross‑border debit card transactions to the interim levels agreed by MasterCard. The UK’s OFT has also commenced similar investigations relating to the MIF in respect of domestic transactions in relation to both the MasterCard and Visa payment schemes. The ultimate impact of the investigations on the Group can only be known at the conclusion of these investigations and any relevant appeal proceedings.
Financial Services Compensation Scheme (FSCS) The FSCS is the UK’s independent statutory compensation fund for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The FSCS is funded by levies on the industry (and recoveries and borrowings where appropriate). The levies raised comprise both management expenses levies and, where necessary, compensation levies on authorised firms.
The Group considers that the claims are without merit and will defend them vigorously. The claims have not been quantified and it is not possible to estimate the ultimate financial impact on the Group at this early stage.
The Group also faces a number of other threats of legal action from employees in relation to terms of employment including pay and bonuses. The Group considers that the complaints are without merit and, should proceedings be issued, they will be vigorously defended.
Operating lease commitments Where a Group company is the lessee the future minimum lease payments under non‑cancellable premises operating leases are as follows: £m £m
Cash and balances at central banks – – – – – 60,722 – 60,722
Deposits from banks – – – – – 39,810 – 39,810
Derivative financial instruments 7,246 50,966 – – – – – 58,212
Notes in circulation – – – – – 1,145 – 1,145
Available‑for‑sale financial assets – – – 42,955 – – – 42,955
Deposits from banks – – – – – 50,363 – 50,363
Derivative financial instruments 4,398 37,760 – – – – – 42,158
From available‑for‑sale financial assets to held‑to‑maturity investments 3,624 3,846 3,455 3,539 – – – –
Total carrying value and fair value 3,908 4,121 4,518 4,606 2,227 2,244 3,337 3,328
Valuation methodology Financial instruments include financial assets, financial liabilities and derivatives. The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Cash and balances at central banks and items in the course of collection from banks The fair value approximates carrying value due to their short‑term nature.
Deposits from banks and customer deposits The fair value of deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.
Level 2 portfolios Level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based significantly on observable market data. Examples of such financial instruments include most over‑the‑counter derivatives, financial institution issued securities, certificates of deposit and certain asset‑backed securities.
Asset‑backed securities: Corporate and other debt securities 5,098 15,337 1,423 21,858
Total financial liabilities carried at fair value 906 67,811 257 68,974