See more about how we create value for all our stakeholders on pages 18–27
This icon appears throughout this report highlighting how we are Helping Britain Prosper. Read more online at www.lloydsbankinggroup.com
This Annual Report and Accounts contains forward looking statements with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the forward looking statements on page 265.
On behalf of the Board Lord Blackwell Chairman Lloyds Banking Group 20 February 2018
Financial results Summary of Group results 39 Divisional results 45 Other financial information 49
Financial statements Independent auditors’ report 158 Consolidated financial statements 166 Parent company financial statements 255
Other information Shareholder information 263 Five year financial summary 265 Forward looking statements 266 Abbreviations 267 Alternative performance measures 267 Subsidiaries and related undertakings 268
>£20m given to the Group’s independent charitable Foundations. The Foundations have helped more than 2,800 charities across the country, including Newry Muay Thai in Northern Ireland, which received a grant from the Halifax Foundation.
Significant strategic progress and a strong financial performance £5.3bn +24% Statutory profit before tax increased significantly £8.5bn +8% Underlying profit increased 245bps +55bps Strong CET1 capital generation pre ordinary dividend and share buyback
+0.9pp Pro forma CET1 ratio after ordinary dividend and share buyback 3.05p +20% Ordinary dividend per share 18bps +3bps Asset quality ratio remains strong, reflecting effective risk management and the continued benign credit environment -1.9pp Our market leading cost:income ratio further improved 62.0pts -0.7pts Our net promoter score, a respected measure of customer satisfaction, remains strong
Chairman’s statement Transforming the Group for success in a digital world
Customers We aim to treat all our customers fairly and inclusively, making it easy for them to find, understand and access products that are right for them, whatever their circumstances. During the year I have seen first-hand how the way we serve our customers has continued to improve, with colleagues embracing new technology and ways of working to meet changing customer needs.
I have also had the opportunity to travel around the country to see some of this work, speaking with teams who work directly with vulnerable customers and visiting charities who receive support from our independent Foundations.
I am delighted that we have raised more than £4 million for our 2017-2018 charity partner Mental Health UK in the past 12 months. There is a growing recognition that mental health and financial health are closely linked and together we are creating the perfect partnership to start developing this support for people across the UK.
Directors We review the Board’s composition and diversity regularly and are committed to ensuring we have the right balance of skills and experience within the Board.
Communities £58m given to help communities in 2017 260,000 hours volunteered
Group Chief Executive’s review A landmark year with strong strategic and financial performance 2017 has been a landmark year for the Group. In May the UK government completed the sell-down of its shares and the Group returned to full private ownership. This was enabled by the significant strategic progress and strong financial performance in recent years and was down to the hard work of all our people and I thank them for it.
During the year we successfully completed the second phase of our strategy with significant improvement in customer service, development of our market leading digital proposition including an open banking platform, targeted growth and delivery of Simplification savings ahead of target. We now have the largest and top rated digital bank in the UK alongside the largest branch network. We also completed the acquisition of MBNA’s prime credit card business, the Group’s first major acquisition since the financial crisis and announced the acquisition of Zurich’s UK workplace pensions and savings business later in the year, giving us a strong platform on which to develop the next stage of our strategy in the financial planning and retirement business.
Statutory profit before tax increased 24 per cent to £5.3 billion, reflecting higher underlying profit and lower below the line charges. Underlying profit was £8.5 billion, an increase of 8 per cent, with improved income and positive operating jaws resulting in an improved cost:income ratio of 46.8 per cent. Asset quality remains strong and the Group’s gross asset quality ratio remains unchanged at 28 basis points, while the net asset quality ratio increased to 18 basis points as a result of expected lower releases and writebacks. Additional PPI provisions of £1.7 billion and conduct costs of £865 million were taken in the year. The increased PPI provision reflects increased complaint levels including the impact of the first FCA advertising campaign for the August 2019 industry deadline.
During the year, loans and advances increased to £456 billion with open mortgage book growth, increased SME balances and continued growth in consumer lending whilst also consolidating the MBNA book. Our balance sheet remains strong with a pro forma CET1 ratio of 13.9 per cent (after ordinary dividends and allowing for the share buyback), a total capital ratio of 21.2 per cent and a pro forma UK leverage ratio of 5.4 per cent.
Strategic progress In 2017 we successfully completed the second phase of our strategic plan, achieving our strategic priorities of creating the best customer experience, becoming simpler and more efficient and delivering sustainable growth.
We remain committed to delivering the best service for our customers and addressing historic conduct issues. We have continued to pay compensation to victims of the legacy fraud at HBOS Reading, and have now made offers to 57 customers, which represents more than 80 per cent of the customers in the review.
Becoming simpler and more efficient Cost management has been a strategic priority and we remain focused on maintaining our competitive advantage in cost leadership. Our Simplification programme has delivered £1.4 billion of run-rate cost savings, ahead of our original £1 billion target, and costs have fallen every year (excluding the impact of MBNA). Our market leading cost:income ratio improved to 46.8 per cent in 2017, with further improvements targeted.
Our continued strong performance positions us well to succeed in a digital world. António Horta-Osório Group Chief Executive
Digitising the Group We will deploy new technology to drive additional operational efficiencies that will make banking simple and easier for customers whilst reducing operating costs, pursuing the following initiatives: deeper end-to-end transformation targeting over 70 per cent of cost base; simplification and progressive modernisation of our data and IT infrastructure; and technology enabled productivity improvements across the business.
Asset quality remains strong and, given our low risk business model and the significant portfolio improvements in recent years, we now expect an asset quality ratio of around 35 basis points through the cycle and less than 30 basis points through the plan period.
Summary Our strong foundations, differentiated business model and strategic capabilities combined with the new strategic plan and a highly engaged team positions us well to succeed in a digital world and continue to help Britain prosper.
Our achievements in 2017 UK government share sale completed, allowing the Group to be returned to full private ownership
Customer relationships are key to our strategy and we specifically measure customer satisfaction and complaint levels. We also track our performance against the targets of our Helping Britain Prosper Plan, about which you can read more on page 20.
Pay for performance across the Group To ensure our employees act in the best interests of customers and shareholders, remuneration at all levels of the organisation is aligned to the strategic priorities and financial performance of the business and also takes into account specific risk management controls. Variable remuneration for all colleagues, including our Executive Directors, is based on the performance of the individual, the business area and the Group as a whole.
We previously reported underlying return on required equity but changed to statutory return on tangible equity at full year 2016 to aid comparability with our peers.
An increased ordinary dividend of 3.05 pence per share, in line with our progressive and sustainable dividend policy. In addition, the Board intends to implement a share buyback of up to £1 billion.
Statutory profit before tax £m 1 Pro forma, reflecting insurance dividend and ordinary dividend. Also reflecting MBNA in 2016 and intended share buyback in 2017.
Our cost:income ratio further improved to 46.8 per cent and remains the lowest of our major UK banking peers.
Reflecting the pace of digital adoption, the number of active digital customers increased in the year. The number of mobile banking users also increased in the year, to 9.3 million, many of whom use our award winning Lloyds Bank app.
Opportunities The economy’s resilience bodes well for us and our customers. While interest rates are expected to increase only gradually, the Bank of England’s first increase in Bank Rate in over 10 years has benefited savers, many of whom will have dealt with low rates for a prolonged period, and will support banking margins. In recent years, low interest rates and our low risk approach have been reflected in low and falling levels of impairments against our lending balances.
There is increasing clarity on impending regulation with a number of key regulatory programmes now agreed or to be finalised in the near future
Capital regulation The Group continues to monitor and prepare for a number of regulatory capital developments taking effect over the next few years. Uncertainty remains around the implementation and impact of some regulatory developments, including the finalisation of Basel III, which will be subject to EU and UK implementation. The highly capital generative nature of the Group means that it remains relatively well-positioned to meet any changes arising.
Ring-fencing From January 2019, the Group and its peers will have to comply with the ring-fencing regulations introduced by the Financial Services (Banking Reform) Act 2013. This legislation has been developed in response to the global financial crisis, with the aim of ensuring that ordinary depositors and other stakeholders, such as shareholders, would be protected in the event of a similar crisis occurring in the future. While this will result in some structural and operational changes for the Group, our simple business model and UK focus mean they are likely to be less onerous than for our major peers.
See how risks associated with these factors impact upon our principal risks and strategy on page 33
Market challenge The needs and expectations of our customers continue to evolve, driven by changing demographics and life patterns along with increased choice, both in terms of provider and channel. The increasing use of digital has also reduced brand affinity and loyalty across a number of sectors.
As we have seen in a number of other industries, incumbents who do not respond to changing customer preferences and behaviours are at the greatest risk.
Outlook Changes to customer expectations and behaviour, demographics and life patterns mean that we cannot be complacent. While we have a number of competitive advantages in the current environment, including our differentiated multi-channel and multi-brand propositions, securing and enhancing the relationships with our customers will be paramount to our future success.
Market challenge The pace of digital adoption has surpassed expectations in recent years and this trend is likely to accelerate further. The increasing role of digital has heightened customer expectations for personalisation while transforming the manner in which customers interact with banks. New entrants to the financial services market are increasing disruption through the innovative use of technology and data, often specifically targeting small, profitable niches.
Security and resilience remain important factors, with the ability to respond to heightened cyber and fraud risks key to retaining customer trust in a digital environment.
Opportunities With customers becoming more empowered as a result of greater choice than ever before, we must be responsive to their changing expectations and ensure that we continue to offer products and services they value. These expectations are likely to be increasingly influenced by non traditional competitors in other industries as they continue to the raise bar for innovation.
Outlook While greater competition increases choice for consumers and reinforces the need to further improve the customer experience, the breadth of our multi-brand offering along with our efficiency and customer satisfaction means we start from a position of strength.
Ensuring IT systems are effective and resilient and that we are prepared for the threat of cyber risk
Multi-channel approach Operating in an integrated way through a range of distribution channels ensures our customers can interact with us when and how they want.
Rigorous execution and management discipline Experience of delivering change and transformation in recent years provides benefit as we further transform the business.
We are proud to take a leading role in helping the UK economy, whether through supporting housing, trade and business growth or by tackling disadvantage.
Our product range is driven by our customers’ needs and is informed through comprehensive customer analysis and insight.
Our simple, low risk, customer focused business model is driven by our competitive positioning. As we enter the next phase of our strategy we will enhance our competitive strengths to further transform the business, help Britain prosper and continue delivering for customers, colleagues and shareholders.
For more about our approach to responsible business and the Plan see pages 18–20
We have continued to invest in the UK’s largest branch network, reformatting branches to reflect changing customer needs
We have improved customer satisfaction with our seamless, multi-brand, multi-channel offering, reflected in increasing Net Promoter Scores (NPS), while customer complaints continued to trend downwards
We have helped Britain prosper through a number of strategic commitments, including supporting more first-time buyers than anybody else
We continue to encourage diversity, believing that everybody should have the opportunity to reach their full potential
NPS score of 62.0, up from 58.6 55 per cent of customers receiving mortgage offer within less than 14 days, up 18pp
Cost:income ratio of 46.8 per cent, down from 49.8 per cent £1.4 billion of Simplification savings achieved, ahead of our original target
Net lending to SMEs up by £3 billion, ahead of market £8 billion of MBNA credit card assets acquired in June 2017
Named world’s best bank for diversity and inclusion by Euromoney magazine
We regularly review our strategy in the light of the changing external environment to ensure that our focus remains the right one for our customers and other stakeholders. As part of this process, the Board specifically discusses strategic issues at a strategy offsite meeting every year.
In June 2016, the Board and the executive management team took part in an intensive two-day strategy meeting to discuss the strategic challenges and opportunities the Group could face in the future, based on four scenarios for how banking could evolve over the next 10 years.
Using this foundation, coupled with the ongoing monitoring of both internal and external stakeholder trends and best practice, our main focus in 2017 was the development of the Group’s strategy for the three year period from 2018 to 2020.
The Board reviewed the more detailed plan and immediate priorities in an extended session in November 2017, placing particular emphasis on the effective management of the programme and the mitigation of potential execution risks.
OUR PURPOSE Helping Britain Prosper OUR AIM Best bank for customers, colleagues and shareholders
Digitising the Group Deploying new technology to improve our efficiency and make banking simpler and easier for customers.
Maximising the Group’s capabilities Aligning the Group’s capabilities as the sole UK banking and insurance provider to deepen customer relationships and grow in targeted segments.
Why this is important In order to be the best bank for customers, we recognise that we must continue to adapt to changes in customer behaviour, technology-driven competition and regulation. Our propositions must be reflective of heightened customer expectations for ease of access, personalisation and relevance, as well as the needs created by changing life patterns.
Key objectives for 2020 To achieve our aim of being best bank for customers, we will deliver best-in-class propositions while continuing to provide our customers with brilliant servicing and a seamless experience across all our channels.
Building a market leading digital experience The recent introduction of open banking regulation has provided an opportunity to enhance our propositions and engage our customers in new ways, whilst keeping them safe. We are the largest digital bank in the UK and aim to build on this position by creating a market leading digital financial services experience with open banking functionality. In doing this, we recognise that customers want to be in control of their finances in a secure and trusted way.
Key objectives for 2020 By digitising the Group, we are expecting to transform our cost base as well as the experience of our customers and colleagues.
Overall, we expect this next phase of our digital transformation to lead to a better experience for our customers and colleagues as well as improvements to risk management and the resilience of our business. In addition, we expect to achieve further structural efficiency gains, which will enable us to maintain our competitive advantage and compete with emerging new competitors, including digital disruptors.
Given our business model, comprising banking and insurance operations and leading digital capabilities, we are uniquely positioned to respond to this demand. We are therefore aiming to capture the significant opportunity arising from the growing financial planning and retirement market. We recognise that customer needs vary and will offer a range of solutions from an execution only level of service to full specialist advice, ensuring that our customers enjoy a seamless experience regardless of the channels they use. Given our wealth of customer data and the investment we are making in technology, we will be able to offer a single customer view capability across our customers’ financial holdings, including insurance and banking products. In addition, we will seek to capture the significant opportunities arising from auto-enrolment and the increased demand for digitised service. We will therefore strengthen our corporate pensions proposition, leveraging our existing commercial banking relationships and the enhanced capabilities that we will gain through
Why this is important Our colleagues are crucial to the success of our business. In order to deliver our transformation over the next three years, and beyond, our colleagues will require new skills and capabilities to reflect the changing needs of the business as it adapts to the evolving operating environment. At the same time, colleague expectations of their employers are changing. As a result, we must devise solutions to continue to attract, develop and retain these skills and capabilities, while fostering a culture that supports a way of working that is agile, trust-based and reinforces the Group’s values.
50 per cent increase in training and development to 4.4 million hours per annum
+£50 billion financial planning and retirement open book assets under administration growth >1 million new pensions customers
How the Group is run Our Group Policies and standards, including our values and Code of Responsibility, guide our behaviour and are embedded and tracked as part of our risk appetite and policy framework.
We engage with stakeholders in many different ways: during our business activities; in face-to-face meetings on specific issues, such as regulation; and also through new media such as digital broadcasts.
A sustainable and responsible approach is integral to what we do and how we operate. Doing business responsibly underpins our purpose and is supported by our Group values and Code of Responsibility.
Our performance in 2017 This year we have made good progress in helping people, businesses and communities, meeting 21 of our 22 targets for the year.
We provide support to businesses of all types and sizes. In 2017, we delivered £1 billion of financial support to the manufacturing sector, exceeding our target, and extended our support for the Lloyds Bank Advanced Manufacturing Centre, helping to train 500 apprentices, graduates and engineers. We also met our target to support UK infrastructure projects collectively worth more than £31 billion. We have now retired this target from our Plan.
We increased net lending to SME and Mid Markets companies by £0.9 billion, but fell short of our £2 billion target. The shortfall reflects similar challenges across the market. Since the beginning of 2011, our net lending to SMEs has increased by 31 per cent whilst the market has contracted by 11 per cent. Since 2012, our lending to Mid Markets companies has increased by 17 per cent compared to a market that has remained flat. Our 2018 target is to deliver £2 billion of net lending across start-up, SME and Mid Markets businesses.
We’re helping communities to become more cohesive by providing vital support for some of the most disadvantaged people living in Britain today. We also champion diversity.
Tackling disadvantage across Britain Number of charities we will support as a result of our £100 million3 commitment to the Group’s independent charitable Foundations 1 2020 targets are cumulative from 2018–2020 and are in line with the next phase of the Group’s strategic plan.
You can read more about all of our Helping Britain Prosper Plan targets online
Other achievements include being rated number 1 in the Stonewall Top 100 2017 LGBT employers and included in the Stonewall inaugural list of Transgender Inclusive Employers 2018; being named the best bank in the world for diversity and inclusion by Euromoney; and once again, a Top 10 Employer for Working Families and Times Top 50 Employer for Women. We also won awards for our approach to agile hiring. You can read more about agility on page 22.
recruitment process and in November, we won a ‘Nothing about us without us’ Disability Smart Award, recognising the way we gather insights about disability from colleagues, customers and charities, then use them to inform our decisions. As a member of the Business Disability Forum, we are proud to have retained our Gold accreditation in the Disability Standard. Our colleague disability network, Access, ran a successful national event, while more than 2,300 colleagues completed our industry leading workplace adjustment process.
Learning and development Investing in learning and development equips colleagues to do their best for customers. During 2017, colleagues spent more than 410,000 days on learning, an average of 5.6 days each. We made it easier for them to access learning by creating new business learning catalogues and Group-wide Learning Resource Centres. We also ran ‘Values in Action’ sessions for all colleagues, supporting the introduction of our new Group and Leadership Behaviours, and unified our learning for line managers and leaders in a new Leadership Academy. This offers a new curriculum for senior colleagues, ‘pathways’ to guide those preparing for a new line management role, and leadership apprenticeships.
above the external best practice response rate. We believe the surveys confirm that colleagues are engaged and believe the Group is moving forward in key areas.
We are piloting a new ‘Easy Read’ format, endorsed by the RNIB, to make bank statements accessible and understandable for customers with a range of learning difficulties and disabilities. This year we agreed our Autism Friendly plans for customers and colleagues, which we have developed in partnership with the National Autistic Society.
Responsible and accessible products We have made significant progress over the last three years to improve the customer experience across many of our key products and services as part of our far-reaching Customer Journey Transformation initiative. In 2017, we launched the last two of our 10 journeys, each of which is intended to put customers at the heart of any changes we make. This year, we issued colleagues in branches with more than 4,000 iPad Pros so they can open accounts faster and introduced new digital services to help colleagues advise customers about corporate pensions or loan eligibility and to process mortgage offers and accounts and small loans for SMEs in less time than ever before.
Our tax contribution The Group continues to be one of the largest contributors to UK tax revenues. We were ranked as the highest payer of UK taxes in the most recent PwC Total Tax Contribution Survey for the 100 Group, which is broadly the FTSE 100 and some large UK private companies. In 2017, we paid £2.5 billion in tax (2016: £2.3 billion). We are also a major tax collector, gathering £1.7 billion on behalf of HMRC in 2017 (2016: £2 billion).
TACKLING SOCIAL DISADVANTAGE ACROSS BRITAIN Through the Lloyds Bank Foundation for the Channel Islands, we are supporting Autism Jersey, a charity that provides much-needed advice and respite for people on the autism spectrum, their families and carers. The charity, which is using a grant of £50,000 over three years to help pay salaries, has grown significantly in the past five years and has helped many individuals obtain care for the first time without travelling to the mainland.
HELPING INCENTIVISE GREEN REAL ESTATE We’re incentivising Unibail-Rodamco, Europe’s largest commercial real estate business, to become more environmentally sustainable – by linking the margin on their five year €650 million revolving credit facility to green key performance indicators. The interest margins set through this innovative refinancing deal, will take into account the Unibail-Rodamco’s performance against KPIs based on its own ‘Sustainability Vision’ and ‘Better Places 2030’ strategies.
Oct 16 - Sept 17 Oct 15 - Sept 161,2 Oct 14 - Sept 151,2 1 Restated 2014/2015 and 2015/2016 emissions data to improve the accuracy of reporting, using actual data to replace estimates. 2 Restated all historic years to reflect improved methodology in assigning road travel between reporting scopes. Emissions in tonnes CO2 e in line with the GHG Protocol Corporate Standard (2004). We are in the process of transitioning to the revised Scope 2 guidance. Criteria used to measure and report Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/responsible-business. Scope 1 emissions include mobile and stationary combustion of fuel and operation of facilities. Scope 2 emissions have been calculated using a location based methodology, as set out by the GHG Protocol.
At the end of 2017, our UK team had financed renewable projects with a combined capacity of over 2.75GW (2016: 1.78GW) and internationally our existing investments in renewables exceed 8.9GW (2016: 7.4GW). In 2017 Lloyds Bank played an important part in Macquarie’s acquisition of the Green Investment Bank (now Green Investment Group), providing financing for a significant portfolio of operational offshore wind farms including Sheringham Shoal, Gwynt y Mor, Rhyl Flats and projects in construction, including Galloper and Rampion offshore wind farms. Together the projects have a total capacity of approximately 2.4GW, which is enough to power over 1.7 million homes and they will support a significant number of jobs across the UK through the supply chain and maintenance of the wind farms.
Risk management The Sustainability Committee will oversee the assessment of our climate-related risks, escalating to the Responsible Business Committee and the Board Risk Committee as appropriate. Our divisions are each exposed to different levels of climate risk. For example, as a large home insurer, we are aware that global warming is projected to increase the risk of flooding and consequently weather-related insurance claims. It is important that we continue to work with our customers, industry peers and government to ensure this risk is minimised and mitigated to keep flood insurance affordable.
Non-financial information statement We aim to comply with the new Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006. The below table, and information it refers to, is intended to help stakeholders understand our position on key non-financial matters. This builds on existing reporting that we already do under the following frameworks: CDP, Global Reporting Initiative, Guidance on the Strategic Report (UK Financial Reporting Council), UN Global Compact, UN Sustainable Development Goals and UN Guiding Principles.
Reporting requirement Policies and standards which govern our approach Risk management and additional information
Human rights, page 22 Responsible and ethical lending, page 24 Working with suppliers, page 25
Customer privacy and data security, page 23 Responsible conduct and culture, page 24 Operational risk, pages 135–136
Direct and indirect economic contribution, page 24 Risk overview, pages 32–33 Principal risks, pages 34–37
Running a responsible business, pages 21–25 Environment, pages 26–27 1 Certain Group Policies and internal standards and guidelines are not published externally.
Its aim is to be the best bank for customers in the UK, by building deep and enduring relationships that deliver value to customers, and by providing them with greater choice and flexibility. Retail operates a multi-brand and multi-channel strategy and continues to simplify the business and provide more transparent products, helping to improve service levels and reduce conduct risks, whilst working within a prudent risk appetite.
Continued to support first-time home buyers, lending £13 billion compared to the £10 billion target.
Lex Autolease exceeded its five year ambition to grow its fleet by 100,000 vehicles, cementing its position as the UK’s leading vehicle leasing company.
Net interest margin increased 18 basis points to 3.54 per cent as a result of lower funding costs.
Commercial Banking Commercial Banking has a client-led, low risk, capital efficient strategy, helping UK-based clients and international clients with a link to the UK.
It supports over 9 million customers with total customer assets under administration of £145 billion and annualised annuity payments to customers in retirement of c.£1 billion. The division’s strategic aim is to be the best insurer and wealth management business in the UK. It is committed to providing trusted, value for money products and services to meet the needs of its customers.
Home insurance net promoter scores increased by 10 per cent and life, pensions and investments by 13 per cent.
Wealth customer assets increased by 7 per cent to £25 billion, reflecting positive market movements.
Financial performance Income in insurance and overall costs remained flat, with higher investment costs offset by lower business as usual costs. Underlying profit has decreased by 3 per cent to £939 million as a result of lower Wealth income.
Total life and pensions sales increased by 12 per cent, driven by 29 per cent increase across workplace, planning and retirement and protection, partly offset by lower bulk annuity sales where we have maintained a strong pricing discipline whilst actively quoting in a very competitive market.
Insurance and Wealth Insurance and Wealth offers insurance, investment and wealth management products and services.
>9m Life, pensions and investments customers £670m of long duration loans funded £939m Underlying profit
As a Group, managing risk effectively is fundamental to our strategy and to operating successfully. We are a simple, low risk, UK focused bank with a culture founded on a prudent through the cycle risk appetite.
A strong risk management culture is crucial for sustainable growth and within Lloyds it is at the heart of everything we do.
Our risk management framework The diagram below outlines the framework in place for risk management across the Group.
Determined by the Board and senior management. Business units formulate their strategy in line with the Group’s risk appetite
Supporting a consistent approach to Group-wide behaviour and risk decision making. Consistency is delivered through the policy framework and risk committee structures
Through Board-delegated executive authorities there is effective oversight of risk management consistent with risk appetite
The potential risks and impacts arising from the external environment are outlined below. They are grouped using the same classification as on pages 8–9, with links to our principal risks and strategic priorities. For information on how we manage our emerging risks, see page 110.
The Group has a proven track record in implementing complex legal and regulatory programmes and will continue to manage any potential impact by remaining actively engaged with governmental bodies, regulatory authorities and industry associations.
Risk and potential impact Economic headwinds such as rising inflation could impact households’ disposable income and businesses’ profitability, impairing customers’ ability to repay their borrowing, and potentially hindering sustainable growth.
The impact of EU exit on our portfolios remains uncertain. Operational changes are likely to be limited given our UK focus but the impact on the UK economy may affect business performance.
Find further discussion on the impact of these factors on our business on pages 8–9
Ensure we develop comprehensive plans for delivery of all legal and regulatory changes and track their progress. Group-wide projects implemented to address significant impacts.
Continued investment in people, processes, training and IT to assess impact and help meet our legal and regulatory commitments.
Engage with regulatory authorities and industry bodies on forthcoming regulatory changes, market reviews and investigations.
Early identification of signs of stress leading to prompt action in engaging the customer.
Product approval, continuous product review processes and customer outcome testing (across products and services) supported by conduct management information.
As we transform our business, minimising conduct risk is critical to achieving our strategic goals and meeting regulatory standards.
Managing organisational capability and capacity to ensure there are the right skills and resources to meet our customers’ needs.
3 Calculated in accordance with the UK Leverage Ratio Framework which requires qualifying central bank claims to be excluded from the leverage exposure measure.
Example Uncertain property insurance claims impact Insurance earnings and capital, e.g. extreme weather conditions, such as flooding, can result in high property damage claims.
Examples Earnings are impacted by our ability to forecast and model customer behaviour accurately and establish appropriate hedging strategies.
The Insurance business is exposed indirectly to equity risk through the value of future management charges on policyholder funds. Credit spread risk within the Insurance business primarily arises from bonds and loans used to back annuities.
Narrowing credit spreads will increase the cost of pension scheme benefits.
The Group’s DB pension schemes have increased their credit allocation and hedged against nominal rate and inflation movements.
Evolving risk and governance arrangements to continue to be appropriate to comply with regulatory objectives.
The Group’s models play a vital role in supporting Group strategy to ensure profitable growth in targeted segments and the Group’s drive toward automation and digital solutions to enhance customer outcomes. Model risk management helps ensure these models are implemented in a controlled and safe manner for both the Group and customers.
Our market leading cost:income ratio continues to provide competitive advantage and improved further to 46.8 per cent with positive operating jaws of 4 per cent.
The Group expects operating costs of less than £8 billion in 2020; the Group also expects the cost:income ratio to improve every year and reach the low 40s exiting 2020, including future remediation costs.
The impairment charge increased to £795 million from £645 million in 2016, reflecting lower releases and write-backs and the consolidation of MBNA. The asset quality ratio increased from 15 basis points to 18 basis points reflecting the expected lower provision write-backs and releases while the gross asset quality ratio was stable year-on-year at 28 basis points including the 2 basis points impact of MBNA in 2017.
The Group expects an asset quality ratio of around 35 basis points through the cycle and less than 30 basis points through the plan period and in 2018. The Group continues to expect the asset quality to remain strong but with further reductions in releases and write-backs, however, following the implementation of IFRS 9, the Group anticipates some additional volatility in impairment.
Market volatility and asset sales of £279 million included positive insurance volatility of £286 million. The credit of £439 million in 2016 included the £484 million gain on sale of the Group’s interest in Visa Europe.
Taxation The tax expense was £1,728 million (2016: £1,724 million) representing an effective tax rate of 33 per cent (2016: 41 per cent). The high effective tax rate largely reflects the restrictions on deductibility of conduct provisions and the banking surcharge. The effective tax rate of 41 per cent in 2016 was higher as it also included the negative impact on the net deferred tax asset of both the change in corporation tax rate and the expected utilisation by the insurance business. The Group expects the effective tax rate to reduce to around 25 per cent by 2020.
Going forward the Group remains confident in its future prospects and expects the return on tangible equity to trend towards the underlying level and expects to generate a statutory return on tangible equity of between 14.0 and 15.0 per cent in 2019, on a higher capital base.
Loans and advances to customers increased by 1 per cent to £456 billion compared with £450 billion at 31 December 2016 mainly due to the acquisition of the MBNA prime credit card portfolio (£8 billion), growth in the open mortgage book, UK Motor Finance and SME, partly offset by reductions in run-off and the closed mortgage book.
The leverage ratio on a pro forma basis increased to 5.4 per cent (31 December 2016: 5.3 per cent), largely reflecting both the increase in fully loaded tier 1 capital and reductions in balance sheet assets.
Tangible net assets per share at 31 December 2016 was 54.8 pence, or 53.4 pence after adjusting for the acquisition of MBNA. The movement from the adjusted 2016 tangible net assets per share to 53.3 pence at 31 December 2017 comprises an increase of 3.1 pence due to the strong financial performance offset by a reduction of 3.2 pence for dividends paid during the year.
Under the previous recovery plans, deficit contributions were committed of £0.3 billion in 2018 and 2019 and c.£0.9 billion per annum thereafter. Under the new recovery plans, deficit contributions of £0.4 billion are payable in 2018, £0.6 billion in 2019, £0.8 billion in 2020 and £1.3 billion per annum from 2021 to 2024. The Group also continues to provide security to these pension schemes, with corporate guarantees and collateral pledged, while also making additional annual contributions for future service. All of the Group’s defined benefit pension schemes will be located within the ring-fenced bank and these revised contributions are included in the Group’s latest capital guidance.
Other matters In 2014 the FCA removed the requirement to publish quarterly interim management statements, however the Group has continued to publish detailed statements. Going forward, given the simple and more stable nature of the Group’s business, we will review the length and content of the Q1 and Q3 interim management statements.
Underlying basis In order to allow a comparison of the Group’s underlying performance, the results are adjusted for certain items including losses on redemption of the Enhanced Capital Notes and the volatility in the value of the embedded equity conversion feature; market volatility and asset sales, which includes the effects of certain asset sales, the volatility relating to the Group’s own debt and hedging arrangements and that arising in the insurance businesses and insurance gross up; the unwind of acquisition-related fair value adjustments and the amortisation of purchased intangible assets; restructuring costs, comprising severance related costs relating to the Simplification programme, the costs of implementing regulatory reform and ring-fencing, the rationalisation of the non-branch property portfolio and the integration of MBNA; and payment protection insurance and other conduct provisions.
5 Calculated in accordance with the UK Leverage Ratio Framework. Excludes qualifying central bank claims.
The table below shows the reconciliation between statutory net interest income and the underlying net interest income.
Tangible net assets per share pre dividend1 56.5p 54.8p 1 Pre final 2016 and interim 2017 dividends.
Return on tangible equity The Group’s underlying return on tangible equity was 15.6 per cent (2016: 14.1 per cent) and statutory return on tangible equity was 8.9 per cent, 2.3 percentage points higher year-on-year as a result of higher underlying profit and lower volatility and other items.
The sale marked the final step in the rescue and rejuvenation of Lloyds Banking Group. The combination of our strong financial performance and the progress we have made towards our strategic priorities has enabled over £21.2 billion to be returned to the government, more than repaying the amount that taxpayers invested.
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Experience across a range of sectors, including banking, asset and investment management, manufacturing and utilities
Lord Lupton was Deputy Chairman of Baring Brothers, co-founded the London office of Greenhill & Co., and was Chairman of Greenhill Europe until May 2017. He was previously a Trustee of the British Museum, Governor of Downe House School and a member of the International Advisory Board of Global Leadership Foundation. He became a Life Peer in October 2015 and is a former Treasurer of the Conservative Party. He served on the House of Lords Select Committee on Charities. He read Jurisprudence at Lincoln College, Oxford and is a qualified solicitor.
External appointments: Chairman of the Royal Northern College of Music and a member of the Board of Opera Ventures.
Passionate advocate of customers, the community, financial inclusion and the development of digital skills
Skills and experience: Extensive operational and financial expertise including strategic and financial planning and control
George joined the Board as an Executive Director in May 2012. Read his full biography on page 55.
Vim was appointed Group Director, Retail in September 2017. He joined the Group in June 2011 as Managing Director, Customer Products and was appointed to the Group Executive Committee in August 2013. Vim is also a UK Finance Board member, leading on Retail Banking. Previously Vim worked for over 12 years at Santander, in a range of roles in Corporate Strategy, Mergers & Acquisitions, the Life Division and most recently held the position of Director, Retail Products. Vim holds an Economics degree from the London School of Economics and is a member of the Institute of Chartered Accountants.
9. Janet Pope Chief of Staff and Group Director, Corporate Affairs, Responsible Business and Inclusion
Malcolm joined the Group as Company Secretary in November 2014. Read his full biography on page 55.
2 Nick Luff and Anthony Watson retired from the Company on 10 May and 11 May respectively.
In 2017 ‘deep dive’ sessions were held on the following topics: IT architecture strategy
Lloyds Bank Corporate Markets On 1 June, 2017, I was appointed a Non-Executive Director of Lloyds Banking Group and also as Chairman designate of the newly created ‘non ring-fenced bank subsidiary’, which is called Lloyds Bank Corporate Markets plc (‘LBCM’), subject to regulatory consent. Since then, we have been engaged in a complex, intense and detailed programme to meet all the conditions which the PRA and FCA have set in order to enable them to give us full authorisation to conduct the non ring-fenced activities of the Group, which are required as part of the ring-fencing regulations for UK banks.
Since receiving the bank’s conditional authorisation in July 2017, the Board has concentrated on creating a bespoke Governance Framework, including the vital Risk Management Framework, which is fit for purpose for LBCM, but also which is consistent and fits within the Group Governance Framework. In essence, LBCM must comply with each and every governance and risk requirement of the Group, but has the right and duty to manage the non ring-fenced bank within any narrower parameters set by the LBCM Board.
Overseeing strategy development The Board held two strategy offsite meetings during the year, giving the Directors the opportunity to focus solely on strategic issues. The first of these was held in June, and concentrated on the priorities of the business and the four strategic pillars which will help the Group progress towards the ‘Bank of the Future’. During the second half of the year, the priorities agreed at the first meeting were developed and the second meeting held in November provided an opportunity to discuss these further, along with financial plans.
António Horta-Osório reflected on the offsite meetings: The Board offsite meetings are especially important in providing an opportunity to focus on strategic issues, taking a view of the longer-term outlook for the Group.
There is a rigorous governance process to oversee design decision and integration execution, which ensures appropriate and timely updates and escalations up to Board level.
Independent Director and Chairman of the Remuneration Committee and institutional shareholders; – regular communications from the Group Chief Executive including correspondence with both retail and institutional shareholders; – investor meetings, roadshows and the AGM.
One of the deep dives held by the Board during the year focused on the Customer Journey. This provided the Board with an update on the progress made on the Customer Journey transformation and gave the Board the opportunity to enhance their understanding and to consider and feedback on future plans.
The Chairman of the Remuneration Committee held a meeting during the year with the unions.
A networking lunch was held, with Lord Blackwell presenting a keynote speech to 50 colleagues. This was followed by a Q&A session at the Group’s Speke office, after which he visited the Rotunda charity, an accredited training centre and community hub. The England and Wales Foundation has been supporting the charity since 2011. In 2017, Rotunda was awarded a further grant to support a pilot project which aims to demonstrate how a local community organisation can produce better services and outcomes for those with offender records and who are long term unemployed.
Members of the Board regularly meet with various organisations and institutions, including the Bank of England, the FCA, the PRA, CBI and accounting bodies.
Representatives of the regulator (both PRA and FCA) observed Board and Committee meetings in 2017.
The Chairman also attended Lloyds Bank Foundation for England and Wales Westminster Parliamentary Reception in November, where more than 100 representatives of small and local charities were joined by MPs, government ministers and representatives from the Group. The reception highlighted the work of small and local charities tackling disadvantage across England.
The Group has an established Speak Up Champion (Anita Frew, Deputy Chairman and Senior Independent Director), a dedicated team to handle disclosures (the Colleague Conduct Management Team (CCMT)) and a third party supplier (Expolink) which colleagues can contact anonymously. There is a clear Speak Up Policy that sets out its commitment to listening to colleague concerns and protecting those who raise concerns from any detriment. The Policy provides information on how concerns can be raised and to whom. It also confirms that the Group has zero tolerance of retaliation and provides assurance around confidentiality and anonymity where required.
Agenda set The Chairman holds monthly meetings to review the draft agenda and planner with the Company Secretary and Chief of Staff, as well as quarterly meetings with a wider group of central functions, to identify emerging issues.
The Board makes full use of technology such as video conferencing, teleconferencing, a Board portal and tablets/devices in its meeting arrangements. This leads to greater flexibility, security and efficiency in Board paper distribution and meeting arrangements.
Minutes and matters arising from the meeting are produced and circulated to the Directors for review and feedback.
The Board is supported by its Committees which make recommendations on matters delegated to them under the Corporate Governance Framework, in particular in relation to internal control risk, financial reporting, governance and remuneration issues.
The management of all Committees is in keeping with the basis on which meetings of the Board are managed. Each of the Committee’s structures facilitates open discussion and debate, with steps taken to ensure adequate time for members of the Committees to consider proposals which are put forward.
The Non-Executive Directors also receive regular updates from the Group Chief Executive’s office including a weekly email which gives context to current issues. In-depth and background materials are regularly provided via a designated area on the Board portal.
Highlights from the 2017 review The reviews concluded that the performance of the Board, its Committees, the Chairman and each of the Directors continues to be effective. All Directors demonstrated commitment to their roles.
Having been Board members for more than six years, a particularly rigorous review of Anita Frew’s and Sara Weller’s independence was undertaken. The Nomination and Governance Committee concluded they were both still sufficiently independent.
The actions from the 2016 Board Effectiveness Review have been recognised by Directors as helpful, particularly, the requirement that ‘links to strategy’ are identified in Board papers. Many think that more needs to be done to make Board papers more concise and focused and that less meeting time should be used for presentations.
Board papers and presentations to the Board The most common observation by Directors concerned the volume and content of information contained within Board papers, which was also linked to observations in favour of reducing the amount of time spent on presentations in Board meetings. Directors would like to receive more concise reports, highlighting important points and avoiding unnecessary volume and repetition, along with having fewer and shorter presentations.
Stakeholder feedback Directors believe that they receive good information on regulatory and customer feedback. Several Directors would like to receive more feedback from stakeholders other than regulators and customers, including shareholders and bond holders. The views of shareholders on remuneration matters are well represented at the Remuneration Committee.
Responsible Business Committee Terms of Reference A number of Directors suggested that the Terms of Reference of the Responsible Business Committee be reconsidered, now that it has been in operation for a full year, in order to avoid duplication of effort in areas covered by other Committees.
In establishing and reviewing the risk management and internal control systems, the Directors carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity, the likelihood of a risk event occurring and the costs of control. The process for identification, evaluation and management of the principal risks faced by the Group is integrated into the Group’s overall framework for risk governance. The Group is forward-looking in its risk identification processes to ensure emerging risks are identified. The risk identification, evaluation and management process also identifies whether the controls in place result in an acceptable level of risk. At Group level, a consolidated risk report and risk appetite dashboard are reviewed and regularly debated by the Group Risk Committee, Board Risk Committee and the Board to ensure that they are satisfied with the overall risk profile, risk accountabilities and mitigating actions. The report and dashboard provide a monthly view of the Group’s overall risk profile, key risks and management actions, together with performance against risk appetite and an assessment of emerging risks which could affect the Group’s performance over the life of the operating plan. Information regarding the main features of the internal control and risk management systems in relation to the financial reporting process is provided within the risk management report on pages 107–156. The Board concluded that the Group’s risk management arrangements are adequate to provide assurance that the risk management systems put in place are suitable with regard to the Group’s profile and strategy.
Control effectiveness review An annual control effectiveness review (‘CER’) is undertaken to evaluate the effectiveness of the Group’s control framework with regard to its material risks, and to ensure management actions are in place to address key gaps or weaknesses in the control framework. Business areas and head office functions assess the controls in place to address all material risk exposures across all risk types. The CER considers all material controls, including financial, operational and compliance controls. Senior management approve the CER findings which are reviewed and independently challenged by the Risk Division and Group Internal Audit and reported to the Board. Action plans are implemented to address any control deficiencies.
Two in-depth strategy away days held during the year; The programme of regular deep dives and discussion topics established in 2016 continues; All papers submitted to Board meetings include clear links to strategy.
Request from Directors to receive more concise reports with clearer signposting of the key issues.
The majority of the Board are independent Non-Executive Directors as shown on page 68.
There are no Directors whose time commitments are considered to be a matter for concern.
The Chairman personally ensures that on appointment each Director receives a full, formal and tailored induction. The emphasis is on ensuring the induction brings the business and its issues alive for the new Director, taking account of the specific role they have been appointed to fulfil and the skills/experience of the Director to date. An outline of the induction programme for Lord Lupton can be found on page 61.
Directors who take on or change roles during the year attend induction meetings in respect of those new roles.
All Directors have access to the services of the Company Secretary in relation to the discharge of their duties.
B7. Re-election of Directors At the 2017 AGM, all Directors were subject to re-election with the exception of Anthony Watson, who stepped down after the AGM and Nick Luff, who stepped down prior to the AGM. All Directors will be standing for re-election, and in the case of Lord Lupton, election by shareholders at the 2018 AGM.
The Audit Committee is responsible for the effectiveness of internal controls and the Risk Management Framework. Further information can be found on pages 73–76.
In addition to these changes, a thorough recruitment process was initiated and overseen by the Committee to select suitable candidates for the roles of Non-Executive Director of the Company and Chairman of Lloyds Bank Corporate Markets plc, who would provide the required skill set, experience and knowledge whilst complementing the existing Board of Lloyds Banking Group plc. As a result of this Lord Lupton was appointed to the Board in June 2017. Lord Lupton was chosen for this role as he brings not just his experience of UK banking and capital markets, but also his extensive corporate advisory experience which will be of particular value to our overall Commercial Banking activities.
During the year the Committee considered a number of issues relating to the Group’s governance arrangements, both internal and external. It assisted the Chairman in keeping the composition of the Board and its Committees under review and it leads the search process for nominations to the Board.
The Group aspires to the highest standards of corporate and internal governance in accordance with the expectations of the Board.
Formation of Lloyds Bank Corporate Markets plc, including the establishment of the Board and its governance structures.
1 Aside from assisting with senior recruitment, benchmarking and succession planning, JCA Group, Russell Reynolds, Egon Zehnder and YSC Consulting have no other connection to the Company.
Succession planning in detail Good succession planning contributes to the delivery of the Group’s strategy by ensuring the desired mix of skills and experience of Board members now and in the future. The Board is also committed to recognising and nurturing talent within executive and management levels across the Group to ensure the Group creates opportunities to develop current and future leaders. The role of succession planning in promoting diversity is recognised and the Group has a range of policies which promote the engagement of under-represented groups within the business in order to build a diverse talent pipeline.
Board Diversity Policy The Board Diversity Policy sets out the Board of Lloyds Banking Group’s approach to diversity and provides a high level indication of the Board’s approach to diversity in senior management roles which is governed in greater detail through the Group’s policies.
New appointments are made on merit, taking account of the specific skills and experience, independence and knowledge needed to ensure a rounded Board and the diversity benefits each candidate can bring to the overall Board composition.
Objectives for achieving Board diversity may be set on a regular basis. On gender diversity the Board has a specific target to maintain at least three female Board members and, recognising the emerging target for FTSE companies to move towards 33 per cent female representation, to take opportunities to increase the number of female Board members over time where that is consistent with other skills and diversity requirements.
Female representation on the Board is currently 25 per cent (based on three female directors and nine male directors).
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The external environment for the Bank remains challenging from both a regulation and competition perspective. As a result the Bank is in the process of transforming its business model and ways of working, primarily through increasing digitisation of all its activities. This creates both risk and opportunity for financial reporting and internal controls, and the Committee has already spent significant time considering the implications of this significant level of change.
During the year the Committee considered a number of issues relating to the Group’s financial reporting, these issues are summarised on the next page, including discussion of the conclusions the Committee reached, and the key factors considered by the Committee in reaching its conclusions.
During the course of the year, the Committee held separate sessions with the internal and external audit teams, without members of the executive management present. For details of how the Committee was run, see page 64.
Whilst the Committee’s membership comprises the Non-Executive Directors noted on page 58, all Non-Executive Directors may attend meetings as agreed with the Chairman of the Committee. The Group Financial Controller, Chief Internal Auditor, the external auditor, the Group Chief Executive, the Chief Financial Officer, the Chief Risk Officer and the Chief Operating Officer also attend meetings of the Committee as appropriate. Details of Committee membership and meeting attendance can be found on page 58.
During the year the Group provided a further £1,650 million to cover further operating costs and redress, including the impact of the August 2019 industry deadline. To 31 December 2017, the Group has provided a total of £18,675 million in respect of PPI mis-selling redress and administration costs.
The Committee continued to challenge the assumptions made by management to determine the provision for PPI redress and administration costs. The Committee oversaw continued use of sensitivities reflecting the uncertainty that remains around the ultimate cost of PPI redress.
The Committee was satisfied that the provisions for other conduct matters were appropriate. The disclosures relating to other conduct provisions are set out in note 37: ‘Other provisions’ on page 213 of the financial statements.
The Committee considered the recognition of deferred tax assets, in particular the forecast taxable profits based on the Group’s operating plan, the split of these forecasts by legal entity and the Group’s long-term financial and strategic plans. The assessment also included the impact of the changes in Group structure that will be made to comply with ring-fencing requirements.
Determining the value of the VIF asset and insurance liabilities is judgemental and requires economic and non-economic actuarial assumptions.
The Committee was satisfied that the value of the VIF asset and insurance liabilities were appropriate. The VIF asset at 31 December 2017 was £4,839 million (31 December 2016: £5,042 million). The disclosures are set out in note 24: ‘Value of in-force business’ on page 198 and note 31: ‘Liabilities arising from insurance contracts and participating investment contracts’ on page 202 of the financial statements. The liability arising from insurance contracts and participating investment contracts at 31 December 2017 was £103,413 million (2017: £94,390 million).
Other significant issues The following matters were also considered by the Committee during the year: Risk management and internal control systems Full details of the internal control and risk management systems in relation to the financial reporting process are given within the risk management section on pages 107–156. Specific matters that the Committee considered for the year included: the effectiveness of systems for internal control, financial reporting and risk management; the extent of the work undertaken by the Finance teams across the Group and consideration of the resources to ensure that the control environment continued to operate effectively; and the major findings of internal investigations into control weaknesses, fraud or misconduct and management’s response along with any control deficiencies identified through the assessment of the effectiveness of the internal controls over financial reporting under the US Sarbanes-Oxley Act.
Group Internal Audit In monitoring the activity, role and effectiveness of the internal audit function and their audit programme the Committee: monitored the effectiveness of Group Internal Audit and their audit programme through quarterly reports on the activities undertaken and a report from the Quality Assurance function within Group Internal Audit; approved the annual audit plan and budget, including resource and reviewed progress against the plan through the year; oversaw the performance of an External Quality Assessment in line with CIIA standards and reviewed the findings and recommendations; oversaw the process for the appointment of the Chief Internal Auditor; and considered the major findings of significant internal audits, and management’s response.
The Committee continues to focus on ensuring the Group has an effective framework for managing operational risk, including enhancing the use of key risk and control indicators and scenarios. The Committee has considered a number of reports in relation to the operational risk framework, cyber, IT resiliency, user access management and Cloud computing.
The Committee reviewed key metrics for the motor finance, credit cards, personal loan and personal current account overdraft portfolios to understand the risks associated with persistent indebtedness.
The macroeconomic and market context was reviewed to ensure understanding of the key drivers of increased consumer lending; this included an examination of the overall market growth in consumer lending, changes in indebtedness, a comparison to pre-crisis levels and a review of the growth rate of each consumer credit product within the portfolio. The key macroeconomic drivers of credit losses including the specific impact of debt to income were also reviewed. Underwriting standards, credit quality and the programme of ongoing improvements to strengthen indebtedness and affordability controls were assessed to ensure that risk appetite for the consumer lending portfolios remains appropriate.
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Data risk The Committee continues to focus on the Group’s risks associated with data management, including governance, control and privacy.
Conclusion: The Group continues to enhance the controls required to manage the data environment effectively, whilst the Committee ensures the necessary risk oversight of the delivery of required regulatory changes relating to data.
In reviewing the UK Secured portfolio, specific consideration was given to the risks associated with maturing residential interest only mortgages. The Committee reviewed repayment rates, in-life and past-term customer engagement and treatment strategies, credit risk performance including debt-to-value ratios, and the Group’s risk appetite for future originations.
The UK payments landscape is experiencing a period of unprecedented change. Open banking, mandated by the Competition Markets Authority, will allow TPPs to offer new services through Application Process Interface technology, providing customers with alternative means of access to their bank accounts (governed by explicit customer consent). PSD2 classifies these TPPs as Account Information Service Providers and Payment Initiation Service Providers. The aim of these changes is to promote competition and enhance customer choice. The changes create a number of key risks including (but not limited to) security risk, data risk and fraud risk as sensitive and confidential customer information is shared more widely than current practice. The Group is alert to the potential new vectors for fraud and risks to consumers flowing from these channels, particularly in relation to data security. Additional controls and mitigations have been developed. The Committee received updates throughout 2017 through the consolidated risk report regarding the requirements of the legislation and how the Group is planning to achieve compliance.
Conclusion: Initial legislative changes required compliance in January 2018 and further regulatory requirements will come into force by the third quarter of 2019 (when strong customer authentication becomes mandatory). The Committee will continue to review progress throughout 2018 as further developments are delivered by the Group-wide programme.
Committee composition, attendance at meetings and effectiveness review Alan Dickinson, Chairman of the Board Risk Committee, attended all meetings. Representatives from Group Internal Audit and the Chief Operating Office are invited to meetings as appropriate.
Representatives of the regulators attended meetings as observers in January (FCA) and July 2017 (PRA).
During the year, the Committee met its key objectives and carried out its responsibilities effectively, as confirmed by the annual effectiveness review. The Committee will consider the output from the 2017 effectiveness review and whether any changes need to be made to the way it works.
Details of the committee membership and meeting attendance can be found on page 58.
Dear Shareholders I am pleased to report on the Responsible Business Committee’s (RBC) second full year of operation in 2017.
We also reviewed work being done to tackle disadvantage in communities across the UK, through our four Charitable Foundations, our partnership with Mental Health UK, and our support for vulnerable customers, including those struggling with low financial skills or illness.
I would like to thank the many thousands of colleagues who have dedicated their time and energy to supporting these activities and I very much hope you enjoy and find it interesting to read about the Committee’s work.
The Committee also considered the following topics: a regular progress report from the Chairman of the executive level Group Customer First Committee (see page 114) on the approach to customers, conduct and culture; a report from Group Sourcing on working in a responsible way with the Group’s suppliers; an oversight of the processes which provide reassurance that customer rectifications are managed responsibly; the benchmarking of trust amongst stakeholders and customers against financial services companies and acknowledged leaders in other industries; the outputs from colleague surveys in relation to the Group’s role as a responsible business; and the draft Modern Slavery Statement, before recommending to the Board for approval.
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Board composition changes Changes to the composition of the Board since 1 January 2017 up to the date of this report are shown in the table below: Joined the Board Left the Board
Directors’ indemnities The Directors of the Company, including the former Directors who retired during the year, have entered into individual deeds of indemnity with the Company which constituted ‘qualifying third party indemnity provisions’ for the purposes of the Companies Act 2006. The deeds indemnify the Directors to the maximum extent permitted by law and remain in force. The deeds were in force during the whole of the financial year or from the date of appointment in respect of the Director appointed in 2017. In addition, the Group had appropriate Directors’ and Officers’ liability insurance cover in place throughout 2017.
The Company did not repurchase any of its shares during the year. (2016: none).
Stuart Sinclair is Senior Independent Directors at QBE Insurance (Europe) Limited, a general insurance and reinsurance company. Lord Lupton is a senior advisor to Greenhill Europe, an investment bank focused on providing financial advice on significant mergers, acquisitions, restructurings, financings and capital raising to corporations, partnerships, institutions and governments. The Board has recognised that potential conflicts may arise as a result of these positions. The Board has authorised the potential conflicts and requires Mr. Sinclair and Lord Lupton to recuse themselves from discussions, should the need arise.
Harris Associates L.P. 3,607,058,7583 5.01% 1 Percentage provided was correct at the date of notification.
Post balance sheet events The Board has announced its intention to implement a share buyback programme, details of which are from a post balance sheet events perspective provided in note 53, ‘Events since the balance sheet date’, on page 252.
Going concern The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the Directors have considered a number of key dependencies which are set out in the risk management section under principal risks and uncertainties: funding and liquidity on page 36 and pages 144–149 and capital position on pages 137–144. Additionally, the Directors have considered the capital and funding projections of the Company and Group. Accordingly, the Directors conclude that the Company and the Group have adequate resources to continue in operational existence for a period of at least 12 months from the date of the approval of the financial statements and therefore it is appropriate to continue to adopt the going concern basis in preparing the accounts.
The divisional teams develop their operating plans based on the Board’s objectives ensuring that they are in line with the Group’s strategy and risk appetite.
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Information relevant to the assessment can be found in the following sections of the annual report and accounts: The Group’s principal activities, business and operating models and strategic direction are described in the strategic report on pages 1–37; Emerging risks are disclosed on page 110; The principal risks, including the Group’s objectives, policies and processes for managing credit, capital, liquidity and funding, are provided in the risk management section on pages 116–156; and
Based upon this assessment, the Directors have a reasonable expectation that the Company and the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years to 31 December 2020.
Resolutions concerning the re-appointment of PricewaterhouseCoopers LLP as auditor and authorising the Audit Committee to set its remuneration will be proposed at the AGM.
Malcolm Wood Company Secretary 20 February 2018 Lloyds Banking Group plc Registered in Scotland Company number SC95000
In my last report, I announced that all colleagues in the Group had received an award of Colleague Group Ownership Shares, with the aim of achieving 100 per cent share ownership among colleagues and building a colleague-wide long-term ownership culture. I am pleased to confirm that this award will be repeated in 2018.
Taking into consideration stakeholders’ views The Committee remains acutely aware that the topic of remuneration, alongside corporate culture and working practices, continues to generate a high level of focus and that the role of the Committee is to ensure that the interests of colleagues, shareholders and other key stakeholders are considered fairly, and in the context of wider societal expectations.
The Long-Term Incentive Plan (LTIP) awards made in 2015 are vesting at 66.3 per cent, reflecting the Group’s strong performance since 2015, balanced against uncertainty in the economic and political environment. In particular, this has impacted negatively on absolute share price performance, resulting in no vesting for the Total Shareholder Return component.
2018 Annual General Meeting I look forward to welcoming you to the 2018 AGM and hope you will support the resolution relating to remuneration.
Pay linked to performance on the basis of both ‘what’ was achieved and ‘how’ it was delivered.
The total GPS award as a percentage of underlying profit before tax and GPS allocation decreased from 4.8 per cent in 2016 to 4.7 per cent in 2017. This compares favourably to shareholder return from dividend payments and share buyback over the same period which increased to 36 per cent of underlying profit. The GPS allocation for 2017 remains significantly lower than the Group’s funding limit of 10 per cent of underlying profit.
Malus/clawback provisions and holding period apply in line with regulatory requirements and market practice.
The charts below summarise the Executive Directors’ remuneration for the 2016 and 2017 performance years.
Juan Colombás Chief Operating Officer (formerly Chief Risk Officer)3 of max of max of max of max 1 2017 Group Performance Share, awarded in March 2018.
António Horta-Osório George Culmer Juan Colombás Totals 1 The LTIP vesting at 66.3 per cent and dividend equivalents awarded in shares were confirmed by the Remuneration Committee at its meeting on 19 February 2018. The total number of shares vesting were 3,035,880 and 346,087 shares delivered in respect of dividend equivalents for António Horta-Osório, 1,642,361 shares vesting and 187,227 shares delivered in respect of dividend equivalents for George Culmer and 1,619,551 shares vesting and 184,627 shares delivered in respect of dividend equivalents for Juan Colombás. The average share price between 1 October 2017 and 31 December 2017 (66.75 pence) has been used to indicate the value. The shares were awarded in 2015 based on a share price of 79.93 pence. LTIP and dividend equivalent figures for 2016 have been adjusted to reflect the share price on the date of vesting (67.51 pence) instead of the average price (58.30 pence) reported in the 2016 report.
The Committee determined that the GPS outcome would be £414.7 million, based on the following performance outcomes.
3 The underlying profit of £7,867 million has been adjusted (reduced) by the £126 million incremental difference between the PVA at year-end 2015 to year-end 2016.
The Group has significantly improved the operation or service of its key customer journeys.
Maintain a strong control, governance and compliance structure in line with the Risk Management Framework
The Group has strongly managed its key risk measures to ensure the safe guarding of the Group.
The Group has successfully managed to improve its operations and strategic processes through simplification initiatives and delivered above target savings.
Key mobilisation milestones are not on track for the separation of the commercial and personal banking customers in line with the regulatory non ring-fenced Bank requirements.
2 Where the performance assessment is qualitative the position against threshold and maximum (Under and Top) is shown. Where internal dashboards are used in reaching the assessment of performance, the Committee is provided with underlying data points and additional commentary to inform its judgement.
Largest digital bank in the UK, with over 13.4 million digitally active customers, providing best-in-class customer experience (number 1 rated mobile app since 2015).
CET1 capital generation of 245 basis points, with CET1 ratio of 15.5 per cent pre capital return, 14.4 per cent pre-buyback, comfortably above requirements.
Development and maintenance of a high cadre of risk professionals, with employee engagement scores above the high performing norms and strong retention of talent.
GCE (salary increase effective 1 January 2018) 2 8.41 8.7 1 Reflects the increase in base salary from 1 January 2017 against which the award is determined.
External appointments António Horta-Osório – During the year ended 31 December 2017, the GCE served as a Non-Executive Director of Exor, Fundação Champalimaud, Stichting INPAR and Sociedade Francisco Manuel dos Santos for which he received fees of £323,688 in total.
Dyfrig John (retired May 2016) – 49 – 49 1 Benefits: car allowance (£12,000).
Notes: J E Daniels served as GCE until 28 February 2011; António Horta-Osório was appointed GCE from 1 March 2011. J E Daniels declined to take a bonus in 2009 and António Horta-Osório declined to take a bonus in 2011.
5 In addition, Nick Prettejohn held 400 6.475% preference shares at 1 January 2017 and 31 December 2017.
Shareholding requirement (audited) From 1 January 2017 the shareholding requirement has been focused on base salary only (previously: base salary plus fixed share award) to provide greater transparency in the measurement of the shareholding requirements. This resulted in an increase in the percentage required as a multiple of salary. The new requirements are 350 per cent of base salary for the GCE and 250 per cent of base salary for the other Executive Directors.
4 Awards (in the form of conditional rights to free shares) in 2017 were made over shares with a value of 300 per cent of reference salary for António Horta-Osório (5,318,685 shares with a face value of £3,660,000); 275 per cent for George Culmer (2,993,565 shares with a face value of £2,059,992); and 275 per cent for Juan Colombás (2,951,987 shares with a face value of £2,031,381). The share price used to calculate face value is the average price over the five days prior to grant (27 February to 3 March 2017), which was 68.814 pence. This was the average share price used to determine the number of shares awarded. Performance conditions for this award are set out in the table below.
The Group has applied a total pay budget of 2.7 per cent including additional funding to ensure a minimum pay award of £600 for eligible colleagues. Salary increases for the Group Chief Executive (GCE) and the Chief Financial Officer (CFO) are set below the budget for the wider colleague population, at 2 per cent. Juan Colombás took on a new role of Chief Operating Officer (COO) in September 2017 and accordingly it is proposed he receive a salary increase of 3.4 per cent to reflect the fact that the COO role is larger than his previous role as the Chief Risk Officer.
The level of pension allowances is unchanged from 2017: GCE: 50 per cent of base salary less flexible benefits allowance CFO: 25 per cent of base salary COO: 25 per cent of base salary
The maximum Group Performance Share opportunity will be unchanged from 2017 at 140 per cent of base salary for the GCE and 100 per cent of base salary for other Executive Directors. The threshold is set at 20 per cent below the Group’s underlying profit target.
Set relative to 2019 targets Threshold: 3.52 complaints per 1,000 accounts Maximum: 3.18 complaints per 1,000 accounts 10%
Awards will be subject to a three-year performance period with vesting between the third and seventh anniversary of award, on a pro-rata basis. Any shares released are subject to a further holding period in line with regulatory requirements and market practice.
The Committee may consider the application of malus and clawback as outlined in the performance adjustment section below.
The annual Non-Executive Director fees were increased by 2 per cent, in line with the base salary increase awarded to the senior management of the Group. These changes took effect from 1 January 2018.
Remuneration Committee Committee composition and purpose The Committee comprises Non-Executive Directors from a wide background to provide a balanced and independent view on remuneration matters. Anthony Watson retired as an independent NonExecutive Director and as a member of the Committee on 11 May 2017. For details of full membership and attendance at meetings, please see page 58.
– Approval of the 2017 Group Performance Share plan design, methodology and performance measures
Stakeholders: – Feedback from the Chairman on her meeting with the PRA and shareholders
Other remuneration matters: – Approval of the 2016 Directors’ Remuneration Report for publication within the annual report and Form 20-F
During the year, Mercer attended Committee meetings upon invitation and provided advice and support in areas such as market and best practice, regulatory and governance developments, drafting the remuneration report, and relevant comparator groups for pay and performance.
António Horta-Osório (Group Chief Executive), Simon Davies (Chief People, Legal and Strategy Officer) until July 2017 and Jen Tippin (Group People and Productivity Director) thereafter, Paul Hucknall (People Director, Centres of Excellence), Matt Sinnott (Group Reward Director), Chris Evans (Director, Reward Policy and Partnering), Stuart Woodward (Head of Reward Regulation and Governance) and Letitia Smith (Group Director, Conduct, Compliance & Operational Risk) provided guidance to the Committee (other than for their own remuneration).
Operation Executive Directors may participate in these plans in line with HMRC guidelines currently prevailing (where relevant), on the same basis as other eligible employees.
The Remuneration Committee’s terms of reference are available from the Company Secretary and are displayed on the Group’s website, www.lloydsbankinggroup.com. These terms are reviewed each year to ensure compliance with the remuneration regulations and were last updated in November 2017.
Further detail can be found in the DRR. In particular, see pages 89–90, 92, 96–97 and 101–102 of the DRR.
Base salaries are reviewed annually, taking into account individual performance and market information. Further information on base salaries can be found on page 100 of the DRR.
Further information on fixed share awards can be found on page 100 of the DRR.
Applies to: Non-Executive Directors (NEDs) Senior Management, Executive Directors, members/attendees of the GEC and their respective direct reports Approved Persons performing SIFs and/or all colleagues performing a Senior Management Function Other MRTs Non-MRTs
Further information on the GOS plan can be found on pages 97 and 101–102 of the DRR.
Further information on deferral, vesting and performance adjustment can be found in the DRR on pages 92, 97 and 102.
All other MRTs and non-MRTs: 25 per cent - 100 per cent of the aggregate of base salary and fixed share award depending on grade.
2 Values for LTIP awards based on an expected value of 50 per cent of maximum value.
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Each risk category is described and managed using the following standard headings: definition, exposures, measurement, mitigation and monitoring.
Risk appetite is documented in a Group risk appetite statement which is reviewed by the Board Risk Committee and approved annually by the Board. The Group level metrics are supported by more detailed sub Board functional and divisional risk appetite metrics.
The Board Risk Committee is responsible for overseeing the development, implementation and maintenance of the Group’s overall Risk Management
Conduct – the Group’s product design and sales practices ensure that products are transparent and meet customer needs.
Market – the Group has robust controls in place to manage the Group’s inherent market risk and does not engage in any proprietary trading, reflecting the customer focused nature of the Group’s activities.
The Group’s risk appetite, principles, policies, procedures, controls and reporting are regularly reviewed and updated where needed to ensure they remain fully in line with regulations, law, corporate governance and industry good-practice.
The Group has a Disclosure Committee which assists the Group Chief Executive and Chief Financial Officer in fulfilling their disclosure responsibilities under relevant listing and other regulatory and legal requirements. In addition, the Audit Committee reviews the quality and acceptability of the Group’s financial disclosures. For further information on the Audit Committee’s responsibilities relating to financial reporting see pages 73–76.
4 Threshold is presented on a fully loaded CRD IV basis. Threshold risk-weighted assets reflect the proportion of significant investments and deferred tax assets that are permitted to be risk-weighted instead of deducted from common equity tier 1 (CET1) capital. Significant investments primarily arise from the investment in the Group’s Insurance business.
Risk appetite: – Assess the results of the stress test against the Group’s risk appetite to ensure the Group is managed within its risk parameters. – Inform the setting of risk appetite by assessing the underlying risks under stress conditions.
The RMF applies to every area of the business and covers all types of risk. It is reviewed, updated and approved by the Board at least annually to reflect any changes in the nature of our business and external regulations, law, corporate governance and industry best practice. In 2017 the annual update was also informed by the findings of an independent external review. The RMF provides the Group with an effective mechanism for developing and embedding risk policies and risk management strategies which are aligned with the risks faced by its businesses. It also seeks to facilitate effective communication on these matters across the Group.
Role of the Board and senior management Key responsibilities of the Board and senior management include: – setting risk appetite and approval of the RMF; – approval of Group-wide risk principles and policies; – the cascade of delegated authority (for example to Board sub-committees and the Group Chief Executive); and – effective oversight of risk management consistent with risk appetite.
Risk appetite Risk appetite is defined within the Group as ‘the amount and type of risk that the Group is prepared to seek, accept or tolerate’ (see the Group’s approach to risk’, pages 108–109).
Three Lines of Defence model The RMF is implemented through a ‘three lines of defence’ model which defines clear responsibilities and accountabilities and ensures effective independent oversight and assurance activities take place covering key decisions.
Risk culture Supporting the formal frameworks of the RMF is the underlying culture, or shared behaviours and values, which sets out in clear terms what constitutes good behaviour and good practice. In order to effectively manage risk across the organisation, the functions encompassed within the three lines of defence have a clear understanding of risk appetite, business strategy and an understanding of (and commitment to) the role they play in delivering it. A number of levers are used to reinforce the risk culture, including tone from the top, clear accountabilities, effective communication and challenge and an appropriately aligned performance incentive and structure.
Group Customer First Committee Provides a Group-wide perspective on the progress of Group’s, divisions’ and functions’ implementation of initiatives which enhance the delivery of customer outcomes and customer trust, and sets and promotes the appropriate tone from the top to fulfil the Group’s vision to become the best bank for customers and help Britain prosper.
Responsible Business Management Committee Recommends and implements the strategy and plans to deliver the Group’s aspiration to be a leader in responsible business as part of the objective of helping Britain prosper.
The Group Risk Committee is supported through escalation and ongoing reporting by business area risk committees, cross-divisional committees addressing specific matters of Group-wide significance and the following second line of defence Risk committees which ensure effective oversight of risk management: Credit Risk Committees Responsible for the development and effectiveness of the relevant credit risk management framework, clear description of the Group’s credit risk appetite, setting of credit policy, and compliance with regulatory credit requirements.
Responsible for monitoring breaches, material events and risk issues, and conducting deep dive assessments on specific conduct, compliance or operational risk subjects to inform corrective action along with the sharing of information and best practice.
Group Financial Risk Committee Responsible for reviewing, challenging and recommending to GEC, GRC and GALCO, the Group Individual Liquidity Adequacy Assessment (ILAAP) and Internal Capital Adequacy Assessment Process (ICAAP) submissions, Pillar 3 Disclosures, the Group recovery and resolution plans, and the annual stress testing of the Group’s operating plan, Prudential Regulation Authority (PRA) and European Banking Authority (EBA) stress tests, and any other analysis as required.
Credit risk exposures in the Insurance and Wealth division largely result from holding bond and loan assets, together with some related swaps, in the shareholder funds (including the annuity portfolio) and from exposure to reinsurers.
Loans and advances, contingent liabilities, commitments, debt securities and derivatives also expose the Group to refinance risk. Refinance risk is the possibility that an outstanding exposure cannot be repaid at its contractual maturity date. If the Group does not wish to refinance the exposure then there is refinance risk if the obligor is unable to repay by securing alternative finance. This may be because the borrower is in financial difficulty, because the terms required to refinance are outside acceptable appetite at the time or the customer is unable to refinance externally, due to a lack of market liquidity. Refinance risk exposures are managed in accordance with the Group’s existing credit risk policies, processes and controls, and are not considered to be material given the Group’s prudent and through the cycle credit risk appetite. Where heightened refinance risk exists (such as in Commercial Banking’s Business Support Unit (BSU) or the run-off book) exposures are minimised through intensive account management and are impaired and identified as forborne where appropriate.
Assessment of obligor quality for both retail and commercial counterparties is largely based on the outcomes of credit risk PD
rating models. The Group operates a number of different regulatory rating models, typically developed internally using statistical analysis and management judgement – retail models rely more on the former, commercial models include more of the latter, especially in the larger corporate and more specialised lending portfolios. Internal data is supplemented with external data, where appropriate.
Use of internally modelled outputs in the regulatory capital process is specific to the calculation approach being used. Under the Retail Internal Ratings Based (IRB) approach the rating system PD assessment is used alongside calculated exposure at default and loss given default values in order to derive risk-weighted assets (RWAs) and regulatory Expected Loss (EL). The Foundation IRB approach requires the use of the rating system PD alongside regulatory prescribed exposure at default and loss given default values. Slotting portfolios do not use loss given default whilst Standardised requires the use of regulatory refined exposure at default in a defined RWA calculation.
Prudent, through the cycle credit principles, risk policies and appetite statements: The independent Risk division sets out the credit principles, credit risk policies and credit risk appetite statements. Principles and policies are reviewed regularly, and any changes are subject to an approval process. Policies and risk appetite statements, where appropriate, are supported by procedures, which provide a disciplined and focused benchmark for credit decisions. Risk oversight teams monitor credit performance trends, review and challenge exceptions to planned outcomes, and test the adequacy of credit risk infrastructure and governance processes throughout the Group, which includes tracking portfolio performance against an agreed set of credit risk appetite tolerances. Oversight and reviews are also undertaken by independent credit risk oversight functions and Group Internal Audit.
Limitations on concentration risk: There are portfolio controls on certain industries, sectors and product lines to reflect risk appetite as well as individual, customer and bank limit guidelines. Credit policies and appetite statements are aligned to the Group’s risk appetite and restrict exposure to higher risk countries and potentially vulnerable sectors and asset classes. Note 17 on page 193 provides an analysis of loans and advances to customers by industry (for commercial customers) and product (for retail customers). Exposures are monitored to prevent both an excessive concentration of risk and single name concentrations. These concentration risk controls are not necessarily in the form of a
Risk m anagem ent maximum limit on exposure, but may instead require new business in concentrated sectors to fulfil additional minimum policy and/or guideline requirements. The Group’s largest exposures are regularly reported to the Board Risk Committee and reported in accordance with regulatory reporting requirements.
Robust country risk management: The Board sets a broad maximum country risk appetite. Within this, the Executive Credit Approval Committee approves the Group country risk framework and sovereign limits on an annual basis. Risk based country appetite for all countries is set within the independent Risk division, taking into account economic, financial, political and social factors as well as the approved business and strategic plans of the Group.
Frequent and robust credit risk oversight and assurance: Undertaken by independent credit risk oversight functions operating within Retail Credit Risk and Commercial Banking Risk which are part of the Group’s second line of defence. Their primary objective is to provide reasonable and independent oversight that credit risk is being managed with appropriate and effective controls.
Group Internal Audit provides assurance to the Board Audit Committee on the effectiveness of credit risk management controls across the Group’s activities. The team carries out independent risk based control audits across the full credit lifecycle.
Collateral held as security for financial assets other than loans and advances is determined by the nature of the underlying exposure. Debt securities, including treasury and other bills, are generally unsecured, with the exception of asset-backed securities and similar instruments such as covered bonds, which are secured by portfolios of financial assets. Collateral is generally not held against loans and advances to financial institutions, however 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 financial counterparties are typically collateralised under a Credit Support Annex (CSA) in conjunction with the International Swaps and Derivatives Association (ISDA) Master Agreement. Derivative transactions with non-financial customers are not usually supported by a CSA.
No collateral is held in respect of retail credit card or unsecured personal lending. For non-mortgage retail lending to small businesses, collateral may include second charges over residential property and the assignment of life cover.
Forbearance identification, classification and measurement The Group classifies Retail accounts as forborne at the time a customer in financial difficulty is granted a concession. Accounts are classified as forborne only for the period of time which the exposure is known to be, or may still be, in financial difficulty. Where temporary forbearance is granted, exit criteria are applied to include accounts until they are known to no longer be in financial difficulty. Where the treatment involves a permanent change to the contractual basis of the customer’s account such as a capitalisation of arrears or term extension, the Group may classify the balance as forborne for a period of 24 months, after which no distinction is made between these accounts and others where no change has been made.
Commercial customers Early identification, control and monitoring are key to supporting the customer and protecting the Group. With the exception of small exposures in SME all non-retail exposures in the Commercial Banking and Run-off divisions are reviewed at least annually (and more frequently where required) by the independent Risk division. As part of the Group’s established credit risk classification system, every exposure in the good book is categorised as either ‘good’ or ‘watchlist’. The term ‘watchlist’ refers to cases which require closer monitoring on the good book and are split between ‘special mention’ and ‘special review’ (the latter being the more serious of the two). This complements the Group’s risk rating tools and is designed to identify and highlight portfolio levels of asset quality as well as individual problem credits. All watchlist names are reviewed by the business and Risk division regularly, and the classification is updated if required. This process seeks to ensure that relationship managers act promptly to identify, and highlight to senior management, those customers who have greater potential to become higher risk in the future.
A detailed assessment is undertaken for cases in BSU to assist in reducing and minimising risk exposure and to also highlight potential strategic options. A range of information is required to fully appraise and understand the customer’s business and cashflow (and therefore debt serviceability).
This may involve the Group, in addition to using its own internal sector experts, engaging professional advisers to perform asset valuations, strategic reviews and where applicable, independent business reviews. The assessment may also involve: – critically assessing a customer’s ability to effectively manage the business in a distressed situation where a turnaround needs to be delivered; – analysis of market sector factors, i.e. products, customers, suppliers, pricing and margin issues; – performance review of operational areas that should be considered in terms of current effectiveness and efficiency and scope for improvements; – financial analysis to model plans and factor in potential sensitivities, vulnerabilities and upsides; and – determining the most appropriate corporate and capital structure suitable for the work out strategy concerned.
The Group’s treatment of loan renegotiations is included in the impairment policy in note 2(H) on page 176 Income statement information set out in the credit risk tables is on an underlying basis (see page 43).
The Group recognises that forbearance alone is not necessarily an indicator of impaired status, but it is a trigger for the review of the customer’s credit profile. If there is any concern over the future cash flows and/or the Group incurring a loss, then forborne loans will be classified as impaired in accordance with the Group’s impairment policy. All impaired loans, including recoveries portfolios, are currently reported as forborne.
Unimpaired forborne assets are included in calculating the overall collective unidentified impairment provision, which uses the historical observed default rate and loss emergence period of the relevant portfolio as a whole as part of its calculation.
Exit from forbearance Where forbearance has been granted a customer will remain treated and recorded as forborne until the customer evidences acceptable performance over a period of time. This period will depend on a number of factors such as whether the customer is trading in line with its revised plan, it is operating within the new terms and conditions (including observation to revised covenants and contractual payments), its financial performance is stable or improving and there are no undue concerns over its future performance. As a minimum, this cure period is currently expected to be at least 12 months following a forbearance event. Customers curing are managed according to their overriding credit risk classification categorisation; this could be in BSU, Run-off or in the mainstream good book.
– Net impairment release of £15 million in 2017 (2016: £104 million charge) reflects an improvement in the level of impaired loans in the portfolio. – Impairment provisions as a percentage of impaired loans increased to 37.1 per cent (31 December 2016: 36.6 per cent), reflecting the continued prudent approach to provisioning.
The stock of repossessions increased to 777 cases at 31 December 2017 compared to 678 cases at 31 December 2016.
New residential lending 65.0 61.9 n/a 64.4 1 Average loan to value is calculated as total loans and advances as a percentage of the total indexed collateral of these loans and advances.
Forborne loans Forborne loans and advances on the principal Retail portfolios reduced by £601 million in 2017 to £1,951 million, driven by improvements on the Secured portfolio. As a percentage of loans and advances, forborne loans and advances on these portfolios improved to 0.6 per cent (31 December 2016: 0.8 per cent).
Secured forborne loans and advances reduced by £668 million in 2017 to £1,428 million, primarily due to a reduction in recapitalisations (with historically higher levels of cases exiting the two year probation period) and a reduction in the level of reduced payment arrangements.
2 Figures for 2017 include improved customer views and the reclassification of some treatments.
Classified as forborne during the year 975 110 34 50 82 1,251 1 Exchange and other movements for 2017 reflects the acquisition of MBNA within Credit cards, and improved customer views and the reclassification of some treatments across the Loans and UK Motor Finance portfolios.
Forborne loans Commercial Banking forbearance At 31 December 2017, £2,374 million (31 December 2016: £2,663 million) of total loans and advances were forborne of which £1,927 million (31 December 2016: £2,197 million) were impaired. Impairment provisions as a percentage of forborne loans and advances increased from 31.1 per cent at 31 December 2016 to 35.0 per cent at 31 December 2017.
Identified indirect exposure information, where available, is also taken into account when setting limits and determining credit risk appetite for individual counterparties. This forms part of the Group’s credit analysis undertaken at least annually for counterparty and sector reviews, with interim updates performed as necessary. Interim updates would usually be triggered by specific credit events such as rating downgrades, sovereign events or other developments such as spread widening. Examples of indirect risk which have been identified, where information is available, are: European banking groups with lending and other exposures to certain Eurozone countries; corporate customers with operations or significant trade in certain European jurisdictions; major travel operators known to operate in certain Eurozone countries; and international banks with custodian operations based in certain European locations.
Derivative balances are included within exposures to financial institutions or corporates, as appropriate, at fair value adjusted for master netting agreements at obligor level and net of cash collateral in line with legal agreements. Exposures in respect of reverse repurchase agreements are included on a gross International Financial Reporting Standards (IFRS) basis and are disclosed based on the counterparty rather than the collateral (repos and stock lending are excluded); reverse repurchase exposures are not, therefore, reduced as a result of collateral held. Exposures to central clearing counterparties are shown net.
1 Excludes reverse repurchase exposure to Institutional funds domiciled in Ireland secured by UK gilts of £16,323 million (2016: £14,506 million) on a gross basis.
At 31 December 2016 1 Excludes reverse repurchase exposure to Institutional funds secured by UK gilts of £2,644 million (2016: £2,679 million) on a gross basis.
Mitigation We have taken a number of steps and have outlined below the following key components: – The Board establishes a Group-wide risk appetite and metrics for regulatory and legal risk; – Group policies and procedures set out the principles and key controls that should apply across the business which are aligned to the Group risk appetite. Mandated policies and processes require appropriate control frameworks, management information, standards and colleague training to be implemented to identify and manage regulatory and legal risk; – Business units assess and implement policy and regulatory requirements and establish local control, processes and procedures to ensure governance and compliance; – Material risks and issues are escalated to divisional and then Group-level bodies which challenge and support the business on its management of them; – Business units regularly produce management information to assist in the identification of issues and test management controls are working effectively; – Risk division and Legal provide oversight and proactive support and constructive challenge to the business in identifying and managing regulatory and legal issues; – Risk division will conduct thematic reviews of regulatory compliance across businesses and divisions where appropriate; and – Business units with the support of divisional and Group-level bodies conduct ongoing horizon scanning to identify and address changes in regulatory and legal requirements.
The Group’s divisions are each exposed to different types and levels of climate-related risk in their operations. For example, the general insurance division regularly uses weather, climate and environmental models and data to assess its insurance risk from covered perils such as windstorm and flood. A team of specialist scientists are employed within underwriting to do this work and they also regularly monitor the state of climate science to assess the need to include its potential impacts within pricing and solvency. In response to the Task Force on Climate-related Financial Disclosure recommendations, in 2018 we will commence a systematic review of climate-related risks and opportunities across the Group’s core divisions.
Project-Related Corporate loans and Bridge loans. The Group has also been a signatory to the UN Principles for Responsible Investment (UNPRI) since 2012, which incorporate ESG (environmental, social and governance risk) considerations in asset management. Scottish Widows is responsible for the annual UNPRI reporting process.
Within Commercial Banking, an electronic Environmental Risk Screening Tool is the primary mechanism for assessing environmental risk for lending transactions. This system provides screening of location specific and sector based risks that may be present in a transaction. Where a risk is identified, the transaction is referred to the Group’s expert in-house environmental risk team for further review and assessment, as outlined below. Where required, the Group’s panel of environmental consultants provide additional expert support.
As a result, there is a risk that certain aspects of the Group’s current or legacy business may be determined by the Financial Conduct Authority, other regulatory bodies or the courts as not being conducted in accordance with applicable laws or regulations, or in a manner that fails to deliver fair and reasonable customer treatment.
Measurement To articulate its conduct risk appetite, the Group has sought more granularity through the use of suitable conduct risk metrics and tolerances that indicate where it may potentially be operating outside its conduct appetite.
Each of the tolerances for the metrics are agreed for the individual product or service and are tracked monthly. At a consolidated level these metrics are part of the Board approved risk appetite. The Group is also evolving its approach to measurements supporting customer vulnerability and customer journeys.
The Group continues to prioritise activity designed to reinforce good conduct in its engagement with the markets in which it operates, with the Market Conduct Steering Committee leading read-across activity of industry issues for LBG consideration. Further training has been delivered for colleagues, and the focus on enhanced procedures, and the enhancement of preventative and detective controls continues – including the Group’s trade surveillance and continuous surveillance capability.
A number of these risks could increase where there is a reliance on third party suppliers to provide services to the Group or its customers.
Table 1.28: Operational risk events by risk category (losses greater than or equal to £10,000), excluding PPI
Monitoring Monitoring and reporting of operational risk is undertaken at Board, Group and divisional risk committees. Each committee monitors key risks, control effectiveness, key risk and control indicators, events, operational losses, risk appetite metrics and the results of independent testing conducted by Risk and/or Group Internal Audit.
Longevity and persistency are key risks within the life and pensions business. Longevity risk arises from the annuity portfolios where policyholders’ future cashflows are guaranteed at retirement and increases in life expectancy, beyond current assumptions, will increase the cost of annuities. Longevity risk exposures are expected to increase with the Insurance business growth in the bulk annuity market. Persistency assumptions are set to give a best estimate, however customer behaviour may result in increased cancellations or cessation of contributions.
Monitoring Insurance underwriting risks in the Insurance business are monitored by Insurance senior executive committees and ultimately the Insurance Board. Significant risks from the Insurance business and the defined benefit pension schemes are reviewed by the Group Executive and Group Risk Committees and/or Board.
This takes into account, amongst other things: – the Pillar 2A ICG set by the PRA, reflecting their point in time estimate, which may change over time, of the amount of capital that is needed in relation to risks not covered by Pillar 1. During the year the PRA updated the Group’s ICG representing an increase from 4.5 per cent to 5.4 per cent of risk-weighted assets at 31 December 2017, of which 3.0 per cent has to be met by CET1 capital. – the PRA Buffer, which they set taking into account the results of the PRA stress tests and other information, as well as outputs from the Group’s internal stress tests. The PRA requires the PRA Buffer itself to remain confidential between the Group and the PRA. – future regulatory developments, including the introduction of the Systemic Risk Buffer in early 2019 and the CCyB on UK exposures during the course of 2018.
The Board also gives due consideration to the distribution of surplus capital through the use of special dividends or share buybacks. Surplus capital represents the return of capital over and above the Board's view of the current level of capital required to grow the business, meet regulatory requirements and cover uncertainties. The amount of required capital may vary from time to time depending on circumstances and by its nature there can be no guarantee that any surplus capital distribution will be appropriate in future years.
Lloyds Banking Group plc acts as a holding company which also issues capital and other securities to capitalise and fund the activities of the Group. The profitability of the holding company, and consequently its ability to sustain dividend payments, is therefore dependent upon the continued receipt of dividends from its subsidiaries (representing both banking and insurance). A number of Group subsidiaries, principally those with banking and insurance activities, are also subject to regulatory capital requirements. These require entities to maintain minimum amounts of capital related to their size and risk. The principal operating subsidiary is Lloyds Bank plc which, at 31 December 2017, had a consolidated CET1 capital ratio of 15.8 per cent (31 December 2016: 15.1 per cent). The Group actively manages the capital of its subsidiaries, which includes monitoring the regulatory capital ratios for its banking and insurance subsidiaries against approved risk appetite limits. It operates a formal capital management policy which requires all subsidiary entities to remit any surplus capital to their parent companies.
Overall the Group’s CET1 ratio has strengthened to 15.5 per cent on a pro forma basis before ordinary dividends and the share buyback. After ordinary dividends the Group’s CET1 ratio was 14.4 per cent on a pro forma basis. In addition the Board intends to implement a share buyback programme of up to £1 billion, equivalent to up to 1.4 pence per share. The buyback will impact the Group’s capital position in 2018 and is expected to reduce CET1 capital by c.50 basis points. Allowing for this at 31 December 2017 the pro forma CET1 ratio would be 13.9 per cent (31 December 2016: 13.0 per cent pro forma after dividends and adjusting for MBNA).
The Bank of England will review the calibration of MREL in 2020 before setting final end-state requirements to be met from 2022. This review will take into consideration any changes to the capital framework, including the finalisation of Basel III.
Excess of expected losses over impairment provisions and value adjustments (498) (602) (498) (602)
The movements in the transitional CET1, AT1, tier 2 and total capital positions in the period are provided below.
2 Includes the accrual for the 2017 full year ordinary dividend and the reversal of the accrual for the 2016 full year ordinary and special dividends which were paid during the year.
Tier 2 capital resources have reduced by £1,212 million in the year largely reflecting the amortisation of dated tier 2 instruments and foreign exchange movements on subordinated debt, partly offset by the transitioning of grandfathered AT1 instruments to tier 2.
Movements in risk levels (market risk only) – – – – (445) – (445)
Credit risk-weighted assets reductions of £2.1 billion were driven by the following key movements: – Asset size saw a reduction of £2.4 billion due to continued active portfolio management, partly offset by targeted growth in key customer segments. – Model update reductions of £4.4 billion were mainly due to PRA approved model changes within the mortgage and unsecured retail portfolios. – Methodology and policy reductions of £0.4 billion were principally the result of further capital efficient securitisation activity.
– Acquisitions and disposals increased by £5.6 billion and were primarily driven by the acquisition of MBNA, partly offset by the disposal of the Group’s interest in a strategic equity investment. – Sterling foreign exchange movements, principally with the Euro and US Dollar, contributed to an overall reduction in credit risk-weighted assets of £0.9 billion.
Counterparty credit risk and CVA risk-weighted assets reductions of £1.7 billion were mainly driven by foreign exchange movements, reductions in position levels, updates to the calculation methodology following clarification of the regulatory approach and other movements.
Insurance businesses The business transacted by the insurance companies within the Group comprises both life insurance business and General Insurance business. Life insurance business comprises unit-linked business, non-profit business and with-profits business.
Scottish Widows Limited (SW Ltd) holds the only with-profit funds managed by the Group. Each insurance company within the Group is regulated by the PRA.
Exposure Liquidity exposure represents the potential stressed outflows in any future period less expected inflows. The Group considers liquidity from both an internal and a regulatory perspective.
Measurement Liquidity risk is managed through a series of measures, tests and reports that are primarily based on contractual maturities with behavioural overlays as appropriate. Note 51 on page 240 sets out an analysis of assets and liabilities by relevant maturity grouping. Additionally the Group undertakes quantitative and qualitative analysis of behavioural aspects of its assets and liabilities in order to reflect their expected behaviour.
The Group carries out internal stress testing of its liquidity and potential cash flow mismatch position over both short (up to one month) and longer term horizons against a range of scenarios forming an important part of the internal risk appetite. The scenarios and assumptions are reviewed at least annually to ensure that they continue to be relevant to the nature of the business including reflecting emerging horizon risks to the Group, such as the UK exit from the EU. For further information on the Group’s 2017 liquidity stress testing results refer to page 148 .
The Group maintains a Contingency Funding Plan which is designed to identify emerging liquidity concerns at an early stage, so that mitigating actions can be taken to avoid a more serious crisis developing. Contingency Funding Plan invocation and escalation processes are based on analysis of five major quantitative and qualitative components, comprising assessment of: early warning indicators; prudential and regulatory liquidity risk limits and triggers; stress testing results; event and systemic indicators; and market intelligence.
Funding and liquidity management in 2017 The Group has maintained its strong funding and liquidity position with a loan to deposit ratio of 110 per cent at 31 December 2017 (109 per cent as at 31 December 2016).
During 2017, the Group drew down a further £15.4 billion under the Bank of England’s Term Funding Scheme (TFS), now fully utilised at £20 billion as at 31 December 2017. The amount outstanding under the Bank of England’s Funding for Lending Scheme (FLS) is £25.1 billion as at 31 December 2017 (£30.1 billion as at 31 December 2016).
The Group’s liquidity surplus continues to exceed the regulatory minimum and internal risk appetite, with a Liquidity Coverage Ratio of 127 per cent as at 31 December 2017 based on the EU Delegated Act.
1 Excludes balances relating to margins of £2.1 billion (31 December 2016: £3.2 billion) and settlement accounts of £1.5 billion (31 December 2016: £1.8 billion).
4 Cash and balances at central banks are combined in the Group’s balance sheet.
1 Medium-term notes include funding from the National Loan Guarantee Scheme (31 December 2016: £1.4 billion), which matured during 2017.
Loans and receivables: Loans and advances to banks – – 32 32 – 528 1,825 24,517 26,870 26,902
Available-for-sale financial assets 154 – 24,824 24,978 – 31,017 31 498 31,546 56,524 1 Assets regarded by the Group to be readily realisable in the normal course of business, to secure funding, meet collateral needs, or be sold to reduce potential future funding requirements, and are not subject to any restrictions on their use for these purposes.
3 The following assets are classified as unencumbered – cannot be used: assets held within the Group’s Insurance businesses which are generally held to either back liabilities to policyholders or to support the solvency of the Insurance subsidiaries; assets held within consolidated limited liability partnerships which provide security for the Group’s obligations to its pension schemes; assets pledged to facilitate the use of intra-day payment and settlement systems; and reverse repos and derivatives balance sheet ledger items.
Mitigation The Group’s Risk Management Framework (RMF) establishes robust arrangements for risk governance, in particular by: – Defining individual and collective accountabilities for risk management, risk oversight and risk assurance through a three lines of defence model which supports the discharge of responsibilities to customers, shareholders and regulators; – Outlining governance arrangements which articulate the enterprise-wide approach to risk management; and – Supporting a consistent approach to Group-wide behaviour and risk decision making through a Group policy framework which helps everyone understand their responsibilities by clearly articulating and communicating rules, standards, boundaries and risk appetite measures which can be controlled, enforced and monitored.
Balance sheet linkages The information provided in table 1.43 aims to facilitate the understanding of linkages between banking, trading, and insurance balance sheet items and the positions disclosed in the Group’s market risk disclosures.
Trading and other financial liabilities at fair value through profit or loss 50,877 43,062 7,815 – Interest rate, foreign exchange
Other liabilities 28,805 – 8,345 20,460 Interest rate 1 Includes £6.9 billion of lower risk loans within the banking book sold by Commercial Banking and Retail to Insurance to manage market risk arising from annuitant liabilities within the Insurance business.
Interest rate risk Yield curve risk in the Group’s divisional portfolios, and in the Group’s capital and funding activities arises from the different repricing characteristics of the Group’s non-trading assets, liabilities (see loans and advances to customers and customer deposits in table 1.43) and off balance sheet positions.
Reported sensitivities are not necessarily predictive of future performance as they do not capture additional management actions that would likely be taken in response to an immediate, large, movement in interest rates. The actions could reduce the net interest income sensitivity and help mitigate any adverse impacts or they may result in changes to total income that are not captured in the net interest income.
Client facing activity and associated hedges 86.1 (54.0) 370.5 (186.9) 176.8 (286.1) 724.9 (408.0)
The reduction in the net interest income sensitivity reflects the growth in the structural hedge throughout 2017 and the accompanying reduction in income volatility in future years.
Mitigation The Group’s policy is to optimise reward whilst managing its market risk exposures within the risk appetite defined by the Board. The Group Market Risk Policy and procedures outlines the hedging process, and the centralisation of risk from divisions into GCT, e.g. via the transfer pricing framework. GCT is responsible for managing the centralised risk and does this through natural offsets of matching assets and liabilities, and appropriate hedging activity of the residual exposures, subject to the authorisation and mandate of GALCO within the Board risk appetite. Derivative desks in CB Markets will then externalise the hedges to the market. The Group has hedge accounting solutions in place, which reduce the accounting volatility arising from the Group’s economic hedging activities by utilising both LIBOR based and bank base rate assets.
The largest residual risk exposure arises from balances that are deemed to be insensitive to changes in market rates (including current accounts, a portion of variable rate deposits and investable equity), and is managed through the Group’s structural hedge. Consistent with the Group’s strategy to deliver stable returns, GALCO seeks to minimise large reinvestment risk, and to smooth earnings over a range of investment tenors. The structural hedge consists of longer term fixed rate assets or interest rate swaps and the amount and duration of the hedging activity is reviewed regularly by GALCO.
Whilst the bank faces margin compression in the current low rate environment, its exposure to pipeline and prepayment risk are not considered material, and are hedged in line with expected customer behaviour. These are appropriately monitored and controlled through divisional Asset and Liability Committees (ALCOs).
Measurement Management of the schemes’ assets is the responsibility of the Trustees of the schemes who are responsible for setting the investment strategy and for agreeing funding requirements with the Group. Should a funding deficit arise, the Group will be liable for meeting it, and as part of a triennial valuation process will agree with the Trustees a funding strategy to eliminate the deficit over an appropriate period.
All trading activities are performed within the Commercial Banking division. While the trading positions taken are generally small, any extreme moves in the main risk factors and other related risk factors could cause significant losses in the trading book depending on the positions at the time. The average 95 per cent 1-day trading VaR (Value at Risk: diversified across risk factors) was £0.6 million for 31 December 2017 compared to £1.3 million for 31 December 2016. The decrease in exposure was mainly due to high VaR during the first half of 2016 caused by overstatement of the interest rate risk by the VaR model. Improvements to more accurately reflect the risk were implemented in June 2016 which reduced the VaR significantly over the second half of 2016 and over 2017.
Mitigation The model risk management framework, established by and with continued oversight from an independent team in the Risk division, provides the foundation for managing and mitigating Model Risk within the Group. Accountability is cascaded from the Board and senior management via the Group Risk Management Framework.
Report on the financial statements Opinion In our opinion, Lloyds Banking Group plc’s consolidated financial statements and parent company financial statements (the ‘financial statements’): – give a true and fair view of the state of the Group’s and of the parent company’s affairs as at 31 December 2017 and of the Group’s profit and the Group’s and the parent company’s cash flows for the year then ended; – have been properly prepared in accordance with IFRSs as adopted by the European Union and, as regards the parent company’s financial statements, as applied in accordance with the provisions of the Companies Act 2006; and – have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.
Other than those disclosed in note 11 to the financial statements, we have provided no non-audit services to the Group or the parent company in the period from 1 January 2017 to 31 December 2017.
We have selected total assets as an appropriate benchmark for parent company materiality. Profit based benchmarks are not considered appropriate for parent company materiality as the Group is not required to disclose a parent company income statement. Parent company overall materiality calculated based on the total assets benchmark exceeds the Group overall materiality level. Therefore parent company overall materiality is restricted to equal the Group overall materiality level (£350m).
For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between £60 million and £120 million.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £20 million for the Group and parent company audits (2016: £20 million) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons.
individually financially significant were within our audit scope, with the risk of material misstatement mitigated through audit procedures including testing of entity level controls, information technology general controls and Group and component level analytical review procedures.
Impairment provisions relating to loans and advances in the Retail division are determined on a collective basis, with the use of impairment models. These models are used to calculate impairment provisions based on key assumptions for example loss emergence period, probability of default, loss given default (including possession propensity and forced sale discounts for mortgages) and valuation of recoveries. These are estimated based on historical experience and other data as available at the reporting date. Management also applies overlays where they believe the calculated assumptions based on historical experience are not appropriate, either due to emerging trends or the models not capturing the risks in the loan portfolio. An example of this is an overlay to the impairment model output for the UK mortgage portfolio relating to the current low interest rate environment. These overlays require significant judgement and are therefore a main area of focus.
For the collective unidentified impaired provision, we tested the completeness and accuracy of the underlying loan information used in the impairment models by agreeing details to the Group’s source systems as well as re-performing the calculation of the modelled provision. For the key inputs and assumptions in the model, we obtained and tested objective evidence that supported their appropriateness. For overlays to the modelled output, we challenged management to provide objective evidence that the overlays were appropriate.
– calculating and reviewing conduct provisions, including governance processes, challenge of key assumptions and approval of provisions.
We performed the following procedures around the measurement of provisions recognised: The majority of our detailed audit work was on the significant conduct provisions in relation to past sales of PPI policies, arrears handling activities, packaged bank accounts and insurance products in the German branch of Clerical Medical Investment Group Ltd (now Scottish Widows Ltd). We also examined other conduct provisions which are individually less material.
For those assumptions based on historic information, we challenged whether this was appropriate for future experience and challenged the appropriateness of any adjustments made by management. We independently performed sensitivity analysis on the key assumptions.
We performed the following procedures around the completeness of provisions recognised: We met with Divisional and Group management to understand the emerging and potential issues that they had identified. We independently assessed emerging and potential areas where exposures might have arisen based upon our knowledge and experience of emerging industry issues and the regulatory environment. We used this to challenge the completeness of the issues identified by management and whether a provision was required.
We reviewed the Group’s correspondence with the Financial Conduct Authority and Prudential Regulation Authority, discussing the content of any correspondence considered to be pertinent to our audit with management. We met on a trilateral basis with the Prudential Regulation Authority and the Chair of the Audit Committee. We also met on a bilateral basis with each regulator.
A number of subjective assumptions about future experience contribute as key inputs into the valuation of the Group’s insurance contracts.
For credit default and illiquidity premium we assessed the appropriateness of the methodology, including modifications made, against our knowledge and experience of the regulatory requirements and of the industry. We assessed the methodology with reference to wider market practice and prevailing economic conditions. We challenged whether the actual asset mix used in the illiquidity premium calculation remained an appropriate proxy to a market consistent portfolio by comparing the proportion of illiquid assets held to those held by other similar companies based on our understanding of the market and the most recent public information for other similar companies.
We understood and tested key controls over the completeness and accuracy of data extracted and supplied to the Group’s actuary, which is used in the valuation of the Group’s defined benefit obligations. We tested the controls for determining the actuarial assumptions and the approval of those assumptions by senior management. We found the key controls were designed, implemented and operated effectively, and therefore we determined that we could place reliance on these controls for the purposes of our audit.
We understood the nature of the significant transactions and reviewed the accounting papers produced in the year including any transaction documents or contracts to evaluate and assess the impact of the transaction on the Group.
Separately, the standard introduces new requirements around the classification and measurement of financial instruments, potentially resulting in fair value differences.
Based on the evidence obtained, we found that the methodologies, modelled assumptions, data used within the models, resulting outputs and overlays to modelled outputs are appropriate.
We have nothing to report having performed a review of the directors’ statement that they have carried out a robust assessment of the principal risks facing the Group and statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only consisted of making inquiries and considering the directors’ process supporting their statements; checking that the statements are in alignment with the relevant provisions of the UK Corporate Governance Code (the ‘Code’); and considering whether the statements are consistent with the knowledge and understanding of the Group and parent company and their environment obtained in the course of the audit.
Directors’ remuneration In our opinion, the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. (CA06)
In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Diluted earnings per share 14 4.3p 2.9p 0.8p 1 The profit after tax attributable to other equity holders of £415 million (2016: £412 million; 2015: £394 million) is partly offset in reserves by a tax credit attributable to ordinary shareholders of £102 million (2016: £91 million; 2015: £80 million).
Items that will not subsequently be reclassified to profit or loss: Post-retirement defined benefit scheme remeasurements: Gains and losses attributable to own credit risk: Gains (losses) before tax (55) – –
Trading and other financial assets at fair value through profit or loss 15 162,878 151,174
Trading and other financial liabilities at fair value through profit or loss 29 50,877 54,504
Value of employee services: Share option schemes – – 82 82 – – 82
Goodwill is recognised as an asset at cost and is tested at least annually for impairment. If an impairment is identified the carrying value of the goodwill is written down immediately through the income statement and is not subsequently reversed. At the date of disposal of a subsidiary, the carrying value of attributable goodwill is included in the calculation of the profit or loss on disposal.
(1) Financial instruments at fair value through profit or loss Financial instruments are classified at fair value through profit or loss where they are trading securities or where they are designated at fair value through profit or loss by management. Derivatives are carried at fair value (see (F) below).
Derivatives embedded in financial instruments and insurance contracts (unless the embedded derivative is itself an insurance contract) are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income statement. In accordance with IFRS 4 Insurance Contracts, a policyholder’s option to surrender an insurance contract for a fixed amount is not treated as an embedded derivative.
(J) Leases (1) As lessee The leases entered into by the Group are primarily operating leases. Operating lease rentals payable are charged to the income statement on a straight-line basis over the period of the lease.
Scheme assets are included at their fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension liability. The Group’s income statement charge includes the current service cost of providing pension benefits, past service costs, net interest expense (income), and plan administration costs that are not deducted from the return on plan assets. Past service costs, which represents the change in the present value of the defined benefit obligation resulting from a plan amendment or curtailment, are recognised when the plan amendment or curtailment occurs. Net interest expense (income) is calculated by applying the discount rate at the beginning of the period to the net defined benefit liability or asset.
Deferred tax is recognised on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the balance sheet. Deferred tax is calculated using tax rates and laws that have been enacted or substantively enacted at the balance sheet date, and which are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
(M) Insurance The Group undertakes both life insurance and general insurance business. Insurance and participating investment contracts are accounted for under IFRS 4 Insurance Contracts, which permits (with certain exceptions) the continuation of accounting practices for measuring insurance and participating investment contracts that applied prior to the adoption of IFRS. The Group, therefore, continues to account for these products using UK GAAP and UK established practice.
Products sold by the life insurance business are classified into three categories: – Insurance contracts – these contracts transfer significant insurance risk and may also transfer financial risk. The Group defines significant insurance risk as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured event were not to occur. These contracts may or may not include discretionary participation features. – Investment contracts containing a discretionary participation feature (participating investment contracts) – these contracts do not transfer significant insurance risk, but contain a contractual right which gives the holder the right to receive, in addition to the guaranteed benefits, further additional discretionary benefits or bonuses that are likely to be a significant proportion of the total contractual benefits and the amount and timing of which is at the discretion of the Group, within the constraints of the terms and conditions of the instrument and based upon the performance of specified assets.
– Non-participating investment contracts – these contracts do not transfer significant insurance risk or contain a discretionary participation feature.
(4) Reinsurance Contracts entered into by the Group with reinsurers under which the Group is compensated for benefits payable on one or more contracts issued by the Group are recognised as assets arising from reinsurance contracts held. Where the underlying contracts issued by the Group are classified as insurance contracts and the reinsurance contract transfers significant insurance risk on those contracts to the reinsurer, the assets arising from reinsurance contracts held are classified as insurance contracts. Where the underlying contracts issued by the Group are classified as non-participating investment contracts and
Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income and accumulated in a separate component of equity together with exchange differences arising from the translation of borrowings and other currency instruments designated as hedges of such investments (see (F)(3) above). On disposal or liquidation of a foreign operation, the cumulative amount of exchange differences relating to that foreign operation are reclassified from equity and included in determining the profit or loss arising on disposal or liquidation.
3 Net of profits on disposal of operating lease assets of £32 million (2016: £58 million; 2015: £66 million).
5 Comprises market movements on the ECN embedded derivative (loss of £101 million); the effects of asset sales (gain of £54 million); volatile items (loss of £107 million ); liability management (loss of £28 million); the amortisation of purchased intangibles (£342 million); restructuring costs (£170 million); TSB costs (£745 million); and the fair value unwind and other items (loss of £192 million).
Interest and similar income: Loans and advances to customers 3.16 3.32 3.50 14,712 15,190 16,256
Interest and similar expense: Deposits from banks, excluding liabilities under sale and repurchase transactions 1.18 0.65 0.41 (80) (68) (43)
Customer deposits, excluding liabilities under sale and repurchase transactions 0.49 0.69 0.87 (1,722) (2,520) (3,299)
Fees and commissions which are an integral part of the effective interest rate form part of net interest income shown in note 5. Fees and commissions relating to instruments that are held at fair value through profit or loss are included within net trading income shown in note 7.
Gains less losses on disposal of available-for-sale financial assets (note 41) 446 575 51
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows: Total life insurance gross claims and surrenders (8,898) (8,617) (7,983)
Depreciation and amortisation: Depreciation of property, plant and equipment (note 26) 1,944 1,761 1,534
Audits of the unconsolidated Open Ended Investment Companies managed by the Group 0.3 0.4 0.4
Acquisition due diligence and other work performed in respect of potential venture capital investments 0.1 1.0 1.2
Note 13: Taxation (A) Analysis of tax expense for the year 2017 £m 2016 £m 2015 £m
(B) Factors affecting the tax expense for the year The UK corporation tax rate for the year was 19.25 per cent (2016: 20 per cent; 2015: 20.25 per cent). An explanation of the relationship between tax expense and accounting profit is set out below: 2017 £m 2016 £m 2015 £m
Note 16: Derivative financial instruments The fair values and notional amounts of derivative instruments are set out in the following table: Contract/ notional amount £m
Exchange rate contracts: Interest rate contracts: Total derivative assets/liabilities – trading and other 2,905,020 23,953 24,511 3,394,500 33,426 32,960
Hedged forecast cash flows expected to occur: Hedged forecast cash flows affect profit or loss: £m £m £m
The net investment in finance leases represents amounts recoverable as follows: 2017 £m 2016 £m
(A) Asset-backed conduits In addition to the structured entities discussed in note 18, which are used for securitisation and covered bond programmes, the Group sponsors an active asset-backed conduit, Cancara, which invests in client receivables and debt securities. The total consolidated exposure of Cancara at 31 December 2017 was £6,049 million (2016: £6,840 million), comprising £5,939 million of loans and advances (2016: £6,684 million) and £110 million of debt securities (2016: £156 million).
(B) Consolidated collective investment vehicles and limited partnerships The assets of the Insurance business held in consolidated collective investment vehicles, such as Open-Ended Investment Companies and limited partnerships, are not directly available for use by the Group. However, the Group’s investment in the majority of these collective investment vehicles is readily realisable. As at 31 December 2017, the total carrying value of these consolidated collective investment vehicle assets and liabilities held by the Group was £68,124 million (2016: £75,669 million).
Generally, the impairment trigger used within the impairment calculation for a loan, or group of loans, is when they reach a pre-defined level of delinquency or where the customer is bankrupt. Loans where the Group provides arrangements that forgive a portion of interest or principal are also deemed to be impaired and loans that are originated to refinance currently impaired assets are also defined as impaired.
The table below sets out the fair value of the identifiable assets and liabilities acquired. The Group has finalised the acquisition accounting in the second half of 2017 and this has resulted in a reduction in other assets of £23 million, an increase in deferred tax assets of £4 million and an increase in goodwill of £19 million compared to the provisional amounts previously reported.
The post-acquisition total income of MBNA, which is included in the Group statutory consolidated income statement for the year ended 31 December 2017, is £436 million. MBNA also contributed profit before tax of £146 million for the same period.
The recoverable amount of the goodwill relating to Scottish Widows has been based on a value-in-use calculation. The calculation uses pre-tax projections of future cash flows based upon budgets and plans approved by management covering a five-year period, the related run-off of existing business in force and a discount rate of 9 per cent. The budgets and plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry information. New business cash flows beyond the five-year period have been extrapolated using a steady 2 per cent growth rate which does not exceed the long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.
The goodwill relating to the acquisition of MBNA has been allocated to the Group’s Cards business as the Cards business is expected to benefit from the synergies of the acquisition. The recoverable amount of this goodwill has been based on a value-in-use calculation using pre-tax cash flow projections based on financial budgets and plans approved by management covering a five-year period and a discount rate of 14 per cent. The cash flows beyond the five year period are extrapolated using a growth rate of 0.5 per cent which does not exceed the long-term average growth rates for the markets in which Cards participates. Management believes that any reasonably possible change in the key assumptions above would not cause the recoverable amount of the Cards business to fall below the balance sheet carrying value.
A market-consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique calibrated to be consistent with the market price of relevant options at each valuation date. Further information on options and guarantees can be found in note 31.
The gross value of in-force business asset in the consolidated balance sheet is as follows: 2017 £m 2016 £m
Movement in the value of in-force business taken to income statement (note 9) (165) 472
Included within brands above are assets of £380 million (31 December 2016: £380 million) that have been determined to have indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These brands are well established financial services brands and there are no indications that they should not have an indefinite useful life.
Cost or valuation: Expenditure on investment properties (see below) 344 – – – 344
Capital expenditure in respect of investment properties which had been contracted for but not recognised in the financial statements was £21 million (2016: £65 million).
Total future minimum sub-lease income of £71 million at 31 December 2017 (£109 million at 31 December 2016) is expected to be received under non-cancellable sub-leases of the Group’s premises.
Note 29: Trading and other financial liabilities at fair value through profit or loss 2017 £m 2016 £m
Trading and other financial liabilities at fair value through profit or loss 50,877 54,504
Change in liabilities charged to the income statement (note 10) 9,378 (311) 9,067 108 9,175
Key changes in assumptions A detailed review of the Group’s assumptions in 2017 resulted in the following key impacts on profit before tax: – Change in persistency assumptions (£237 million decrease).
– Change in the assumption in respect of current and future mortality and morbidity rates (£289 million increase). – Change in expenses assumptions (£142 million decrease).
Note 32: Life insurance sensitivity analysis Critical accounting estimates and judgements Elements of the valuations of liabilities arising from insurance contracts and participating investment contracts require assumptions to be made about future investment returns, future mortality rates and future policyholder behaviour and are subject to significant management judgement and estimation uncertainty. The methodology used to value these liabilities and the key assumptions that have been made in determining their carrying value are set out in note 31.
Widening of credit default spreads on corporate bonds8 0.25% addition (235) (195) (200) (166)
The total amount recognised in the balance sheet relates to: 2017 £m 2016 £m
Pension schemes Defined benefit schemes Critical accounting estimates and judgements The accounting valuation of the Group’s defined benefit pension schemes’ liabilities requires management to make a number of assumptions. The key areas of estimation uncertainty are the discount rate applied to future cash flows and the expected lifetime of the schemes’ members. The discount rate is required to be set with reference to market yields at the end of the reporting period on high quality corporate bonds in the currency and with a term consistent with the defined benefit pension schemes’ obligations. The average duration of the schemes’ obligations is approximately 19 years. The market for bonds with a similar duration is illiquid and, as a result, significant management judgement is required to determine an appropriate yield curve on which to base the discount rate. The cost of the benefits payable by the schemes will also depend upon the life expectancy of the members. The Group considers latest market practice and actual experience in determining the appropriate assumptions for both current mortality expectations and the rate of future mortality improvement. It is uncertain whether this rate of improvement will be sustained going forward and, as a result, actual experience may differ from current expectations. The effect on the net accounting surplus or deficit and on the pension charge in the Group’s income statement of changes to the principal actuarial assumptions is set out in (iii) below.
The Group operates a number of funded and unfunded pension arrangements, the majority, including the three most significant schemes, are funded schemes in the UK. All these schemes are operated as separate legal entities under trust law by the trustees and are in compliance with the Pensions Act 2004. The responsibility for the governance of the Group’s funded defined benefit pension schemes lies with the Pension Trustees. All of the Group’s funded UK defined benefit pension schemes are managed by a Trustee Board (the Trustee) whose role is to ensure that their Scheme is administered in accordance with the Scheme rules and relevant legislation, and to safeguard the assets in the best interests of all members and beneficiaries. The Trustee is solely responsible for setting investment policy and for agreeing funding requirements with the employer through the funding valuation process. The Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the Scheme’s regulations.
During 2009, the Group made one-off contributions to the Lloyds Bank Pension Scheme No 1 and Lloyds Bank Pension Scheme No 2 in the form of interests in limited liability partnerships for each of the two schemes which hold assets to provide security for the Group’s obligations to the two schemes. At 31 December 2017, the limited liability partnerships held assets of approximately £5.5 billion. The limited liability partnerships are consolidated fully in the Group’s balance sheet.
The last funding valuations of other Group schemes were carried out on a number of different dates. In order to report the position under IAS 19 as at 31 December 2017 the most recent valuation results for all schemes have been updated by qualified independent actuaries. The main differences between the funding and IAS 19 valuations are different and more prudent approach to setting the discount rate and more conservative longevity assumptions used in the funding valuations.
The expense recognised in the income statement for the year ended 31 December comprises: 2017 £m 2016 £m 2015 £m
Life expectancy for member aged 60, on the valuation date: Life expectancy for member aged 60, 15 years after the valuation date: The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 at 31 December 2017 is assumed to live for, on average, 27.9 years for a male and 29.5 years for a female. In practice there will be much variation between individual members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire in 15 years’ time at age 60.
Expected life expectancy of members: Increase of one year 44 42 1,404 1,213 1 At 31 December 2017, the assumed rate of RPI inflation is 3.20 per cent and CPI inflation 2.15 per cent (2016: RPI 3.23 per cent and CPI 2.18 per cent).
2 At 31 December 2017, the assumed discount rate is 2.59 per cent (2016: 2.76 per cent).
There was no change in the methods and assumptions used in preparing the sensitivity analysis from the prior year.
The statutory position reflects the deferred tax assets and liabilities as disclosed in the consolidated balance sheet and takes account of the inability to offset assets and liabilities where there is no legally enforceable right of offset. The tax disclosure of deferred tax assets and liabilities ties to the amounts outlined in the tables below which splits the deferred tax assets and liabilities by type.
The UK corporation tax rate will reduce from 19 per cent to 17 per cent on 1 April 2020. The Group measures its deferred tax assets and liabilities at the value expected to be recoverable or payable in future periods, and re-measures them at each reporting date based on the most recent estimates of utilisation or settlement, including the impact of bank surcharge where appropriate. The deferred tax impact of this re-measurement in 2017 is a charge of £9 million in the income statement and a credit of £22 million in other comprehensive income.
Movements in deferred tax liabilities and assets (before taking into consideration the offsetting of balances within the same taxing jurisdiction) can be summarised as follows: Deferred tax assets Tax losses £m
Critical accounting estimates and judgments Estimation of income taxes includes the assessment of recoverability of deferred tax assets. Deferred tax assets are only recognised to the extent they are considered more likely than not to be recoverable based on existing tax laws and forecasts of future taxable profits against which the underlying tax deductions can be utilised.
In addition, no deferred tax asset is recognised in respect of unrelieved foreign tax credits of £46 million (2016: £46 million), as there are no expected future taxable profits against which the credits can be utilised. These credits can be carried forward indefinitely.
No deferred tax has been recognised in respect of foreign trade losses where it is not more likely than not that we will be able to utilise them in future periods. Of the asset not recognised, £35 million (2016: £63 million) relates to losses that will expire if not used within 20 years, and £56 million (2016: £56 million) relates to losses with no expiry date.
Determining the amount of the provisions, which represent management’s best estimate of the cost of settling these issues, requires the exercise of significant judgement. It will often be necessary to form a view on matters which are inherently uncertain, such as the scope of reviews required by regulators, the number of future complaints, the extent to which they will be upheld, the average cost of redress and the impact of legal decisions that may be relevant to claims received. Consequently the continued appropriateness of the underlying assumptions is reviewed on a regular basis against actual experience and other relevant evidence and adjustments made to the provisions where appropriate.
Sensitivities The Group estimates that it has sold approximately 16 million PPI policies since 2000. These include policies that were not mis-sold and those that have been successfully claimed upon. Since the commencement of the PPI redress programme in 2011 the Group estimates that it has contacted, settled or provided for approximately 53 per cent of the policies sold since 2000.
HBOS Reading – customer review The Group is undertaking a review into a number of customer cases from the former HBOS Impaired Assets Office based in Reading. This review follows the conclusion of a criminal trial in which a number of individuals, including two former HBOS employees, were convicted of conspiracy to corrupt, fraudulent trading and associated money laundering offences which occurred prior to the acquisition of HBOS by the Group in 2009. The Group has provided £100 million in the year to 31 December 2017 and is in the process of paying compensation to the victims of the fraud for economic losses as well as ex-gratia payments and awards for distress and inconvenience. The review is ongoing and at 12 February 2018, the Group had made offers to 57 customers, which represents more than 80 per cent of the customers in review.
Vacant leasehold property Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income, compared to the head rent, and the possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on a biannual basis and will normally run off over the period of under-recovery of the leases concerned, currently averaging 5 years; where a property is disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
Note 38: Subordinated liabilities The movement in subordinated liabilities during the year was as follows: Preference shares £m
Preference shares £m 6.267% Non-Cumulative Callable Fixed to Floating Rate Preference shares callable 2016 319
Undated subordinated liabilities £m 7.5% Undated Subordinated Step-up Notes 5 4.25% Subordinated Undated Instruments 7
Subordinated Callable Notes 2016 382 1 4.65% Subordinated Fixed Rate Notes 2026 (US$1,500 million).
3 Comprising Series 1 (£101 million), Series 2 (£142 million), Series 3 (£110 million).
Note 39: Share capital (1) Authorised share capital As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual general meeting on 5 June 2009. This change took effect from 1 October 2009.
Information regarding significant direct or indirect holdings of shares in the Company can be found on page 82.
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of ordinary and preference shares as granted at the annual general meeting on 11 May 2017. The authority to issue shares and the authority to make market purchases of shares will expire at the next annual general meeting. Shareholders will be asked, at the annual general meeting, to give similar authorities.
Ordinary shares The holders of ordinary shares, who held 100 per cent of the total ordinary share capital at 31 December 2017, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to exercise voting rights. Holders of ordinary shares may also receive a dividend (subject to the provisions of the Company’s articles of association) and on a winding up may share in the assets of the Company.
The Company has entered into deeds of covenant with the Foundations under the terms of which the Company makes annual donations. The deeds of covenant in effect as at 31 December 2017 provide that such annual donations will cease in certain circumstances, including the Company providing nine years’ notice. Such notice has been given to the Lloyds TSB Foundation for Scotland.
Redemption of preference shares1 – 210 131 1 During the year ended 31 December 2016, the Company redeemed all of its outstanding 6.267% Non-cumulative Fixed to Floating Rate Callable US Dollar Preference Shares at their combined sterling equivalent par value of £210 million. These preference shares had been accounted for as subordinated liabilities. On redemption an amount of £210 million was transferred from the distributable merger reserve to the share premium account (2015: £131 million in respect of the redemption of the outstanding 6.0884% Non-cumulative Fixed to Floating Rate Preference Shares and 5.92% Non-cumulative Fixed to Floating Rate Preference Shares).
Gains and losses attributable to own credit risk (net of tax) 2 (40) – –
Other employee award schemes 332 168 172 1 Net of a credit in respect of unclaimed dividends written-back in accordance with the Company’s Articles of Association.
Note 44: Dividends on ordinary shares The directors have recommended a final dividend, which is subject to approval by the shareholders at the Annual General Meeting, of 2.05 pence per share (2016: 1.7 pence per share; 2015: 1.5 pence per share) representing a total dividend of £1,475 million (2016: £1,212 million; 2015: £1,070 million), which will be paid on 29 May 2018. At 31 December 2016 the directors also recommended a special dividend of 0.5 pence per share (2015: 0.5 pence per share) representing a total dividend of £356 million (2015: £357 million). The financial statements do not reflect recommended dividends.
The trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to receive dividends but have chosen to waive their entitlement to the dividends on those shares as indicated: the Lloyds Banking Group Share Incentive Plan (holding at 31 December 2017: 12,414,401 shares, 31 December 2016: 27,898,019 shares, waived rights to all dividends), the HBOS Share Incentive Plan Trust (holding at 31 December 2017: 445,625 shares, 31 December 2016: 445,625 shares, waived rights to all dividends), the Lloyds Banking Group Employee Share Ownership Trust (holding at 31 December 2017: 13,346,132 shares, 31 December 2016: 10,699,978 shares, on which it waived rights to all dividends) and Lloyds Group Holdings (Jersey) Limited (holding at 31 December 2017: 42,846 shares, 31 December 2016: 42,846 shares, waived rights to all but a nominal amount of one penny in total).
Note 45: Share-based payments continued Save-As-You-Earn schemes Eligible employees may enter into contracts through the Save-As-You-Earn schemes to save up to £500 per month and, at the expiry of a fixed term of three or five years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 80 per cent of the market price at the start of the invitation.
Movements in the number of share options outstanding under the SAYE schemes are set out below: Number of options
The weighted average share price at the time that the options were exercised during 2017 was £0.67 (2016: £0.67). The weighted average remaining contractual life of options outstanding at the end of the year was 1.4 years (2016: 2.9 years).
The weighted average fair value of options granted in the year was £0.62 (2016: £0.68). The fair values of options granted have been determined using a standard Black-Scholes model. The weighted average share price at the time that the options were exercised during 2017 was £0.69 (2016: £0.64). The weighted average remaining contractual life of options outstanding at the end of the year was 4.9 years (2016: 5.1 years).
Awards in respect of the 2015 grant will vest in 2018 at a rate of 66.3 per cent.
The weighted average fair value of awards granted in the year was £0.57 (2016: £0.64).
The table below details, on an aggregated basis, key management personnel compensation: 2017 £m 2016 £m 2015 £m
Granted, including certain adjustments (includes entitlements of appointed key management personnel) – 3 3
The Group provides banking and some investment management services to certain of its pension funds. At 31 December 2017, customer deposits of £337 million (2016: £171 million) and investment and insurance contract liabilities of £307 million (2016: £406 million) related to the Group’s pension funds.
Visa Inc completed its acquisition of Visa Europe on 21 June 2016. As part of this transaction, the Group and certain other UK banks also entered into a Loss Sharing Agreement (LSA) with Visa Inc, which clarifies the allocation of liabilities between the parties should the litigation referred to above result in Visa Inc being liable for damages payable by Visa Europe. The maximum amount of liability to which the Group may be subject under the LSA is capped at the cash consideration which was received by the Group at completion. Visa Inc may also have recourse to a general indemnity, previously in place under Visa Europe’s Operating Regulations, for damages claims concerning inter or intra-regional MIF setting activities.
Tax authorities The Group has an open matter in relation to a claim for group relief of losses incurred in its former Irish banking subsidiary, which ceased trading on 31 December 2010. In 2013 HMRC informed the Group that their interpretation of the UK rules which allow the offset of such losses denies the claim. If HMRC’s position is found to be correct management estimate that this would result in an increase in current tax liabilities of approximately £650 million (including interest) and a reduction in the Group’s deferred tax asset of approximately £350 million. The Group does not agree with HMRC's position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due. There are a number of other open matters on which the Group is in discussion with HMRC (including the tax treatment of certain costs arising from the divestment of TSB Banking Group plc), none of which is expected to have a material impact on the financial position of the Group.
Residential mortgage repossessions In August 2014, the Northern Ireland High Court handed down judgment in favour of the borrowers in relation to three residential mortgage test cases concerning certain aspects of the Group’s practice with respect to the recalculation of contractual monthly instalments of customers in arrears. The FCA is actively engaged with the industry in relation to these considerations and has published Guidance on the treatment of customers with mortgage payment shortfalls. The Guidance covers remediation for mortgage customers who may have been affected by the way firms calculate these customers’ monthly mortgage instalments. The Group is now determining its detailed approach to implementation of the Guidance and will contact affected customers during 2018.
Operating lease commitments Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows: 2017 £m 2016 £m
Items in course of transmission to banks – – – – – 584 – 584
Liabilities arising from non-participating investment contracts – – – – – – 15,447 15,447
Trading and other financial assets at fair value through profit or loss – 45,253 105,921 – – – – 151,174
Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques used include discounted cash flow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to those of the instruments held by the Group.
Valuation of financial assets and liabilities Assets and liabilities carried at fair value or for which fair values are disclosed have been classified into three levels according to the quality and reliability of information used to determine the fair values.
Note 48: Financial instruments continued (3) Financial assets and liabilities carried at fair value Critical accounting estimates and judgements The valuation techniques for level 2 and, particularly, level 3 financial instruments involve management judgement and estimates the extent of which depends on the complexity of the instrument and the availability of market observable information. In addition, in line with market practice, the Group applies credit, debit and funding valuation adjustments in determining the fair value of its uncollateralised derivative positions. A description of these adjustments is set out in this note on page 233. Further details of the Group’s level 3 financial instruments and the sensitivity of their valuation including the effect of applying reasonably possible alternative assumptions in determining their fair value are set out below. Details about sensitivities to market risk arising from trading assets and other treasury positions can be found in the risk management section on page 151.
Valuation methodology for financial liabilities, excluding derivatives Liabilities held at fair value through profit or loss These principally comprise debt securities in issue which are classified as level 2 and their fair value is determined using techniques whose inputs are based on observable market data. The carrying amount of the securities is adjusted to reflect the effect of changes in own credit spreads. From 1 January 2017, the resulting gain or loss is recognised in other comprehensive income (see note 1).
(C) Derivatives All of the Group’s derivative assets and liabilities are carried at fair value. At 31 December 2017, such assets totalled £25,834 million (31 December 2016: £36,138 million) and liabilities totalled £26,124 million (31 December 2016: £34,924 million). The table below analyses these derivative balances by valuation methodology (level 1, 2 or 3, as described on page 228). The fair value measurement approach is recurring in nature. There were no significant transfers between level 1 and level 2 during the year.
Losses (gains) recognised in the income statement within other income (208) 215 220 (299)
Derecognised pursuant to tender offers and redemptions in respect of Enhanced Capital Notes – – (476) –
Loans and receivables: Loans and advances to customers: unimpaired 467,670 467,276 – 16,832 450,444
During 2016, the Group reassessed its holding of government securities classified as held-to-maturity in light of the low interest rate environment at that time and they were reclassified as available-for-sale; this resulted in a credit of £1,544 million to the available-for-sale revaluation reserve (£1,127 million after tax).
The table below sets out the carrying values of the transferred assets and the associated liabilities. For repurchase and securities lending transactions, the associated liabilities represent the Group’s obligation to repurchase the transferred assets. For securitisation programmes, the associated liabilities represent the external notes in issue (note 30). Except as otherwise noted below, none of the liabilities shown in the table below have recourse only to the transferred assets.
The primary risks affecting the Group through its use of financial instruments are: credit risk; market risk, which includes interest rate risk and foreign exchange risk; liquidity risk; capital risk; and insurance risk. Information about the Group’s exposure to each of the above risks and capital can be found on pages 107–156. The following additional disclosures, which provide quantitative information about the risks within financial instruments held or issued by the Group, should be read in conjunction with that earlier information.
Currency risk 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. These risks reside in the authorised trading centres who are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and liquidity risk function in London. Associated VaR and the closing, average, maximum and minimum are disclosed on page 155.
Total structural foreign currency exposures, after net investment hedges 32 374 32 31 – 36
Note 51: Financial risk management continued Credit risk The Group’s credit risk exposure arises in respect of the instruments below and predominantly in the United Kingdom. Information about the Group’s exposure to credit risk, credit risk management, measurement and mitigation can be found on pages 107–156.
Loans and receivables: Loans and advances to banks, net1 6,611 – 6,611 26,902 – 26,902
Performance bonds and other transaction-related contingencies 1 Amounts shown net of related impairment allowances.
Allowance for impairment losses on loans and advances to customers on an underlying basis 3,442 3,532 1 Comprises an allowance in respect of HBOS (£11,147 million) and, in 2017, MBNA (£162 million). These amounts impact the impairment allowance on an underlying basis but not on a statutory basis.
Total loans and advances which are neither past due nor impaired 6,577 295,765 48,897 116,396 461,058 31,590
Total loans and advances which are past due but not impaired 6 5,934 585 336 6,855 –
2 Other comprises sub-investment grade (2017: £89 million; 2016: £91 million) and not rated (2017: £23 million; 2016: £72 million).
Note 51: Financial risk management continued Debt securities, treasury and other bills held at fair value through profit or loss An analysis of the Group’s trading and other financial assets at fair value through profit or loss is included in note 15. The credit quality of the Group’s debt securities, treasury and other bills held at fair value through profit or loss is set out below: Investment grade1 £m Other2 £m Total £m
Total other assets held at fair value through profit or loss 32,414 2,144 34,558 35,742 2,488 38,230
Derivative assets An analysis of derivative assets is given in note 16. The Group reduces exposure to credit risk by using master netting agreements and by obtaining collateral in the form of cash or highly liquid securities. In respect of the Group’s net credit risk relating to derivative assets of £12,785 million (2016: £17,599 million), cash collateral of £5,419 million (2016: £6,472 million) was held and a further £275 million was due from OECD banks (2016: £613 million).
2 Other comprises sub-investment grade (2017: £1,878 million; 2016: £1,830 million) and not rated (2017: £340 million; 2016: £271 million).
D. Collateral held as security for financial assets A general description of collateral held as security in respect of financial instruments is provided on page 117. The Group holds collateral against loans and receivables and irrevocable loan commitments; qualitative and, where appropriate, quantitative information is provided in respect of this collateral below. Collateral held as security for trading and other financial assets at fair value through profit or loss and for derivative assets is also shown below.
Loans and advances to banks There were reverse repurchase agreements which are accounted for as collateralised loans within loans and advances to banks with a carrying value of £771 million (2016: £902 million), against which the Group held collateral with a fair value of £796 million (2016: £785 million).
Unimpaired non-mortgage retail lending amounted to £49,482 million (2016: £39,864 million). Lending decisions are predominantly based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security provided. Collateral values are rigorously assessed at the time of loan origination and are thereafter monitored in accordance with business unit credit policy.
Unimpaired secured lending Unimpaired secured commercial lending amounted to £48,120 million (2016: £36,275 million).
Note 51: Financial risk management continued For unimpaired secured commercial lending, the Group reports assets gross of collateral and therefore discloses the maximum loss exposure. The Group believes that this approach is appropriate as collateral values at origination and during a period of good performance may not be representative of the value of collateral if the obligor enters a distressed state.
Trading and other financial assets at fair value through profit or loss (excluding equity shares) Included in trading and other financial assets at fair value through profit or loss are reverse repurchase agreements treated as collateralised loans with a carrying value of £31,590 million (2016: £33,079 million). Collateral is held with a fair value of £39,099 million (2016: £30,850 million), all of which the Group is able to repledge. At 31 December 2017, £31,281 million had been repledged (2016: £27,303 million).
Irrevocable loan commitments and other credit-related contingencies At 31 December 2017, the Group held irrevocable loan commitments and other credit-related contingencies of £63,237 million (2016: £66,240 million). Collateral is held as security, in the event that lending is drawn down, on £10,956 million (2016: £10,053 million) of these balances.
Collateral repossessed During the year, £297 million of collateral was repossessed (2016: £241 million), consisting primarily of residential property.
Trading and other financial liabilities at fair value through profit or loss The fair value of collateral pledged in respect of repurchase transactions, accounted for as secured borrowing, where the secured party is permitted by contract or custom to repledge was £48,765 million (2016: £45,702 million).
Note 51: Financial risk management continued The table below analyses financial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts, on an undiscounted future cash flow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the balance sheet date; balances with no fixed maturity are included in the over 5 years category.
Derivative financial liabilities: Gross settled derivatives – net flows 1,769 1,687 1,856 3,686 4,080 13,078
The following tables set out the amounts and residual maturities of the Group’s off balance sheet contingent liabilities and commitments.
Net gain on sale of available-for-sale financial assets (446) (575) (51)
1 These OEICs (Open-ended investment companies) are mutual funds which are consolidated if the Group manages the funds and also has a sufficient beneficial interest. The population of OEICs to be consolidated varies at each reporting date as external investors acquire and divest holdings in the various funds. The consolidation of these funds is effected by the inclusion of the fund investments and a matching liability to the unitholders; and changes in funds consolidated represent a non-cash movement on the balance sheet.
(D) Analysis of cash and cash equivalents as shown in the balance sheet 2017 £m 2016 £m 2015 £m
(F) Disposal and closure of group undertakings and businesses 2017 £m 2016 £m 2015 £m
Trading and other assets at fair value through profit or loss – – 3,420
In October 2017 the IASB issued an Amendment to IFRS 9, ‘Prepayment Features with Negative Compensation’ which has an effective date of 1 January 2019. This Amendment changes the requirements of IFRS 9 so that certain prepayment features meet the solely payments of principal and interest test. The Group has some loans in its Commercial Banking division that have these features and so the Group has decided to apply the Amendment in 2018 in order to avoid further changes to accounting for financial assets in 2019. The Amendment is still subject to EU endorsement and the Group assumes this will occur during 2018.
The ongoing impact on the financial results will only become clearer after running the IFRS 9 credit risk models over a period of time and under different economic environments, however, it could result in impairment charges being more volatile when compared to the current IAS 39 impairment model, due to the forward looking nature of expected credit losses.
The core principle of IFRS 15 is that revenue reflects the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled. The recognition of such revenue is in accordance with five steps to: identify the contract; identify the performance obligations; determine the transaction price; allocate the transaction price to the performance obligations; and recognise revenue when the performance obligations are satisfied.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of all derivative contracts.
Note 2: Amounts due from subsidiaries These comprise short-term lending to subsidiaries, repayable on demand. The fair values of amounts owed by subsidiaries are equal to their carrying amounts. No provisions have been recognised in respect of amounts owed by subsidiaries.
Movements in the merger reserve were as follows: 2017 £m 2016 £m 2015 £m
In addition the Company carries out banking activities through its subsidiary, Lloyds Bank plc. At 31 December 2017, the Company held deposits of £272 million with Lloyds Bank plc (2016: £42 million). Given the volume of transactions flowing through the account, it is not meaningful to provide gross inflow and outflow information. Included within other liabilities is £2,168 million (2016: £2,690 million) due to subsidiary undertakings. In addition, at 31 December 2017 the Company had interest rate and currency swaps with Lloyds Bank plc with an aggregate notional principal amount of £8,068 million and a net negative fair value of £62 million (2016: notional principal amount of £2,905 million and a net positive fair value of £461 million). Of this amount an aggregate notional principal amount of £4,455 million and a net positive fair value of £246 million (2016: notional principal amount of £1,529 million and a net positive fair value of £307 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities.
The following reconciliation shows the movements in derivative financial instrument assets within level 3 portfolios: 2017 £m 2016 £m
Fair values of financial assets and liabilities The valuation techniques for the Company’s financial instruments are as discussed in note 48 to the consolidated financial statements.
Valuation hierarchy The table below analyses the assets and liabilities of the Company. With the exception of derivatives all assets and liabilities are held at amortised cost. They are categorised into levels 1 to 3 based on the degree to which their fair value is observable. No assets or liabilities were categorised as level 1 (2016: nil).
TACKLING DISADVANTAGE ACROSS BRITAIN We’re helping thousands of disadvantaged people across Britain through our independent charitable Foundations. In Edinburgh, the Thistle Centre of Wellbeing has received a £70,000 grant from the Bank of Scotland Foundation to help them support people with long term health conditions. They will use the grant to finance around 320 personal consultations for the next two years. This face‑to‑face support allows people to stay connected and manage their health condition thanks to a range of activities including tai chi sessions led by local volunteers.
Reports and communications The Group issues regulatory announcements through the Regulatory News Service (RNS); shareholders can subscribe for free via the ‘Investors & Performance’ section of our website at www.lloydsbankinggroup.com, where our statutory reports and shareholder communications are available. A summary of the scheduled reports and communications to be issued in 2018 is set out below: Available format
American Depositary Receipts (ADRs) Our shares are traded in the USA through a New York Stock Exchange‑listed sponsored ADR facility with The Bank of New York Mellon as the depositary. The ADRs are traded on the New York Stock Exchange under the symbol LYG. The CUSIP number is 539439109 and the ratio of ADRs to ordinary shares is 1:4.
The financial statements (statutory basis) for each of the years presented have been audited by PricewaterhouseCoopers LLP, independent auditors.
Profit (loss) for the year attributable to ordinary shareholders 3,042 2,001 466 1,125 (838)
7 Capital ratios for 2013 are in accordance with the modified Basel II framework as implemented by the PRA.
Lloyds Banking Group may also make or disclose written and/or oral forward looking statements in reports filed with or furnished to the US Securities and Exchange Commission, Lloyds Banking Group annual reviews, half‑year announcements, proxy statements, offering circulars, prospectuses, press releases and other written materials and in oral statements made by the directors, officers or employees of Lloyds Banking Group to third parties, including financial analysts. Except as required by any applicable law or regulation, the forward looking statements contained in this Annual Report are made as of the date hereof, and Lloyds Banking Group expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this Annual Report to reflect any change in Lloyds Banking Group’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
Alternative performance measures As described on page 43, the Group analyses its performance on an underlying basis. The Group also calculates a number of metrics that are used throughout the banking and insurance industries on an underlying basis as these provide management with a relevant and consistent view of these measures from period to period. A description of the Group’s alternative performance measures and their calculation is set out below.
Asset quality ratio The underlying impairment charge for the period (on an annualised basis) in respect of loans and advances to customers after releases and write‑backs, expressed as a percentage of average gross loans and advances to customers for the period.
In compliance with Section 409 of the Companies Act 2006, the following comprises a list of all related undertakings of the Group, as at 31 December 2017. The list includes each undertaking’s registered office and the percentage of the class(es) of shares held by the Group. All shares held are ordinary shares unless indicated otherwise in the notes.
Bank of Scotland Leasing Ltd 2 Bank of Scotland LNG Leasing (No 1) Ltd
LDC I LP 41 * LDC II LP 41 * LDC III LP 41 * LDC IV LP 41 * LDC Parallel VII LP 41 * LDC Parallel (Nominees) Ltd 40 LDC Ventures Carry Ltd (applied for strike off) 40 LDC Ventures Trustees Ltd (applied for strike off) 40 LDC V LP 41 * LDC VI LP 41 * LDC VII LP 41 * Leasing (No. 2) Ltd (In liquidation) 13 Legacy Renewal Company Ltd 5 Lex Autolease (CH) Ltd 1 Lex Autolease (FMS) Ltd (In liquidation) 13 Lex Autolease (Shrewsbury) Ltd (In liquidation) 13 iv v
Lloyds Bank Maritime Leasing (No. 10) Ltd 1 Lloyds Bank Maritime Leasing (No. 12) Ltd
Lloyds Bank Maritime Leasing (No. 17) Ltd 1 Lloyds Bank Maritime Leasing (No. 18) Ltd
̂x Lloyds Bank Properties Ltd 1 Lloyds Bank Property Company Ltd 1 Lloyds Bank S.F. Nominees Ltd 1 Lloyds Bank Subsidiaries Ltd 1 Lloyds Bank Trust Company (International) Ltd 1 Lloyds Bank Trustee Services Ltd 1 Lloyds Banking Group Pensions Trustees Ltd 1 Lloyds Commercial Leasing Ltd (In liquidation) 13 Lloyds Commercial Properties Ltd 1 Lloyds Commercial Property Investments Ltd 1 Lloyds Corporate Services (Jersey) Ltd 6 Lloyds Development Capital (Holdings) Ltd 40 Lloyds Engine Capital (No.1) U.S LLC 14 * Lloyds Far East Ltd 46 Lloyds Financial Leasing Ltd (In liquidation) 13 Lloyds General Leasing Ltd 1 Lloyds Group Holdings (Jersey) Ltd 47 i #
Lloyds Property Investment Company No. 4 Ltd 1 Lloyds Property Investment Company No.5 Ltd 1 Lloyds Secretaries Ltd 1 Lloyds Securities Inc. 14 Lloyds Trust Company (Gibraltar) Ltd 42 Lloyds TSB Pacific Ltd 51 Lloyds UDT Asset Leasing Ltd 1 Lloyds UDT Asset Rentals Ltd 1 Lloyds UDT Business Development Ltd 1 Lloyds UDT Business Equipment Ltd 1 Lloyds UDT Hiring Ltd 1 Lloyds UDT Leasing Ltd 1 Lloyds UDT Ltd 1 Lloyds UDT Rentals Ltd (In liquidation) 52 Lloyds Your Tomorrow Trustee Ltd 1 Loans.Co.UK Limited 82 London Taxi Finance Ltd 1 i ii London Uberior (L.A.S. Group) Nominees Ltd 5 * Lotus Finance Ltd 79 i # LTGP Limited Partnership Incorporated 37 * Mainsearch Company Limited 82 Maritime Leasing (No. 19) Ltd 1 MBNA Direct Limited 82 MBNA Europe Finance Limited 83 MBNA Europe Holdings Limited 82 MBNA Global Services Limited 82 MBNA Indian Services Private Limited 84 MBNA Limited 82 MBNA R & L S.A.R.L. 85 MBNA Receivables Limited 63 Meadowfield Investments Ltd (In liquidation) 88 Membership Services Finance Ltd 4 Mitre Street Funding Ltd 6 Moor Lane Holdings Ltd 6 Moray Investments Ltd (In liquidation) 13 Newfont Ltd 20 NFU Mutual Finance Ltd 2 i #
Western Trust Holdings Ltd (In liquidation) 13 Whitestar Securities Ltd (In liquidation) 13 ii xi Wood Street Leasing Ltd 1
Addison Social Housing Holdings Ltd 61 ARKLE Finance Trustee Ltd 10 ARKLE Funding (No. 1) Ltd 62 ARKLE Holdings Ltd 62 ARKLE Master Issuer plc 62 ARKLE PECOH Holdings Ltd 62 ARKLE PECOH Ltd 62 Cancara Asset Securitisation Ltd 63 Candide Financing 2007 NHG BV 64 Candide Financing 2008‑1 BV 64 Candide Financing 2008‑2 BV 64 Candide Financing 2011‑1 BV 64 Candide Financing 2012‑1 BV 64 Cardiff Auto Receivables Securitisation 2018‑1 Plc 44 Cardiff Auto Receivables Securitisation Holdings
Clerical Medical Non Sterling Megapark Hold Co BV 68 Clerical Medical Non Sterling Megapark Prop Co SA 67 Credit Card Securitisation Europe Limited 63 Deva Financing Holdings Ltd 44 Deva Financing plc 44 Deva One Limited 63 Deva Three Limited 63 Deva Two Limited 63 Edgbaston RMBS 2010‑1 plc 44 Edgbaston RMBS Holdings Ltd 44 Fontwell Securities 2016 Ltd 61 Gresham Receivables (No. 1) Ltd 63 Gresham Receivables (No. 3) Ltd 63 Gresham Receivables (No. 10) Ltd 63 Gresham Receivables (No.11) UK Ltd 69 Gresham Receivables (No. 12) Ltd 63 Gresham Receivables (No. 13) UK Ltd 69 Gresham Receivables (No. 14) UK Ltd 69 Gresham Receivables (No. 15) UK Ltd 69 Gresham Receivables (No. 16) UK Ltd 69 Gresham Receivables (No. 19) UK Ltd 69 Gresham Receivables (No. 20) Ltd 63 Gresham Receivables (No. 21) Ltd 63 Gresham Receivables (No. 22) Ltd 63 Gresham Receivables (No. 23) Ltd 63 Gresham Receivables (No. 24) Ltd 63 Gresham Receivables (No. 25) UK Ltd 69 Gresham Receivables (No. 26) UK Ltd 69 Gresham Receivables (No.27) UK Ltd 69 Gresham Receivables (No. 28) Ltd 63 Gresham Receivables (No. 29) Ltd 63 Gresham Receivables (No. 30) UK Ltd 69 Gresham Receivables (No. 31) UK Ltd 69 Gresham Receivables (No. 32) UK Ltd 69 Gresham Receivables (No. 33) UK Ltd 69 Gresham Receivables (No. 34) UK Ltd 69 Gresham Receivables (No. 35) Ltd 63 Gresham Receivables (No.36) UK Ltd 69 Gresham Receivables (No.37) UK Ltd 69 Gresham Receivables (No.38) UK Ltd 69 Gresham Receivables (No.39) UK Ltd 69 Gresham Receivables (No.40) UK Ltd 69 Gresham Receivables (No.41) UK Ltd 69 Gresham Receivables (No.42) Ltd 63 Gresham Receivables (No.44) UK Ltd 69 Gresham Receivables (No.45) UK Ltd 69 Gresham Receivables (No.46) UK Ltd 69 Gresham Receivables (No.47) UK Limited 69 Guildhall Asset Purchasing Company (No 3) Ltd 63 Guildhall Asset Purchasing Company (No.11) UK Ltd 69 Hart 2014‑1 Ltd 61 Leicester Securities 2014 Ltd 71 Lingfield 2014 I Holdings Ltd 44 Lingfield 2014 I plc 44 Lloyds Bank Covered Bonds (Holdings) Ltd 44 Lloyds Bank Covered Bonds (LM) Ltd 44 Molineux RMBS 2016‑1 plc 44 Molineux RMBS Holdings Ltd 44 Penarth Asset Securitisation Holdings Ltd 44 Penarth Funding 1 Ltd 61 Penarth Funding 2 Ltd 61 Penarth Master Issuer plc 44 Penarth Receivables Trustee Ltd 61 Permanent Funding (No. 1) Ltd 44 Permanent Funding (No. 2) Ltd 44 Permanent Holdings Ltd 44 Permanent Master Issuer plc 44