The Commission will produce a final report for the Cabinet Committee on Banking, by the end of September 2011, having completed its evidence gathering phase at the end of January 2011. The written responses which the ICB have received at this stage have been published on its website. The Group’s response can also be found on our website, www.lloydsbankinggroup.com.
The global economy has continued to recover from the deep recession of 2009, but the recovery is fairly weak by past standards and its continuation is not assured. Remaining vulnerabilities in the sustainability of public finances and the robustness of banking sectors across the US and Europe have meant that growth there has faltered during 2010 and required monetary policy to be kept highly accommodative for longer than expected at the start of the year. Ireland has required support from the IMF and EU, and other high deficit countries in the Eurozone may do so during 2011. The US has extended the Bush-era tax cuts, although it is unclear how much stimulus this will provide given the need to tighten fiscal policy significantly in the medium term.
Total loans and advances to customers decreased by £7.4 billion, or 2 per cent, to £363.7 billion, compared to 31 December 2009. This resulted from reduced customer demand for credit and customers continuing to reduce their personal indebtedness. The reduction in lending to customers was partly the result of the repayment of unsecured debt where balances reduced by £3.6 billion, or 12 per cent.
Corporate Markets comprises Commercial, Corporate, Wholesale Markets, Wholesale Equity and Corporate Real Estate Business Support Unit. Commercial and Corporate provide relationship-based banking, risk management and advisory services to business customers, principally in the UK. Wholesale Markets provides risk management solutions, specialised lending, access to capital markets and multi-product financing solutions to its customers, whilst managing the Group’s own portfolio of structured credit investments and treasury assets. Wholesale Equity manages the division’s equity investment holdings (including Lloyds Development Capital). Corporate Real Estate Business Support Unit manages relationships with commercial real estate customers facing financial difficulties.
Operating expenses decreased 9 per cent, reflecting reduced levels of operating lease depreciation and further cost savings achieved from the integration programme, partially offset by additional staff related costs in the Business Support Unit and continued investment in customer facing resource and systems.
The merger completed on 31 December 2010 at which point BOSI ceased to exist and its banking licence was relinquished. Bank of Scotland plc will utilise its extensive operational and management capability, including general and credit management, oversight and control, within the UK in relation to the Irish portfolio. This will support the efficient rundown of the remaining Irish lending portfolio.
Customer deposits have increased by £3.6 billion, or 16 per cent, reflecting strong growth in the UK Private Banking business driven by the success of the Reserve savings account.
New business profit has increased by 12 per cent to £381 million, reflecting an improved mix of business and cost reductions through integration across our sales channels. The improved margin reflects the strategic choices made in respect of product and channel propositions as the legacy businesses have been integrated in order to focus on value.
A reconciliation of banking net interest income to Group net interest income which shows the items excluded in determining banking net interest income follows: £m £m
Number of ordinary shares in issue (millions)2 68,074 63,775 5,973 5,648 5,638
Effective performance management is at the heart of our work to build a high performance culture across Lloyds Banking Group. It also plays a critical role in helping us to develop our colleagues to build long term partnerships with customers and strong relationships with each other. Every colleague has a Balanced Scorecard comprising of five areas (building the business, customer, risk, people and finance) with objectives that are aligned to our broader strategy. At the end of every year colleagues are given a performance rating based on their overall contribution during the year assessed against both what they have done (performance against their objectives) and how they have gone about doing it (performance against our values and behaviours). This performance rating is then linked to how each colleague is rewarded.
”I came away inspired and feeling that Lloyds Banking Group is the place to be for ethnic minorities. It was a life changing event for me.”
In 2010, Halifax launched the Cash ISA Promise, an industry leading move to help drive a fairer deal for customers when transferring their cash ISA. The Cash ISA Promise enables all customers switching their existing cash ISA to Halifax, to earn interest from the first day that we receive their completed transfer form. It was launched in response to
Liquidity and funding risks are managed within a Board approved framework using a range of metrics to monitor the Group’s profile against its stated appetite and potential market conditions.
Insurance risk is inherent in the insurance business and can be affected by customer behaviour. Insurance risks accepted relate primarily to mortality, longevity, morbidity, persistency, expenses, property and unemployment.
Further Support Account: The Further Support Account is an extra tier of capital support for the with-profits policies in existence at the date of demutualisation. The Scheme requires that assets can only be transferred from the Non-Participating Fund if the economic value of the remaining assets in the fund exceeds the aggregate of the Support Account and Further Support Account. Unlike the Support Account test, the economic value used for this test includes both admissible assets and the present value of future profits of business written in the Non-Participating Fund or by any subsidiaries of that fund. The balance of the Further Support Account is expected to reduce to nil by the year 2030. At 31 December 2010, the estimated net economic value of the Non-Participating Fund and its subsidiaries for the purposes of this test was £4,322 million (31 December 2009: £3,823 million) and the estimated combined value of the Support Account and Further Support Account was £2,446 million (31 December 2009: £2,495 million).
Resolutions concerning the re-appointment of PricewaterhouseCoopers LLP as auditors and authorising the Audit Committee to set their remuneration will be proposed at the annual general meeting.
All other matters, including responsibility for managing the business day to day, are delegated to the Group Chief Executive.
Diversity The Board is keen to ensure that, subject to merit, its membership reflects diversity in the broadest sense including diversity of gender, ethnicity and background. Appointments made to the Board during 2010 reflect this policy. Further information is provided in Board Changes below.
Board size Our aim is to ensure that the size of the Board is sufficient to reflect a broad range of views and perspectives whilst allowing all Directors to participate effectively in meetings. At year end, the Board comprised 14 directors which is within the range, albeit at the upper end, set by the Nomination & Governance Committee.
– Glen Moreno and David Roberts were appointed on 1 March 2010 specifically to enhance the Board’s banking skills and expertise. Glen Moreno combines strong financial services and commercial experience gained in both an executive and non-executive capacity in the UK and internationally, while David Roberts’ in-depth commercial and retail banking expertise complements the broader perspectives of other Non-Executives.
Overview Business review Governance Financial statements Other information 123 Group profile 1
Each year the Audit Committee establishes a limit on the fees that can be paid to the external auditors in respect of non-audit services and monitors quarterly the amounts paid to the auditors in this regard. The external auditors also report regularly to the Audit Committee on the actions that they have taken to comply with professional and regulatory requirements and current best practice in order to maintain their independence. This includes the rotation of key members of the audit team. Total auditor remuneration analysed between audit and other services is shown in note 11 to the financial statements on page 177.
He will participate in the Group’s annual incentive scheme for the calendar year 2011. His annual bonus maximum opportunity for 2011 will be 225 per cent of basic salary. This will be subject to deferral on terms at a minimum in line with the FSA Code and the deferred element will be subject to malus if the performance that generated the incentive is found to be unsustainable.
ANNUAL INCENTIVE PLAN The annual incentive scheme for Executive Directors is designed to reflect specific goals linked to the performance of the business.
During 2010, Eric Daniels received fees of £75,000 which was retained by him, for serving as Non-Executive Director of BT plc.
The market price for a share in the Company at 1 January 2010 and 31 December 2010 was 50.69p and 65.70p, respectively. The range of prices between 1 January 2010 and 31 December 2010 was 46.58p to 78.40p.
The following table contains information on the performance conditions for executive options granted since 2000. The Remuneration Committee chose the relevant performance conditions because they were felt to be challenging, aligned to shareholders’ interests and appropriate at the time.
Overview Business review Governance Financial statements Other information 145 Group profile 1
Movements in revaluation reserve in respect of available-for-sale financial assets: Change in fair value 1,231 2,234
Overview Business review Governance Financial statements Other information 149 Group profile 1
Overview Business review Governance Financial statements Other information 151 Group profile 1
Cash and cash equivalents at end of year 57(D) 62,300 65,690
During 2010, the International Financial Reporting Interpretations Committee clarified the treatment of amounts previously recognised in equity in respect of assets that were transferred from the available-for-sale category to the loans and receivables category. When an impairment loss is recognised in respect of such transferred financial assets, the unamortised balance of any available-for-sale revaluation reserve that remains in equity should be transferred to the income statement and recorded as part of the impairment loss. The Group has changed its accounting policy to reflect this clarification. Under the Group’s previous accounting policy, when such a transferred financial asset became impaired, not all of the unamortised amounts previously transferred to equity were recycled to the income statement and therefore continued to be accreted over the expected remaining life of the financial asset. This change is applied retrospectively and the effect has been to reduce retained profits and increase available-for-sale revaluation reserves by £131 million at 1 January 2009; shareholders’ equity is unchanged. There was no material effect on the Group’s income statement during 2009.
Investments in joint ventures and associates at end of year 30 189 123 (14) 151 479
Included within interest and similar income is £1,288 million (2009: £971 million) in respect of impaired financial assets. Net interest income also includes a charge of £932 million (2009: charge of £121 million) transferred from the cash flow hedging reserve (see note 49).
On 18 February 2010, as part of the Group’s recapitalisation and exit from its proposed participation in the Government Asset Protection Scheme, Lloyds Banking Group plc issued 3,141 million ordinary shares in exchange for certain existing preference shares and preferred securities. This exchange resulted in a gain of £85 million.
Total impairment charged to the income statement 10,952 16,673 13 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES
Overview Business review Governance Financial statements Other information 179 Group profile 1
Overview Business review Governance Financial statements Other information 181 Group profile 1
Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted average number of ordinary shares in issue during the year, which has been calculated after deducting 8 million (2009: 10 million) ordinary shares representing the Group’s holdings of own shares in respect of employee share schemes.
Lloyds Banking Group Annual Report and Accounts 2010 18 TRADING AND OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill is allocated to the appropriate cash generating unit; of the total balance of £2,016 million (31 December 2009: £2,016 million), £1,836 million (or 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance division and £170 million (or 8 per cent of the total) to Asset Finance in the Group’s Wholesale division.
The gross value of in-force business asset in the consolidated balance sheet is as follows: 2010 £m 2009 £m
Included in the amounts reported above are collateral balances in the form of cash provided in respect of repurchase agreements amounting to £nil (2009: £19 million).
(I) BUSINESS DESCRIPTION The Group has with-profit funds within Scottish Widows plc and Clerical Medical Investment Group Limited containing both insurance contracts and participating investment contracts.
Report of the independent auditors on the parent company financial statements 272
Current estimate of cumulative claims 485 531 686 458 539 609 3,308
Series 3 (US$600 million) b, c, d 232 326 11¾% Perpetual Subordinated Bonds (£100 million) 102 102 65/8% Undated Subordinated Step-up Notes callable 2010 (£410 million) b, d, e 6 5 5.125% Step-up Perpetual Subordinated Notes callable 2015 (£560 million) (Scottish Widows plc) a 550 547 5.125% Undated Subordinated Step-up Notes callable 2016 (£500 million) b – –
e The fixed rate on this security was reset from 6.625 per cent to 4.6482 per cent with effect from 15 July 2010.
During May and June 2010, the Company issued a further 1,158 million ordinary shares in relation to three separate exchanges for preference shares and other subordinated liabilities issued by the Group.
No options were outstanding under the Bank of Scotland Executive Stock Option schemes at 31 December 2010. Options outstanding at 31 December 2009 had exercise prices in the range of £8.834 to £10.009 and a weighted average remaining contractual life of 0.8 years.
Overview Business review Governance Financial statements Other information 231 Group profile 1
(ii) For the other 50 per cent of the award (the TSR Award) – it was necessary for the Group’s total shareholder return (calculated by reference to both dividends and growth in share price) to exceed the median of a comparator group (14 companies) over the relevant period by an average of 7.5 per cent per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award would vest where the Group’s total shareholder return was equal to median and vesting would occur on a straight line basis in between these points. Where the Group’s total shareholder return was below the median of the comparator group, the TSR Award would lapse. The relevant period commenced on 8 March 2007 and ended on 7 March 2010.
The current LTIP rules allow for awards to be made of up to 400 per cent of base salary. Under normal circumstances awards are made of 300 per cent of salary with the additional 100 per cent available for circumstances that the Remuneration Committee deems to be exceptional. In 2008, awards were made of 375 per cent of base salary to the Group Chief Executive and two of the Executive Directors for retention purposes, and in light of data reviewed by the committee which showed total remuneration to be behind median both for the FTSE 20, and the other major UK banks.
An additional discretionary award was made in April, May and September 2009. The performance conditions for those awards are as follows: (i) Synergy savings: The release of 50 per cent of the shares will be dependent on the achievement of target run-rate synergy savings in 2009 and 2010 as well as the achievement of sustainable synergy savings of at least £1.5 billion by the end of 2011. The award will be broken down into three equally weighted annual tranches. Performance will be assessed at the end of each year against annual performance targets based on a trajectory to meet the 2011 target. The extent to which targets have been achieved will determine the proportion of shares to be banked each year. Any release of shares will be subject to the Remuneration Committee judging the overall success of the delivery of the integration programme.
Granted, including certain adjustments1 (includes entitlements of appointed directors) 4 –
OPERATING LEASE COMMITMENTS Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows: £m £m
(2) RECLASSIFICATION OF FINANCIAL ASSETS In 2010 the Group reviewed its approach to managing a portfolio of government securities held as a separately identifiable component of the Group’s liquidity portfolio. Given the long-term nature of this portfolio, the Group concluded that certain of these securities will be able to be held until they reach maturity. Consequently, on 1 November 2010, government securities with a fair value of £3,601 million were reclassified from available-for-sale financial assets to held-to-maturity investments reflecting the Group’s positive intent and ability to hold them until maturity.
The Group’s level 3 derivative assets include £1,177 million (31 December 2009: £1,797 million) in respect of the value of the embedded equity conversion feature of the enhanced capital notes issued in December 2009. The embedded equity conversion feature is valued by comparing the market price of the enhanced capital notes with the market price of similar bonds without the conversion feature. The latter is calculated by discounting the expected enhanced capital note cash flows in the absence of a conversion using prevailing market yields for similar capital securities without the conversion feature. The market price of the enhanced capital notes was calculated with reference to multiple broker quotes. Movements in the fair value of the derivative are recorded in net trading income.
Assets arising from reinsurance contracts held – of the assets arising from reinsurance contracts held at 31 December 2010 of £2,146 million (31 December 2009: £1,875 million), £671 million (31 December 2009: £510 million) were due from insurers with a credit rating of AA or above.
Total loans and advances which are neither past due nor impaired 35,333 347,292 48,429 185,872 581,593 19,082
Overview Business review Governance Financial statements Other information 261 Group profile 1
Ian Rankin Senior Statutory Auditor for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors Edinburgh 24 February 2011
Overview Business review Governance Financial statements Other information 279 Group profile 1
SHARE DEALING FACILITIES Lloyds Banking Group offers shareholders a choice of two dealing services: Lloyds TSB Share Dealing – Internet dealing. Visit www.lloydstsbsharedealing.com
LOANS AND ADVANCES Loans and advances to banks 187 Loans and advances to customers 188 Valuation 244
SHARE-BASED PAYMENTS Accounting policy 161 Notes to the consolidated financial statements 227