Low level impairment Improving indebtedness, along with the continued low interest rate environment, is continuing to reduce impairments which are below expected through-the-cycle levels. The share of highly indebted consumers has fallen further in 2015, and consumers’ concerns over their level of debt and mortgage payments are back to pre-crisis lows. Personal and corporate insolvency rates are low, both around half their 2009-10 peaks. Rising property prices have also sharply reduced potential losses from defaults on property lending.
Expected outcomes – Engaged colleagues who actively share their views – Collaborative working environment that enables colleagues to work together better for the benefit of customers – Line managers have the talent and capabilities to lead their teams and deliver our strategy
Building a responsible culture To become the best bank for customers we must continue to put the customer at the heart of everything we do. This year we created a new Group Customer First Committee, attended by senior leaders from across the business including the Chief Executive’s Chief of Staff. The Committee is driving the development of a new Culture Framework. We will use this Framework to create a culture dashboard, to enable us to monitor our progress.
RESPONSIBLE BUSINESS PERFORMANCE In addition to the issues highlighted as most material by our stakeholders, we also report annually on other aspects of responsible business, which we regard as integral to our operations.
Restated 2013/2014 emissions data to improve the accuracy of reporting, using actual data to replace estimations and our re-categorisation of the emissions from our owned vehicles.
Capital risk The risk that we have a sub-optimal amount or quality of capital or that capital is inefficiently deployed across the Group.
Conclusion The Group has delivered a robust underlying performance in 2015, driven by higher income, lower operating costs and reduced impairment and further improved underlying returns. Statutory profit before tax of £1.6 billion was lower, due to the impact of PPI, where an additional charge of £2.1 billion was taken in the fourth quarter largely to reflect our interpretation of the impact of the proposals contained within the FCA consultation paper regarding a potential time bar and the Plevin case.
1 Derived from underlying profit by removing the effect of movements in intangible (non-cash) items and assumption changes. For 2015 reporting this measure has been refined to include the cash benefits from the ‘long-term investments strategy’.
2 Intangible items include the value of in-force life business, deferred acquisition costs and deferred income reserves.
3 Dividends per ordinary share in 2015 includes a recommended special dividend of 0.5 pence.
13 George Culmer Executive Director and Chief Financial Officer Appointed: May 2012 (Board)
Biographies of the Group Executive Committee (GEC) members, and in the case of the Group Audit Director, GEC attendee, are provided opposite.
Antonio joined the Group from Santander, where he had worked in a number of different leadership roles and jurisdictions since 1998. He was part of the management team that completed the take-over of Abbey National and Bradford & Bingley; and was Chief Financial Officer of Santander UK. Before Santander, Antonio spent over nine years at Arthur Andersen.
Karin is a Non-Executive Director of Scottish Widows Ltd. She is also the Group’s Executive Sponsor for Sexual Orientation and Gender Identity.
– Group performance report from the Group Chief Executive – Report on financial performance, including budgets, forecasts and capital position from the Chief Financial Officer – Risk report from the Chief Risk Officer – Chairman’s activities report – Reports from Committee Chairmen
Diversity policy The Board places great emphasis on ensuring that its membership reflects diversity in the broadest sense. The combination of personalities and experience on the Board provides a comprehensive range of perspectives and challenge and improves the quality of decision making. Information on Board diversity by gender and experience can be found on page 56. The Board has adopted, and was close to achieving, the recommendations of Lord Davies of 25 per cent female representation by 2015. As at 31 December 2015, female representation on the Board remained at 23 per cent (based on three female directors and 10 male directors). During the period between the appointment of Stuart Sinclair on 4 January 2016 and Dyfrig John’s retirement at the 2016 AGM, female representation on the Board will drop to 21.4 per cent, when there will be male directors with the number of women on the Board remaining at three. A table providing details of the number of women employed at various levels of seniority within the Group as at 31 December 2014 and 2015 can be found on page 26.
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. Overall, the Board was considered collegiate, inclusive and hard-working, with shared values of integrity and respect. The Chairman was widely respected and had strong working relationships with the Chief Executive
During 2015, succession planning and the composition of the Board and its Committees remained a key focus for the Nomination & Governance Committee. On the Committee’s recommendation, the Board appointed Deborah McWhinney and Stuart Sinclair as independent Non-Executive Directors in December 2015 and January 2016 respectively.
At the core of the process is an on-going audit led by the Chairman of the collective Board’s technical and governance skill set. This exercise allows the creation of a matrix which the Chairman uses to track the Board’s strengths and identify gaps in the desired collective skills profile of Board members taking into account the Group’s future strategic direction.
Financial reporting During the year, the Committee considered the following significant financial issues in relation to the Group’s financial statements and disclosures, with input from management, Group Audit and the external auditor: KEY ISSUES COMMITTEE REVIEW AND CONCLUSION
Areas of focus have included the opportunities and risks emerging from developments in technology, in particular in relation to the Group’s ambition of improving its digital and technological capabilities in delivering for customers. Risks arising from the implementation of banking sector ring-fencing legislation have also been an important consideration, ensuring adequate forward planning is undertaken to address anticipated risks as requirements in this area continue to emerge.
25 per cent will vest for threshold performance and 50 per cent for on-target performance.
The Committee appoints independent consultants to provide advice on specific matters according to their particular expertise. During the year, Deloitte LLP advised the Committee. Deloitte was appointed as remuneration consultant by the Committee following a competitive tendering process. Deloitte has voluntarily signed up to the Remuneration Consultants’ Code of Conduct. The Committee has evaluated Deloitte’s performance during 2015. The process of the review consisted of a detailed questionnaire completed by members of the Committee. The results were discussed by the Committee and it was concluded that Deloitte were effective in providing objective and independent advice to the Committee. In particular, it was recognised that Deloitte had sufficient knowledge and experience of all appropriate remuneration-related areas to provide adequate contributions to enable the Committee to fulfil its responsibilities. Deloitte LLP is not connected with the Group.
Deloitte’s fees for services to the Committee in 2015 were on a time and materials basis and amounted to £426,700. In addition, Deloitte LLP provided the Group with advice on taxation and other consulting services, and assurance services.
Less: Buy-out amounts – (712) – (300) – – – (1,012)
Outstanding share awards Directors’ interests (audited) Shareholding guidelines Executive Directors were required to build up a holding in Lloyds Banking Group plc shares of value equal to 150 per cent of base salary (200 per cent for the GCE) within three years from the later of 1 January 2012 or their date of joining the Board. With the introduction of the fixed share award in 2014, the gross annual value of this award was added to salary to determine the personal shareholding requirement. For the purposes of assessing the additional shareholding requirement, Executive Directors have up to three years from 1 January 2014 to build up the additional shareholding created by the addition of the fixed share award. As at 31 December 2015, all Executive Directors significantly exceeded the requirements.
3 Options exercised on 31 March 2015. The closing market price of the Group’s ordinary shares on that date was 78.28 pence.
12/03/15 118,078 Release of 2011 Deferred Bonus 27/03/15 82,635 Fixed Share Award 20/05/15 3,647 Dividend reinvestment 12/06/15 (2,750,000) Sale 25/06/15 75,588 Fixed Share Award 25/06/15 44,355 Release of 2012 Deferred Bonus 02/09/15 162,436 Release of 2011 and 2012 Deferred Bonus 29/09/15 89,604 Fixed Share Award 21/12/15 92,217 Fixed Share Award
The Committee also takes into account base salary increases for employees throughout the Group. The Group has applied a 2 per cent overall salary budget increase for the general population differentiated by performance and market position (with increases of around 5 per cent for strongly performing colleagues). Salary increases of 2 per cent are proposed for the Chief Financial Officer (CFO) and the Chief Risk Officer (CRO).
GCE: 50 per cent of reference salary less flexible benefits allowance
Financial risk management objectives and policies in relation to the use of financial instruments
Special rights with regard to the control of the Company – note to the accounts
This full risk management section provides a more in-depth picture of how risk is managed within the Group, detailing the Group’s emerging risks, approach to stress testing, risk governance, committee structure, appetite for risk (pages 112 to 119) and a full analysis of the primary risk drivers (pages 120 to 169) – the framework by which risks are identified, managed, mitigated and monitored.
Below is an overview of the principal output responsibilities by team: – Finance teams in the business prepare and review finance related stress testing results including, but not limited to, income, margins, costs, lending and deposit volumes. – Credit risk and market risk teams prepare and review risk-related stress outputs, including, but not limited to, impairment charges, risk-weighted assets, expected loss and trading losses. – The Group Corporate Treasury team reviews the stress outputs and evaluates the impact upon the Group’s Capital and Funding Plan.
The Group assesses whether a loan benefiting from a UK government sponsored programme is impaired using the same accounting policies and practices as it does for loans not benefiting from such a programme. There is no direct impact on the impairment status of a loan benefiting from the Mortgage Rescue schemes, as these schemes involve the purchase, and eventual sale, of the property. The loans included within the Income Support for Mortgage Interest scheme may be impaired, in accordance with the normal definition of impairment.
A portfolio approach is taken for SME customers with exposures below £1 million managed in BSU. All customers with exposures below £1 million are reported as forborne whilst they are managed by SME BSU (whether impaired or unimpaired).
Table 1.15: Analysis of owner occupier interest-only mortgages maturities 1 Year £bn 2-5 Years £bn 6-10 Years £bn > 11 Years £bn
Measurement Management of the assets is the responsibility of the Trustees of the schemes who are responsible for setting the investment strategy and for agreeing funding requirements with the Group. The difference between assets and liabilities determines whether there is a surplus or deficit. Any deficit must be met by the Group with additional funding agreed with the Trustees as part of a triennial valuation process.
Table 1.48: Total wholesale funding by currency (audited) Sterling £bn US dollar £bn Euro £bn
Encumbered assets This disclosure provides further detail on the availability of assets that could be used to support potential future funding requirements of the Group. The disclosure is not designed to identify assets that would be available in the event of a resolution or bankruptcy.
The above table sets out the carrying value of the Group’s encumbered and unencumbered assets, separately identifying those that are available to support the Group’s funding needs. It should be noted that the table does not include collateral received by the Group (i.e. from reverse repos) that is not recognised on its balance sheet, the vast majority of which the Group is permitted to repledge. The Group provides collateralised security financing services to its clients, providing them with cash financing or specific securities. Collateralised security financing is also used to manage the Group’s own short-term cash and collateral needs. For securities accepted as collateral mandates are credit rating driven with appropriate notional limits per rating, asset and individual bond concentration. The vast majority of collateral the Group uses in repo/reverse repo and stock lending/stock borrowing transactions is investment grade government issued, primarily UK government debt. The majority of repo/reverse repo and stock lending/stock borrowing transactions are short-term, having a residual maturity of less than three months.
In December 2015, the FPC published a document alongside its Financial Stability Report in which it expressed its views on the overall calibration of the capital requirements framework for the UK banking system together with a description of how it expected the framework to transition from its current state to its end point in 2019 as well as ongoing work to refine capital requirements during that transitional period.
FINANCIAL REPORTING RISK Definition Financial reporting risk is defined as the risk that the Group suffers reputational damage, loss of investor confidence and/or financial loss arising from the adoption of inappropriate accounting policies, ineffective controls over financial and regulatory reporting, failure to manage the associated risks of changes in taxation rates, law, ownership or corporate structure and the failure to disclose accurate and timely information.
– the calculation and review of conduct provisions including governance processes and approvals of model assumptions and outputs.
The allocation of forecast profits is also judgemental when considering the utilisation of the deferred tax assets in the separate legal entities where the assets reside.
Interest receivable on loans and receivables 2.98 3.12 3.28 16,693 18,254 20,417
Depreciation and amortisation: Depreciation of property, plant and equipment (note 27) 1,534 1,391 1,374
The following types of services are included in the categories listed above: Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with regulatory filings. Other services supplied pursuant to legislation relate primarily to the costs associated with the Sarbanes-Oxley Act audit requirements together with the cost of the audit of the Group’s Form 20-F filing.
Loans and advances to banks 3,065 – 3,065 8,212 – 8,212
Gross investment in finance leases, receivable: Not later than 1 year 497 573
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 (2014: £2,016 million), £1,836 million, or 91 per cent of the total (2014: £1,836 million, 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance division and £170 million, or 8 per cent of the total (2014: £170 million, 8 per cent of the total) to Asset Finance in the Group’s Consumer Finance division.
This breakdown shows the movement in the value of in-force business only, and does not represent the full contribution that each item in the breakdown contributes to profit before tax. This will also contain changes in the other assets and liabilities, including the effects of changes in assumptions used to value the liabilities, of the relevant businesses. The presentation of economic variance includes the impact of financial market conditions being different at the end of the reporting period from those included in assumptions used to calculate new and existing business returns.
Balance sheet amount at 31 December 2014 4,492 1,519 2,760 3,773 12,544
The responsibility for the governance of the Group’s funded defined benefit pension schemes lies with the Pension Trustees. Each 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 triennial valuation process. The Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the Scheme’s regulations.
NOTE 40: SUBORDINATED LIABILITIES The movement in subordinated liabilities during the year was as follows: Preference shares £m
Issued during the year: 4.5% Fixed Rate Subordinated Debt Securities due 2024 (US$1,000 million) – – – – 629 629
Subordinated Step-up Floating Rate Notes 2016 – – – – (165) (165)
Issued under employee share schemes – 5,299,416 312,618,630 – 1 32
1 There were no movements in this reserve during 2015, 2014 or 2013.
Distributions on other equity instruments (net of tax) (note 45) (314) (225) –
Other share option plans Lloyds Banking Group Executive Share Plan 2003 The Plan was adopted in December 2003 and under the Plan share options may be granted to senior employees. Options under this plan have been granted specifically to facilitate recruitment and as such were not subject to any performance conditions. The Plan is used not only to compensate new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in some instances, the grant being made subject to individual performance conditions.
Deposits placed by key management personnel attracted interest rates of up to 4.7 per cent (2014: 4.7 per cent; 2013: 2.9 per cent).
National Loan Guarantee Scheme The Group participates in the UK government’s National Loan Guarantee Scheme, providing eligible UK businesses with discounted funding based on the Group’s existing lending criteria. Eligible businesses who have taken up the funding benefit from a 1 per cent discount on their funding rate for a pre-agreed period of time.
Debt securities classified as loans and receivables – – 88 –
Market risk Interest rate risk In the Group’s retail banking business interest rate risk arises from the different repricing characteristics of the assets and liabilities. Liabilities are either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of England’s base rate. There is a relatively small volume of deposits whose rate is contractually fixed for their term to maturity.
Trading and other financial assets at fair value through profit or loss 25,696 12,877 6,526 3,008 680 1,495 6,411 83,843 140,536
Available-for-sale financial assets 963 1,533 724 28 203 939 6,085 46,018 56,493
Trading and other financial liabilities at fair value through profit or loss 32,209 15,145 1,316 3,658 7,508 59,836
Net charge (credit) in respect of defined benefit schemes 315 (478) 503
IFRS 9 is effective for annual periods beginning on or after 1 January 2018.
NOTE 7: DEBT SECURITIES IN ISSUE These comprised US$862.5 million 7.75% Public Income Notes due 2050 issued by the Company in July 2010; these were redeemed by the Company in 2015.