Strategic report Chairman’s statement 2 Group Chief Executive’s review 5 Key performance indicators 8 Our external environment 10 Our business 14 Our strategic priorities 16 Our key stakeholders and Board engagement 20 Responsible business 26 Financial performance overview 36 Risk overview 40
I am also pleased, that as announced in May 2019, the Group will be moving to quarterly dividend payments this year with the first payment in respect of the first quarter of 2020 due in June.
We are supporting businesses by providing funding, once again lending them up to £18 billion in 2020, and the skills and tools they will need to develop and grow. For instance, our Digital Academies provide relevant free training and our International Trade Portal helps them find new customers overseas. Additionally we have helped 2,000 social entrepreneurs start up and scale and we have regional teams working with Be the Business to address productivity issues and provide a boost for local companies.
Highlights Customer expectations are being shaped by experiences outside of financial services, with convenience, choice and greater levels of personalisation becoming increasingly important
Our response In line with our position as the largest digital bank in the UK, we are investing heavily in technology to ensure that we can continue to deliver meaningful enhancements to the customer experience while also delivering organisational improvements in terms of responsiveness, insight and efficiency. Our technology spend is among the top quartile of global peers, with the amount spent in 2019 equivalent to 19 per cent of our operating cost base. Importantly, in excess of 75 per cent of this spend is focused on creating new capabilities and enhancing existing ones, with this investment critical to successfully delivering our modular approach to transformation.
Maximising Group capabilities Aligning the Group’s capabilities as the UK’s sole integrated financial services provider to deepen customer relationships and grow in targeted segments.
As a retail and commercial financial services provider we understand that long-term success is only possible with a customercentric business model and therefore customer impact is critical to all Board decisions.
Management have been focused on ensuring key proposed changes in variable reward structures are fit for purpose for colleagues across the Group as part of a fair and consistent reward package
Long-term implications Like all UK banks impacted by the EU exit, we submitted contingency plans to the regulators both in the UK and elsewhere as to how we would manage potential EU exit scenarios and are well prepared to ensure continuity of our limited EU business activities at the end of transition period; new European entities have been established and are now operational.
The Group also works continuously to bolster defences against cyber-attacks, paying particular attention to reducing the risks that vulnerable people face. We are a founding member of the Financial Services Cyber Collaboration Centre, working with the Government’s National Cyber Crime Centre, and the Cross-Market Operational Resilience Group. We also work closely with other banks, recognising the importance of collaboration when it comes to security, including being part of the Cyber Defence Alliance (CDA). We also meet all of the requirements set out in the EU General Data Protection Regulation (GDPR).
Insurance: be a leading UK insurer in improving the resilience of customers’ lives against extreme weather caused by climate change
Risk management Climate risk is a key emerging risk for the Group. Our approach to identifying and managing climate risk is founded on embedding it into our existing risk management framework, and integrating it through policies, authorities and risk control mechanisms. During 2019, we updated our TCFD implementation plan to incorporate Prudential Regulatory Authority (PRA) supervisory expectations and refined deliverables, with further resource invested in the programme.
Angela signed up to the Lloyds Bank Academy in Bristol to draw on our expert knowledge and experience, and generate ideas to improve her own business. Through the courses, Angela has gained digital confidence and now understands the positive difference that digital marketing can make such as how engaging with online reviewers can make a positive impact to her business.
Gender, gender identity and sexual orientation In 2019, 36.8 per cent of senior roles were held by women, and we remain focused on our target of 40 per cent by the end of 2020.
Tangible net assets per share 50.8p 53.0p (2.2)p 1 2018 restated to reflect amendments to IAS 12, see basis of presentation on page 206.
Insurance and Wealth offers insurance, investment and wealth management products and services.
Establish a common approach to categorise risks to support assessment, aggregation and reporting
Ring-fencing ensures that we are safer and continue to deliver a leading customer experience by providing further protection to core retail and SME deposits, increasing transparency of our operations and facilitating the options available in resolution
Loans and advances to customers4 440.4 447.2 (2) 441.0 – 444.4 (1)
Less profit attributable to non-controlling interests and other equity holders (£m) (547) (531)
The Group has a number of initiatives planned for 2020 to accelerate cultural change, in particular in relation to empathy and promoting simplicity.
This insight is a valuable input into understanding how customers’ lives are evolving to help develop the Group’s strategic direction.
Under the leadership of the Group Chief Executive, William Chalmers, who joined the Board during the year, and Juan Colombás make and implement decisions in all matters affecting operations, performance and strategy. They provide specialist knowledge and experience to the Board. Together with António HortaOsório, William Chalmers and Juan Colombás design, develop and implement strategic plans and deal with day-to-day operations of the Group.
The Committee considered a number of search firms before appointing Heidrick & Struggles1 to assist with the identification of potential candidates based on the Board’s criteria.
Committee purpose and responsibilities The purpose of the Committee is to monitor and review the Group’s financial and narrative reporting arrangements, the effectiveness of the internal controls (including over financial reporting) and the risk management framework, whistleblowing arrangements and each of the internal and external audit processes, including the statutory audit of the consolidated financial statements and the independence of the statutory auditor.
Assessed Group Internal Audit’s resources and skills (supplemented by externally sourced subject matter experts as required) as adequate to fulfil its mandate
Conclusion: The Committee noted satisfaction with the standard of compliance documented in the MLRO report, and acknowledged the action plans in place across the Group to further enhance the Group’s position. Additionally, the Committee acknowledged the strategic plans in place to further enhance and digitise the Group’s financial crime control framework, designed to deliver more effective and agile controls whilst improving the customer experience.
The Company has also granted deeds of indemnity by deed poll and by way of entering into individual deeds, which constitute ‘qualifying third-party indemnity provisions’ to the Directors of the Group’s subsidiary companies, including to former Directors who retired during the year and since the year end, and to Group colleagues subject to the provisions of the Senior Managers and Certification Regime. Such deeds were in force during the financial year ended 31 December 2019 and remain in force as at the date of this report.
When determining reward outcomes, other factors outside of the scorecard are considered. Scores directly correlate to reward outcomes and, as can be seen with this year’s awards, there is clear pay for performance alignment
Colleagues and Conduct measures (33%) Colleagues are critical to the delivery of the Group’s long-term strategy and we confirmed our investment in training and development as part of transforming ways of working to drive better customer outcomes. Ensuring the way we operate is aligned with the Group’s low-risk appetite, as well as in line with the Group’s cultural aspiration, values and behaviours is key to our long-term success
4 Other remuneration payments comprise income from all employee share plans, which arises through employer matching or discounting of employee purchases.
Strong start to tenure as CFO, overseeing a challenging second half, marked by the substantial increase in PPI provision related to the deadline for claims submission
O ther inform ation Lloyds Banking Group Annual Report and Accounts 2019 107
António Horta-Osório – 0% 0% 54% 97% 94.18% 55% 66.30% 68.70% 49.7%
Digital net promoter score Set relative to 2021 targets Threshold: 65.3 Maximum: 68.3
2018 annual report on remuneration (advisory vote) 43,322 91.95% 3,790 8.05% 1,006
Directors’ Remuneration Policy and Group Remuneration Policy alignment There is no significant difference between the Policy for Executive Directors and that for other colleagues. If a significant difference for any individual were proposed, this would be subject to approval by the Remuneration Committee (within regulatory requirements). The table below summarises how the Policy applies across the Group.
The Committee may make awards on hiring an external candidate to ‘buy-out’ remuneration arrangements forfeited on leaving a previous employer. In doing so the Committee will take account of relevant factors including any performance conditions attached to these awards, the form in which they were granted (e.g. cash or shares), the currency of the awards, and the timeframe of awards. Any such award made will be made in accordance with the PRA’s Rulebook and made on a comparable basis to those forfeited and subject to malus and clawback at the request of the previous employer as required by the PRA rules.
This may, for example, include the following circumstances: An interim recruit, appointed to fill an Executive Director role on a short-term basis
Base salary Fixed share award Pension, benefits and other fixed remuneration
Paid until date of termination including any period of leave required by the Group (subject to individual benefit scheme rules).
2 Reference to change of control or merger includes a compromise or arrangement under section 899 of the Companies Act 2006 or equivalent. Fixed share awards may also be released/ exchanged in the event of a resolution for the voluntary winding up of the Company; a demerger, delisting, distribution (other than an ordinary dividend) or other transaction, which, in the opinion of the Committee, might affect the current or future value of any award; or a reverse takeover, merger by way of a dual listed company or other significant corporate event, as determined by the Committee. In the event of a demerger, special dividend or other transaction which would in the Committee’s opinion affect the value of awards, the Committee may allow a deferred Group Performance Share award or a long term incentive award to vest to the extent relevant performance conditions are met to that date and if the Committee so determined, on a time pro-rated basis (unless determined otherwise) to reflect the number of months of the underpin period worked.
Core benefits for UK-based colleagues include pension, private medical insurance, life insurance and other benefits that may be selected through the Group’s flexible benefits plan. Further information on benefits and all-employee share plans can be found on page 116 of the DRP. Benefits can be amended or withdrawn in the following circumstances: – to reflect a change to colleague contractual terms; – to reflect a change of grade; – termination of employment with the Group; – to reflect a change of Reward Strategy/benefit provision; – if the award would be inconsistent with any statutory or tax requirements.
Risk management All narrative and quantitative tables are unaudited unless otherwise stated. The audited information is required to comply with the requirements of relevant International Financial Reporting Standards.
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 85 to 88.
– Continued investment in and focus on the Group’s Cyber programme to ensure confidentiality and integrity of data and availability of systems. Key areas of focus relate to access controls, network security, disruptive technology, and denial of service capability.
Assisted by the Board Risk and Audit Committees, the Board approves the Group’s overall governance, risk and control frameworks and risk appetite. Refer to the Corporate Governance section on pages 70 to 93, for further information on Board committees.
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. These are subject to regular review and governance, with any changes subject to an approval process. Risk teams monitor credit performance trends and the outlook. Risk teams also test the adequacy of and adherence to credit risk policies and processes throughout the Group. This includes tracking portfolio performance against an agreed set of credit risk appetite tolerances.
The Group’s effective risk management seeks to ensure early identification and management of customers and counterparties who may be showing signs of distress
Number of cases Total mortgage accounts % Value of loans1 Total mortgage balances
New residential lending 63.1 58.6 n/a 62.5 1 2019 LTVs (loan to value) use Markit’s 2019 Halifax House Price Index; 2018 LTVs have been restated on the same basis.
Offset by a reduction of 121 basis points relating to the in-year PPI charge and 11 basis points relating to the impact of changes arising from the implementation of IFRS 16 on risk-weighted assets
Funded by 1 Excludes reverse repos of £54.6 billion (31 December 2018: £40.5 billion).
Table 1.48: Analysis of 2019 total wholesale funding by residual maturity
Mitigation The Group takes an active involvement in agreeing mitigation strategies with the schemes’ Trustees. An interest rate and inflation hedging programme is in place to reduce liability risk. The schemes have also reduced equity allocation and invested the proceeds in credit assets. The Trustees have put in place a longevity swap to mitigate longevity risk. The merits of longevity risk transfer and hedging solutions are reviewed regularly.
We understood and tested the key controls around the appropriateness of the model calculation.
– certain disclosures of directors’ remuneration specified by law are not made; or – the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns.
Value of employee services: Share option schemes – – 71 71 – – 71
Defined benefit pension scheme obligations The net asset recognised in the balance sheet at 31 December 2019 in respect of the Group’s defined benefit pension scheme obligations was £550 million (comprising an asset of £681 million and a liability of £131 million) (2018: a net asset of £1,146 million comprising an asset of £1,267 million and a liability of £121 million) . The Group’s accounting policy for its defined benefit pension scheme obligations is set out in note 2(K) .
Gains less losses on disposal of financial assets at fair value through other comprehensive income – (5) – 201 196
Gain related to establishment of joint venture (note 23) 244 – –
Life insurance and participating investment contracts gross claims and surrenders can also be analysed as follows: Total life insurance gross claims and surrenders (8,684) (8,735) (8,898)
Foreign tax: Current tax on profit for the year (70) (34) (40)
Recognition (derecognition) of losses that arose in prior years 18 (9) –
Later than 3 years and not later than 4 years 103 154
7 This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
Note 37: Deferred tax The Group’s deferred tax assets and liabilities are as follows: Statutory position £m £m Tax disclosure £m £m
Payment protection insurance (excluding MBNA) The Group increased the provision for PPI costs by a further £2,450 million in the year ended 31 December 2019, bringing the total amount provided to £21,875 million.
Certain Group companies, together with other panel banks, have also been named as defendants in private lawsuits, including purported class action suits, in the US in connection with their roles as panel banks contributing to the setting of US Dollar, Japanese Yen and Sterling LIBOR and the Australian BBSW Reference Rate. Certain of the plaintiffs' claims have been dismissed by the US Federal Court for Southern District of New York (subject to appeals).
Loans and advances to banks, net1 9,775 – 9,775 6,283 – 6,283
Stage 3 assets include balances of £205 million (2018: £250 million) (with outstanding amounts due of approximately £1,700 million (2018: £2,200 million) ) which have been subject to a partial write-off and where the Group continues to enforce recovery action.
At 31 December 2019, Stage 3 secured commercial lending amounted to £966 million, net of an impairment allowance of £243 million (2018: £658 million, net of an impairment allowance of £215 million) . The fair value of the collateral held in respect of impaired secured commercial lending was £744 million (2018: £590 million) . In determining the fair value of collateral, no specific amounts have been attributed to the costs of realisation. For the purposes of determining the total collateral held by the Group in respect of impaired secured commercial lending, the value of collateral for each loan
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 £8,324 million (2018: £28,438 million) .
Financial assets at fair value through profit or loss 7,195 3,689 3,016 1,710 451 2,801 5,385 135,942 160,189
Financial assets at fair value through profit or loss 7,350 – –
Financial liabilities: Financial liabilities at fair value through profit or loss – – – 3,464 – 3,464
Total income, net of insurance claims 18,359 18,626 18,659 17,267 17,421
Applied Composites Group Ltd (in liquidation) 85.76% Victoria Works, Thrumpton Lane, Retford, DN22 6HH xvii & Aquila Bidco Ltd 89.25%
EC4V 4LA (11) 3rd Floor South, 55 Baker Street, London, W1U 8EW (12) Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire, RG9 1HH (13) 2-4, Rue Eugene Ruppert L-2453, Luxembourg (14) Nordea Investment Funds S.A., 562 rue de Neudorf, L-2220 Luxembourg (15) 78 Sir John Rogerson’s Quay, Dublin 2, Ireland (16) Schroder Unit Trusts Ltd, 31 Gresham Street, London, EC2V 7QA (17) UBS Investment Funds ICVC, 21 Lombard Street, London, EC3V 9AH (18) Oppenheim Asset Management Services S.à r.l. , 2, Boulevard Konrad Adenauer, L-1115