The strategy is focused on being a more conservative, ‘through the cycle’ relationship based business. The key objectives of our strategy are: – Building a high performance organisation
We are pleased with the progress we have made in reducing the size of the Group’s balance sheet, with over half of our five year reduction plan achieved in the first two years. Although this has had an adverse effect on income, it has resulted in a material reduction in the Group’s risk profile, and a smaller balance sheet which brings associated funding benefits.
We have a very good working relationship with UKFI who act like any value orientated shareholder with regard to the strategic development and financial performance of the Group, providing significant constructive challenge where they see fit.
Development and implementation of a fully scaled single IT platform which will support the Group.
Other income decreased by 14 per cent to £10,164 million. Excluding liability management gains and movements in the fair value of the ECNs, underlying other income decreased 4 per cent. This reflected lower payment protection insurance (PPI) income as a result of the Group’s decision to withdraw from writing PPI business during the year, lower overdraft charges following changes to fee structures, and loss on sale of assets arising from targeted balance sheet reductions, as well as other elements principally related to changes in financial market conditions during the year.
With income growth in the short term dependent, inter alia, upon economic conditions, strong cost management will continue to be an important focus for management.
Non-core consists of businesses and/or business lines that are inconsistent with Wholesale’s relationship-focused strategic vision of capital and liquidity efficient growth, driven by broad and deep customer relationships and within a prudent risk framework.
Cost:income ratio 33.7% 23.9% As at 31 December 2010 2009 Change £bn £bn %
In Wealth, profit before tax increased by 36 per cent to £269 million. However, this was more than offset by the International loss before tax which increased by 56 per cent to £5,465 million.
Reconciliation of opening EEV balance sheet to closing EEV balance sheet on covered business
Under a market consistent valuation, changes in assumed equity and property returns have no impact on the EEV.
In addition to this the Integration programme is delivering substantial synergy benefits. The focus throughout 2011 will be to complete the migration of systems and process legacies onto a single platform. This will primarily be achieved by delivering the IT consolidation, a single and centralised operating model, along with excellent disciplined procurement and rationalisation of the property portfolio.
Delegates came away from the event feeling motivated, inspired and equipped to make their career with the Group all they want it to be. Following the launch event, by the end of the year GEM Network membership increased to almost 1,500 members.
Strengthening the Group’s focus in this way, the People Risk function’s early priorities have included: reviewing and enhancing the co-ordination and management of the Group’s Approved Persons arrangements for Significant Influence Functions, providing guidance on moderation of pay and bonuses to comply with the FSA’s Remuneration Code and increasing the integration of risk into our reward and performance framework.
Protecting customers against financial crime We take protecting our customers and their assets extremely seriously. We invest in activities to deter, detect and prevent fraud and we operate systems designed to ensure that our products and services are not abused for the purposes of laundering the proceeds of crime or for facilitating terrorism. We have processes in place to check the identity of customers and use various tools to monitor the validity of transactions that they make and receive.
Research published by Lloyds TSB shows that, ‘Second Steppers’ – those still living in their first home, but looking to take their next step up the housing ladder – are the segment of the market most likely to have their equity levels affected by a reduction in house prices. Second Steppers typically bought their first homes at the height of the market and, due to market conditions, have not benefited from any increase in their equity. Originally launched for first time buyers, in 2010 ‘Lend a Hand’ was extended to all home movers, in recognition of the challenges faced by Second Steppers of securing a larger deposit. No other major lender offers deals for customers moving house unless they have a deposit of at least 10%.
In 2010, we were re-selected for the Dow Jones Sustainability Index. This comprises the top 10 per cent most sustainable companies globally, based on long-term economic, environmental and social criteria. We are the top UK bank in the new FTSE CDP Carbon Strategy Index Series launched in 2010 and a component of the Carbon Disclosure Leadership Index. We are also Platinum performers in Business in the Community’s Corporate Responsibility Index and are included in the FTSE4Good Index.
The embedding of an integrated governance and risk management framework throughout the Group has continued, through a consistent approach to risk appetite, policies, delegations and Risk Committee structures.
RISK MANAGEMENT OVERSIGHT The Chief Risk Officer oversees and promotes the development and implementation of a consistent Group-wide risk management framework. The Chief Risk Officer, supported by the Group Risk Directors and the Divisional Risk Officers, provides objective challenge to the Group’s senior management. The Group Executive Committee and the Board receive regular briefings and guidance from the Chief Risk Officer to ensure awareness of the overarching risk management framework and a clear understanding of their accountabilities for risk and internal control.
The UK Government appointed an Independent Commission on Banking to review possible structural measures to reform the banking system and promote stability and competition. That commission will publish its final report by the end of September 2011. The Treasury Select Committee is conducting an examination of competition in retail banking. It is too early to quantify the potential impact of these developments on the Group.
EUROPEAN SOVEREIGN EXPOSURES (unaudited) As at 31 December 2010, the Group had in aggregate, minimal direct exposure to the national and local governments of Portugal, Ireland, Italy, Greece and Spain.
Provisions held against secured assets reflect adequate allowance for incurred losses including customers currently on repayment plans or in financial difficulties who are maintaining their repayments whilst interest rates are very low.
Wealth and International’s impairment charge increased by £1,910 million to £5,988 million in 2010 compared with 2009. Impairment charges as a percentage of average loans and advances to customers increased to 8.90 per cent from 6.04 per cent in 2009.
The Group has adopted Foundation IRB as the interim capital calculation approach for all non-retail exposures in Wholesale and Wealth and International. The Group has adopted the Lloyds TSB relationship model and risk appetite and many of its risk management models and methodologies and as such, believe that converging on Foundation IRB will facilitate integration work. This change has resulted in a reduction in risk weighted assets of approximately £23 billion.
– We have a prudent approach to remuneration with the structure for 2011 designed to reflect corporate and personal performance.
– Cash amounting to £516,000 vesting in three equal tranches in 2011 – 2013
March 2000 – March 2001 Growth in earnings per share which is equal to the aggregate percentage change in the retail price index plus three percentage points for each complete year of the relevant period plus a further condition that the Company’s ranking based on TSR over the relevant period should be in the top 50 companies of the FTSE 100.
The consolidated financial statements of Lloyds Banking Group plc have been prepared in accordance with International Financial Reporting Standards as adopted by the European Union (EU). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body. The EU endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued by the IASB.
(v) Improvements to IFRSs (issued April 2009). Sets out minor amendments to IFRS standards as part of the annual improvements process.
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.
Collective impairment allowances are generally established for smaller balance homogenous portfolios. The collective impairment allowance is also subject to estimation uncertainty and in particular is sensitive to changes in economic and credit conditions, including the interdependency of house prices, unemployment rates, interest rates, borrowers’ behaviour, and consumer bankruptcy trends. It is, however, inherently difficult to estimate how changes in one or more of these factors might impact the collective impairment allowance.
The Group has procedures that are designed to ensure auditor independence, including that fees for audit and non-audit services are approved in advance. This approval can be obtained either on an individual engagement basis or, for certain types of non-audit services, particularly those of a recurring nature, through the approval of a fee cap covering all engagements of that type provided the fee is below that cap. All statutory audit work as well as non-audit assignments where the fee is expected to exceed the relevant fee cap must be pre-approved by the Audit Committee on an individual engagement basis. On a quarterly basis, the Audit Committee receives a report detailing all pre-approved services and amounts paid to the auditors for such pre-approved services.
Trading value through Trading value through assets profit or loss Total assets profit or loss Total £m £m £m £m £m £m
(iii) private equity investments of £1,733 million (31 December 2009: £1,880 million) that are managed, and evaluated, on a fair value basis in accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.
Loans and advances to customers include finance lease receivables, which may be analysed as follows: £m £m
(II) METHOD OF CALCULATION OF LIABILITIES With-profit liabilities are stated at their realistic value, the main components of which are: – With-profit benefit reserve, the total asset shares for with-profit policies; – Cost of options and guarantees; – Deductions levied against asset shares; – Planned enhancements to with-profits benefits reserve; and
Deferred tax assets of £396 million (31 December 2009: £487 million) have not been recognised in respect of capital losses carried forward as there are no predicted future capital profits. Capital losses can be carried forward indefinitely.
e In November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from 31 January 2010 to 31 January 2012.
LLOYDS BANKING GROUP EXECUTIVE SHARE OPTION SCHEMES The executive share option schemes were long-term incentive schemes available to certain senior executives of the Group, with grants usually made annually. Options were granted within limits set by the rules of the schemes relating to the number of shares under option and the price payable on the exercise of options. The last grant of executive options was made in August 2005. These options were granted without a performance multiplier and the maximum limit for the grant of options in normal circumstances was three times annual salary. Between April 2001 and August 2004, the aggregate value of the award based upon the market price at the date of grant could not exceed four times the executive’s annual remuneration and, normally, the limit for the grant of options to an executive in any one year would be equal to 1.5 times annual salary with a maximum performance multiplier of 3.5. Prior to 18 April 2001, the normal limit was equal to one year’s remuneration and no performance multiplier was applied.
For the HBOS sharesave plan, no options were exercised during 2010 or 2009. The options outstanding at 31 December 2010 had an exercise price of £1.8066 (2009: £3.64) and a weighted average remaining contractual life of 2.9 years (2009: 4.0 years).
Other items serving as direct credit substitutes include standby letters of credit, or other irrevocable obligations, where Lloyds Banking Group has an irrevocable obligation to pay a third party beneficiary if the customer fails to repay an outstanding commitment; they also include acceptances drawn under letters of credit or similar facilities where the acceptor does not have specific title to an identifiable underlying shipment of goods.
CAPITAL COMMITMENTS Excluding commitments in respect of investment property (note 28), capital expenditure contracted but not provided for at 31 December 2010 amounted to £339 million (2009: £203 million). Of this amount, £282 million (2009: £198 million) related to assets to be leased to customers under operating leases. The Group’s management is confident that future net revenues and funding will be sufficient to cover these commitments.
– Credit derivatives, except for the items classified as level 3, which are valued using publicly available yield and credit default swap (CDS) curves; the Group uses standard models with observable inputs.
The table below sets out the reconciliation of the allowance for impairment losses of £18,373 million (31 December 2009: £14,801 million) shown in note 25 to the allowance for impairment losses on a combined businesses basis of £29,635 million (31 December 2009: £25,988 million) shown above: 2010 £m
Trading and other financial assets at fair value through profit or loss 22,912 6,047 10,517 9,666 100,869 150,011
Included within cash and cash equivalents at 31 December 2010 is £14,694 million (2009: £13,323 million) held within the Group’s life funds, which is not immediately available for use in the business.
Total subordinated liabilities 4,074 4,205 a Further information regarding these issues can be found in note 46 to the consolidated financial statements.