The balance sheet reduction over time will provide the Group with increased optionality and flexibility from the resultant releases in both funding and capital. These benefits have been incorporated into the Group’s overall business plans, which include actions to increase retail and corporate deposits over time. Together these actions will reduce the proportion of the Group’s funding that is derived from wholesale markets and eliminate our use of government and central bank sponsored funding facilities, whilst providing capacity for core relationship business growth.
The movement in funds under management includes movements in respect of Insight’s external fund management business up to disposal on 2 November 2009. All funds which will continue to be managed by SWIP post-transition are included within closing funds under management.
Strong cost management delivering benefits. Operating expenses have decreased by £155 million to £974 million mainly due to continued focus on cost management and delivering integration synergies. Underlying operating expenses reduced by 8 per cent allowing for certain reclassifications and non-recurring items.
Group Operations aims to be recognised as a world class operations business by colleagues, customers, stakeholders and peers whilst ensuring value through cost and process efficiency. This will be achieved by providing excellent technology and effective process to support the businesses; driving simplification, automation and continuous improvement; developing world class operations, leadership and capability; and maintaining strong controls to protect the Group.
2008 comparative figures have been amended to reflect the impact of centralising operations across the Group as part of the integration programme. To ensure a fair comparison of 2009 performance, 2008 direct costs have been increased with an equivalent offsetting increase in recharges to divisions.
Over the last year, the Group has mobilised its integration programme, building systems integration plans whilst delivering financial benefits and making good progress towards creating a truly integrated organisation.
We are using our Partnership of London 2012 to promote the Olympic and Paralympic Games’ benefits to British businesses, many of them our customers. The Lloyds TSB Official Business Guide for London 2012 is helping companies of all sizes across the country seize the commercial opportunities. It offers practical financial advice and lists useful sources of support. More than 2,000 business guides have been downloaded and over 45,000 distributed.
Revenue and capital investment decisions require additional formal assessment and approval. Formal risk assessment is conducted as part of the financial approval process. Significant mergers and acquisitions by business units require specific approval by the board. In addition to the standard due diligence conducted during a merger or acquisition, group risk conducts, where appropriate, an independent risk assessment of the target company.
– Credit scoring: In its principal retail portfolios, the Group uses statistically-based decisioning techniques (primarily credit scoring). Divisional risk departments review scorecard effectiveness and approve changes, with material changes being subject to group risk approval.
– Management actions taken, coupled with more favourable recent economic trends, have reduced overall volumes of customers entering Collections in the second half of the year.
TABLE 1.10: ACTUAL AND AVERAGE LTVS ACROSS THE PRINCIPAL MORTGAGE PORTFOLIOS As at 31 December 2009 Mainstream Buy to let Specialist1 Total
MITIGATION A key element of the control framework is the consideration of insurance risk by a suitable combination of high level committees/boards. For the life assurance businesses the key control bodies are the board of Scottish Widows Group Limited and the board of HBOS Financial Services Limited with the more significant risks also being subject to approval by the group executive committee and/or Lloyds Banking Group board. For the general insurance businesses the key control bodies are the boards of the legal entities including Lloyds TSB General Insurance Limited, St. Andrew’s Insurance plc and the Irish subsidiaries, with the more significant risks again being subject to group executive committee and/or Lloyds Banking Group board approval. All Group staff pension schemes issues are covered by the group asset and liability committee and the group business risk committee.
The HBOS capital model calculations are driven by risk and control assessments, validated by scenarios and internal and external loss events.
Joined the board on 1 March 2009. President and chief executive of the Securities Industry and Financial Markets Association. Held a number of senior appointments in JP Morgan Chase from 1993 to 2008 including vice chairman, fi nancial institutions and governments, from 2005. A director of the US-Japan Foundation, Great-West Life Annuity Insurance Co. and Putnam Investments and a member of the Global Markets Advisory Committee for the National Intelliegence Council. A former director in the Offi ce of Thrift Supervison, US Department of the Treasury and Koram Bank and the International Foundation of Election Systems. Aged 64.
Joined the board in 2005. Held a number of senior and general management appointments in Vodafone from 1984 to 2006 including a directorship of that company from 1996, group chief operating offi cer from 2001 and deputy chief executive offi cer from 2005. Previously held positions in Philips from 1978 to 1982 and Mars GB from 1982 to 1984. A nonexecutive director of De La Rue, Digicel Group and Emobile (Japan), a director of Sky Malta, a member of the Altimo International advisory board and a senior advisor to UBS and CVC Capital Partners in relation to the global telecommunications sector. Pro vice-chancellor of University of Bath. A former chairman of The Sage Group. Aged 61.
In addition, on 26 July 2009, the appointment of Sir Winfried Bischoff as chairman of Lloyds Banking Group was recommended to, and approved by, the board, following the process set out below.
P N Green8 7 10 17 (max 22) 6 (max 7) 1 (max 2) 7 (max 11)
A copy of the financial statements of the Company is placed on our website, www.lloydsbankinggroup.com. The directors are responsible for the maintenance and integrity of statutory and audited information on the Company’s website. Information published on the internet is accessible in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
We believe that these arrangements are well aligned with the FSA’s Code of Practice on Remuneration.
We also have non-financial measures of performance against risk objectives in the plan for executives, which enables a more rounded assessment of risk-taking behaviour.
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.
For impaired debt instruments which are classified as loans and receivables, impairment losses are recognised in subsequent periods when it is determined that there has been a further negative impact on expected future cash flows. A reduction in fair value caused by general widening of credit spreads would not, of itself, result in additional impairment.
GOODWILL At 31 December 2009 the Group carried goodwill on its balance sheet totalling £2,016 million (2008: £2,256 million), all of which relates to acquisitions made a number of years ago.
Lloyds Banking Group Annual Report and Accounts 2009 4 SEGMENTAL ANALYSIS continued
GAIN ON CAPITAL TRANSACTIONS During 2009, as part of the Group’s management of capital, the Group exchanged certain existing subordinated debt securities for new securities as described below. These exchanges resulted in a gain on extinguishment of the existing liability of £1,498 million, being the difference between the carrying amount of the security extinguished and the fair value of the new security together with related fees and costs.
In July 2009, dated and undated subordinated liabilities issued by Clerical Medical Finance plc were exchanged for senior unsecured notes issued by Lloyds TSB Bank plc resulting in a gain of £30 million.
Depreciation and amortisation: Depreciation of tangible fixed assets (note 30) 1,716 648
Acquisition due diligence and other work performed in respect of potential venture capital investments 1.4 1.0
Conduits Other Total Conduits Other Total £m £m £m £m £m £m
Annual Report and Accounts 2009 44 SUBORDINATED LIABILITIES continued a Since 2004, the Company has had in issue 400 6 per cent non-cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the rights to a fi xed rate non-cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company. The holder of the 400 25p 6 per cent preference shares has waived its right to payment for the period from 1 March 2010 to 1 March 2012.
7.375% Undated Subordinated Guaranteed Bonds (£200 million) (Clerical Medical Finance plc) d, f 35 –
15% Enhanced Capital Notes due 2019 (Series 21) (£775 million) 1,125 –
Pursuant to the successful rights issue, the Company withdrew from its proposed participation in GAPS and on 3 November 2009, the Company entered into a GAPS Withdrawal Deed with HM Treasury pursuant to which, among other matters, the Company agreed that the Group would pay HM Treasury an amount of £2,500 million in recognition of the benefi ts to the Group’s trading operations arising as a result of HM Treasury proposing to make GAPS available to the Group.
At 31 December 2009 there were loans and advances to customers of £12,235 million (2008: £nil) outstanding and balances within customer deposits of £254 million (2008: £nil) relating to other joint ventures and associates.
Items in the course of collection from banks – – – – – 1,579 – 1,579
Assets arising from reinsurance contracts held – of the assets arising from reinsurance contracts held at 31 December 2009 of £1,875 million (31 December 2008: £385 million), £510 million (31 December 2008: £380 million) were due from insurers with a credit rating of AA or above.
Total held as trading assets 3,456 2,534 2,512 348 72 42 8,964
The exposure to monolines on wrapped loans and receivables and bonds is the internal assessment of amounts that will be recovered from the monoline guarantor on interest and principal shortfalls.
Within 1-3 3-5 Over 5 1 year years years years Total £m £m £m £m £m 55 CONSOLIDATED CASH FLOW STATEMENT
Applies when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements and permits such an entity to treat the benefi t of such an early payment as an asset.
As part of the Group’s recapitalisation and exit from the GAPS the Group announced on 27 November 2009 that an aggregate amount of £1,484 million would be issued in the form of new ordinary shares of Lloyds Banking Group in exchange for certain existing preference shares, and preferred securities. The conversion price was determined as the fi ve day weighted average price for the fi ve trading days ending on 11 February 2010.
The fi nancial information has been prepared under the historical cost convention, as modifi ed by the revaluation of all derivative contracts.
Dated subordinated liabilities 57/8% Subordinated Guaranteed Bonds 2014 (€750 million) 768 821
a Further information regarding these issues can be found in note 44 to the consolidated fi nancial statements.
c Since 2004, the Company has had in issue 400 6 per cent non-cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the rights to a fi xed rate non-cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company. The holder of the 400 25p 6 per cent preference shares has waived its right to payment for the period from 1 March 2010 to 1 March 2012.
THE BETTER PAYMENT PRACTICE CODE A copy of the code and information about it may be obtained from the BIS Publications Orderline 0845 015 0010, quoting ref URN 04/606. Alternatively, visit www.payontime.co.uk for details.
ANNUAL GENERAL MEETING The annual general meeting will be held at 11.00am on Thursday 6 May 2010 at the Edinburgh International Conference Centre.