Financial statements Independent auditors’ report 161 Consolidated fi nancial statements 170 Parent company fi nancial statements 275
UK’s largest digital bank, branch reach and customer franchise with leading integrated propositions Our scale and reach across the UK means that our customer franchise extends to around 26 million customers, with 15.7 million digitally active customers. We are uniquely positioned to deal with customers' banking and investment needs.
Helping Britain Prosper LIVE was a fantastic experience, which I felt lucky and grateful to be involved with. I left the day feeling inspired and excited to see how the Group will evolve in the next three years.
We believe we can make a substantial contribution to Britain’s social and economic prosperity. We’re developing a Skills Academy, initially focusing on Digital Skills, in pilot in the North West of England. Through our charitable Foundations we support thousands of charities working with groups on issues such as domestic abuse and homelessness. As sustainability becomes more of a priority for us all, we have a role to play in supporting a lower carbon economy, the UN's Sustainable Development Goals and the UK Government's Clean Growth strategy.
We also extended the focus on mental health to our colleague wellbeing resources, increasing private medical benefit cover for mental health to match that of physical health. Our employee assistance programme now provides colleagues with access to counselling and cognitive behavioural therapy, and our workplace adjustments programme increasingly offers support for mental as well as physical types of disability.
Leading customer experience We are committed to adapting to changing customer expectations. With increasing competition and digital propositions in the market, customers expect great service and a frictionless experience.
The most significant risks which could impact the delivery of our long-term strategic objectives and our approach to each risk are detailed below.
Our governance framework and strong culture of ownership and accountability enabled effective, on time, compliance with the SM&CR requirements and enable us to demonstrate clear accountability for decisions.
During the year, the Board continued to ensure corporate governance was embedded into the thinking and processes of the business. Lord Blackwell Chairman
ther inform ation including Deputy Group General Counsel and General Counsel for Group Legal. Kate is a trustee of the Lloyds Bank Foundation for England and Wales and is a Non-Executive Director of Scottish Widows.
Where further training or awareness is identified, such as new technology, regulations or sector advances, deep dives are held with the relevant field expert to provide overviews, chances to raise questions, and debate the impacts on business in an informal setting. Details of the new mandatory training that has been rolled out to the Non-Executive Directors this year can be seen on page 63.
The Board is supported by its Committees which make recommendations on matters delegated to them under the Corporate Governance Framework, in particular in relation to Board appointments internal control risk, financial reporting, governance and remuneration issues.
The management of all Committees is in keeping with the basis on which meetings of the Board are managed. Each of the Committees’ structures facilitates open discussion and debate, with steps taken to ensure adequate time for members of the Committees to consider proposals which are put forward.
Q: As Whistleblowing Champion for the Group, what are the reporting lines to you, and how do matters get escalated to the Board?
Matters may be added to agendas in response to external events, Non-Executive Director requests, regulatory initiatives and the quarterly Board topic review meetings.
Board Directors are committed and suitably inquisitive. They come well-prepared to meetings and show a healthy balance of supporting management and asking pertinent questions.
Workforce engagement During the year, the Nomination and Governance Committee made a recommendation to the Board as to how the Board would engage with the ‘wider workforce’ as a key stakeholder following the Financial Reporting Council’s recent guidelines. The Board has discussed and agreed the approach to engagement during 2019, methods of gathering and documenting workforce views, and considering how feedback provided by the workforce would be presented to and considered by the Board on a timely basis.
From the second quarter of 2019, the Board will receive a report on a quarterly basis to provide further oversight and insight into workforce related activity and support with key decision making.
Interviews were held between the Chairman and a shortlist of candidates.
Annually the Committee undertakes an effectiveness review. The review forms part of the Board evaluation process with Directors being asked to complete parts of the questionnaire relating to the Committees of which they were members. The findings of the review were considered by the Committee at its January 2019 meeting. On the basis of the evaluation, the feedback was that the performance of the Committee continues to be effective. Details of Committee membership and meeting attendance can be found on page 56.
Conclusion: The Committee noted the positive work undertaken in the detection and prevention of fraud; acknowledged the need to maintain momentum, and therefore parity, with our peers; and, recognised the continuing efforts of the Group to protect the integrity of genuine customer journeys.
Omissions Emissions associated with joint ventures and investments are not included in this disclosure as they fall outside the scope of our operational boundary. The Group does not have any emissions associated with heat, steam or cooling and is not aware of any other material sources of omissions from our reporting.
The Committee places great importance on ensuring there are clear links between remuneration and delivery of both financial and strategic objectives aligned to the long-term sustainable success of the Group.
Lloyds return index FTSE 100 return index Growth in the value of a hypothetical £100 holding since 31st December 2008 (to 31st December 2018) Source: Mercer Kepler
António Horta-Osório – – Waived 62% 71% 54% 57% 77% 77% 67.6%
António Horta-Osório – – 0% 0% 25.3% 30% 30% 0% 0% 0%
Operation The Committee is responsible for evaluating and making recommendations to the Board with regards to the Chairman’s fees. The Chairman does not participate in these discussions.
Principal risks The Group’s principal risks are shown in the risk overview (pages 32 to 35). The Group’s emerging risks are shown overleaf. Full analysis of the Group’s risk categories is on pages 114 to 159.
Increasing regulatory rules and laws from both the UK and overseas may affect the Group’s operation, placing pressure on expert resource and investment priorities.
Group Market Risk Committee Reviews and recommends market risk appetites. Monitors and oversights market risk exposures across the Group and adherence to Board Risk Appetite. Approves the framework and designation of books between the Trading Book and the Banking Book for regulatory purposes.
As the third line of defence, Group Internal Audit undertakes regular risk-based reviews to assess the effectiveness of credit risk management and controls. The Group’s external auditors also review adequacy at each quarter-end.
The table below shows the Group’s underlying ECL allowances for the upside and downside scenarios using a 100 per cent weighting, which means that both stage allocation and the ECL are based on the single scenario only. All non-modelled provisions, including management judgement remain unchanged.
The impairment charge increased by £151 million (21.2 per cent) to £862 million for 2018 (2017: £711 million). The increase is attributable to the inclusion of MBNA for a full year and a low impairment charge in Secured compared to one-off write-backs in 2017.
The UK Motor Finance portfolio continued to grow, with loans and advances increasing by 8.7 per cent to £14.9 billion at 31 December 2018 (1 January 2018: £13.7 billion). Increases in Stage 2 and Stage 3 balances reflect growth in the retail portfolio. The impairment charge in the period was broadly flat at £113 million (2017: £111 million). The portfolio continues to benefit from a conservative approach to residual values at origination and through the loan lifecycle, with prudent residual value provisions accounting for £99 million of Stage 1 and Stage 2 expected credit loss allowance at 31 December 2018. Coverage for the portfolio was flat at 1.9 per cent.
To assist in managing the balance sheet, the Group operates a Liquidity Transfer Pricing (LTP) process which: allocates relevant interest expenses from the centre to the Group’s banking businesses within the internal management accounts; helps drive the correct inputs to customer pricing; and is consistent with regulatory requirements. LTP makes extensive use of behavioural maturity profiles, taking account of expected customer loan prepayments and stability of customer deposits, modelled on historic data.
The majority of debt issuance originates from the issuance, capital vehicles and medium-term notes desks and the interest rate risk of the debt issued is hedged by swapping them into a floating rate.
We tested the formulae applied within the calculation files. We tested the completeness and accuracy of key data inputs, sourced from underlying systems that are applied in the calculation. We tested the reconciliation of loans and advances between underlying source systems and the expected credit loss models.
From the evidence obtained, we found the data and assumptions used by management in the actuarial valuations for pension obligations to be appropriate.
As part of our review, we identified a number of IT privileged accounts that had not been onboarded to the privileged access restriction tool as at 31 December 2018.
(H) Impairment of financial assets The impairment charge in the income statement includes the change in expected credit losses and certain fraud costs. Expected credit losses are recognised for loans and advances to customers and banks, other financial assets held at amortised cost, financial assets measured at fair value through other comprehensive income, and certain loan commitments and financial guarantee contracts. Expected credit losses are calculated as an unbiased and probability‑weighted estimate using an appropriate probability of default, adjusted to take into account a range of possible future economic scenarios, and applying this to the estimated exposure of the Group at the point of default after taking into account the value of any collateral held, repayments, or other mitigants of loss and including the impact of discounting using the effective interest rate.
Forward looking information The measurement of expected credit losses is required to reflect an unbiased probability‑weighted range of possible future outcomes. In order to do this, the Group has developed an economic model to project sixteen key impairment drivers using information derived mainly from external sources. These drivers include factors such as the unemployment rate, the house price index, commercial property prices and corporate credit spreads. The model‑generated economic scenarios for the six years beyond 2018 are mapped to industry‑wide historical loss data by portfolio. Combined losses across portfolios are used to rank the scenarios by severity of loss. Four scenarios from specified points along the loss distribution are selected to reflect the range of outcomes; the central scenario reflects the Group’s base case assumptions used for medium‑term planning purposes, an upside and a downside scenario are also selected together with a severe downside scenario. Rare occurrences of adverse economic events can lead to relatively large credit losses which means that typically the most likely outcome is less than the probability‑weighted outcome of the range of possible future events. To allow for this a relatively unlikely severe downside scenario is therefore included. At 1 January and 31 December 2018, the base case, upside and downside scenarios each carry a 30 per cent weighting; the severe downside scenario is weighted at 10 per cent. The choice of alternative scenarios and scenario weights is a combination of quantitative analysis and judgemental assessment to ensure that the full range of possible outcomes and material non‑linearity of losses are captured. A committee under the chairmanship of the Chief Economist meets quarterly, to review and, if appropriate, recommend changes to the economic scenarios to the Chief Financial Officer and Chief Risk Officer. Findings dealing with all aspects of the expected credit loss calculation are presented to the Group Audit Committee.
Insurance and other, net of insurance claims (2) (627) 1,613 372 1,356
Securities and other gains comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss as follows: 2018 £m 2017 £m 2016 £m
Note 17: Derivative financial instruments continued The Group’s hedged items are as follows: Change in fair value of hedged item for ineffectiveness assessment
Cost or valuation: Exchange and other adjustments – (37) – (44) (81)
A significant goal of the asset‑liability matching strategies adopted by Group schemes is to reduce volatility caused by changes in market expectations of interest rates and inflation. In the main schemes, this is achieved by investing scheme assets in bonds, primarily fixed interest gilts and index linked gilts, and by entering into interest rate and inflation swap arrangements. These investments are structured to take into account the profile of scheme liabilities, and actively managed to reflect both changing market conditions and changes to the liability profile.
At 31 December 2018 the asset‑liability matching strategy mitigated 105 per cent of the liability sensitivity to interest rate movements and 106 per cent of the liability sensitivity to inflation movements. In addition a small amount of interest rate sensitivity arises through holdings of corporate and other debt securities.
As a result of legislation enacted in 2016, the UK corporation tax rate will reduce from 19 per cent to 17 per cent on 1 April 2020. The Group measures its deferred tax assets and liabilities at the value expected to be recoverable or payable in future periods, and re‑measures them at each reporting date based on the most recent estimates of utilisation or settlement, including the impact of bank surcharge where appropriate. The deferred tax impact of this re‑measurement in 2018 is a credit of £32 million in the income statement and a charge of £19 million in other comprehensive income.
Other (charge) credit to equity – – – – (17) – (17)
Note 45: Share-based payments continued Save-As-You-Earn schemes Eligible employees may enter into contracts through the Save‑As‑You‑Earn (SAYE) schemes to save up to £500 per month and, at the expiry of a fixed term of three or five years, have the option to use these savings within six months of the expiry of the fixed term to acquire shares in the Group at a discounted price of no less than 80 per cent of the market price at the start of the invitation.
Loans and advances to banks – – – – 6,611 – 6,611
Transfers into the level 3 portfolio 815 348 1,163 152 2 154
2 Other comprises sub‑investment grade (31 December 2018: £85 million; 1 January 2018: £98 million) and not rated (31 December 2018: £263 million; 1 January 2018: £376 million) .
Cash consideration received on losing control of group undertakings and businesses 1 129 5
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of approximately £1 million (2017: £1 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not included beyond 5 years.
Lloyds UDT Hiring Ltd (In liquidation) 1 Lloyds UDT Leasing Ltd 1 Lloyds UDT Ltd 1 Lloyds UDT Rentals Ltd (In liquidation) 52 Lloyds Your Tomorrow Trustee Ltd 1 Loans.Co.UK Limited 82 London Taxi Finance Ltd 1 i ii London Uberior (L.A.S. Group) Nominees Ltd 5 * Lotus Finance Ltd 79 i ii # LTGP Limited Partnership Incorporated 34 * Mainsearch Company Limited 82 Maritime Leasing (No. 19) Ltd 1 MBNA Direct Limited 82 MBNA Europe Finance Limited 83 MBNA Europe Holdings Limited 82 MBNA Global Services Limited 82 MBNA Indian Services Private Limited 81 MBNA Limited 82 MBNA R & L S.A.R.L. 76 MBNA Receivables Limited 63 Membership Services Finance Ltd 4 Mitre Street Funding Sarl 56 Moor Lane Holdings Ltd 58 Newfont Ltd (In liquidation) 13 NFU Mutual Finance Ltd 2 i ii # vii
HBOS SPECIALISED INVESTMENT FUNDS ICVC 1 Cautious Managed Fund 52% Ethical Fund 83% Fund of Investment Trusts 40% Smaller Companies Fund 66% Special Situations Fund 51%
Balanced Solution 43% Cautious Solution 34% Discovery Solution 42% Strategic Solution 54% Dynamic Solution 56% Defensive Solution 66% Adventurous Solution 76% European (ex UK) Equity Fund 96% Asia Pacific (ex Japan) Equity Fund 96% Japan Equities Fund 85% US Equities Fund 100% Fundamental Index UK Equity Fund 88% Fundamental Index Global Equity Fund 96% Fundamental Index Emerging Markets Equity Fund 95% Fundamental Low Volatility Index Global Equity 98% Fundamental Low Volatility Index Emerging