We are meeting our customers’ needs by creating a simpler, more responsive organisation and are investing in our digital capability while maintaining a comprehensive branch network.
Our support for our customers and communities does not just extend to the lending commitments we have made to our key customer groups. It also covers a number of other initiatives through the Helping Britain Prosper Plan. In 2014, we delivered against the majority of these major commitments, donating £16.5 million to the Bank’s Foundations to help tackle disadvantage and now having trained over 1,300 colleagues as mentors to SMEs and social entrepreneurs and provided over 940,000 of paid volunteer hours to support community projects.
Our balance sheet and funding position have also been transformed, with our post dividend Common Equity Tier 1 (CET1) ratio strengthening to 12.8 per cent through
While we recognise we still have a lot more to do, these strong foundations give us confidence in our prospects and our ability to achieve our strategic objectives over the next three years, despite uncertainties with regard to the political, regulatory, economic and competitive environment. We are therefore well positioned to continue to progress towards being the best bank for our customers while delivering strong and sustainable returns for our shareholders and supporting the UK economic recovery.
‘85 ‘88 ‘91 ‘94 ‘97 ‘00 ‘03 ‘06 ‘09 ‘12 ‘14 2003-7 avg 2003-7 avg
REGULATION The regulatory landscape is continuing to evolve with a greater focus on protecting consumers and small business customers through conduct and competition regulation, and on capital ratios, ring-fencing and resolution models through prudential regulation.
Efficient systems and processes, providing better customer experience and cost leadership
Our business model We are a leading financial services group with a low cost, low risk, customer focused, UK retail and commercial banking business model. We provide a range of services, primarily in the UK, to individuals and commercial customers and by focusing on the needs of customers and operating sustainably and responsibly, we believe we will help Britain prosper and create value for our shareholders.
7.4 We will consistently increase the engagement levels of lesbian, gay, bisexual and transgender colleagues in all roles
Homebuyers We made public commitments to lend £10 billion to 80,000 first-time buyers in 2014. We fulfilled both in November 2014, ahead of schedule. In total, we advanced £11.9 billion in new mortgage lending to over 89,000 first-time buyers this year – a 23 per cent and 12 per cent improvement, respectively, on 2013. We provided 1 in 4 of all new first-time buyer mortgage loans completed in the UK in 2014.
Restated 2012/2013 emissions data to reflect improved reporting processes, using actual data to replace estimations.
Scope 2 emissions have increased despite a reduction in electricity consumption due to a significant increase of global-warming potential of the UK grid mix.
– Maintain competitive working practices to attract, retain and engage high quality people.
Net interest income increased 8 per cent to £11,761 million, reflecting the continued improvement in net interest margin and loan growth in our key customer segments, partly offset by the effect of disposals and the reduced Run‑off portfolio. Net interest margin increased to 2.45 per cent, up 33 basis points, benefiting from improved deposit pricing and lower funding costs (including approximately 7 basis points from the Enhanced Capital Notes (ECNs) exchange in the first half), partly offset by continued pressure on asset prices. The net interest margin in the fourth quarter was 2.47 per cent, 4 basis points lower than in the previous quarter as a result of a one‑off charge to net interest income following the decision to simplify the range of savings products available to customers.
Excludes repos of £nil (31 December 2013: £3.0 billion). Customer deposits comparative restated, see note 1, page 188.
Intangible items include the value of in‑force life business, deferred acquisition costs and deferred income reserves.
Legacy issues We have continued to face legacy issues including Payment Protection Insurance and in July the Group announced that it had reached settlements with UK and US federal authorities in regards to the manipulation of the London Interbank Offered Rate and Sterling Repo Rate. In respect of the latter, the Board regards the actions of those individuals found responsible as completely unacceptable and has taken vigorous action over the last four years to prevent this kind of behaviour from re-occurring.
Discussions within other committees were also fed through to the Board for consideration, such as those of the Group Executive Committee and its Strategy Working Group, a forum which oversees development of the Group strategy, delivery of the Group Strategic Review and which gives consideration to strategic priorities and opportunities across the Group.
EFFECTIVENESS Board effectiveness The Chairman of the Board leads the rolling review of the Board’s effectiveness and that of its committees and individual directors with the support of the Nomination & Governance Committee, which he also chairs.
The creation of a new Board Committee Board oversight for matters of the kind currently covered by the executive Responsible Business Committee would be welcome.
The decision to commence a tender process was taken having given due consideration to the new EU legislation. Whilst the Audit Committee noted that the Group was not obliged to change its auditor for a number of years, it was still felt that it would be appropriate to undertake a tender process at this juncture. The Audit Committee’s decision as to the timing of the tender was also influenced by the understanding that at least two other UK banks were likely to put their audits out to tender in the near future and potentially as early as the second half of 2014.
The effectiveness of the risk management and internal control systems is reviewed regularly by the Board and the Audit Committee, which also receives reports of reviews undertaken by the Risk Division and Group Audit. The Audit Committee receives reports from the Company’s auditor, PricewaterhouseCoopers LLP (which include details of significant internal control matters that they have identified), and has a discussion with the auditor at least once a year without executives present, to ensure that there are no unresolved issues of concern.
NEDs are reimbursed for expenses and any tax arising from these expenses. Where appropriate, the Group will also meet the costs and any tax arising from travel for business purposes.
George Culmer 877,951 27/06/14 176,584 Fixed Share Award 25/09/14 87,592 Fixed Share Award 19/12/14 87,914 Fixed Share Award
– The Group has made significant progress and continues to deliver on its strategy of strengthening the balance sheet, including its capital position, to improve the resilience of the Group. – The Group continues to work closely with regulatory authorities and industry associations to ensure that it is able to identify and respond to proposed regulatory changes. – The Group has strong governance, processes and controls which, combined with the Group’s proactive management of risk, result in an appropriate level of capital.
The components of the RMF can be found in the risk overview on page 31.
Group Executive Committee (GEC) Supports the Group Chief Executive in ensuring the effectiveness of the Group’s risk management framework and the clear articulation of the Group’s risk policies, while also reviewing the Group’s aggregate risk exposures and concentrations of risk.
FULL ANALYSIS OF RISK DRIVERS The Group’s risk framework covers all types of risk which affect the Group and could impact on the achievement of its strategic objectives. A detailed description of each category is provided below.
The Group’s accounting policy for loan renegotiations and forbearance is set out in note 2 on page 194. Income statement information set out in the credit risk tables is on an underlying basis (see page 41).
Treatment strategies exist to help customers who may not be able to fully repay the principal balance at maturity. Of the residential interest only mortgages which have missed the payment of principal at the end of term, balances of £1,117 million remain at 31 December 2014 (£895 million at 31 December 2013). The average loan to value of these accounts is 28.7 per cent at 31 December 2014 (28.0 per cent at 31 December 2013). Of these accounts, 8.4 per cent are impaired (7.4 per cent at 31 December 2013).
Daily monitoring and control processes are in place to address internal and regulatory liquidity requirements. The Group monitors a range of market and internal early warning indicators on a daily basis for early signs of liquidity risk in the market or specific to the Group. These are a mixture of quantitative and qualitative measures, including: daily variation of customer balances, changes in maturity profiles, cash outflows, funding concentration, changes in primary liquidity portfolio, credit default swap (CDS) spreads and changing funding costs.
Loans and receivables: Loans and advances to banks 31 1,354 880 2,234 183 22,917 23,100 25,365
Other comprises: items in the course of collection from banks, investment properties, goodwill, value of in-force business, other intangible assets, tangible fixed assets, current tax recoverable, deferred tax assets, retirement benefit assets and other assets.
Basis of determining regulatory capital of the life insurance businesses Available capital resources Available capital resources represent the excess of assets over liabilities calculated in accordance with detailed regulatory rules issued by the PRA.
Regulatory capital requirements Each life insurance company must retain sufficient capital to meet the regulatory capital requirements mandated by the PRA; the basis of calculating the regulatory capital requirement is given below. Except for Scottish Widows and Clerical Medical, the regulatory capital requirement is a combination of amounts held in respect of actuarial reserves, sums at risk and maintenance expenses (the Long-Term Insurance Capital Requirement) and amounts required to cover various stress tests (the Resilience Capital Requirement). The regulatory capital requirement is deducted from the available capital resources to give statutory excess capital.
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we looked at where the directors and management made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all our audits, we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors or management that represented a risk of material misstatement due to fraud.
We also focused on the measurement of impairment, including the assessment of whether historic experience is appropriate when assessing the likelihood of incurred losses in the portfolios (particularly given the improving economic conditions).
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted by the European Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
We examined the analysis performed by management which sets out the basis for their judgements in respect of the material tax exposures identified, together with relevant supporting evidence such as correspondence with tax authorities and legal opinions obtained. We used our understanding of the business and also read correspondence with tax authorities to challenge the completeness of identified exposures and the need for provisions.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £8 million as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
Independent auditors’ report to the members of Lloyds Banking Group plc continued
(6) Sale and repurchase agreements (including securities lending and borrowing) Securities sold subject to repurchase agreements (repos) continue to be recognised on the balance sheet where substantially all of the risks and rewards are retained. Funds received under these arrangements are included in deposits from banks, customer deposits, or trading liabilities. Conversely, securities purchased under agreements to resell (reverse repos), where the Group does not acquire substantially all of the risks and rewards of ownership, are recorded as loans and receivables or trading securities. The difference between sale and repurchase price is treated as interest and accrued over the life of the agreements using the effective interest method.
The accounting for share‑based compensation is set out in (M) below.
(ii) Accounting for non-participating investment contracts The Group’s non‑participating investment contracts are primarily unit‑linked. These contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit‑linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable. Investment returns (including movements in fair value and investment income) allocated to those contracts are recognised in the income statement through insurance claims.
Given the relative size of the mortgage portfolio, a key variable is house prices which determine the collateral value supporting loans in such portfolios. The value of this collateral is estimated by applying changes in house price indices to the original assessed value of the property. If average house prices were ten per cent lower than those estimated at 31 December 2014, the impairment charge would increase by approximately £195 million in respect of UK mortgages and a further £6 million in respect of Irish mortgages.
As disclosed in note 39, deferred tax assets totalling £921 million (2013: £802 million) have not been recognised in respect of certain capital losses carried forward, trading losses carried forward and unrelieved foreign tax credits as there are no predicted future capital or taxable profits against which these losses can be recognised.
Restated to reflect changes in Divisional structure – see page 202.
Other non-audit fees: This category includes due diligence relating to corporate finance, including venture capital transactions and other assurance and advisory services.
Due to change in UK corporation tax rate (24) (594) (320)
The income tax charge is made up as follows: £m £m £m
For amounts included above which are subject to repurchase and reverse repurchase agreements see note 54.
Total loans and advances to customers before allowance for impairment losses 489,118 504,918
Charge to the income statement (note 12) 735 – 2 737
Asset‑backed securities: Corporate and other debt securities – 5,529 5,529 – 1,855 1,855
NOTE 25: VALUE OF IN-FORCE BUSINESS The gross value of in‑force business asset in the consolidated balance sheet is as follows: 2014 £m 2013 £m
The total amount provided for PPI represents the Group’s best estimate of the likely future costs, albeit a number of risks and uncertainties remain, including complaint volumes, uphold rates, average redress paid, the scope and cost of proactive mailings and remediation, litigation costs and the outcome of the FCA Enforcement investigation. The cost of these factors could differ materially from the Group’s estimates and the assumptions underpinning them and could result in a further provision being required.
The foreign currency translation reserve represents the cumulative after‑tax gains and losses on the translation of foreign operations and exchange differences arising on financial instruments designated as hedges of the Group’s net investment in foreign operations.
If the adjusted EP reaches £2,330 million, 100 per cent of this element will vest.
If the average percentage reaches 15 per cent, 100 per cent of this element will vest.
If the adjusted total costs reaches: – 48.9 per cent, 25 per cent of this element will vest.
Advanced (includes loans of appointed key management personnel) 2 2 3
Repayments (includes loans of former key management personnel) (1) (2) (4)
Collective investment vehicles The Group manages 132 (2013: 210) collective investment vehicles, such as Open Ended Investment Companies (OEICs) and of these 80 (2013: 145) are consolidated. The Group invested £811 million (2013: £2,472 million) and redeemed £984 million (2013: £2,189 million) in the unconsolidated collective investment vehicles during the year and had investments, at fair value, of £2,243 million (2013: £3,291 million) at 31 December. The Group earned fees of £201 million from the unconsolidated collective investment vehicles during 2014 (2013: £277 million).
INTERCHANGE FEES On 11 September 2014, the European Court of Justice (the ECJ) upheld the European Commission’s 2007 decision that an infringement of EU competition law had arisen from arrangements whereby MasterCard issuers charged a uniform fallback multilateral interchange fee (MIF) in respect of cross‑border transactions in relation to the use of a MasterCard or Maestro branded payment card.
Loans and advances to customers – – – – 492,952 – – 492,952
Reverse repurchase agreements included in above amounts: Loans and advances to customers 5,148 5,148 120 120
(Losses) gains recognised in the income statement, within other income, relating to the change in fair value of those liabilities held at 31 December 2014 – 1 1
Debt securities The fair values of debt securities, which were previously within assets held for trading and were reclassified to loans and receivables, are determined predominantly from lead manager quotes and, where these are not available, by alternative techniques including reference to credit spreads on similar assets with the same obligor, market standard consensus pricing services, broker quotes and other research data.
Subordinated liabilities The fair value of subordinated liabilities is determined by reference to quoted market prices where available or by reference to quoted market prices of similar instruments. Subordinated liabilities are classified as level 2, since the inputs used to determine their fair value are largely observable.
Irrevocable loan commitments and other credit-related contingencies At 31 December 2014, the Group held irrevocable loan commitments and other credit‑related contingencies of £57,711 million (2013: £59,172 million). Collateral is held as security, in the event that lending is drawn down, on £8,673 million (2013: £19,123 million) of these balances.
Includes temporary treatments where the customer is currently benefiting from the change or the treatment has ended within the last six months. Permanent changes which commenced during the last 24 months for existing customers as at 31 December are also included. Asset Finance UK previously reported accounts on a temporary concession as forborne for the period of the concession only and accounts on a permanent concession for 12 months after the concession had ended. 2013 balances have been restated.