Costs for 2014 are expected to be around £9 billion, excluding TSB running costs
Progressive dividend policy expected thereafter moving to a dividend payout ratio of at least 50 per cent of sustainable earnings in the medium term
Building customer relationships Customer relationships are key to our strategy and are critical for all our businesses. Significant differences across our four divisions mean the financial and non-financial strategic indicators for the development of customer relationships are generally tracked at a divisional level. Commentary on these is therefore included in the specific divisional sections of this report.
The lower risk inherent in a focused retail and commercial banking model such as ours is now being recognised by regulators, as are the many changes we have implemented to achieve a strong capital, liquidity and funding position. We remain confident we will meet the latest regulatory capital requirements when finalised, including the adoption of CRD IV, and the Group is considering opportunities to raise new Additional Tier 1 capital. Discussions around the ring-fencing proposals for uK banks have continued to evolve through 2013, and although many details still remain unclear, our intention is to become a ring-fenced bank and meet the Independent Commission on Banking’s 2019 deadline.
The Group’s funding structure and liquidity position remain robust. We further reduced wholesale funding by £32.0 billion, representing a 19 per cent decrease in the year, with the proportion of funding with a maturity of less than a year at 32 per cent. We continue to maintain a strong liquidity position including £89.3 billion of cash and highly rated, low risk securities.
Our digital channels go from strength to strength, with active internet banking users now increased to over 10.5 million and mobile banking users to more than four million, and over 1.2 billion log-ons in 2013. We have now created a new Digital, Marketing and Customer Development function to capitalise on our achievements to date, focusing our investment and ensuring our success in Retail is replicated by sharing digital product development across all divisions.
Within Asset Finance, we were pleased to announce a partnership between our Black Horse business and Jaguar land Rover which will see us provide lending facilities to over 200 motor dealerships to cover vehicle stock and personal finance to customers seeking to purchase a car. Black Horse also enabled customers to make payments via mobile devices this year. Within Wealth, we also now provide better support and faster advice through a newly inaugurated Private Banking client centre while harnessing the latest customer relationship management technology, halving the time from initial contact to customer interview.
Our 2013 Colleague Survey had the highest ever participation rate, reaching over 75 per cent. There were improvements in scores across all key categories and we compare favourably with other uK companies. notably the employee engagement Index (eeI), which shows the extent to which colleagues feel motivated to contribute to the success of the Group, and are willing to apply discretionary effort to help the business succeed, rose to 64 per cent, 16 points higher than in 2012. Meanwhile, the Performance excellence Index (PeI), which shows how strongly colleagues believe the Group is committed to delivering, and continuously improving, high quality products and services to customers, rose to 76 per cent, 8 points higher than in 2012. There are many factors that influence these scores; the ongoing delivery of our strategy, the achievement of key milestones, together with the recent start of our return to full private ownership, have all contributed to the improvement in engagement.
There is still a lot to do and we are not complacent, but the progress we have made means we have a simpler, more efficient, low risk business, which given the additional investments we are making, is well placed to serve our customers and to help Britain prosper. We therefore remain confident in the Group’s prospects, despite continued regulatory uncertainty, and in our ability to generate strong and sustainable returns for our shareholders.
The iconic lloyds Bank brand relaunched and TSB created as a new challenger bank.
Strategy Commercial Banking’s strategy is to be the best bank for our clients. We have put clients at the centre of our business model and meet their needs with a suite of core banking products from lending and Transaction Banking to Financial Markets and Capital Markets, delivering the full capability of the bank to our clients and serving their needs as they move up the value chain. Our strategy is driven by three guiding principles; to be client centric, uK focused and capital efficient with a rigorous focus on executing our plans according to these core principles. This will be delivered through the formation of a simpler leaner organisation, sharper prioritisation of resources to support our core clients and focused investment in product capability to better serve our clients’ needs. All of this will contribute to the delivery of strong and sustainable Commercial Banking returns over time.
Helping customers with disabilities To be the best bank for customers, our products and services need to be accessible to everyone, including people with physical disabilities. We set up a Disability Services Support Team in 2012 and became the first bank to introduce a British Sign language video service for customers with hearing impairments. In 2013 we were shortlisted in the Organisational Achievement Category of the Signature Awards, which highlight ‘excellence in communication with deaf people’.
– Our Performance excellence Index score was 76 per cent (up on 2012 by 8 percentage points), 12 percentage points above the uK average – Our employee engagement Index score was 64 per cent (up on 2012 by 16 percentage points), 3 percentage points above the uK average – Our line Management Index score was 81 per cent (up on 2012 by 4 percentage points), 14 percentage points above the uK average
Our diversity networks We have four colleague diversity networks: Breakthrough – network for women; Access – disability network; GeM – Group ethnic minority network; and Rainbow – lesbian, Gay, Bisexual and Transgender network. Our sexual orientation programme was rated in the top 20 of the Stonewall Workplace equality index for the past two years with our Rainbow network achieving ‘Star Performer’ status.
Over the past three years, colleagues have volunteered over 650,000 hours in their local communities and consequently we’re on track to achieve our target of 1 million volunteering hours by 2015.
The divested business, rebranded TSB, has operated as a separate business within lloyds Banking Group since September 2013.
Continued investment in our people, processes and IT systems is enabling us to meet our regulatory commitments.
Core loans and advances grew by £11.6 billion or 3 per cent to £436.9 billion, primarily driven by increases in Commercial Banking and Wealth, Asset Finance and International. We also returned Retail secured lending to growth, as expected in the third quarter and delivered £1.9 billion of further loan growth in our core book in the fourth quarter.
Core underlying profit increased by 25 per cent to £2,193 million due to increased income and lower impairment charges. Core return on risk-weighted assets increased by 38 basis points to 1.74 per cent.
SMe comprises clients with turnover of up to £25 million in line with lending data supplied by the Bank of england.
Funds under management (excluding St. James’s Place and other disposals from the International portfolio) have grown by 2 per cent largely as a result of stronger equity markets.
The strong underlying profitability and capitalisation of the Insurance business has enabled us to remit £2.2 billion of dividends to the Group during 2013 whilst maintaining a strong capital base.
– Incremental cost savings of 6 per cent have been achieved through Simplification and tight cost control actions such as sourcing, the centralisation, automation and re-engineering of end-to-end processes, and consolidation and rationalisation of property and IT. These savings are offset by higher costs of supplying investment projects and the impact of regulatory costs and inflation.
Skills and experience: Dyfrig has spent his career in banking, principally at HSBC where he worked for 37 years. During that time he held a number of senior management and board positions in the uK and overseas including Chief executive Officer of HSBC Bank PlC. He has the knowledge and experience to provide valuable insight and contribute effectively as a non-executive Director and Member of the Audit Committee and Risk Committee. Dyfrig has a Sloan Fellowship from the london Business School. He is also a fellow of the Chartered Institute of Bankers.
Shadow sites – As the Group is not billed directly for energy consumed in these sites the Group does not have full visibility of consumption data. To allow emissions relating to these sites to be included within its emissions reporting for 2013, an estimation using an average gas/electricity consumption level per occupied square metre (obtained from sites where the Group holds the energy supply contract directly with the supplier) has been calculated. For electricity, consumption estimated in this way relates to 397 sites. For gas, consumption estimated in this way relates to 185 sites.
GHG emissions per average FTe (based on 2012 FTe) 3.91 3.37 3.33
In 2013, the Audit Committee, in conjunction with the Board Risk Committee, concluded that the Group’s systems of internal control and risk management were effective, and recommended that the Board approve them accordingly.
Reviews the independence of non-executive Directors, the re-appointment or re-election of Directors and their suitability to continue in office.
Martin Scicluna 3/3 1 number of meetings held during the period the member held office. 2 The views of the Directors who are unable to attend meetings are provided to the Committee Chairman for representation at the meeting.
In the 2013 full year results, a charge of £2,726 million was reflected for impairment losses.
The Audit Committee considered the recognition of deferred tax assets, in particular the forecast taxable profits based on the Group’s five year operating plan, the split of these forecasts by legal entity and the impact of the adjustment to the pension deficit on the implementation of IAS 19(R).
The Board Risk Committee carried out its annual review of the Group’s risk appetite in April 2013 for recommendation to the Board. The review considered the statements and risk appetite metrics under each category of identified risk which included: funding and liquidity; capital; market; earnings; operational risk; regulatory and conduct; people and risk culture; and credit. In July, the Board Risk Committee reviewed and recommended additional operational risk appetite metrics which had been developed following the earlier April discussion.
The report is subject to an advisory vote at the 2014 annual general meeting. Whilst the outcome of this resolution is not binding on the Group, it does provide a clear indication to the Committee of whether its decisions are supported by the shareholders.
Juan Colombás 12 months 30 november 2010 under his contract (dated 3 november 2010), the GCe is entitled to an amount equivalent to base salary and pension allowance as a payment in lieu of notice if notice to terminate is given by the Group. If notice to terminate is given by the GCe, he is entitled to an amount equivalent to base salary if the Group chooses to make a payment in lieu of notice. Such payments in lieu will be made in monthly instalments subject to mitigation. He is also entitled to six months’ notice from the Group in the event of his long-term incapacity. As part of a buyout of a pension forfeited on joining from Santander, the GCe is also entitled to the provision of an unfunded unapproved retirement benefit scheme (uuRBS), subject to performance conditions as described further in the Implementation Report. In all other respects, the terms of the GCe’s contract in relation to payments for loss of office match those set out below for new directors.
– ensuring 100 per cent of product reviews were completed on time.
Loss of office payments (audited) There were no payments for the loss of office made to former Directors during 2013.
Sir Winfried Bischoff 1,300,000 – – – – 1,300,000 n/a n/a lord Blackwell 50,000 – – – – 50,000 n/a n/a
The Group’s approach to risk The Group operates a prudent approach to risk with rigorous management controls to keep the Group safe, support sustainable business growth and minimise losses within risk appetite. The Group has a strong and independent risk function (Risk Division) with a mission to maintain a robust control framework, identify and escalate emerging risks and support sustainable business growth within risk appetite through good risk reward decisioning.
– Proactive regulatory advice and challenge to be applied across the Group. – Programmes in place to deliver redress for customers where identified.
The Group uses scenario stress testing to: – Provide an assessment of strategic plans against Board Risk Appetite, alongside a comparison of portfolio performance in adverse circumstances against risk appetite limits, to ensure the Group is managed within risk appetite.
– Drive the development of potential actions and contingency plans to mitigate the impacts of adverse scenarios. Stress testing also links directly to the Group’s recovery planning process.
Governance Clear accountabilities and responsibilities for stress testing are assigned to senior management and the risk and finance functions throughout the Group. This is formalised through the Business Planning and Stress Testing Policy and Procedure, which are reviewed at least annually.
(Insurance is a separate regulated entity with its own Board and governance structure)
Mandate of the Risk Division – the objective of Risk Division is to provide both expert advice and review and challenge to the business. It also has a key role in promoting the implementation of a strategic approach to risk management reflecting the risk appetite and RMF agreed by the Board that encompasses: – embedded and effective risk management processes; – transparent and focused risk monitoring and reporting; – provision of expert and high quality advice and guidance to the Board, executives and Management on strategic issues and horizon scanning for pending regulatory changes; and
Stock of residential mortgages 49.5 66.9 66.2 52.8 new residential lending 63.6 64.0 n/a 63.6
Funding and liquidity management in 2013 The transformation of the Group funding position has been substantially completed. The continued run down of the non-core asset portfolios and the growth in customer deposits has strengthened the Group’s funding position and reduced exposure to wholesale funding. The Group is now in a position where the core loan book is fully funded by core deposits (core loan to deposit ratio 100 per cent). This strong funding position has enabled the Group to undertake a number of funding related actions during the course of the year. In May 2013 the Group repaid in full the remaining e3.5 billion of outstanding long Term Refinancing Operation (lTRO) funding from the european Central Bank having earlier repaid e10 billion in February 2013. In addition to this, during 2013, the Group repaid other term funding totalling £12.6 billion early.
The regulatory framework within which the Group operates continues to be enhanced as part of the global banking reforms.
Includes the benefits of the announced sales of Heidelberger leben, Scottish Widows Investment Partnership and Sainsbury’s Bank.
Measurement Financial reporting risk is measured by the adequacy of and compliance with a number of key controls. Identification of potential financial reporting risk also forms a part of the Group’s Operational Risk management framework.
We focused the majority of our work on the provisions in relation to PPI, SMe derivatives and also in respect of the mis-selling of insurance products in the German branch of Clerical Medical.
Profit attributable to non-controlling interests 36 84 73 loss attributable to equity shareholders (838) (1,471) (2,963)
The value of the Group’s defined benefit pension schemes’ liabilities requires management to make a number of assumptions. The key areas of estimation uncertainty are the discount rate applied to future cash flows and the expected lifetime of the schemes’ members. The accounting surplus or deficit is sensitive to changes in the discount rate, which is affected by market conditions and therefore potentially subject to significant variation. The cost of the benefits payable by the schemes will also depend upon the longevity of the members. Assumptions are made regarding the expected lifetime of scheme members based upon recent experience and extrapolate the improving trend, however given the rate of advance in medical science and increasing levels of obesity, it is uncertain whether they will ultimately reflect actual experience.
Deferred tax on losses no longer recognised following sale of Australian operations (348) – –
Included in the amounts reported above are reverse repurchase agreements treated as collateralised loans with a carrying value of £29,288 million (2012: £14,433 million). Collateral is held with a fair value of £32,434 million (2012: £19,629 million), all of which the Group is able to repledge. At 31 December 2013, £8,195 million had been repledged (2012: £15,640 million).
Debt securities classified as loans and receivables: Debt securities classified as available-for-sale financial assets: All debt securities and lending assets held by the Group in Cancara are restricted in use, as they are held by the collateral agent for the benefit of the commercial paper investors and the liquidity providers only. The Group provides liquidity facilities to Cancara under terms that are usual and customary for standard lending activities in the normal course of the Group’s banking activities. The Group could be asked to provide support under the contractual terms of these arrangements if Cancara experienced a shortfall in external funding, which may occur in the event of market disruption. As at 31 December 2013 and 2012 these obligations had not been triggered.
Non-market risk An allowance for non-market risk is made through the choice of best estimate assumptions based upon experience, which generally will give the mean expected financial outcome for shareholders and hence no further allowance for non-market risk is required. However, in the case of operational risk, reinsurer default and the with-profit funds these can be asymmetric in the range of potential outcomes for which an explicit allowance is made.
Mortality and morbidity The mortality and morbidity assumptions, including allowances for improvements in longevity, are set with regard to the Group’s actual experience where this provides a reliable basis and relevant industry data otherwise. For German business, appropriate industry tables have been considered.
Included in the amounts reported above are deposits held as collateral for facilities granted, with a carrying value of £1,874 million (2012: £23,078 million) and a fair value of £2,112 million (2012: £25,682 million).
Maintenance expenses Allowance is made for future policy costs explicitly. expenses are determined by reference to an internal analysis of current and expected future costs plus a margin for adverse deviation. explicit allowance is made for future expense inflation. For German business appropriate cost assumptions have been set in accordance with the rules of the local regulatory body.
(i) Characteristics of and risks associated with the Group’s schemes The Group has established a number of defined benefit pension schemes in the uK and overseas. All significant schemes are based in the uK, with the three most significant being the defined benefit sections of the lloyds Bank Pension Schemes no’s 1 and 2 and the HBOS Final Salary Pension Scheme. These schemes provide retirement benefits calculated as a percentage of final pensionable salary depending upon the length of service; the minimum retirement age under the rules of the schemes at 31 December 2013 was generally 55 although certain categories of member are deemed to have a contractual right to retire at 50.
The responsibility for the governance of the Group’s funded defined benefit pension schemes lies with the Pension Trustees. each of the Group’s funded uK defined benefit pension schemes are managed by a Trustee Board (the Trustee) whose role is to ensure that their Scheme is administered in accordance with the Scheme rules and relevant legislation, and to safeguard the assets in the best interests of all members and beneficiaries. The Trustee is solely responsible for setting investment policy and for agreeing funding requirements with the employer through the triennial valuation process. The Board of Trustees must be composed of representatives of the Company and plan participants in accordance with the Scheme’s regulations.
During 2013 average monthly customer initiated complaints have continued to fall. Good progress has also been made in the planned proactive mailings. There have been some adverse trends (as detailed below), and a further £3,050 million has been added to the provision, of which £500 million was at the half year, £750 million in the third quarter and £1,800 million at the year end. This brings the total amount provided to £9,825 million, of which approximately £2,090 million relates to anticipated administrative expenses. As at 31 December 2013, £2,807 million of the provision remained unutilised (29 per cent of total provision) relative to an average monthly spend including administration costs in the last six months of £230 million. The increase of £3,050 million in 2013, and the overall provision, is underpinned by the following drivers: – Volumes of customer initiated complaints (after excluding complaints from customers where no PPI policy was held) – at 31 December 2012, the provision assumed a total of 2.3 million complaints would be received. Average monthly volumes in 2013 decreased by 54 per cent compared to 2012, and fourth quarter volumes fell in line with the Group’s revised end third quarter expectations. However, following further statistical modelling and the results of a customer survey, the Group is now forecasting a slower decline in future volumes than previously expected. A further provision of £870 million was therefore made during the year to reflect this. Approximately 2.5 million complaints have been received to date, with the provision assuming approximately 550,000 in the future compared to an average run-rate of approximately 37,000 per month in the last three months. The table below details the historical complaint trends.
shares, on which it waived rights to all dividends), lloyds Group Holdings (Jersey) limited (holding at 31 December 2013: 42,846 shares, 31 December 2012: 42,846 shares, waived rights to all but a nominal amount of one penny in total) and the lloyds TSB Qualifying employee Share Ownership Trust (holding at 31 December 2013: 1,398 shares, 31 December 2012: 1,398 shares, waived rights to all but a nominal amount of one penny in total).
Deferred bonus plan 276 248 221 executive and SAYe plans: Options granted in the year 42 12 13
Big Society Capital In January 2012 the Group agreed, together with The Royal Bank of Scotland plc (and two other non-related parties), to commit up to £50 million each of equity investment into the Big Society Capital Fund. The Fund, which was created as part of the Project Merlin arrangements, is a uK social investment fund. The Fund was officially launched on 3 April 2012 and the Group had invested £12 million in the Fund by 31 December 2012 and invested a further £11 million during the year ended 31 December 2013.
Debt securities in issue – – – – – 117,253 – 117,253 liabilities arising from insurance contracts and participating investment contracts – – – – – – 82,953 82,953 liabilities arising from non-participating investment contracts – – – – – – 54,372 54,372 unallocated surplus within insurance businesses – – – – – – 267 267
Movements in level 3 portfolio The table below analyses movements in level 3 financial assets carried at fair value (recurring measurement).
Financial assets The Group provides loans and advances to commercial, corporate and personal customers at both fixed and variable rates. The carrying value of the variable rate loans and those relating to lease financing is assumed to be their fair value. For fixed rate lending, several different techniques are used to estimate fair value taking into account expected credit losses, prevailing market interest rates and expected future cash flows. For retail exposures, fair value is principally estimated by discounting anticipated cash flows (including interest at contractual rates) at market rates for similar loans offered by the Group and other financial institutions. Certain loans secured on residential properties are made at a fixed rate for a limited period, typically two to five years, after which the loans revert to the relevant variable rate. The fair value of such loans is estimated by reference to the market rates for similar loans of maturity equal to the remaining fixed interest rate period. The fair value of wholesale loans is estimated by discounting anticipated cash flows at a rate which reflects the effects of interest rate changes, adjusted for changes in credit risk.
Financial liabilities The fair value of deposits repayable on demand is considered to be equal to their carrying value. The fair value for all other deposits is estimated using discounted cash flows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.
Trading and other financial assets at fair value through profit or loss¹ 146,187 – 146,187 loans and receivables: loans and advances to banks¹ 32,095 – 32,095 loans and advances to customers¹ 512,138 – 512,138
Interest rate risk In the Group’s retail banking business interest rate risk arises from the different repricing characteristics of the assets and liabilities. liabilities are either insensitive to interest rate movements, for example interest free or very low interest customer deposits, or are sensitive to interest rate changes but bear rates which may be varied at the Group’s discretion and that for competitive reasons generally reflect changes in the Bank of england’s base rate. There is a relatively small volume of deposits whose rate is contractually fixed for their term to maturity.
loans and advances to banks The Group may require collateral before entering into a credit commitment with another bank, depending on the type of financial product and the counterparty involved, and netting arrangements are obtained whenever possible and to the extent that such agreements are legally enforceable. Collateral is held as part of reverse repurchase or securities borrowing transactions.
Included in the total above: Temporary arrangements currently on treatment 1,100 3,103 179 516 3.4 3.7
Permanent treatments within last 12 months 2,187 1,913 78 90 3.1 4.3 £5,688 million of current and recent forborne loans and advances were not impaired at 31 December 2013 (31 December 2012: £8,344 million).
Once a customer evidences acceptable performance over a period of time, the Group would expect that it could be returned to the mainstream good classification and they would no longer be considered forborne. It is important to note that such a decision can be made only by the independent Risk Division.
Note 1: Accounting policies The Company has applied International Financial Reporting Standards as adopted by the european union in its financial statements for the year ended 31 December 2013. IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee and its predecessor body. The eu endorsed version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Company has not taken advantage of this relaxation, and therefore there is no difference in application to the Company between IFRS as adopted by the eu and IFRS as issued by the IASB.
Core tier 1 capital As defined by the PRA mainly comprising shareholders’ equity and equity non-controlling interests after deducting goodwill, other intangible assets and other regulatory deductions. Further details are given in the Capital Risk section on page 178.
CRD IV On 27 June 2013, the european Commission published, through the official journal of the european union, its legislation for a Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), which form the CRD IV package. Amendments were subsequently made to the Regulation trough the corrigenda published on 30 november 2013. The package implements the Basel III proposals in addition to the inclusion of new proposals on sanctions for non-compliance with prudential rules, corporate governance and remuneration. The rules are set to be implemented from 1 January 2014 onwards, with certain sections set to be phased in.
Enhanced Capital Notes (ECNs) The Group’s eCns are subordinated notes issued by the Group that contain an embedded equity conversion feature. Further details of these are given in note 44.
Private equity investments Private equity is equity securities in operating companies not quoted on a public exchange. Investment in private equity often involves the investment of capital in private companies or the acquisition of a public company that results in the delisting of public equity. Capital for private equity investment is raised by retail or institutional investors and used to fund investment strategies such as leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital.
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