We want to take a leading role in helping the UK economy whether through supporting housing, trade, growth, infrastructure or tackling disadvantage. Our Helping Britain Prosper Plan, launched in 2014, helps us achieve this, taking us beyond business as usual by setting measurable targets in the areas where we believe we can make the biggest difference. The Plan is an investment in our long-term sustainable success which underpins our aim to become the best bank for customers whilst delivering superior and sustainable returns for shareholders.
Strategic report Our competitive strengths 02 Group highlights 03 Divisional highlights 04 Chairman's statement 06 Group Chief Executive's review 08 Market overview 10 Our business model 12 Our strategic priorities 14 Key performance indicators 16 Our Helping Britain Prosper Plan 18 Doing business responsibly 20 Risk overview 26
The Plan is core to our strategy: we know from long experience that when Britain prospers, so do we. So the Plan is an investment in our collective long-term success. It supports our strategy to become the best bank for customers and it’s fundamental to rebuilding trust in our brands and the sector.
Since 2002 we have been running Personal Development and Career Development Programmes for disabled colleagues. 1,500 of our colleagues have completed this programme to date.
Criteria used to measure and report Scope 1, 2, 3 emissions is provided in the Lloyds Banking Group Reporting Criteria statement available online at www.lloydsbankinggroup.com/responsible-business
Scope 2 emissions have been calculated using a location based methodology, as set out by the GHG Protocol.
Total income, net of insurance claims 17,267 17,421 16,399 18,478 20,517
Financial performance – Underlying profit decreased by 13 per cent to £837 million. A 17 per cent increase in new business income was more than offset by adverse economics impacting existing business income together with increased investment costs. – Life and pensions sales (PVNBP) decreased by 6 per cent. Excluding the internal With-Profits fund bulk annuity transfers in 2015 and 2016, PVNBP increased 23 per cent reflecting the four bulk annuity deals secured, growth in corporate pensions and increased momentum in both planning and retirement and protection. – General insurance gross written premiums (GWP) decreased by 3 per cent, reflecting the continued softening of the Home market and the run off of legacy products. – Costs increased by 10 per cent to £772 million, reflecting increased investment and £28 million annual levy associated with the Flood Re scheme.
Underlying profit after tax and profits attributable to other equity holders (£m) 5,410 6,155
The Board’s approach, led by me, your Chairman, is to ensure corporate governance is embedded into the thinking and processes of the business. This is vitally important because we believe a commitment to good governance ensures we continually challenge our assumptions and risks, and underpins the delivery of our strategy to become the best bank for customers and generate sustainable returns for shareholders.
Looking forward to 2017, our corporate governance priorities will be completing the Group’s strategic review and ensuring we are equipped to deliver the key programmes; implementing the actions from the 2016 Board Effectiveness Review; and taking forward the necessary changes to implement our ring-fencing preparations.
Anthony Watson 5 5 1 Mr Luff was unable to attend the February Committee meeting due to a prior commitment.
I have been through quite a few inductions over the years and what was especially effective about the Group’s induction was the mixture of highly structured overviews on key topics such as capital, liquidity and conduct, together with self-selected ‘top-ups’ and site visits. Attending functions, conferences, product forums, customer focus groups and branches provided valuable context too.
JANUARY 2017 Final review of draft 2016/17 Plan before recommending to the Board for approval
Deeds for existing Directors are available for inspection at the Company’s registered office.
KEY MESSAGES – Remuneration review concluded in 2016, resulting in revised Reward Principles and variable remuneration design aligned to the Group’s strategic priorities. – Strong financial performance overall and further progress against strategic priorities, supporting bonus outcome of £392.9 million. This included a 19 per cent downward collective adjustment and equates to 4.8 per cent of pre bonus underlying profit. – Executive Director 2016 bonus awards approximately 77 per cent of maximum.
Executive-level share ownership is high, with all Executive Director shareholdings well above their minimum requirement under the shareholding policy. The Group Chief Executive’s current shareholding significantly exceeds the level required, as detailed in the annual report on remuneration.
1 Adjusted total costs. 2 FCA reportable complaints per 1,000 for the period up to and including H1 2016 and formally closed FCA complaints per 1,000 accounts for the period from H2 2016. Both exclude PPI
Fixed share award The levels of award set for 2017 remain unchanged and are as follows: Group Chief Executive: £900,000
The levels of the 2017 award are unchanged from 2016 and are as follows: GCE: £900,000 CFO: £504,000 CRO: £497,000 Shares will be released in equal tranches over a five year period.
Executive Directors are eligible to participate in the Group’s Sharesave and Sharematch plans on the same basis as other employees.
In 2017, at least 75 per cent of performance is weighted towards a financial measure.
The approach to determining annual bonus awards is summarised below: Group target bonus outcome, modified subject to 1. Group underlying profit modifier (50%) 2. Balanced scorecard performance (50%)
The following table sets out the total remuneration of the eight highest paid senior executives (excluding Executive Directors) in respect of the 2016 performance year.
Risk management is at the heart of our strategy to become the best bank for customers Our mission is to support the business in delivering sustainable growth. This is achieved through informed risk decision making and superior risk and capital management, supported by a consistent risk-focused culture
Additionally, credit risk arises from leasing arrangements where the Group is the lessor. Note 2(J) on page 190 provides details on the Group’s approach to the treatment of leases.
Strong rating systems and controls: The Group has established an independent team in the Risk Division that sets common minimum standards, designed to ensure risk models and associated rating systems are developed consistently and are of sufficient quality to support business decisions and meet regulatory requirements. Internal rating models are developed and owned by the Risk Division. The designated model owner takes responsibility for ensuring the validation of the rating systems, supported and challenged by an independent specialist Group function.
The Group seeks to avoid correlation or wrong way risk where possible. Under repo policy, the issuer of the collateral and the repo counterparty should be neither the same nor connected. The same rule applies for derivatives. The Risk Division has the necessary discretion to extend this rule to other cases where there is significant correlation. Countries with a rating equivalent to AA- and above may be considered to have no adverse correlation between the counterparty domiciled in the country and that country of risk (issuer of securities).
Low risk culture and prudent risk appetite – The Group continues to operate a prudent approach to credit risk, with the portfolios benefiting from the focus on credit at origination and a prudent through the cycle approach to credit risk appetite. The Group’s portfolios are well positioned against current economic concerns and market volatility. – The Group’s credit processes and controls ensure effective risk management, including early identification and management of customers and counterparties who may be showing signs of distress. – The Group has delivered lending growth in key segments without relaxing credit criteria despite terms and conditions in some of the Group’s markets being impacted by increased competition and, in Commercial Banking, uncertainty in some sectors. – Sector concentrations within the lending portfolios are closely monitored and controlled, with mitigating actions taken where appropriate. Sector and product caps limit exposure to certain higher risk and vulnerable sectors and asset classes. In particular: - The average indexed LTV of the Retail UK Secured portfolio at 31 December 2016 was 44.0 per cent (31 December 2015: 46.1 per cent). The percentage of closing loans and advances with an indexed LTV greater than 100 per cent was 0.7 per cent (31 December 2015: 1.1 per cent).
– Commercial Banking remains disciplined within its low risk appetite approach and key credit risks continue to be effectively managed, including early identification and management of potential concern customers. We manage and limit exposure to certain sectors and asset classes, and closely monitor credit quality, sector and single name concentrations. – Detailed EU Exit portfolio impact assessments have been undertaken and internal and external key performance indicators are being monitored closely to help identify early signs of any deterioration. – Despite the uncertain economic headwinds, the portfolios are well positioned and monitoring confirms that we have yet to see any material deterioration in the credit quality of our portfolios. However, given the challenging environment our portfolios will not be immune and impairments are likely to increase from their historic low levels, driven mainly by lower levels of releases and write-backs and an element of credit normalisation.
Asset quality ratio1 0.02% 0.01% 1bp 1 In respect of loans and advances to customers.
Other Commercial Banking – Other Commercial Banking comprises £71,217 million of gross loans and advances to customers in Mid Markets, Global Corporates and Financial Institutions.
Table 1.42: Reconciliation of Group funding to the balance sheet (audited) At 31 December 2016 At 31 December 2015
Loans and advances to customers 13,668 32,641 7,418 53,727 150,086 7,678 159,510 84,174 251,362 455,175
The capital conservation buffer (CCB) is a standard buffer of 2.5 per cent of risk-weighted assets designed to provide for losses in the event of stress and is being phased in over the period from 1 January 2016 to 1 January 2019. During 2016 it was 0.625 per cent and during 2017 it is 1.25 per cent.
Dividends in respect of 2015 earnings received from the insurance business1 500 – – 500
AT1 capital resources have reduced by £703 million in the year, primarily reflecting the annual reduction in the transitional limit applied to grandfathered AT1 capital instruments and an increase in the significant investments deduction.
We read the minutes of key governance meetings including those of the Board, and of various management committees, as well as attending Audit Committee and Board Risk Committee meetings. We also understood the key activities of the Conduct and Compliance function.
The directors approved the consolidated financial statements on 21 February 2017.
Value of employee services: Share option schemes – – 141 141 – – 141
(O) Provisions and contingent liabilities Provisions are recognised in respect of present obligations arising from past events where it is probable that outflows of resources will be required to settle the obligations and they can be reliably estimated.
Other segment items: Investments in joint ventures and associates at end of year 1 – 4 – 42 47 1 Restated – see page 194. 2 Net of profits on disposal of operating lease assets of £66 million.
Movement in value of in-force business (note 24) 472 (162) (428)
Amortisation of acquired value of in-force non-participating investment contracts (note 24) 37 41 43
Regulatory provisions: Payment protection insurance provision (note 38) 1,000 4,000 2,200
1 The Finance (No. 2) Act 2015 introduced restrictions on the tax deductibility of provisions for conduct charges arising on or after 8 July 2015. This has resulted in an additional income statement tax charge of £219 million (2015: £459 million).
Of the total allowance in respect of loans and advances to customers, £1,876 million (2015: £2,425 million) related to lending that had been determined to be impaired (either individually or on a collective basis) at the reporting date.
Liabilities held at fair value through profit or loss 9,425 7,879
For the fair value of collateral pledged in respect of repurchase agreements see note 52.
The balances above are shown gross of reinsurance. As at 31 December 2016, related reinsurance balances were £29 million (2015: £34 million); reinsurance balances are reported within other assets (note 27). Liabilities arising from non-participating investment contracts are categorised as level 2. See note 49 for details of levels in the fair value hierarchy.
The Group has also established three private limited companies which hold assets to provide security for the Group’s obligations to the HBOS Final Salary Pension Scheme, a section of the Lloyds Bank Pension Scheme No 1 and the Lloyds Bank Offshore Pension Scheme. At 31 December 2016 these held assets of approximately £4.8 billion in aggregate. The private limited companies are consolidated fully in the Group’s balance sheet. The terms of these arrangements require the Group to maintain assets in these vehicles to agreed minimum values in order to secure obligations owed to the relevant Group pension schemes. The Group has satisfied this requirement during 2016.
Floating Rate Primary Capital Notes – – (108) – – (108)
9.875% Subordinated Fixed to Fixed Rate Notes 2021 callable 2016 – – – – (456) (456)
LIBOR and other trading rates In July 2014, the Group announced that it had reached settlements totalling £217 million (at 30 June 2014 exchange rates) to resolve with UK and US federal authorities legacy issues regarding the manipulation several years ago of Group companies’ submissions to the British Bankers’ Association (BBA) London Interbank Offered Rate (LIBOR) and Sterling Repo Rate. The Group continues to cooperate with various other government and regulatory authorities, including the Serious Fraud Office, the Swiss Competition Commission, and a number of US State Attorneys General, in conjunction with their investigations into submissions made by panel members to the bodies that set LIBOR and various other interbank offered rates.
Liabilities held at fair value through profit or loss – 7,878 1 7,879
Trading liabilities in respect of securities sold under repurchase agreements The fair value of these liabilities is determined using discounted cash flow techniques. The discount rates are derived from observable repo curves specific to the type of security sold under the repurchase agreement.
Loans and receivables: Loans and advances to customers: unimpaired 451,339 450,986 – – 450,986
C. Credit quality of assets Loans and receivables The disclosures in the table below and those on page 264 are produced under the underlying basis used for the Group’s segmental reporting. The Group believes that, for reporting periods following a significant acquisition such as the acquisition of HBOS in 2009, this underlying basis, which includes the allowance for loan losses at the acquisition date on a gross basis, more fairly reflects the underlying provisioning status of the loans. The remaining acquisition-related fair value adjustments in respect of this lending are therefore identified separately in this table.
Hedge Accounting The hedge accounting requirements of IFRS 9 are more closely aligned with risk management practices and follow a more principle-based approach than IAS 39. The standard does not address macro hedge accounting, which is being considered in a separate IASB project. There is an option to maintain the existing IAS 39 hedge accounting rules until the IASB completes its project on macro hedging. The Group currently expects to continue applying IAS 39 hedge accounting in accordance with this accounting policy choice.
There were no movements in the capital redemption reserve in 2014, 2015 or 2016.
Foreign exchange and other movements (24) – 546 522 1 See note 4.
NOTE 8: RELATED PARTY TRANSACTIONS continued Loans to subsidiaries 2016 £m 20151 £m
Factors that could cause actual business, strategy, plans and/or results (including but not limited to the payment of dividends) to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward looking statements made by the Group or on its behalf include, but are not limited to: general economic and business conditions in the UK and internationally; market related trends and developments; fluctuations in interest rates (including low or negative rates), exchange rates, stock markets and currencies; the ability to access sufficient sources of capital, liquidity and funding when required; changes to the Group’s credit ratings; the ability to derive cost savings and other benefits including, but without limitation as a result of any acquisitions, disposals and other strategic transactions; changing customer behaviour including consumer spending, saving and borrowing habits; changes to borrower or counterparty credit quality; instability in the global financial markets, including Eurozone instability, the exit by the UK from the European Union (EU) and the potential for one or more other countries to exit the EU or the Eurozone and the impact of any sovereign credit rating downgrade or other sovereign financial issues; technological changes and risks to cyber security; natural, pandemic and other disasters, adverse weather and similar contingencies outside the Group’s control; inadequate or failed internal or external processes or systems; acts of war, other acts of hostility, terrorist acts and responses to those acts, geopolitical, pandemic or other such events; changes in laws, regulations, accounting standards or taxation, including as a result of the exit by the UK from the EU, or a further possible referendum on Scottish independence; changes to regulatory capital or liquidity requirements and similar contingencies outside the Group’s control; the policies, decisions and actions of governmental or regulatory authorities or courts in the UK, the EU, the United States or elsewhere including the implementation and interpretation of key legislation and regulation; the ability to attract and retain senior management and other employees; requirements or limitations on the Group as a result of HM Treasury’s investment in the Group; actions or omissions by the Group’s directors, management or employees including industrial action; changes to the Group’s post-retirement defined benefit scheme obligations; the extent of any future impairment charges or write-downs caused by, but not limited to, depressed asset valuations, market disruptions and illiquid markets; the value and effectiveness of any credit protection purchased by the Group; the inability to hedge certain risks economically; the adequacy of loss reserves; the actions of competitors, including nonbank financial services, lending companies and digital innovators and disruptive technologies; and exposure to regulatory or competition scrutiny, legal, regulatory or competition proceedings, investigations or complaints. Please refer to the latest Annual Report on Form 20-F filed with the US Securities and Exchange Commission for a discussion of certain factors together with examples of forward looking statements.
Subsidiary undertakings (continued) The Group has determined that it has the power to exercise control over the following entities without having the majority of the voting rights of the undertakings. Unless otherwise stated, the undertakings do not have share capital or the Group does not hold any shares.