We are living through difficult times but lloyds Banking Group remains a strong institution focused on building deeper relationships with our customers and delivering long-term shareholder value.
excellent cost management. The Group’s cost:income ratio, excluding market dislocation, improved by 1.1 percentage points to 47.0 per cent.
5 per cent reduction in mortality and morbidity (excluding annuitants)7 23 4 100 basis points increase in equity and property returns8 nil nil 25 basis points increase in corporate bond spreads9 (59) (4)
Through twice yearly formal reviews and feedback, all our people understand how their performance impacts on colleagues, customers and our overall business success. Together, these act as robust processes for differentiating high performance and addressing and managing underperformance.
CorPorate university We have one of the largest corporate universities in Europe, which delivers a range of business-focused learning programmes. In addition to internally developed content, the university continues to work with best-practice suppliers to develop and deliver learning. The availability of programmes carrying relevant external certification provides colleagues with performance benchmarks and portable qualifications. We also support a range of business focused and developmental professional qualifications.
Flexible working is increasingly important in the competitive workplace and we have created a balanced environment where we offer a multitude of flexible working practices including: reduced hours; variable hours; job sharing; compressed hours; term-time working and tele-working.
The group change management committee is responsible for ensuring that the aggregate risks associated with the Group’s project portfolio are identified, assessed and mitigated, thereby ensuring that the portfolio remains deliverable within an acceptable level of risk.
Line management are directly accountable for the management of risks arising from the Group’s business. A key objective is to ensure that business decisions strike an appropriate balance between risk and reward, consistent with the Group’s risk appetite. The senior executive team and the board receive regular briefings and guidance from the chief risk officer to ensure awareness of the overarching risk management framework and a clear understanding of their accountabilities for risk and internal control.
All business units, divisions and group functions complete a control self-assessment annually (described on page 73), reviewing the effectiveness of their internal controls and putting in place enhancements where appropriate. Managing directors and group executive directors certify the accuracy of their assessment.
the lloyds tsB group business strategy is used to determine the Group’s high level risk principles and risk appetite measures and metrics for the primary risk drivers (see Table 1.3). A key focus has been to develop earnings volatility measures to complement existing capital measures for risk appetite. The risk appetite is proposed by the group chief executive and reviewed by various governance bodies including the group executive committee and the risk oversight committee. Responsibility for the approval of risk appetite rests with the board. The approved high level appetite and limits are delegated to individual group executive directors by the group chief executive.
Following completion of the HBOS plc transaction, Lloyds Banking Group has moved swiftly to apply its risk management practices to the HBOS Group. As part of the completion process, we have amended Lloyds TSB Group high level policies so that they could be introduced for Lloyds Banking Group.
The Group’s strategy is reviewed and approved by the board. Regular reports are provided to the group executive committee and the board on the progress of the Group’s key strategies and plans. Group risk conducts oversight to seek to ensure that business plans remain consistent with the Group’s strategy.
taBle 1.4: Banking – trading and other finanCial assets at fair value through Profit or loss
In recent months, the strain in the financial systems has increased substantially, leading to a significant tightening in market liquidity with the threat of a more marked deterioration in the global economic outlook and a consequent increase in recourse to liquidity schemes provided by central banks. Whilst various governments, including the UK Government, have taken substantial measures to ease the current crisis in liquidity, such as the measures announced in the UK on 8 October 2008 and 13 October 2008, there can be no assurance that these global measures will succeed in improving the funding and liquidity of the markets in which the major banks, including Lloyds Banking Group, operate.
Exposure represents the sufficiency of the Group’s policies and procedures to maintain adequate books and records to support statutory, prudential and tax reporting, to present and detect financial reporting fraud and to manage the Group’s tax exposure.
Capital ratios for 2008 are in accordance with Basel II requirements; ratios for 2007 and earlier years reflect Basel I.
The directors and senior management are committed to maintaining a control-conscious culture across all areas of operation. This is communicated to all employees by way of published policies and procedures and regular management briefings. A requirement to comply with internal control risk policies is a key component of individual staff objectives expressed in the balanced scorecard. Key business risks are identified, and these are controlled by means of procedures such as physical controls, credit, trading and other authorisation limits and segregation of duties. In addition, there is an annual control self assessment exercise whereby the key businesses and head office functions review specific controls and attest to the accuracy of their assessments. The assessment covers all enterprise-wide risk management categories and is in accordance with the principles of the combined code. As in previous years, this exercise was completed for the year ended 31 December 2008. All returns have been satisfactorily completed and appropriately certified.
The package is designed to encourage a long-term and risk-based focus: – Salary is a significant proportion of the total package, avoiding excessive leverage – All incentives will be paid on a deferred basis over three years – Deferred annual incentive is subject to claw-back, i.e. is not paid if performance on which the incentive is based is found to be unsustainable – A combination of financial and non-financial measures encourages a long-term focus – Economic profit, which is a risk-adjusted profit measure, is a core financial target
We believe that these arrangements are well aligned with the Financial Services Authority’s draft Code of Practice on Remuneration.
The remuneration committee takes an interest in ensuring that appropriate remuneration and governance arrangements are in place throughout the organisation, with the Group functions providing an oversight role in the development of remuneration policy and practice below the senior executive population. In particular, divisional remuneration decisions are subject to independent oversight from the human resources function and the appointment and remuneration for risk officers in the divisions is reviewed in conjunction with the chief risk officer for the Group.
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 to be made.
The executive directors waived their entitlement to any bonus in respect of the 2008 performance. There will be no free shares award under Shareplan in respect of 2008.
Report of the independent auditors on the parent company financial statements 182
At 1 January 2008 (or later date of appointment) At 31 December
March 1998 – August 1999 Growth in earnings per share which is equal to the aggregate percentage change in the retail price index plus two percentage points for each complete year of the relevant period plus a further condition that the Company’s ranking based on TSR over the relevant period should be in the top 50 companies of the FTSE 100.
Ms Dial was the only participant in this plan where an option was granted to her, in June 2005, to acquire 242,825 ordinary shares in Lloyds TSB Group plc for a total price of £1. The option was not subject to any performance condition but would normally become exercisable only if she remained an employee, and had not given notice of resignation, on 31 May 2008. The option lapsed on notice of resignation tendered prior to 31 May 2008. Full details of the plan were set out in the 2005 annual report.
To The members of LLoyds banking group pLc We have audited the consolidated financial statements of Lloyds Banking Group plc for the year ended 31 December 2008 which comprise the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and the related notes. These consolidated financial statements have been prepared under the accounting policies set out therein.
We read other information contained in the annual report and consider whether it is consistent with the audited consolidated financial statements. The other information comprises only the Overview, the unaudited part of the Business Review, the directors’ report, the corporate governance disclosures, the unaudited part of the directors’ remuneration report, the shareholder information and all the other information listed on the contents page. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated financial statements. Our responsibilities do not extend to any other information.
Profit on sale of businesses 13 – 657 profit before tax 807 4,000 profit for the year 845 3,321
Private placement of ordinary shares 760 – – 760 – 760
– Indications that the borrower or group of borrowers is experiencing significant financial difficulty; – Restructuring of debt to reduce the burden on the borrower; – Breach of loan covenants or conditions; and
The leases entered into by the Group are primarily operating leases. Operating lease rentals are charged to the income statement on a straight-line basis over the period of the lease.
Borrowings (which include deposits from banks, customer accounts, debt securities in issue and subordinated liabilities) are recognised initially at fair value, being their issue proceeds net of transaction costs incurred. Borrowings are subsequently stated at amortised cost using the effective interest method.
Other income (net of fee and commission expense) 1,766 579 (3,680) (3,101) 829 (199) – (705)
Gains less losses on disposal of available-for-sale financial assets (note 43) 19 5
Reviews of the financial position of corporate and other borrowers 1.4 2.8
Other, including adjustments in respect of businesses sold in earlier years – (22)
Weighted average number of ordinary shares for diluted earnings per share 5,781m 5,683m
Bank and building society certificates of deposit – 433 – 811
Loans and advances to customers include balances that have been securitised but not derecognised, comprising both residential mortgages and commercial banking loans, the carrying values of which are set out below together with any related liabilities. Residential mortgages are not derecognised because the Group remains exposed to the majority of the risk of any default in respect of them; commercial banking loans are not derecognised because the Group has not transferred the contractual rights to receive the cash flows from those loans nor has it assumed a contractual obligation to pay the cash flows from those loans to a third party.
The other asset-backed securities not in the Cancara conduit of £4,103 million (31 December 2007: £3,056 million) comprise £2,917 million (31 December 2007: £2,643 million) of US Government guaranteed student loan asset-backed securities and £1,186 million (31 December 2007: £413 million) of unhedged asset-backed security collateralised debt obligations.
All assets have been individually assessed for impairment. The criteria used to determine whether an impairment loss has been incurred are disclosed in note 2(J). Included in available-for-sale assets at 31 December 2008 are debt securities individually determined to be impaired whose gross amount before impairment allowances was £282 million (2007: £75 million) and in respect of which no collateral was held. In addition, included in available-for-sale assets at 31 December 2008 are equity securities individually determined to be impaired whose gross amount before impairment allowances was £31 million (2007: nil).
Balance sheet amount at 31 December 2007 719 864 1,256 2,839
Insurance contract liabilities, substantially all of which relate to business written in the United Kingdom, are comprised as follows: gross reinsurance* net Gross Reinsurance* Net £m £m £m £m £m £m
Cash paid for claims settled in the year (275) – (275)
Rate of increase for pensions in payment 2.80 3.10 years years
Index to annual report 192 financial calendar 2009 195 i) Issued by a group undertaking under the Company’s subordinated guarantee.
Changes in authorised and issued share Capital sinCe the end of the year
performanCe Conditions for exeCutive options foR oPTIonS GRAnTED UP To mARCH 2001 options granted Performance conditions
In respect of options granted between march 1998 and march 2001, the relevant period for the performance conditions begins at the end of the financial year preceding the date of grant and will continue until the end of the third subsequent year following commencement or, if not met, the end of such later year in which the conditions are met. once the conditions have been satisfied the options will remain exercisable without further conditions. If they are not satisfied by the tenth anniversary of the grant the option will lapse.
The performance conditions for awards made in march and August 2007 are as follows: (i) for 50 per cent of the award (the ‘EPS Award’) – the performance condition is as described for may 2006 with the relevant performance period commencing on 1 January 2007 and ending on 31 December 2009.
The tables below detail, on an aggregated basis, balances outstanding at the year end and related income and expense, together with information relating to other transactions between the Group and its key management personnel: £m £m loans
Deposits placed by key management personnel attracted interest rates of up to 6.0 per cent (2007: 8.0 per cent).
The financial Services Compensation Scheme (fSCS) is the UK’s statutory fund of last resort for customers of authorised financial services firms and pays compensation if a firm is unable to pay claims against it. The fSCS has borrowings from Hm Treasury to fund the compensation costs associated with the institutions that have failed in 2008 and will receive the receipts from asset sales, surplus cash flow and other recoveries from these institutions in the future.
In 2008, the Group has accrued £122 million in respect of its current obligation to meet management expenses levies.
other items serving as direct credit substitutes include standby letters of credit, or other irrevocable obligations, where Lloyds Banking Group has an irrevocable obligation to pay a third party beneficiary if the customer fails to repay an outstanding commitment; they also include acceptances drawn under letters of credit or similar facilities where the acceptor does not have specific title to an identifiable underlying shipment of goods.
Trading and other financial assets at fair value through profit or loss – 857 44,207 – – – – 45,064
Trading assets: Government securities 62 – – – – – 62
TRADInG AnD oTHER LIABILITIES AT fAIR VALUE THRoUGH PRofIT oR LoSS
Index to annual report 192 financial calendar 2009 195 for the year ended 31 december 2008 £ million £ million
Index to annual report 192 financial calendar 2009 195 6 subordinated liabilities £m £m preferred securities fixed/floating Rate non-Cumulative Callable Preference Shares callable 2015 (£600 million)† 584 593 fixed/floating Rate non-Cumulative Callable Preference Shares callable 2016 (US$ 1,000 million)† 824 515 6% non-Cumulative Redeemable Preference Shares – –