ANNUAL REPORT
AND ACCOUNTS 2009
CREATING THE UK’S BEST
FINANCIAL SERVICES PROVIDER
CONTENTS
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group key performance indicators
Chairman’s statement
Group chief executive’s review
Group chief executive’s Q&A
Marketplace trends
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
GOVERNANCE
The board
Directors’ report
Corporate governance
Directors’ remuneration report
FINANCIAL STATEMENTS
Report of the independent auditors on the consolidated financial statements
Consolidated financial statements
Notes to the consolidated financial statements
Report of the independent auditors on the parent company financial statements
Parent company financial statements
Notes to the parent company financial statements
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
VIEW OUR ANNUAL
REPORT ONLINE…
A full version of our Annual Report
and Accounts and information
relating to Lloyds Banking Group
is available at
lloydsbankinggroup.com
1
2
3
4
5
6
10
14
16
18
24
50
52
56
95
96
98
100
105
126
127
133
249
250
253
261
262
265
266
PRESENTATION OF INFORMATION
In order to provide more meaningful and relevant comparatives, the
results of the Group and divisions are presented on a ‘combined
businesses’ basis. The key principles adopted in the preparation of the
combined businesses basis of reporting are described below.
In order to reflect the impact of the acquisition, the following
adjustments have been made:
– the 2008 results include the results of HBOS as if it had been acquired
on 1 January 2008;
– the 2009 results assume HBOS had been owned throughout the year;
– the unwind of acquisition-related fair value adjustments is shown as one
line in the 2009 combined businesses income statement and has not
been back-dated to 2008; and
– the gain on acquisition of HBOS and amortisation of purchased
intangible assets have been excluded.
In order to better present the underlying business performance the
following items, not related to the acquisition, have also been excluded:
– the results of BankWest and St. Andrews which were sold in December
2008 and the related loss on disposal;
– insurance and policyholder interests volatility;
– integration costs;
– goodwill impairment; and
– Government Asset Protection Scheme (GAPS) fee.
The combined businesses balance sheet as at 31 December 2008
aggregates the Lloyds TSB Group and the HBOS Group balance
sheets as at 31 December 2008, adjusted for the subsequent
recapitalisation in January 2009 and reflects the fair value adjustments
applied to the HBOS balance sheet at 16 January 2009.
FORWARD LOOKING STATEMENTS
This annual report includes certain forward looking statements within
the meaning of the US Private Securities Litigation Reform Act of 1995
with respect to the business, strategy and plans of Lloyds Banking
Group and its current goals and expectations relating to its future
financial condition and performance. Statements that are not historical
facts, including statements about Lloyds Banking Group’s or its
directors and/or management’s beliefs and expectations, are
forward looking statements. Words such as ‘believes’, ‘anticipates’,
‘estimates’, ‘expects’, ‘intends’, ‘aims’, ‘potential’, ’will’, ‘would’,
‘could’, ‘considered’, ‘likely’, ‘estimate’ and variations of these
words and similar future or conditional expressions are intended to
identify forward looking statements but are not the exclusive means
of identifying such statements. By their nature, forward looking
statements involve risk and uncertainty because they relate to events
and depend upon circumstances that will occur in the future.
Examples of such forward looking statements include, but are not
limited to, projections or expectations of the Group’s future financial
position including profit attributable to shareholders, provisions,
economic profit, dividends, capital structure, expenditures or any
other financial items or ratios; statements of plans, objectives or goals
of Lloyds Banking Group or its management including in respect of the
integration of HBOS and the achievement of certain synergy targets;
statements about the future business and economic environments
in the United Kingdom (UK) and elsewhere including future trends
in interest rates, foreign exchange rates, credit and equity market
levels and demographic developments and any impact on the
Group; statements about strategic goals, competition, regulation,
disposals and consolidation or technological developments in the
financial services industry; and statements of assumptions underlying
such statements.
Factors that could cause actual results to differ materially from the
plans, objectives, expectations, estimates and intentions expressed
in such forward looking statements made by Lloyds Banking Group
or on Lloyds Banking Group’s behalf include, but are not limited to,
general economic conditions in the UK and internationally; inflation,
deflation, interest rates, policies of the Bank of England and other
G8 central banks, exchange rate, market and monetary fluctuations;
changing demographic developments including mortality and
changing customer behaviour including consumer spending, saving
and borrowing habits, borrower credit quality, technological changes,
natural and other disasters, adverse weather and similar contingencies
outside the Group’s control; inadequate or failed internal or external
processes, people and systems; terrorist acts and other acts of war
or hostility and responses to those acts, geopolitical, pandemic or
other such events; changes in laws, regulations, taxation, Government
policies or accounting standards or practices and similar contingencies
outside Lloyds Banking Group’s control; the ability to derive cost
savings and other benefits as well as mitigate exposures from the
acquisition and integration of HBOS; inadequate or failed internal
or external processes, people and systems; exposure to regulatory
scrutiny, legal proceedings or complaints; changes in competition and
pricing environments; the inability to hedge certain risks economically;
the adequacy of loss reserves; the ability to secure new customers
and develop more business from existing customers; the degree of
borrower credit quality; the ability to achieve value-creating mergers
and/or acquisitions at the appropriate time and prices and the success
of Lloyds Banking Group in managing the risks of the foregoing.
Lloyds Banking Group may also make or disclose written and/or oral
forward looking statements in reports filed with or furnished to the
US Securities and Exchange Commission, Lloyds Banking Group
annual reviews, half-year announcements, proxy statements, offering
circulars, prospectuses, press releases and other written materials
and in oral statements made by the directors, officers or employees
of Lloyds Banking Group to third parties, including financial analysts.
Except as required by any applicable law or regulation, the forward
looking statements contained in this annual report are made as of
the date hereof, and Lloyds Banking Group expressly disclaims any
obligation or undertaking to release publicly any updates or revisions
to any forward looking statements contained in this annual report to
reflect any change in Lloyds Banking Group’s expectations with regard
thereto or any change in events, conditions or circumstances on which
any such statement is based.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
1
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
2
3
4
5
6
Five year financial summary
95
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
18
24
50
52
56
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
GROUP PROFILE
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
1
1
Lloyds Banking Group
Lloyds Banking Group
Annual Report and Accounts 2009
Annual Report and Accounts 2009
OUR VISION IS TO BE RECOGNISED AS
THE BEST FINANCIAL SERVICES COMPANY
IN THE UK BY SHAREHOLDERS, CUSTOMERS
AND COLLEAGUES
OUR GROUP
Lloyds Banking Group is a leading UK based financial services group providing a wide range of banking and
financial services, primarily in the UK, to personal and corporate customers.
Lloyds Banking Group was formed in January 2009 following the acquisition of HBOS and our main business
activities are retail, commercial and corporate banking, general insurance, and life, pensions and investment
provision. The new Group also operates an international banking business with a global footprint in over
30 countries.
The Group is the UK’s largest retail bank and has a large and diversified customer base. Services are offered
through a number of well recognised brands including Lloyds TSB, Halifax, Bank of Scotland, Scottish Widows,
Clerical Medical and Cheltenham & Gloucester, and via a unique distribution capability comprising the largest
branch network in the UK and intermediary channels.
Lloyds Banking Group is quoted on both the London Stock Exchange and the New York Stock Exchange and
is one of the largest companies within the FTSE 100.
GROUP STRATEGY
DIVISIONAL OVERVIEW
GROUP PERFORMANCE
A detailed description of the corporate
strategy which supports our vision. We
aim to understand our customers and
meet their needs, while building a high
performance, efficient organisation that
encourages and develops its staff.
Details of our four primary operating
divisions, the key product markets in which
they participate and their contribution to
the Group’s total income.
2009 at a glance: key highlights of the year
together with a summary of group results
and key performance indicators.
2
3
4-5
2
Lloyds Banking Group
Annual Report and Accounts 2009
GROUP STRATEGY
OUR CORPORATE STRATEGY
Our corporate strategy supports the Group vision of being recognised as the best financial services
company in the UK by customers, colleagues and shareholders. The strategy is focused on being a
more conservative, ‘through the cycle’ relationship based business.
The main focus for the Group remains the financial services markets in the UK and our strategic
position was significantly strengthened through the acquisition of HBOS in January 2009. We are
a well diversified UK financial services Group and the largest retail financial services provider in the UK.
We have leading positions in many of the markets in which we participate, a market leading distribution
capability, well recognised brands and a large customer base. The scale of the organisation provides
us with the opportunity to further invest in products and services, systems and training that combined will
offer unparalleled choice and service to our customers.
Our corporate strategy is focused on:
DEVELOPING STRONG CUSTOMER FRANCHISES THAT ARE BASED
ON DEEP CUSTOMER RELATIONSHIPS
All our businesses are focused on extending the reach and depth of our customer relationships, whilst
enhancing product capabilities to build competitive advantage. Ensuring we understand and effectively
meet the needs of our customers from core banking products to the more specialist services such as
insurance, wealth management or corporate banking is at the heart of our business and is fundamental
to ensuring we are developing long lasting customer relationships.
BUILDING A HIGH PERFORMANCE ORGANISATION
In delivering a high performance organisation the Group is focused on improving our cost efficiency
and utilising our capital more effectively whilst maintaining a prudent approach to risk.
– The Group aspires to have one of the lowest cost to income ratios amongst UK financial institutions
and further improving our processing efficiency and effectiveness will remain a priority. The anticipated
synergies arising from the acquisition will be key to further improving our efficiency.
– Utilising capital more effectively is increasingly important in the current environment and capital
will be rigorously allocated across our portfolio of businesses to support business growth.
– The prudent Lloyds TSB ‘through the cycle’ approach to risk has been applied to the enlarged Group.
Our conservative and prudent approach to risk is core to the business model and the ‘through the cycle’
approach means we will continue to support our customers throughout the economic cycle. The
risk structures and frameworks that have been implemented are the foundation for good business
management.
MANAGING OUR MOST VALUABLE RESOURCE, OUR PEOPLE
Executing our strategy effectively will only be possible if we ensure deliverables are effectively aligned
with our corporate strategy and we manage our most valuable resource, our people, well. Our people
have the skills and capabilities to deliver the strategy but in driving performance it is important to ensure
we encourage, manage and develop our staff whilst creating a great place to work.
The effective integration of the two businesses will be a significant challenge over the next few years,
but comprehensive plans are in place and excellent progress is already being made.
The Group believes that the successful execution of its strategy to focus on core markets, customer and
cost leadership, capital efficiency and a prudent risk appetite will enable the Group to achieve its vision
of being recognised as the best financial services company in the UK.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
DIVISIONAL OVERVIEW
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
3
Lloyds Banking Group
Annual Report and Accounts 2009
ALL OUR DIVISIONS ASPIRE TO BE
RECOGNISED AS THE BEST IN THEIR
CHOSEN FINANCIAL MARKETS
OUR DIVISIONS
Since the acquisition of HBOS in January 2009 there have been four primary operating divisions: Retail, Wholesale, Wealth and
International, and Insurance. The key product markets in which they participate and relative contribution to the Group’s total income
are presented below and a more detailed analysis of their strategy, business and performance is outlined within the Business Review.
42%
of total Group
income1
39%
of total Group
income1
10%
of total Group
income1
9%
of total Group
income1
RETAIL
WHOLESALE
WEALTH AND INTERNATIONAL
INSURANCE
Secured lending – mortgages
Corporate Markets
Unsecured lending – credit cards,
loans and overdrafts
Internet and telephone banking
Current accounts
Savings accounts
24
Treasury and Trading
Asset Finance
28
A MULTI-BRAND APPROACH
Wealth management
Asset management
International Banking
34
Life assurance, pensions and investments
General Insurance
38
1Excludes central group items
The Group now operates a range of well recognised brands across the four divisions with different brands utilised for different customer
segments, geographies and markets. The main four brands operated by the Group are Lloyds TSB, Halifax, Bank of Scotland and
Scottish Widows though a number of other brands are used in specialist markets.
4
Lloyds Banking Group
Annual Report and Accounts 2009
GROUP PERFORMANCE
KEY HIGHLIGHTS
COMBINED BUSINESSES1 – RESULTS SUMMARY
Statutory profit before tax of £1,042 million (2008: £760 million)
includes an £11,173 million acquisition-related negative goodwill
credit.
Combined businesses loss of £6,300 million for the year
(2008: £6,713 million loss).
Resilient core businesses performance despite year-on-year
margin pressure and weak economy. £35 billion of gross new
mortgage lending, approximately 100,000 new commercial
accounts.
Total income, net of insurance claims, increased by 12 per cent
to £23,964 million due to the absence of £3.4 billion of
mark-to-market losses on the Group’s treasury asset portfolio and
gains of £1.5 billion on capital transactions, which were partly offset
by significant year-on-year margin pressures.
Banking net interest margin improved to 1.83 per cent in the
second half of the year, compared to 1.72 per cent in the first half.
Integration ahead of schedule and cost synergies target
increased to £2 billion run-rate by the end of 2011. Total cost
synergies of £534 million have been realised during the year.
Annualised run-rate savings totalled £766 million at the year end.
Total impairments significantly higher at £23,988 million for
2009. Second half impairments were 21 per cent lower than in
the first half of 2009. We expect to see a similar pace of
half-yearly improvement throughout 2010, with further substantial
reductions in 2011 and beyond.
Robust capital position and strengthened funding profile.
Core tier one capital at 8.1 per cent following the successful capital
raising in December 2009. Wholesale funding maturing in more
than one year increased from 44 per cent to 50 per cent.
Outlook: economy showing signs of stabilisation, with weak
upturn expected in 2010. Significant improvement in the
performance of our continuing businesses expected in 2010.
Medium-term goals reflect economic outlook and significant
opportunity to leverage relationship-led model across
enlarged business base. High single-digit income growth from
our continuing businesses targeted within two years. Continued
reduction in cost:income ratio. Further run-off of around £140 billion
of assets to reduce the balance sheet in the medium term and allow
for investment in core relationship businesses.
Net interest income
Other income
Total income
Insurance claims
2009
£m
12,726
11,875
24,601
2008
£m
14,903
6,933
21,836
(637)
(481)
Total income, net of insurance claims
23,964
21,355
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures
and associates
(11,609)
(12,236)
12,355
9,119
(23,988)
(14,880)
(767)
(952)
Loss before tax and fair value unwind
(12,400)
(6,713)
Fair value unwind
6,100
–
Loss before tax – combined businesses
(6,300)
(6,713)
RECONCILIATION OF COMBINED BUSINESSES LOSS
BEFORE TAX TO STATUTORY PROFIT BEFORE TAX
Loss before tax – combined businesses
(6,300)
(6,713)
Integration costs
Volatility
GAPS fee
Negative goodwill credit
Amortisation of purchased intangibles and
goodwill impairment
Pre-acquisition results of HBOS plc
Insurance grossing adjustment
Results of BankWest and St. Andrews
Loss on disposal of businesses
Profi t before tax – statutory
(1,096)
–
478
(2,349)
(2,500)
11,173
–
–
(993)
280
(258)
10,825
–
–
–
1,042
10
90
(845)
760
1
In order to reflect the impact of the acquisition of HBOS, provide
more relevant and meaningful comparatives and better present
the underlying business performance, the results of the Group and
divisions are presented on a combined businesses basis. The key
principles adopted in the preparation of the combined businesses
basis are described in the contents page. A full reconciliation of
the combined businesses basis to the statutory basis is given in
note 4 on page 151. Unless otherwise stated, the commentaries on
pages 1 to 95 are on a combined businesses basis.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
5
Lloyds Banking Group
Annual Report and Accounts 2009
GROUP KEY PERFORMANCE INDICATORS
STATUTORY PROFIT BEFORE TAX
37%
2008
2009
760
INCOME AND COST GROWTH1
(5)
Costs
Income
EARNINGS PER SHARE
INCOME AND COST GROWTH1
INCOME AND COST GROWTH1
12%
2008
2009
(5)
(5)
Income
Income
Costs
Costs
6.7
PROFIT/LOSS BEFORE TAX1
(6,713)
(6,300)
COST:INCOME RATIO1
2008
2009
48
CORE TIER 1 CAPITAL RATIO
2008
2009
1 Combined businesses basis.
5.6
£m
1,042
%
12
pence
%
%
12
12
7.5
£m
2008
2009
%
57
%
8.1
6
Lloyds Banking Group
Annual Report and Accounts 2009
CHAIRMAN’S STATEMENT
Sir Winfried Bischoff
2009 HAS BEEN A YEAR OF CHANGE BUT
ALSO ONE OF ACHIEVEMENT AS THE
BUSINESS HAS POSITIONED ITSELF TO
BENEFIT FROM WHAT WE EXPECT TO BE
STRONG EARNINGS MOMENTUM OVER
THE NEXT FEW YEARS
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
1
2
3
4
5
18
24
50
52
56
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Chairman’s statement
6
Five year financial summary
95
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
7
Lloyds Banking Group
Annual Report and Accounts 2009
OUR YEAR IN BRIEF
CREATION OF LLOYDS BANKING GROUP
Lloyds Banking Group was created in January 2009 and is now the
UK’s largest retail bank.
GOVERNMENT ASSET PROTECTION SCHEME
In March, in what was clearly a very difficult external market, the
Group announced its intention to participate in the Government
Asset Protection Scheme. At the time the Scheme provided an
opportunity to reduce the risk profile of the balance sheet and
significantly strengthen the Group’s capital position. A more
economically favourable alternative was later pursued.
PLACING AND COMPENSATORY OPEN OFFER
A placing and compensatory open offer was successfully
completed in June. The proceeds allowed the Group to
repurchase the £4 billion of preference shares held by HM Treasury.
EU STATE AID
In November the Group’s restructuring plan was agreed by the
European Commission. The board approved the restructuring
plan and is confident that this will not have a materially negative
impact on the Group.
CAPITAL RAISING
In December we successfully undertook the largest ever capital
raising in Europe comprising a £9 billion debt exchange and
a £13.5 billion rights issue. This provided a market-based
alternative to our intended participation in the Government Asset
Protection Scheme and provided superior economic value to
our shareholders.
RESILIENT CORE BUSINESS PERFORMANCE
Whilst the capital raising activities took much of the external
attention during 2009, the Group has continued to deliver a
resilient core business performance in a difficult economic
environment. The integration of the two businesses is progressing
ahead of schedule and the Group is now very well positioned for
future earnings growth.
My first annual statement to you as chairman comes at the end of
what has been a momentous and, at times, extraordinary year for
Lloyds Banking Group. It has been a year of change but also one of
achievement as the business has positioned itself to benefit from
what we expect is going to be good earnings momentum over
the next few years. The changing economic climate both in the UK
and overseas over the past 12 months has presented the banking
industry with many difficult challenges. However, as we move into
2010, we believe that we are well positioned to benefit from the
encouraging signs of economic recovery, albeit we believe the UK
economy will grow at below trend levels over the next few years.
Our commitment to our customers continues to be at the heart of
our business and our relationship with them is critical to our success.
Only by focusing on the needs of our customers and offering
products and services that address those needs can we expect to
be successful and deliver benefit to all our stakeholders.
ACHIEVEMENTS
I am encouraged by what Lloyds Banking Group as an organisation
has achieved this year. In particular, in November we launched the
largest ever capital raising comprising a £9 billion debt exchange
and a £13.5 billion rights issue. This capital raising programme could
not have been completed so successfully without the strong support
of the vast majority of our shareholders, debt holders and of course
importantly the UK Government through UK Financial Investments.
We remain immensely grateful to them for that support. In providing
this market-based alternative to our intended participation in the
Government Asset Protection Scheme, we believe we provided
superior economic value to our shareholders. Both the rights
issue and the liability management exercise are an important step
towards meeting our, and the Government’s, objective for the Group
to operate as a wholly privately owned self-supporting commercial
enterprise. HM Treasury’s stake in the Group of 43.4 per cent at the
year end has reduced to 41.3 per cent following the completion of
the capital raising programme in February 2010.
During the last few months of 2009 the Group, together with
HM Treasury, concluded negotiations with the European
Commission on a restructuring plan required as a result of the
state aid received by the Group. We will dispose of a retail banking
business with at least 600 branches, a 4.6 per cent market share of
the personal current account market in the UK and approximately
19 per cent of the Group’s mortgage assets, along with a number of
behavioural remedies. The board is confident that the plan will not
have a materially negative impact on the Group.
One of the behavioural commitments we entered into as part of the
plan is not to make coupon payments or to exercise voluntary call
options on certain securities from 31 January 2010 until 31 January
2012. This will also prevent us from paying dividends on our ordinary
shares for the same duration. We fully understand the hardship that
the lack of dividend and coupon payments has caused many of our
shareholders and stakeholders, and we are working diligently to
restore the ability to pay dividends and create shareholder value.
The board intends to resume dividend payments on ordinary shares
as soon as market conditions and the financial performance of
the Group permit, subject to the expiry, in 2012, of the restrictions
arising from the European Commission’s remedies.
8
Lloyds Banking Group
Annual Report and Accounts 2009
CHAIRMAN’S STATEMENT
Whilst the capital raising activities took much of the external
attention during 2009, the Group delivered a resilient core
business performance and the integration of the two businesses is
progressing ahead of schedule. Further detail on our performance
is outlined in the group chief executive’s review.
to and can be broadly supported by regulatory authorities and
governments. Such proposals could set the industry on the path
towards an internationally agreed understanding, removing the
uncertainty and scepticism hanging over the industry both of which
factors act as a brake on progress, to the detriment of the broader
economies.
PEOPLE
The past year has been difficult for everyone and we are mindful
of the uncertainty our colleagues have faced.
Since joining the Group in September, I have had the pleasure of
meeting many of our colleagues and it is clear we have a strong
team who have shown an impressive degree of professionalism,
enthusiasm, commitment and sheer hard work in these challenging
circumstances. Not only have they successfully undertaken the
normal day job of serving our customers and realising the potential
of the leading franchise in the UK, but they are engaged in
implementing one of the most complex integration and corporate
restructurings ever undertaken. They have acquitted themselves
admirably and I thank them on behalf of all shareholders.
Importantly, our Group is led by a strong management team who
I believe have the skills to ensure this organisation delivers value to
our customers and shareholders. They have successfully addressed
the key strategic and operational challenges facing the organisation
and will continue to do so to the benefit of all our stakeholders.
THE BANKING INDUSTRY
It is of course a privilege to have the opportunity to serve our
customers. Given our scale, with that privilege comes obligations.
That is why we are playing an active part in the UK’s economic
recovery. I am pleased to note that we extended £70 billion of
gross committed lending last year helping many households
and businesses in the process. As the country’s largest private
sector savings institution, we also played a commensurate part in
encouraging people to rediscover the savings habit, an essential
component of the economic recovery. More broadly we were,
and continue to be, involved in all the Government schemes
to encourage lending and to assist people or businesses in
financial difficulties. Also, our Lloyds Development Capital activities
provide vital equity and debt capital to smaller and medium-sized
businesses that often are the most vulnerable, but at the same time,
most growth orientated parts of the economy.
To the extent that banking institutions, including Lloyds Banking
Group, meet their obligations of service and intermediation and
are responsible and pro-active conduits of channelling savings into
productive enterprises and households, we hope that trust in our
institutions may be re-established. It will not happen overnight,
but happen it must and it is up to us to ensure by our actions that
it does.
It follows that it is right that there is thoughtful and considered
debate on the shape and structure of our industry and not simply
knee-jerk reaction by the industry. Accordingly, I believe that the
combined efforts of a few of the major global financial institutions,
perhaps with two or three of the respected industry bodies,
should pro-actively help develop proposals which are acceptable
REMUNERATION
We are conscious of the current public debate about remuneration
in the banking sector. We understand that this is a sensitive issue for
many people at a time when their personal finances are challenged,
and also in the light of the significant support given by taxpayers
to our industry. We have thought carefully and responsibly about
the design of our remuneration schemes and have been engaged
in discussions with, and listened to, the views of a broad group of
our shareholders on the remuneration of senior management. We
are committed to maintaining the right balance between reward,
risk management and performance and will continue to emphasise
consultation with our shareholders with a view to achieving the right
balance. Specifically, we are active participants in the debate about
the appropriate remuneration structures for the banking sector.
We believe deferral and clawback are the way forward and have
implemented these two factors in our own remuneration structures.
They have also become key features of remuneration design in the
banking sector more generally and will be refined further, here in the
UK and elsewhere.
As we announced on 22 February 2010, our group chief executive,
Eric Daniels decided to waive the bonus which the board on the
recommendation of the remuneration committee had awarded
him. Eric took this decision in the interests of the Group since he
felt the public debate about bonuses in the banking industry was
in danger of obscuring the very real advances which had been
achieved in terms of capital creation, quality of revenues, earnings
prospects and write-offs, and integration benefits. We are grateful
to Eric for his action. At the same time, I believe it is important
for the future that we and our shareholders find a way whereby
remuneration models will be allowed to be honoured without the
recipient being put in a position to feel he should waive the awards
arising from them.
We are, as you know, primarily a retail and commercial bank. This
means that the total payout under our Group bonus schemes for
2009 will be a small percentage of overall revenues. All awards in
the Group are subject, where appropriate, to deferral and clawback
and agreed with UK Financial Investments and the Financial Services
Authority (FSA).
DIRECTORS AND GOVERNANCE
Governance structures are increasingly important in the financial
services industry. I am committed to ensuring that Lloyds Banking
Group is at the forefront of these developments. To that end the
board has given additional authority to our nomination committee
and renamed it nomination and governance committee, to deal
with all governance matters and make recommendations on these
to the board.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
1
2
3
4
5
18
24
50
52
56
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Chairman’s statement
6
Five year financial summary
95
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
9
Lloyds Banking Group
Annual Report and Accounts 2009
Since February 2009, there have been eleven changes to the board,
five new directors and six departures.
In February 2009 two new non-executive directors were appointed.
Anthony Watson CBE brings with him over 40 years experience
in the investment management industry. Timothy Ryan is a senior
investment banker with a wealth of knowledge and understanding
of the financial services industry and significant experience in the
governmental sector. Lord Leitch was appointed deputy chairman
in May 2009. In March 2010 we will be joined by Glen Moreno and
David Roberts. Glen is chairman of Pearson plc and will be senior
independent director. He has significant financial and banking
industry and public company experience in the UK and abroad.
David Roberts’ deep understanding at the most senior level of
commercial and retail banking in the UK, Europe and internationally
is particularly valuable in that core business of our Group. As you
know I joined on 15 September 2009. The full particulars and
background of all our directors are set out on pages 96 and 97.
We have also seen a number of departures. Ewan Brown,
Jan du Plessis, Philip Green, Sir David Manning and Carolyn McCall
have all retired from the board. I would like to thank each of them for
their contribution to the Group, in some cases for many years, and
during a period of great change, and latterly turmoil, in the banking
sector. We wish them well for the future. I wish also to pay tribute to
my predecessor Sir Victor Blank as chairman of the Group during a
tumultuous time. Sir Victor has had a long and distinguished career
in financial and professional services and in commerce and industry
and he retires with my thanks for his counsel and commitment since
his appointment in 2006.
OUTLOOK
The acquisition of HBOS at the beginning of 2009 improved the
strategic positioning of Lloyds Banking Group albeit at short-term
cost. We now have leading positions in many of the financial
markets in which we participate, a market leading distribution
capability, well recognised brands and a large customer base. The
scale of the organisation provides us with the opportunity to further
invest in products and services, systems and training, offering
unparalleled choice and service to our customers. This strategic
positioning, along with our strong relationship focus and prudent
risk appetite, provides the platform for future growth.
The successful execution of our strategy which is to focus on core
markets, on customer and cost leadership, on capital efficiency
and on a prudent risk and funding profile should enable the Group
to deliver earnings growth and shareholder value whilst achieving
its aim to be recognised as the best financial services company
in the UK.
Sir Winfried Bischoff
Chairman
25 February 2010
10
Lloyds Banking Group
Annual Report and Accounts 2009
GROUP CHIEF EXECUTIVE’S REVIEW
J Eric Daniels
AQUE NULLAB INCTI
2009 WAS A YEAR OF SIGNIFICANT
ACHIEVEMENT IN SHAPING THE GROUP.
WE HAVE ESTABLISHED POSITIVE TRENDS
IN MARGIN, COST AND IMPAIRMENTS AND
ARE WELL POSITIONED
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entuary sapiente delecatus auaut pre fear enrdis doloribr asperiore
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excepel il ipiendusam voluptat.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
1
2
3
4
5
18
24
50
52
56
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Chairman’s statement
6
Five year financial summary
95
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
11
Lloyds Banking Group
Annual Report and Accounts 2009
ADDRESSING THE KEY ISSUES
CREATING THE PLATFORM FOR FUTURE GROWTH
We now have market-leading positions in many of the financial
markets in which we participate, a market-leading distribution
capability, well recognised brands and a large customer base. Over
the last 12 months we have appointed the management team and
implemented the management structures to ensure delivery of our
strategy going forward.
INTEGRATION
Excellent progress is being made on the integration of the two
businesses. Detailed integration plans have been developed and
implemented and we exited the year with a cost synergy run-rate
of £766 million. The significant progress being made has led us to
raise the expected synergies to a £2 billion annualised run-rate by
the end of 2011.
RISK MANAGEMENT
The strong risk management culture and more prudent risk
appetite previously prevalent within Lloyds TSB has been applied
to the enlarged Group. The new Group has already exited a
number of non-core areas in which HBOS previously participated
and the more prudent ‘through the cycle’ approach to risk is being
applied to all new business.
EU STATE AID
The uncertainty of the state aid repercussions was addressed
in November when our restructuring plan was agreed by the
European Commission. The board approved the restructuring plan
and is confident that this will not have a materially negative impact
on the Group.
CAPITAL
The successful capital raising in December significantly
strengthened the Group’s capital ratios. The appropriateness
of capital levels will continue to be a focus for the regulatory
authorities but we will always seek to satisfy capital requirements in
a way that protects and maximises value to shareholders.
SUMMARY
2009 was another challenging year for the financial services industry,
both in the UK and around the world, reflecting a continuation
of many of the issues that arose in 2008. During the year, the
UK experienced its sharpest contraction in gross domestic
product (GDP) for many decades, with a sharp fall in the value of
commercial property alongside rising company failures and higher
unemployment levels. Despite the tough market conditions, our
core businesses have performed well.
Our significant achievements in 2009 will shape the future of the
Lloyds Banking Group. We strengthened our franchise, attracting
new customers and building deeper relationships. We have made
excellent progress with the integration of HBOS, which we acquired
in January 2009. The Group’s capital is robust and our funding
profile was strengthened considerably during the period.
The management team implemented a number of programmes that
have resulted in positive trends in margins, costs and impairments.
Given the momentum we have already developed in these
areas, and with the stabilising economy, we believe the Group is
well positioned to deliver a strong financial performance in the
coming years.
We believe we have substantial additional growth opportunities
from continuing to develop our business model and applying
it across the broader franchise. As we realise the potential, it
will enable us to further improve our growth trajectory in the
coming years.
Although we are forecasting a slow, below trend, economic recovery,
the Group is successfully addressing the near-term challenges and is
well positioned to deliver value for our customers and shareholders.
As a result, the financial performance of the Group’s continuing
businesses is expected to improve significantly in 2010 and beyond.
RESULTS OVERVIEW
On a statutory basis, the Group delivered a profit before tax of
£1 billion for 2009. This result includes an £11.2 billion negative
goodwill gain associated with the purchase of HBOS, given we
acquired the business at half book value in anticipation of the likely
losses resulting from their troubled asset portfolios.
On a combined businesses basis, the Group reported a £6.3 billion
loss for the year, compared to a £6.7 billion loss in 2008. Our total
income rose 12 per cent, whilst costs fell 5 per cent. The higher
income and lower costs drove a substantial uplift in the trading
surplus, which increased by 35 per cent, and our cost:income ratio
improved to 48.4 per cent. As guided last August, there was a
significant increase in impairments, which rose to £24 billion from
£14.9 billion in 2008, principally due to the HBOS portfolios and their
high level of exposure to commercial property.
12
Lloyds Banking Group
Annual Report and Accounts 2009
GROUP CHIEF EXECUTIVE’S REVIEW
RESILIENT CORE BUSINESS PERFORMANCE
COST SYNERGY TARGET INCREASED
Total income, net of insurance claims, was up 12 per cent on
prior year, helped by lower write-downs on treasury assets and
the profits from debt swaps. These gains more than offset the
year-on-year decline in margins, which suffered from the impact of
very low base rates and increased funding costs as we lengthened
our maturity profile.
The continued development of our customer franchises has enabled
us to offset the impact of the weak economy. In Retail, we opened
nearly 2 million current accounts and nearly 5 million new savings
accounts, which are important drivers for future profitable growth.
We delivered an equally good performance in the Wholesale
division. In our Commercial business, we opened approximately
100,000 new accounts and achieved a 23 per cent share of start-up
businesses, and in Corporate we saw a 49 per cent improvement
in cross-sales income from Lloyds TSB customers. Wealth and
International, our new division, made a very encouraging start in
2009 with a strong growth in the number of relationship clients and
a 13 per cent growth in the number of UK private banking customers.
In Insurance, despite the more difficult market conditions, we
made good progress in key product areas such as Open Ended
Investment Companies (OEICs) and life assurance protection.
With over 30 million customers we understand the financial
hardships that many households and businesses are experiencing
as a result of the recent economic decline in the UK. We are
committed to helping our customers in these challenging times,
which is reflective of our relationship-based approach. In Retail,
we maintained strong levels of mortgage lending, with £35 billion
of gross new lending, and helped thousands of our customers to
buy new homes. In Wholesale we have provided approximately
£10 billion of committed gross lending to small and medium-sized
enterprises and approximately £25 billion to Corporate customers.
We are acutely aware of the importance of supporting households
and businesses as we exit the recession, and we will remain just as
focused on this in 2010 as we were in 2009.
Our asset margin improved during 2009, although the upturn came
earlier than we had expected. We are pricing assets to appropriately
reflect risk and our funding costs, and the net interest margin
recovered somewhat in the second half. The key drivers influencing
our margin in 2010 will be asset pricing, a possible increase in the
base rate and the cost of wholesale funding. We expect to be able
to achieve a margin of 2 per cent this year, and to be on an upward
trajectory after that.
We envisage minimal medium-term impact on our margin from the
cost of wholesale funding, as we reduce our absolute wholesale
funding requirement. Additionally, whilst we anticipate that a high
proportion of our existing government and central bank funding will
not have to be re-financed, we believe we can replace the residual
portion at a cost that is similar to that which we are paying for these
facilities at present.
Costs fell by 5 per cent in the year. We have made great strides
on delivering the integration of Lloyds TSB and HBOS, one of
the largest financial services mergers ever undertaken. We exited
the year with a cost synergy run-rate of £766 million. The key
programmes we have put in place are: rationalising our businesses
to eliminate areas of duplication; leveraging our procurement
skills and re-aligning our property requirements. Given we have
now achieved half of our cost run-rate target, we have raised our
guidance and are now targeting annual run-rate cost synergies of
£2 billion by the end of 2011.
IMPAIRMENTS EXPECTED TO REDUCE
SIGNIFICANTLY IN THE COMING YEARS
Impairments in the year were £24 billion, which is reflective of the
problem HBOS portfolios, in particular, the over-concentration in
commercial real estate. When we released our half-year results, we
said that total Group impairments would peak in that half, and the
full-year numbers confirm that guidance.
The Lloyds TSB conservative approach to risk management has
been implemented across the Group, and is making a difference.
All new lending is within the Group’s risk appetite and the existing
portfolios are being managed to Group standards. Looking
forward, we expect to see a similar pace of half-yearly improvement
throughout 2010, with further substantial reductions in 2011, and
beyond. We expect reductions in all three customer divisions,
although we remain cautious on the Irish portfolios, given the
uncertain economic outlook.
ROBUST CAPITAL POSITION
Following our recent successful capital raise, the Group’s year end
core tier one ratio was 8.1 per cent and it rose by a further 30 basis
points in February 2010. This reflects a number of successful actions
during the year which included the £4 billion ordinary share placing
and compensatory open offer in June, and the £22.5 billion equity
raising and liability management exercises announced in November.
FUNDING AND LIQUIDITY STRENGTHENED
A number of steps were taken in the year to extend the Group’s
wholesale funding maturity and to further improve our liquidity
profile. The Group’s loan to deposit ratio improved and over
50 per cent of the wholesale funding had a maturity of over one year
(2008: 44 per cent). We had also established an £88 billion liquidity
buffer at the end of 2009. In addition, the Group continued to widen
its diverse range of funding sources and had already achieved a
significant amount of its expected term funding issuance for 2010 by
the end of January.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
1
2
3
4
5
18
24
50
52
56
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Chairman’s statement
6
Five year financial summary
95
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
13
Lloyds Banking Group
Annual Report and Accounts 2009
DELIVERING SUSTAINABLE VALUE
THROUGH THE CYCLE
The Group’s aim is to be recognised as the UK’s best financial
services business and to deliver sustainable value through the cycle
for our customers and shareholders. The principal element of the
Group’s strategy remains the focus on building deep, long-lasting
customer relationships in all its franchises. We continue to support
this with a focus on driving down costs and maintaining effective
capital management disciplines, within a strong, conservative, risk
management framework.
The Group aims to:
– Deliver high single-digit income growth from our continuing
businesses within the next two years.
– Deliver annual reductions in our cost:income ratio of 2 per cent
over the next few years.
– Run-off non-relationship assets to reduce the size of our balance
sheet, providing the capacity to re-invest in growing our
relationship businesses.
BUSINESS OUTLOOK
2009 was a year of substantial achievement, in which we shaped
the Group to enable us to deliver the growth potential of the
enlarged franchise. We achieved this whilst maintaining good
momentum in the core business, and as a result the Group is now
in a strong position.
We have established positive trends in margin, costs and
impairments. The management actions we have already taken in
these areas, combined with the underlying business momentum,
point towards significantly improved financial performance in the
coming years.
We also believe there are significant opportunities for additional
growth, potentially amounting to hundreds of millions of pounds
in revenues. Over the last five years Lloyds TSB has delivered
accelerating growth by focusing on acquiring, deepening and
broadening customer relationships. We can see significant
opportunity from sustaining this trend in the legacy Lloyds TSB
franchise, and extending the model across the enlarged Group.
As we realise this potential, we will add to our growth trajectory.
STATE AID
During 2009, the Group was required to work with HM Treasury
to submit a restructuring plan to the European Commission in
the context of a state aid review. During the last few months of
2009, the final terms of the restructuring plan were agreed by the
European Commission College of Commissioners. The board
approved the restructuring plan and is confident that it will not
have a materially negative impact on the Group.
OUR PEOPLE
The last 12 months have been very challenging for all of our staff,
across the Group. The external environment has been difficult,
but our staff have continued to serve and support our customers
superbly while delivering one of the largest banking mergers in
history. I, along with all the members of the board, am very proud of
their achievements this last year, and their performance underpins
my confidence in our ability to deliver in the coming years.
J Eric Daniels
Group Chief Executive
25 February 2010
ECONOMIC OUTLOOK
The economic performance last year was worse than most
expected, with a 4.8 per cent decline in GDP. Looking forward, we
remain cautious but realistic. Our view is that the risk of a severe
further downturn in 2010 is lower than a few months ago and we
continue to forecast growth in GDP of 1.8 per cent for 2010, with
a similar trend in 2011. Against that backdrop, we expect property
prices will be broadly flat in 2010 and we remain on the cautious side
of the range of market expectations. We anticipate that company
failures will peak this year, but do not expect them to reach the
heights seen in the last recession due to much lower corporate debt
servicing costs. We believe unemployment will also peak in 2010,
but at a lower level than seen in the last recession.
Our financial outlook and guidance are based on a range of
economic scenarios. Having stressed our portfolios, we are
confident of our capital position and the expectation of improving
financial performance, albeit the growth would be slower in coming
through if there were a second economic downturn, or a weaker
than expected economic recovery.
14
Lloyds Banking Group
Annual Report and Accounts 2009
GROUP CHIEF EXECUTIVE’S Q&A
ISSUE: THE GOVERNMENT SHAREHOLDING
As a result of the recapitalisation of the banking sector and the
subsequent capital raisings the Government now holds a significant
stake in Lloyds Banking Group.
What are the implications of this holding, how does the
Government intend to reduce its holding and how does the
Government’s share ownership impact the Group’s business?
As at the date these accounts were approved the Government’s
shareholding in Lloyds Banking Group was approximately
41.3 per cent, which is managed by UK Financial Investments
(UKFI) on behalf of HM Treasury.
We have a very good working relationship with UKFI who act
like any value orientated shareholder with regard to the strategic
development and financial performance of the Group, providing
significant constructive challenge where they see fit. The
Government has made it very clear that UK financial institutions
in which it holds substantial stakes will continue to be separate
economic units with independent powers of decision and will
continue to have their own independent boards and management
teams, determining their own strategies and commercial policies
(including business plans and budgets).
Moreover, the relationship between the Government and the Group
falls within the framework document between HM Treasury and
UKFI published on 2 March 2009, which states that UKFI will manage
investments in the UK financial institutions in which HM Treasury
holds an interest on a commercial basis and will not intervene in
day-to-day management decisions of the investee companies
(including with respect to individual lending or remuneration
decisions).
The timing of any share disposal will be at the discretion of UKFI.
However, within the publication ‘An Introduction: Who We Are,
What We Do and the Framework Document Which Governs the
Relationship Between UKFI and HM Treasury’, it is stated that UKFI
is to ‘develop and execute an investment strategy for disposing of
the investments in the banks in an orderly and active way through
sale, redemption, buy-back or other means within the context of
an overarching objective of protecting and creating value for the
taxpayer as shareholder, paying due regard to the maintenance of
financial stability and to acting in a way that promotes competition’.
Going forward the Group is focused on delivering strategy and
subsequently value to all our shareholders. The Government holding
does not impact this management focus and we remain committed
to operating as a wholly privately owned, self supporting, dividend
paying, commercial enterprise over time.
ISSUE: STATE AID
The European Commission required the Group to agree a
restructuring plan as a result of the investment in the Group by
HM Treasury.
What remedies were agreed with the European Commission
and what are the implications of these remedies?
As a result of HM Treasury’s investment in the Company in
the context of the placing and open offer undertaken by the
Company in November 2008 and the Group’s participation in
the Credit Guarantee Scheme, the Group was required to work
with HM Treasury to submit a restructuring plan to the European
Commission in the context of a state aid review. This plan was
required to contain measures to limit any competition distortions
resulting from the state aid received by the Group.
During the last few months of 2009, HM Treasury and the Group
were involved in detailed negotiations with the European
Commission in relation to the terms of the restructuring plan in
order to reach a mutually acceptable solution. The final approval
of the UK Government’s state aid measures, including the terms
of the final restructuring plan, was agreed by the College of
Commissioners in November 2009. The plan consists of the
following principal elements:
a
b
c
the disposal of a retail banking business with at least
600 branches, a 4.6 per cent share of the personal current
accounts market in the UK and approximately 19 per cent of
the Group’s mortgage assets. The business consists of: the
TSB brand; the branches, savings accounts and branch based
mortgages of Cheltenham & Gloucester; the branches and
branch based customers of Lloyds TSB Scotland and a related
banking licence; additional Lloyds TSB branches in England and
Wales, with branch based customers; and, Intelligent Finance.
These disposals need to be made within four years of the date
of state aid approval;
an asset reduction programme to achieve a £181 billion
reduction in a specified pool of end 2008 assets by
31 December 2014; and
behavioural commitments, including commitments; not to make
certain acquisitions for approximately three to four years; and
not to make discretionary payments of coupons or to exercise
voluntary call options on hybrid securities from 31 January 2010
until 31 January 2012, which will also prevent the Group from
paying dividends on its ordinary shares for the same duration.
The assets and liabilities, and associated income and expenses,
of the business to be divested (referred to above) cannot be
determined with precision until nearer the date of sale. However,
the Company estimated that, as at 31 December 2008 and after
aggregating the elements relating to Lloyds TSB and HBOS, the
retail business to be divested comprised approximately £70 billion
of customer lending and £30 billion of customer deposits. For
the year ended 31 December 2008, the board estimated that the
retail business to be divested generated income of approximately
£1.4 billion and contributed approximately £500 million of profit
before tax to the Group.
The board approved the restructuring plan and is confident that this
will not have a materially negative impact on the Group.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A 14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
15
Lloyds Banking Group
Annual Report and Accounts 2009
ISSUE: THE GROUP DIVIDEND
The European Commission state aid review prevents the Group
from paying dividends on its ordinary shares.
When will you recommence the payment of dividends?
As a result of the UK Government’s investment in the Group as part
of the initial recapitalisation by the Company in November 2008, the
rights issue announced in November 2009 and our participation in
the Credit Guarantee Scheme, the Group has been deemed to have
accepted state aid and subsequently the European Commission
required us to undertake a restructuring plan (see the state aid
question for further detail). This, amongst other things, includes a
behavioural commitment not to make discretionary payments of
coupons or to exercise voluntary call options on hybrid securities from
31 January 2010 until 31 January 2012. This also prevents the Group
from paying dividends on its ordinary shares for the same duration.
We understand the distress the lack of dividend has caused many of
our shareholders and are working hard to restore shareholder value.
The capital raising in December 2009 was a significant step towards
meeting our objective of operating as a wholly privately owned,
self-supporting, dividend paying, commercial enterprise over time.
The board intends to resume dividend payments on ordinary shares
as soon as market conditions and the financial performance of the
Group permit, subject to the expiry of the restrictions arising from
the European Commission remedies.
ISSUE: FUTURE GROWTH
At the time of the acquisition of HBOS the Group indicated that the
acquisition was a unique transaction that would position the Group
for further growth.
Does the Group still believe that this is the case and how is
the Group going to deliver earnings growth over the next
few years?
The acquisition of HBOS at the beginning of 2009 has undoubtedly
improved the strategic positioning of the Lloyds Banking Group and
helped position the Group for future growth. We now have market
leading positions in many of the financial markets in which we
participate, a market leading distribution capability, well recognised
brands and a large customer base. The scale of the organisation
provides us with the opportunity to further invest in products and
services, systems and training, offering unparalleled choice and
service to our customers. This strategic positioning along with our
strong relationship focus and prudent risk appetite provides the
platform for future growth.
Our customer franchise and relationship focus will be key drivers of
earnings growth going forward and we believe that the Group can
deliver high single-digit income growth within the next few years as
we meet the needs of our customers more effectively and extend
the depth of our customer relationships.
Lloyds TSB has historically been strong in managing the cost
base but the unique positioning of the Group also now provides
a number of opportunities not available to other providers. The
integration of the two businesses provides the opportunity for
significant cost synergies. We have already outlined that we are
looking to achieve £2 billion of cost synergies per annum by the
end of 2011 and are already well on track for this, having delivered
£766 million of synergies on an annualised basis in 2009. To date
these synergies have primarily arisen from de-duplication of
functions and property consolidation but going forward significant
opportunities still exist from system integration and procurement.
We believe that the Group can deliver a 200 basis points reduction
in the cost:income ratio per annum over the next few years.
Impairment losses, particularly from the heritage HBOS business,
have also significantly impacted profits over the past two years. We
outlined at the half-year that we believed Group impairment losses
had peaked in the first half of 2009 and this was borne out in the full
year numbers which showed a 21 per cent reduction in impairment
in the second half of the year. The Group believes impairment losses
will continue to fall going forward and though given the current
economic environment such levels are still inflated we believe
impairments will return to more normalised levels over the next
couple of years. The significant reduction in expected impairments
will evidently benefit profits.
Overall the Group believes that the successful execution of its
strategy focusing on core markets, customer and cost leadership,
capital efficiency and a prudent risk appetite should enable the
Group to deliver earnings growth and shareholder value whilst
achieving its vision to be recognised as the best financial services
company in the UK.
16
Lloyds Banking Group
Annual Report and Accounts 2009
MARKETPLACE TRENDS
THE ECONOMY
2009 has been a mixed year in terms of economic developments.
With an estimated fall of 5 per cent, UK GDP growth was towards
the bottom end of our, and the market’s, range of expectations. The
UK experienced the biggest recorded single-year GDP fall since
the 1930s, and the peak to trough decline in GDP currently matches
the early 1980s recession (see chart 1). The downturn in most other
industrialised economies was of similar magnitude. In response,
official interest rates have fallen to their lowest level since the Bank
of England was founded. Interest rates elsewhere have also fallen to
extremely low levels.
CHART 1:
UK GDP IN THE LAST THREE RECESSIONS
% change in real GDP since the start of the recession
Early ’90s
Early ’80s
Now
Source: National Statistics, Lloyds Banking Group
6
4
2
0
-2
-4
-6
-8
0
1
2
3
4
6
11
8
5
Quarters from start of recession
10
7
9
12
13
14
15
16
Perhaps partly in response to such low interest rates, other
economic indicators have not turned out so badly in 2009 as many
had feared.
At the beginning of the year, most commentators would have
expected such a sharp drop in GDP to result in much worse
unemployment numbers than has been the case. In fact,
employment has held up quite well given the severity of the decline
in GDP (see chart 2). Similarly, the rate of company failures so far
in this downturn has been lower than might have been expected
given the severity of the GDP decline (see chart 3).
CHART 2:
UK EMPLOYMENT IN THE LAST THREE RECESSIONS
1
0
-1
-2
-3
-4
-5
-6
-7
% change in employment since the start of the recession
Now
Source: National Statistics, Lloyds Banking Group
Early ’90s
Early ’80s
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Quarters from start of recession
CHART 3:
UK COMPANY FAILURES IN THE LAST THREE RECESSIONS
300
% change in company failures since the start of recession
250
200
150
100
50
0
Early ’80s
Now
Source: Insolvency Service, Lloyds Banking Group
Early ’90s
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
Quarters from start of recession
Companies went into this recession in better shape generally than
during the last recession, and seem to have taken early action to
cut investment, stocks and working hours. Helped by very low
interest rates, the aggregate financial position of the corporate
sector has remained strong. This has undoubtedly helped to limit
failure rates. And this in turn has probably helped to limit the rise
in unemployment – the biggest single cause of job losses in most
recessions is business failure.
Meanwhile, property prices have also held up better than many
forecasters had expected. At the beginning of the year, the average
view was that house prices would fall by around 15 per cent during
2009, and decline further in 2010. In fact, the Halifax house price
index ended the year higher than twelve months earlier, and other
indices showed a similar picture. House prices fell during the early
part of the year, but then started to recover in the second half and
finished the year still above long term average levels relative to
household incomes, albeit well down on their peak in 2007. The
consensus view is now for modest further growth in 2010.
Commercial property prices showed a similar recovery. Having fallen
sharply in late 2008 and early 2009, commercial property capital
values have stabilised recently, despite continued falls in rental
values, and many forecasts for 2009 and 2010 have been revised
up. At the end of 2009, the consensus forecast was for modest
growth in capital values this year and next, even as rental values
decline further.
Looking forward, the most likely immediate economic scenario is
one of slow and erratic growth. GDP is estimated to have begun to
recover in Q4 2009, and may even have done so earlier once final
revisions are made to earlier estimates for Q3. Survey evidence,
including purchasing manager indices, were pointing to positive
growth in manufacturing and services for most of the second half
of 2009. Retail sales growth accelerated in late 2009, although
some of this may have been spending brought forward to beat
the restoration of VAT to 17.5 per cent. Unemployment appears to
have levelled off, at least temporarily, and actually fell in late 2009.
Financial market conditions have continued to normalise, in line with
the improving economic outlook. The consensus forecast for 2010
has risen gradually, and by the end of 2009 was suggesting
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
17
Lloyds Banking Group
Annual Report and Accounts 2009
have also taken advantage of the recovery in financial markets
to increase capital market borrowing thereby further reducing
bank credit demand. As a result, the outstanding stock of bank
and building society lending to private non-financial businesses
declined in 2009, and corporate deposits returned to positive
growth despite the weakness of demand in many companies’
markets. Strengthened corporate finances were probably a major
factor limiting the growth in company failures in 2009. Indeed, as
chart 3 shows, the rate of company failures reduced in the second
half of 2009.
We expect that the weakness of likely economic recovery will be
mirrored in slow growth of major banking markets in 2010 as both
households and businesses continue to restructure their finances.
However, 2010 may see company failure rates rise again, since it
is typically when companies have to restock to meet an upturn in
demand that the financial pressures on them are greatest.
2010 GDP growth of around 1.5 per cent, close to our own central
scenario. This slow recovery is consistent with the sort of upturn
seen after past financial crises. But even that below-trend growth
relies mainly on a recovery in net external trade and an end to
company destocking. Domestic demand growth is likely to be
minimal in 2010.
Alternative scenarios remain possible. The Bank of England’s most
likely outcome, as published in the February 2010 Inflation Report,
is for a somewhat faster recovery during 2010 than the consensus
forecast. However, the risks around that are skewed towards
the downside.
It is possible that the economy will dip again if hit by some new
shock – and what might start as a temporary setback to recovery
could have longer lasting effects if it damages consumer, business
or financial market confidence. Furthermore, uncertainties remain
about how the economy will respond as and when the Bank of
England begins to reverse quantitative easing and restore interest
rates to more normal levels, and the Government begins to take
action to reduce the large fiscal deficit.
IMPACT ON OUR MARKETS
2009 was a year of weakening growth in most of our markets. On
the retail side, net new market mortgage lending (ie new lending
minus repayments) was very low throughout 2009, as a result of
which growth in outstanding balances slowed to around 1 per cent
by year end. Net new market unsecured consumer lending was
very weak in the first half of the year, and turned negative in the
second half.
Weakening lending growth appears to have been driven by both
supply and demand. Some lenders have pulled back from the
market, especially from higher risk segments. But at the same time,
data on our own retail customers shows that they have reacted to
the recession by prioritising reducing debt. This trend is apparent
across all our customer groups, whether split by age, income, or
indebtedness. This helps to explain why market deposit growth
also weakened in 2009, despite a higher national saving ratio.
Households have on average chosen to use the cash freed up by
reduced spending and lower debt interest payments to pay off
debt rather than save more.
Market mortgage arrears rose during the first half of 2009, but then
fell back in the second half. Market credit card arrears also fell during
the second half. Improving arrears trends may have been helped
by households starting to pay down debt. And many mortgage
borrowers will have found their debt servicing costs reduced during
2009 as their variable mortgage rates fell or as their fixed rate loans
expired and they rolled off onto lower standard variable rates.
Quite strong growth in the average household’s real disposable
income in 2009 will also have helped, aided by better-than-expected
employment levels in the second half and falling inflation.
Businesses also appear to have used 2009 to strengthen their
financial position where possible. Sharp cutbacks in investment
spending, and in stocks, have enabled businesses in aggregate
to remain in financial surplus and reduce their reliance on external
credit – from banks, trade creditors and others. Large companies
18
Lloyds Banking Group
Annual Report and Accounts 2009
SUMMARY OF GROUP RESULTS
During 2009 the Group delivered a resilient trading performance
against the backdrop of a marked slowdown in the UK economic
environment and continued challenges in financial markets.
In addition, the Group has made excellent progress in the
integration of HBOS following its acquisition on 16 January 2009.
Statutory profit before tax in 2009 was £1,042 million, compared
to £760 million in 2008, largely reflecting the impact of an
£11,173 million credit to the income statement from the gain
arising on the HBOS acquisition (negative goodwill) which offset
the significant increase in impairments during the year. Profit
attributable to equity shareholders was £2,827 million and
earnings per share (EPS) totalled 7.5p.
To enable meaningful comparisons to be made with 2008, the
income statement and balance sheet commentaries are on a
combined businesses basis. Certain commentaries also exclude
the unwind of fair value adjustments.
On a combined businesses basis, the Group reported a loss
before tax in 2009 of £6,300 million, compared to a loss before
tax of £6,713 million in 2008. Whilst the Group delivered resilient
revenues, lower costs and a strong trading surplus performance,
up 35 per cent to £12,355 million, profits were adversely impacted
by significantly higher impairment losses which increased by
£9,108 million to £23,988 million.
A RESILIENT REVENUE PERFORMANCE
The Group delivered a resilient revenue performance in 2009
given significant year-on-year margin pressures. Total income,
net of insurance claims, was 12 per cent higher at £23,964 million,
supported by a good performance in Wholesale largely as a
result of the absence of last year’s £3.4 billion impact of
market dislocation, more favourable interest and currency rate
environments, good transaction volumes in capital markets and
strong flows of client driven derivative transactions at improved
spreads. Income also includes £1.5 billion gains on a number of
liability management transactions.
In Retail, lower levels of income from payment protection insurance,
reflecting the impact of the decision in January 2009 to move to a
monthly premium product, and lower loan volumes, the impact of
falling interest rates on deposit margins and higher overall funding
costs from wholesale money markets have led to retail banking
revenues being 13 per cent lower than in 2008. Whilst lending
markets have remained generally subdued throughout the industry,
the Group has maintained a 24 per cent share of gross mortgage
lending. Unsecured lending balances were slightly lower, reflecting
lower customer demand and tightened credit criteria. During the
year, we have continued to build our current account and savings
customer franchises in what remains a competitive market for
customer deposits.
New business sales in our life assurance and pensions businesses
were 26 per cent lower than last year, reflecting the extremely
challenging market conditions which led to a general market-wide
slowdown in the sale of life, pensions and investments products.
Sales of OEICs and life assurance protection products remain good.
In Wealth and International, income was 6 per cent lower reflecting
the impact of deposit margin pressure and falls in global stock
markets in the first half of 2009.
Total assets decreased by 9 per cent to £1,027 billion, with a
7 per cent decrease in loans and advances to customers reflecting
the impact of reductions in non-relationship lending portfolios.
Customer deposits decreased by 1 per cent to £407 billion, as
growth in Retail was offset by the planned reduction in higher
interest paying term deposits elsewhere.
Year-on-year Group net interest income decreased by £2,177 million,
or 15 per cent, to £12,726 million. The net interest margin from our
banking businesses was 24 basis points lower at 1.77 per cent, as
higher asset pricing was more than offset by the impact of lower
deposit margins, reflecting the impact of falling base rates, and
higher funding costs, which included the impact of the Group
extending its wholesale funding maturity profile. During the second
half of 2009 however, the impact of asset pricing more than offset
the impact of lower base rates and higher funding costs and the
margin increased to 1.83 per cent, compared to 1.72 per cent in the
first half of the year. The net interest margin is expected to increase
in 2010 to approximately 2 per cent, with further improvements
expected in the margin in subsequent years reflecting the impact
of continued improvements in asset pricing, moderate base rate
rises and greater stability in wholesale funding markets. This margin
outlook reflects our core economic assumptions for the medium
term and includes the impact of the Group’s asset reduction
programme and the assumed costs of refinancing as wholesale
funding matures. Other income, net of insurance claims, increased
by £4,786 million, or 74 per cent, to £11,238 million, largely reflecting
the absence of last year’s investment write-downs, and the gains on
liability management transactions.
STRONG COST MANAGEMENT
DELIVERING BENEFITS
The Group has an excellent track record in managing its cost
base, and has continued to deliver a strong cost performance.
During 2009, operating expenses decreased by 5 per cent to
£11,609 million, as integration related savings have started to be
captured and lower operating lease depreciation offset inflation
linked growth and investment in our continuing businesses. Over
the last twelve months, the total number of roles has reduced by
over 11,500 as the Group has started to achieve its targeted cost
synergy savings.
In addition, we have already made significant progress in capturing
savings from areas such as procurement and, overall, £534 million
of cost synergy savings have already been realised, which represent
annual run-rate savings of over £760 million. As a result of the
integration programme being ahead of schedule the Group has
increased its commitment to deliver cost synergies and other
operating efficiencies to achieve run-rate savings of £2 billion per
annum by the end of 2011. One-off integration costs over this
period are expected to total approximately 1.55 times the revised
targeted cost synergies. The Group also expects to continue to
improve its cost:income ratio by in excess of 2 percentage points
per annum during this period, with further improvements thereafter
as we seek to optimise the ratio over the medium term.
BUSINESS REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
1
2
3
4
5
6
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
Summary of Group results
18
The board
Divisional results
Our people
Corporate responsibility
Risk management
24
50
52
56
Five year financial summary
95
Directors’ report
Corporate governance
Directors’ remuneration report 105
96
98
100
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
19
Lloyds Banking Group
Annual Report and Accounts 2009
At the Group level, we are confident that the overall impairment
charge peaked during 2009. Although we would normally expect
that impairments would peak one to two years after the low point
of a recession, given the significant Wholesale charge during the
year, predominantly driven by the HBOS property and property
related portfolios and HBOS (UK and US) corporate portfolios, we
believe that the charge in 2010 will be significantly lower than the
2009 charge. The impairment charge in the second half of 2009
was 21 per cent lower than that in the first half of the year. Given
our current economic outlook, we expect to see a similar pace of
half-yearly improvement throughout 2010, with further substantial
reductions in 2011 and beyond.
ACQUISITION RELATED BALANCE SHEET
ADJUSTMENTS
Fair value adjustments reflected in the calculation of the net assets
acquired totalled £1,241 million. Negative adjustments in respect of
tangible net assets totalled £2,107 million principally reflecting the
write-down of HBOS’s retail and corporate lending portfolios offset
by gains on the valuation of HBOS’s own debt. Intangible assets
totalling £4,650 million have been recognised, largely reflecting
the value of HBOS’s relationship with its retail customer base and
the value of its brands. Other acquisition related balance sheet
adjustments include the elimination of HBOS’s available-for-sale and
cash flow hedging reserves which totalled £6,439 million.
As a result of these adjustments, the Group expects some
£3.3 billion, net, to unwind positively through the Group’s income
statement over the medium to long term. During 2009, the Group’s
income statement reflected gains of £6.1 billion. In 2010, we
currently expect a further benefit of some £2.5 billion. Thereafter,
over the medium term, smaller benefits are expected to accrue.
GAIN ON ACQUISITION OF HBOS
Following the acquisition of HBOS in January 2009, the Group has
recognised a gain of £11,173 million in respect of negative goodwill.
This arises because the consideration paid to acquire HBOS, in
January 2009, was considerably less than the fair value of the net
assets acquired, reflecting the unique circumstances surrounding
the transaction.
VOLATILITY
A large proportion of the investments held by the Group’s insurance
businesses is invested in assets which are expected to be held on
a long-term basis and which are inherently subject to short-term
investment market fluctuations. Whilst it is expected that these
investments will provide enhanced returns over the longer term, the
short-term impact of investment market volatility can be significant.
In 2009, higher equity market returns compared to our long-term
assumption have contributed to positive insurance and policyholder
volatility totalling £478 million.
IMPAIRMENT LEVELS HIGHER BUT
EXPECTED TO HAVE PEAKED
During 2009 we have experienced a significant rise in impairment
levels in the Group’s lending portfolios. This largely represents
falls in the value of commercial real estate and the impact of the
economic deterioration during the year, including the effects of
rising unemployment and reduced corporate cash flows, although
the effects of some of these issues started to reduce in the second
half of the year. This increase in impairment levels was however
partially offset by the accelerated unwind of credit related fair value
adjustments taken at the time of the HBOS acquisition totalling over
£7 billion. The impairment charge in the second half of 2009 was
21 per cent lower than in the first half of the year, reflecting the peak
of overall impairments in the first half.
In Retail, impairment losses increased by £532 million, or
14 per cent, to £4,227 million, particularly reflecting increases in
UK unemployment during 2009 on the unsecured charge, which
was partly offset by a lower secured impairment charge as house
prices stabilised. Compared to 2009, we expect to see a reduction
in the Retail impairment charge in 2010 with further improvements
thereafter as the UK economic environment improves and house
prices continue to stabilise.
The Wholesale charge for impairment losses increased significantly
by £5,289 million to £15,683 million, reflecting, in particular, the
year-on-year decline in commercial property valuations and reduced
levels of corporate cash flows. In particular, the real estate related
lending exposures in the legacy HBOS portfolios were more
sensitive to the downturn in the economic environment.
We continue to believe that the overall Wholesale impairment
charge peaked in the first half of 2009 and we have seen significant
reduction in the Wholesale impairment charge in the second half
of 2009. Further significant reductions are expected in 2010 and
beyond, assuming current economic expectations. We have spent
a significant amount of time analysing and addressing the issues
in the legacy HBOS portfolios, with the greatest attention paid to
the over concentration in real estate related lending and those
portfolios that fall outside the Lloyds TSB risk appetite. As a result
of our portfolio review, which applied prudent assumptions to real
estate asset expectations, and with the deterioration in the economy
translating into lower commercial property valuations, we took
prudent and material impairment charges especially in the first half
of the year.
In our Wealth and International business the impairment charge
rose by £3,347 million to £4,078 million, reflecting significant
provisions against our Irish (£1,793 million) and Australian
(£508 million) commercial real estate portfolios. We continue to
have ongoing concerns with regard to the outlook for the Irish
economy although we expect 2009 to have been the peak for the
International impairment charge.
Overall, impairment losses increased by £9,108 million to
£23,988 million. Impairment losses on loans and advances to
customers expressed as a percentage of average lending was
3.25 per cent, compared to 1.81 per cent in 2008. Impaired loans
and advances increased by £27,529 million to £58,833 million
and now represent 8.9 per cent of total loans and advances to
customers, up from 4.4 per cent at 31 December 2008.
20
Lloyds Banking Group
Annual Report and Accounts 2009
SUMMARY OF GROUP RESULTS
TAXATION
The Group’s 2009 income statement includes a tax credit of
£1,911 million. This primarily reflects a tax credit relating to the
Group’s reported loss and a policyholder interests related tax
charge offsetting in full the credit for policyholder interests
included in the Group’s profit before tax.
The UK Government has published draft legislation which, when
enacted, will introduce a bank payroll tax of 50 per cent applicable
to discretionary bonuses and other amounts over £25,000 awarded
to bank employees in the period 9 December 2009 to 5 April 2010.
The legislation has yet to be finalised and there remain significant
uncertainties over aspects of its detailed application and the Group
continues to asses its ultimate liability in respect of all of its schemes.
However, in accordance with the requirements of International
Accounting Standard (IAS) 19 ‘Employee Benefits’ the Group has
provided in full for the estimated cost of the bank payroll tax; the
amount is not significant.
ROBUST CAPITAL RATIOS
At the end of December 2009, the Group’s capital ratios,
following the Group’s successful capital raising in December 2009,
increased significantly with a total capital ratio on a Basel II basis
of 12.4 per cent, a tier 1 ratio of 9.6 per cent and a core tier 1 ratio
of 8.1 per cent. These capital ratios were further enhanced by the
issuance on 18 February 2010 of £1.5 billion equity, as part of the
capital raising programme announced in November 2009, which
further increased the core tier 1 capital ratio by 30 basis points to an
adjusted 8.4 per cent. During 2009, risk-weighted assets decreased
by 1 per cent to £493.3 billion, as the reduction in balance sheet
assets was partly offset by the procyclical impact of the weaker
economic environment. Over the next few years we expect to see
further reductions in risk-weighted assets as a result of both balance
sheet asset reductions and a positive procyclical impact from the
expected improvement in the UK economic environment.
Following the introduction of a prescribed stress test by the
Financial Services Authority in January 2009 the Group undertook
a significant exercise which stress tested the Group’s capital base
to withstand the impact of a significant economic deterioration
in the UK, resulting in a requirement to increase the Group’s
capital position. As a result of this increased capital requirement,
in March 2009, in what was clearly a difficult external market, the
Group announced its intention to participate in the Government
Asset Protection Scheme. This would have enabled the Group
to substantially strengthen its capital position to meet the newly
increased regulatory capital requirements, and reduce the risk
profile of the enlarged Group’s balance sheet.
In June 2009, the Group successfully completed a £4 billion placing
and compensatory open offer with the proceeds being used to
redeem the £4 billion of preference shares held by HM Treasury.
The redemption of the HM Treasury preference shares removed the
annual cost of the preference share dividends of £480 million and
improves the Group’s cash flow generation.
On 3 November 2009 the Group announced further proposals to
meet its current and long-term capital requirements by way of a
£13.5 billion rights issue and the generation of at least £7.5 billion
(subsequently increased to £9 billion) core tier 1 and/or contingent
core tier 1 capital through a number of debt exchange offers.
In doing so the Group announced that it would not participate
in GAPS. This reflected the more positive economic environment
than the conditions prevailing in March 2009 when the Group
announced its intention to participate in GAPS. As a result of the
highly successful conclusion of this transaction, reflecting the strong
support received from shareholders and investors, the Group is
now in a robust capital position. We note the various recently issued
regulatory capital consultation papers and impact studies and will
continue to work with our regulators to ensure this robust capital
position is maintained as the ongoing capital requirements for banks
continue to change.
In addition, during 2009, the Group completed a number of balance
sheet liability management transactions that have generated
significant core tier 1 capital by redeeming certain securities at a
discount to their balance sheet carrying value. A substantial
number of note holders have accepted the various offers made
and, as a result, the Group has generated a pre-tax profit from
these transactions of approximately £1.5 billion.
RIGHTSIZING THE BALANCE SHEET
In the Group’s Interim Results announcement in August 2009, we set
out our strategy to reduce assets associated with non-relationship
lending and investments, including business which is outside our
current risk appetite, by some £200 billion by the end of 2014. It
is our intention to manage these assets for value and, given the
current economic climate, our primary focus will be on running these
assets down over time. During 2009, the Group’s total balance sheet
assets reduced by £100 billion of which £60 billion related to the
portfolios of assets in run-off (£15 billion customer assets; £30 billion
treasury assets; £15 billion impairment). We expect to achieve a
further reduction in such assets of approximately £140 billion over
the next few years. The impact of running down these portfolios is
not expected to have a significant impact on the Group’s financial
performance over the medium term.
The balance sheet reduction over time will provide the Group with
increased optionality and flexibility from the resultant releases in
both funding and capital. These benefits have been incorporated
into the Group’s overall business plans, which include actions
to increase retail and corporate deposits over time. Together
these actions will reduce the proportion of the Group’s funding
that is derived from wholesale markets and eliminate our use of
government and central bank sponsored funding facilities, whilst
providing capacity for core relationship business growth.
A STRONG LIQUIDITY AND FUNDING POSITION
The recent extended turbulence in global capital markets has been
a severe examination of the banking system’s capacity to absorb
sudden significant changes in the funding and liquidity environment,
and individual institutions have faced varying, but significant,
degrees of stress. The Group has a strong liquidity position which
is supported by our robust and stable customer deposit base. The
Group continues to benefit from a diversity of funding sources,
which have recently been enhanced by the establishment of a
US Medium Term Note programme, and a second regulated
covered bond programme. The Group’s wholesale funding base
BUSINESS REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
1
2
3
4
5
6
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
Summary of Group results
18
The board
Divisional results
Our people
Corporate responsibility
Risk management
24
50
52
56
Five year financial summary
95
Directors’ report
Corporate governance
Directors’ remuneration report 105
96
98
100
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
21
Lloyds Banking Group
Annual Report and Accounts 2009
SUMMARY
The deterioration in the UK economic environment, particularly in
the first half of 2009, created an extremely challenging operating
background against which to integrate two large banking
organisations. As expected, against this backdrop, the significant
increase in corporate impairments has led the Group to report a loss
before the credit for negative goodwill arising on the acquisition
of HBOS. The Group has a strong risk management culture and
is well-placed to manage through the near-term challenges and
benefit from what we expect to be a slow but steady UK economic
recovery during 2010 and beyond.
Our revenue performance has been resilient and we are already
beginning to deliver improving interest margins, which we expect to
improve further over the next few years. We have an excellent track
record in cost management, with a unique opportunity to capture
significant acquisition related synergies over the next few years. We
believe the Group’s overall impairment charge has now peaked, with
a significant reduction expected in 2010. We have a robust capital
and funding position. Overall, therefore, based on our current
economic outlook, we expect to deliver a significantly improving
combined businesses financial performance in 2010, with strong
medium-term prospects thereafter.
Tim J W Tookey
Group Finance Director
25 February 2010
has proved to be resilient, supporting the Group’s balance sheet
with a reduced dependence on short-term funding. During the
year the Group has also significantly increased its holdings of liquid
assets from £104.5 billion to £150.8 billion. In addition, the Group
has improved the quality of its liquid asset portfolio by increasing its
cash at central banks and Government debt securities, and reducing
its holdings of eligible bank debt securities.
During 2009, the Group has extended the maturity profile of
wholesale funding, such that, at 31 December 2009, 50 per cent
of wholesale funding had a maturity date greater than one year
(31 December 2008: 44 per cent). Over time, and as we see
improvements in the capacity of wholesale funding markets, we
expect to maintain the amount of the Group’s wholesale borrowings
with a maturity date greater than one year in excess of 40 per cent
which we consider to be an appropriate and sustainable long-term
proportion. However, in this regard we note recent regulatory
consultation papers relating to liquidity requirements which, if put
into practice, could require banks to manage their liquidity risk
differently. Increases in customer deposits and the reduction in
assets set out above, mean that we expect to see a slow but steady
improvement in the Group’s loan to deposit ratio. The Group does
not set a target for this ratio, which we believe does not reflect
either the quality of lending or the term of deposits held but would
expect to see it return to legacy Lloyds TSB levels of approximately
140 per cent over the next few years. During 2009 the ratio
excluding repos, improved to 169 per cent.
Relative to the size of its balance sheet, the Group does not have
significant senior funding issuance requirements. Over the next
three years the Group expects its public capital and senior funding
issuance to total in the range of £20 billion to £25 billion per annum.
We have made good progress on our 2010 term funding issuance
plans following the issuance in December 2009 of US$2 billion
tier 1 securities and in January 2010 the Group issued US$5 billion
senior unsecured debt, and executed a £2.5 billion Residential
Mortgage-Backed Securities (RMBS) transaction which included the
first public US$ tranche of RMBS by a UK issuer since 2008.
At 31 December 2009, the Group’s overall funding support from
governmental and central bank sources totalled £157 billion, with a
significant proportion (predominantly Special Liquidity Scheme (SLS)
and Credit Guarantee Scheme (CGS) funding) maturing over the
course of the next two years. The Group’s balance sheet reduction
plans will avoid the necessity to refinance much of this funding.
The current cost to the Group of participating in these schemes
is currently approximately 50 basis points over LIBOR for the SLS
and approximately 130 basis points over LIBOR for CGS. Overall,
based on expected spreads and balance sheet mix, we believe
the increased cost of wholesale funding over the next few years is
expected to negatively impact the Groups net interest margin by
less than 10 basis points, and this cost is expected to be more than
offset by the impact of improved product pricing.
22
Lloyds Banking Group
Annual Report and Accounts 2009
SUMMARY OF GROUP RESULTS
COMBINED BUSINESSES SEGMENTAL ANALYSIS
2009
Net interest income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures and associates
Profi t (loss) before tax and fair value unwind
Fair value unwind1
Profi t (loss) before tax
Banking net interest margin2
Cost:income ratio
Impairment as a percentage of
average advances3
Key balance sheet and other items
31 December 2009
Loans and advances to customers
Customer deposits
Risk-weighted assets
Wealth and
International
£m
Group
Operations and
Central items
£m
Insurance
£m
Retail
£m
7,970
1,804
9,774
–
9,774
(4,566)
5,208
(4,227)
(6)
975
407
1,382
1.97%
46.7%
Wholesale
£m
4,710
4,199
8,909
–
8,909
(4,106)
4,803
(15,683)
(720)
(11,600)
6,897
(4,703)
1.52%
46.1%
1,217
1,128
2,345
–
2,345
(1,544)
801
(4,078)
(21)
(3,298)
942
(2,356)
1.71%
65.8%
1.11%
5.92%
6.04%
£bn
371.1
224.1
128.6
£bn
191.8
153.4
286.0
£bn
63.5
29.0
63.2
(287)
2,944
2,657
(637)
2,020
(974)
1,046
–
(22)
1,024
(49)
975
48.2%
£bn
1.1
(884)
1,800
916
–
916
(419)
497
–
2
499
(2,097)
(1,598)
£bn
0.6
0.2
14.4
Group
£m
12,726
11,875
24,601
(637)
23,964
(11,609)
12,355
(23,988)
(767)
(12,400)
6,100
(6,300)
1.77%
48.4%
3.25%
£bn
627.0
406.7
493.3
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
1
2
3
4
5
6
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
BUSINESS REVIEW
GOVERNANCE
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Summary of Group results
18
The board
Divisional results
Our people
Corporate responsibility
Risk management
24
50
52
56
Five year financial summary
95
Directors’ report
Corporate governance
Directors’ remuneration report 105
96
98
100
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
23
Lloyds Banking Group
Annual Report and Accounts 2009
COMBINED BUSINESSES SEGMENTAL ANALYSIS continued
2008
Net interest income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures and associates
Profit (loss) before tax
Banking net interest margin2
Cost:income ratio
Impairment as a percentage of
average advances3
Key balance sheet and other items
31 December 2008
Loans and advances to customers
Customer deposits
Risk-weighted assets
Wholesale
£m
Wealth and
International
£m
Group
Operations and
Central items
£m
Insurance
£m
Retail
£m
8,454
2,739
11,193
–
11,193
(4,963)
6,230
(3,695)
7
2,542
2.15%
44.3%
5,752
(302)
5,450
–
5,450
(4,591)
859
(10,394)
(944)
(10,479)
1.85%
84.2%
1,314
1,191
2,505
–
2,505
(1,476)
1,029
(731)
(21)
277
2.06%
58.9%
0.97%
3.32%
1.05%
£bn
377.1
216.3
118.9
£bn
234.6
157.9
311.0
£bn
64.6
34.1
61.2
(345)
3,493
3,148
(481)
2,667
(1,129)
1,538
–
2
1,540
42.3%
£bn
–
–
0.7
(272)
(188)
(460)
–
(460)
(77)
(537)
(60)
4
(593)
£bn
0.9
0.9
6.7
Group
£m
14,903
6,933
21,836
(481)
21,355
(12,236)
9,119
(14,880)
(952)
(6,713)
2.01%
57.3%
1.81%
£bn
677.2
409.2
498.5
1
2
3
Fair value unwind represents the impact on the consolidated and divisional income statements of the acquisition related balance sheet adjustments. These adjustments principally reflect the
application of market based credit spreads to HBOS’s lending portfolios and own debt. The net fair value unwind in 2009 is mainly attributable to a reduction in the impairment charge
of £6,859 million, as losses reflected in the opening balance sheet valuation of the lending portfolios have been incurred, offset by a charge to net interest income of £2,166 million as the value
of HBOS’s own debt accretes to par.
The Group’s net interest income includes certain amounts attributable to policyholders, in addition to the interest earnings on shareholders’ funds held in the Group’s insurance businesses.
In addition, the Group’s net interest income is significantly affected by the accounting treatment of a number of products predominately in Wholesale division where either the funding costs
or the related revenues are recognised within other income. In order to enhance comparability in the Group’s banking net interest margin, these items have been excluded in determining
net interest income and average interest earning assets.
Impairment on loans and advances to customers divided by average loans and advances to customers, excluding reverse repo transactions, gross of allowance for impairment losses.
24
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
RETAIL
BY MAKING ITS CUSTOMERS CENTRAL
TO ITS STRATEGY RETAIL CONTINUES TO
MAKE SUBSTANTIAL STRATEGIC PROGRESS
OVERVIEW
KEY OPERATING BRANDS
Retail is the largest retail bank in the UK and the leading provider of
current accounts, savings, personal loans, credit cards and mortgages.
With its strong stable of brands including Lloyds TSB, Halifax,
Bank of Scotland and Cheltenham & Gloucester, it serves over
30 million customers through one of the largest branch and fee free
ATM networks in the UK.
Retail has approximately 22 million current account customers and
provides social banking to over 4 million people through basic banking
or social banking accounts. It is also the largest provider of personal
loans in the UK, as well as being the UK’s leading credit card issuer.
Retail provides one in four residential mortgages making it the leading
UK mortgage lender as well as being a major provider of home finance
for the first time buyer. Retail is the largest private sector savings
provider in the UK, with over 21 million savers. It is also a major general
insurance and bancassurance distributor, selling a wide range of
long-term savings, investment and general insurance products.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
25
Lloyds Banking Group
Annual Report and Accounts 2009
KEY HIGHLIGHTS
PERFORMANCE SUMMARY
Change
%
(6)
(34)
(13)
8
(16)
(14)
(62)
(46)
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
2009
£m
7,970
1,804
9,774
(4,566)
5,208
(4,227)
2008
£m
8,454
2,739
11,193
(4,963)
6,230
(3,695)
Share of results of joint ventures
and associates
(6)
7
Profit before tax and
fair value unwind
Fair value unwind
Profit before tax
Banking net interest margin
Cost:income ratio
Impairment losses as a % of
average advances
As at 31 December
975
407
1,382
1.97%
46.7%
2,542
–
2,542
2.15%
44.3%
1.11%
0.97%
2009
£bn
2008
£bn
Change
%
Key balance sheet and other items
Loans and advances to customers
371.1
377.1
Customer deposits:
Savings
Current accounts
Risk-weighted assets
185.6
38.5
224.1
128.6
182.7
33.6
216.3
118.9
(2)
2
15
4
8
Profit before tax and fair value unwind amounted to £975 million,
a decrease of £1,567 million on 2008 primarily due to lower income
and higher levels of impairment, partly offset by a decrease in
operating expenses.
Net interest income has decreased by 6 per cent to £7,970 million.
The banking net interest margin decline of 18 basis points reflected
higher wholesale funding costs and lower deposit margins in the low
base rate environment, partly offset by higher asset pricing, the benefits
from which improved the margin in the second half of the year.
Other operating income has decreased by 34 per cent to
£1,804 million, primarily due to lower payment protection income and
non-recurring one-off income in 2008.
Strong cost management delivering benefits. Operating expenses
decreased by 8 per cent primarily due to tight cost control, cost savings
achieved from the integration programme and lower Financial Services
Compensation Scheme charges.
Impairment losses have increased by 14 per cent to £4,227 million,
reflecting the effect of increased UK unemployment during 2009 on the
unsecured charge, partly offset by a lower secured impairment charge
as house prices stabilised.
Continued good new lending quality, reflecting continued strong
credit criteria with the average loan-to-value ratio on new mortgage
lending at 59 per cent, compared to 63 per cent for 2008.
Good progress was made in integrating the Lloyds TSB and
HBOS retail businesses. New management structures have been
implemented across Retail and continuing good progress has been
made in streamlining, simplifying and integrating back office processes.
Retail’s integration synergies of £124 million for 2009 were ahead of
expectations.
Loans and advances to customers have decreased by 2 per cent,
reflecting the impact of customers reducing their personal indebtedness
and not taking on new financial commitments.
Customer deposits have increased by 4 per cent, despite the high
level of term deposits maturing in the period. The growth in deposits
accelerated in the second half of 2009, increasing by £5.6 billion, or
3 per cent.
Good momentum in the business into the second half, with a positive
trend in income growth in 2009, tight cost control, good progress being
made on integration, and impairment losses peaking.
PERFORMANCE INDICATORS
PROFIT BEFORE TAX
(46%)
£m
INCOME AND COST GROWTH 2009
%
2008
2009
1,382
(8)
2,542
(13)
CUSTOMER DEPOSITS
£bn
LOANS AND ADVANCES TO CUSTOMERS
4%
2008
2009
(2%)
216.3
224.1
2008
2009
Income
Cost
£bn
377.1
371.1
26
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
RETAIL
STRATEGIC VISION
Retail’s strategic goal is to be recognised by its customers as the UK’s
best and most recommended bank. It will achieve this by building
deep and enduring customer relationships which deliver real value to
customers. Supporting this strategy are a strong stable of brands which
provide unparalleled customer reach and choice; deep customer insight
based on the strength of the customer franchise; and highly efficient and
effective low cost processes as a result of business scale. Real customer
understanding and lower cost processes will enable further investment in
the products and services that Retail customers want. Last, but not least,
investment in effective tools and processes will allow Retail colleagues to
focus on meeting customer needs. This strategy will be delivered within
clearly defined and prudent risk parameters.
PROGRESS AGAINST STRATEGIC INITIATIVES
INTEGRATION
The immediate priority of the business has been to plan and successfully
deliver the integration of the retail activities of Lloyds TSB and HBOS.
Good progress has been made in 2009. Organisational structures have
been aligned to establish a single management team across Retail. The
management of the sales force is now consistent across both heritages.
The different mortgage operating models have been integrated and
simplified and the number of mortgage operational sites reduced. In
Direct Channels the multi-skilling of advisors has commenced enabling
advisors to answer both banking and savings calls. Retail has sold
Halifax Estate Agencies as part of ongoing initiatives to focus on its core
business. Retail is on track to deliver its annualised cost savings target of
£378 million for 2011.
DEEP AND ENDURING CUSTOMER RELATIONSHIPS
A key goal of Retail is to build deeper and enduring relationships with
customers and, in particular to help its customers build a more secure
financial future. Retail has continued to maintain momentum in its key
businesses and is making good progress in implementing its relationship
strategy. In 2009 the number of customers with their main current
account with Retail (those paying in more than £1,000 a month) increased
by 4 per cent. In addition, almost 5 million new savings accounts and
almost 2 million new current accounts were opened.
New accounts opened in Lloyds TSB in 2009 were broadly in line with
2008 despite the difficult market, with lower mortgage sales being offset
by a particularly strong performance in savings. Sales in the Halifax and
Bank of Scotland networks have shown an improving trend in the second
half of the year. The pilot of the Lloyds TSB leads system in Halifax and
Bank of Scotland in the second half resulted in a significant sales uplift.
This will be rolled out to the whole network in 2010.
To support Retail customers, who are encountering financial difficulties,
a cross-channel support programme has been launched. Lloyds TSB
branches and telephone units have at least one trained Financial Health
Specialist providing customers with budgeting and money management
advice. In the Halifax and Bank of Scotland businesses, customers have
a dedicated telephone support line with trained specialists able to
guide them through financial difficulties. Support is also available for all
customers online and through a specially developed brochure. For those
customers requiring more intensive help, assistance is provided through
dedicated support units where tailored repayment programmes can be
agreed. Customers are actively supported and referred to free money
advice agencies where they have multiple credit facilities that require
restructuring.
CREATING PRODUCTS AND SERVICES THAT CUSTOMERS VALUE
The introduction of the new Reward current account by Halifax and
Bank of Scotland was well received by customers. Halifax and Bank of
Scotland have taken the lead in the market and moved the majority
of their customers to a new and simpler overdraft charging structure.
In addition, they have also launched the new Visa contactless debit
card. Another innovative product launched in 2009 was the Lloyds TSB
‘Lend a Hand’ mortgage. This allows first time buyers access to interest
rates usually available to those with a 25 per cent deposit by linking the
product to funds in a savings account provided by family or friends. As
well as providing a return for savers, this product supports growth in the
important first time buyers market. In addition, Lloyds TSB launched its
new monthly saver with an interest rate of 5 per cent for 12 months.
In Lloyds TSB the role of the bank manager is being re-defined, backed
by a marketing campaign, with the focus on traditional customer
service and advice, building relationships with the customer within a
modern banking environment. Retail also continues to lead the market
in the provision of mobile banking services which assist customers in
monitoring their bank accounts by providing access through their
mobile phone.
IMPROVING PRODUCTIVITY AND CONTINUALLY IMPROVING
CUSTOMER SERVICE
Productivity in both branch networks has increased during 2009.
The Lloyds TSB network has continued to realise the benefits of
the investments made in 2008 in developing branch staff as well
as increasing the number of branches opening on a Saturday.
Consequently in 2009, sales of personal core banking products by
personal bankers increased by 20 per cent. Productivity in the Halifax
branch network has grown steadily, with the introduction of the
Lloyds TSB leads system to support the more effective cross-selling of
products. The sharing of best practice with the Halifax financial advisors
has seen their number of monthly sales of protection products increase
by over 200 per cent during 2009.
Following a period of strong growth in the use of internet banking, a
significant percentage of Retail’s customer enquiries and transactions
now occur online. There are 6.8 million active users of Retail internet
services logging on 52 million times a month. There has been an
18 per cent growth in online account transfers and online payments
to third parties. In addition, customers are making increasing use of
electronic statements, with more than 6 million accounts now having
statements delivered electronically rather than in paper format.
FINANCIAL PERFORMANCE
Profit before tax and fair value unwind decreased by £1,567 million to
£975 million. This decrease was driven by higher impairment losses and
lower income, partly offset by a reduction in operating expenses.
Retail’s banking net interest margin decreased by 18 basis points to
1.97 per cent reflecting higher wholesale funding costs and reduced
margins on savings products due to the low base rate environment,
partly offset by higher asset pricing which led to a stronger margin in
the second half of 2009.
Total income has decreased by £1,419 million, or 13 per cent, to
£9,774 million, reflecting the impact on margins referred to above, lower
payment protection income and non-recurring one-off income in 2008.
Total income is analysed as follows:
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
27
Lloyds Banking Group
Annual Report and Accounts 2009
Mortgages and Savings
Consumer Banking
Total income
2009
£m
3,667
6,107
9,774
2008
£m
5,009
6,184
11,193
Change
%
(27)
(1)
(13)
first half of 2008. Deposit growth accelerated through 2009 reversing the
trend of declining deposit balances in the second half of 2008. Deposit
growth in the second half of 2009 was particularly strong at £5.6 billion,
or 3 per cent. Current account balances have increased by 15 per cent in
the year resulting from growth in the number of current accounts and the
low interest rate environment.
Total income in Mortgages and Savings has decreased by 27 per cent.
The reduction in Mortgage income reflected increased wholesale money
market funding costs, which was partly offset by higher asset pricing.
Lower income in Savings was the result of margin pressures arising from
lower base rates and the competitive environment, the impact of which
was partly offset by higher customer deposits.
Consumer Banking (current accounts and unsecured lending) income was
broadly unchanged in 2009 compared to 2008. As previously reported,
on 1 January 2009 Retail introduced a monthly premium payment
protection product and ceased selling single premium products. This
new product offers customers the benefit of monthly payments whilst
retaining the product’s valuable benefits and has been well received by
both customers and the market. Income from this product is recognised
over the life of the loan rather than all being recognised in the first year.
This reduction in income, together with the effect of lower loan volumes,
was broadly offset by a strong performance across the rest of Consumer
Banking, including benefits from asset re-pricing.
Lending to customers in 2009 has fallen by 2 per cent reflecting the
impact of customers reducing their personal indebtedness and not
taking on new financial commitments in the current difficult economic
environment. Risk-weighted assets increased by 8 per cent reflecting
the impact of the weak economic environment on credit quality.
Retail continued to make good progress in building its mortgage
business in a contracting market by focusing on the prime mortgage
market, particularly through its network rather than intermediaries,
whilst maintaining a prudent approach to risk. Gross new mortgage
lending totalled £35 billion during 2009, representing a market share
of 24 per cent. Retail has maintained its strong commitment to the
housing market and first time buyers, with more than 60 per cent of new
lending in 2009 being for house purchase rather than for re-mortgage.
In March 2009, the Group committed to increase its planned gross
lending to homebuyers by £3 billion in the following 12 months – Retail
is on track to deliver this commitment. The average loan-to-value ratio
at the end of 2009 was 54.8 per cent compared with 54.9 per cent at the
end of 2008, whilst the average loan-to-value ratio on new residential
lending in 2009 was 59.3 per cent compared with 63.1 per cent in 2008.
Retail continued to be an industry leader in its support for shared equity
and share ownership schemes. Specialist lending balances (self-certified
and sub-prime) decreased slowly following the decision, at the start
of the year, to withdraw from this market. New buy to let lending
remained broadly flat at 13 per cent of total mortgage lending; however,
redemptions in this book were low. Buy to let mortgage balances have
increased by £2.9 billion in the year. Retail continued to carefully assess
the risks of such lending and as a result the average loan-to-value on
new lending in the buy to let portfolio has fallen to 65.6 per cent at the
end of 2009 compared to 73.1 per cent at the end of 2008.
Operating expenses decreased by £397 million, or 8 per cent, to
£4,566 million driven primarily by strong cost control, cost savings
resulting from integrating the two businesses and the benefit of a
lower Financial Services Compensation Scheme levy. The reduction
in operating expenses resulting from integrating the Lloyds TSB
and HBOS retail businesses was delivered through streamlining
management structures, consolidating the number of mortgage
operational sites, integrating and simplifying the mortgage operating
model, procurement savings from the rationalisation of suppliers and
property savings through the consolidation of sites.
Impairment losses on loans and advances have increased by
£532 million, or 14 per cent, to £4,227 million in 2009. Impairment
losses as a percentage of average advances were 1.11 per cent in 2009
compared to 0.97 per cent in 2008. Higher unemployment and the weak
economy drove a significant increase in unsecured impairments which
was partly offset by a lower secured impairment charge as house prices
stabilised. Unsecured impairment losses are sensitive to economic
conditions, particularly unemployment levels; consequently the 2009
impairment charge increased by £1,038 million to £3,438 million. The
stabilisation of the housing market, in combination with lower interest
rates and prudent risk management, has resulted in the secured
impairment charge decreasing in 2009 by £506 million to £789 million.
Total impaired loans, as a percentage of closing advances to customers,
decreased during the second half of the year to 2.9 per cent compared
to 3.0 per cent at 30 June 2009 and 2.6 per cent at 31 December 2008.
Arrears levels in the secured portfolios were higher than 2008 but
improved in the second half of 2009, and remained below the industry
average. The percentage of mortgage cases more than three months
in arrears increased to 2.3 per cent at 31 December 2009 compared
to 1.8 per cent as at 31 December 2008. The stock of repossessed
properties reduced by 32 per cent to 2,720 properties compared
to 4,011 properties at the end of 2008 and, as a proportion of total
accounts, remains lower than the industry average. Currently, average
proceeds from the sale of repossessed properties are in excess of
average valuations assumed in Retail’s provisioning models.
The level of impaired loans in the unsecured lending portfolio, as at
31 December 2009, totalled £3.8 billion, or 11.9 per cent of closing
advances (after writing off £2.1 billion of loans provided against in
earlier years). This compared with £5.4 billion, or 14.7 per cent of
closing advances at 31 December 2008; however, on an equivalent
basis (adjusting for the £2.1 billion write-off in 2009) impaired loans at
31 December 2008 totalled £3.3 billion, or 8.9 per cent of advances.
The underlying increase in impaired loans which occurred in the first half
of 2009 reflected the weak economy, particularly rising unemployment.
During 2009 a number of actions have been taken which improved
delinquency rates on new business.
Customer deposits have increased by 4 per cent over the last 12 months
despite the high level of term deposits maturing during the period, as a
result of Halifax and Bank of Scotland deposit gathering activities in the
Compared to 2009, Retail expects to see a reduction in its impairment
charge in 2010 as house prices continue to stabilise, with further
improvements thereafter as the UK economic environment improves.
28
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
WHOLESALE
THE ‘THROUGH THE CYCLE’ RELATIONSHIP
FOCUSED STRATEGY MEANS WHOLESALE
WILL SUPPORT CUSTOMERS THROUGHOUT
THE ECONOMIC CYCLE
OVERVIEW
KEY OPERATING BRANDS
The Wholesale division serves in excess of a million businesses, ranging
from start-ups and small enterprises to global corporations, with a
range of propositions fully segmented according to customer need.
The division comprises Corporate Markets, Treasury and Trading, and
Asset Finance.
Corporate Markets comprises Corporate, Commercial, Corporate
Real Estate, Specialist Finance and Wholesale Markets. Corporate,
Commercial and Corporate Real Estate provide relationship-based
banking, risk management and advisory services to corporate and
commercial customers principally in the UK. Specialist Finance includes
the acquisition finance and private equity businesses. Wholesale Markets
provides risk management solutions, specialised lending, capital markets
advisory and multi-product financing solutions to its customers, whilst
managing the Group’s own portfolio of structured credit investments
and treasury assets.
Treasury and Trading’s role is to provide access to financial markets in
order to meet the Group’s balance sheet management requirements,
and provides trading infrastructure to support execution of
customer-driven risk management transactions, whilst operating within a
well controlled and conservative risk appetite.
Asset Finance consists of a number of leasing and speciality lending
businesses including Contract Hire (Lex, Autolease and Hill Hire),
Specialist Assets and Consumer Finance (Black Horse Motor and
Personal Finance).
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
29
Lloyds Banking Group
Annual Report and Accounts 2009
KEY HIGHLIGHTS
PERFORMANCE SUMMARY
Loss before tax and fair value unwind amounted to £11,600 million,
an increase of £1,121 million on 2008 due to higher levels of impairment,
partly offset by an increase in other operating income and a decrease in
operating expenses.
Total income has increased by 63 per cent to £8,909 million,
particularly reflecting the lower impact of market dislocation and
continued strength in sales and trading activity.
Net interest income has decreased by 18 per cent to £4,710 million.
The banking net interest margin decline of 33 basis points since prior
year reflected higher wholesale funding costs partly offset by higher
asset pricing. Margins fell in the first half of the year but have stabilised in
the second half of 2009.
Strong cost management delivering benefits, excluding the cost of
settlement of certain historic US dollar payments practices incurred
in 2008, total operating expenses decreased by 7 per cent, reflecting
reduced levels of operating lease business and cost savings achieved
from the integration programme, partly offset by increased investment in
Wholesale’s customer focused business support functions.
Impairment losses amounted to £15,683 million, compared to
£10,394 million in 2008, reflecting the continued weak economic climate
and the application of Lloyds Banking Group prudent impairment
assumptions, primarily in HBOS Corporate Real Estate and HBOS (UK
and US) Corporate businesses. Total impairment losses are expected to
have peaked in the first half of 2009, with a significant reduction in the
impairment charge delivered in the second half of 2009 of 39 per cent.
Cross-selling from deepening relationships has increased by
26 per cent reflecting increased product competencies and
opportunities through a single sales force on the combined
customer base.
Balance sheet reductions, reflect active de-risking of the balance sheet
by either selling down or reducing holdings in debt securities and
available-for-sale positions, deleveraging by customers in Wholesale’s
strategic segments and the impact of impairments and foreign
exchange movements.
Good progress was made in integrating the Lloyds TSB and HBOS
wholesale businesses. Wholesale’s integration synergies for 2009 were
ahead of expectations.
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures
and associates
Loss before tax and
fair value unwind
Fair value unwind
Loss before tax
Loss before tax and fair value
unwind by business unit
Corporate Markets
Treasury and Trading
Asset Finance
Loss before tax and
fair value unwind
Banking net interest margin
Cost:income ratio
Impairment losses as a % of
average advances
As at 31 December
2009
£m
4,710
4,199
8,909
(4,106)
4,803
2008
£m
5,752
(302)
5,450
(4,591)
859
(15,683)
(10,394)
(720)
(944)
(11,600)
(10,479)
6,897
–
(4,703)
(10,479)
(11,736)
(10,509)
595
(459)
273
(243)
(11,600)
(10,479)
1.52%
46.1%
1.85%
84.2%
Change
%
(18)
63
11
(51)
24
(11)
55
(12)
(89)
(11)
5.92%
3.32%
2009
£bn
2008
£bn
Change
%
Key balance sheet and other items
Loans and receivables:
Loans and advances to customers
191.8
234.6
Loans and advances to banks
Debt securities
Available-for-sale financial assets
Customer deposits1
Risk-weighed assets
18.9
31.7
36.9
153.4
286.0
37.0
40.5
74.1
157.9
311.0
1
Of which repos represents £35.5 billion (2008: £18.1 billion).
PERFORMANCE INDICATORS
LOSS BEFORE TAX
55%
-10479
(10,479)
£m
INCOME AND COST GROWTH 2009
(4,703)
0
-11
2008
2009
(11)
Cost
Income
GROWTH IN CROSS-SELLING INCOME
%
COMMITTED GROSS LENDING
(18)
(49)
(22)
(50)
(3)
(8)
%
63
63
£bn
20092
26
20092
c 35.0
2No equivalent data in 2008 (pre-acquisition).
30
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
WHOLESALE
STRATEGIC VISION
Wholesale’s strategic goal is to be recognised as the UK’s leading,
‘through-the-cycle’, relationship-focused wholesale bank. The mission
is to deepen and retain recurring, multi-product customer relationships
building on deep insight into customer needs to provide a broad range
of banking, risk management and capital market products.
PROGRESS AGAINST STRATEGIC INITIATIVES
SUPPORTING CUSTOMERS THROUGH THE CYCLE
Wholesale has provided approximately £35 billion of committed gross
lending to the Corporate and Small and Medium Enterprises (SME)
sector during 2009 and recruited approximately 100,000 new commercial
accounts. Additionally, Wholesale has expanded its product capability
in Wholesale Markets to allow customers to diversify their funding by
accessing wider sources of capital markets liquidity, and to manage their
interest rate and currency risks in an uncertain operating environment.
For customers who have been adversely impacted by the recession,
Wholesale has continued to expand its dedicated Business Support
Units across its Corporate, Commercial, Corporate Real Estate and
Specialist Finance business areas. Business Support Units offer solutions
to customers including providing finance to maintain cash flow and
capital restructuring where appropriate. By focusing on effective
customer turnaround during turbulent times, Wholesale is deepening
relationships and retaining loyal customers.
Wholesale’s ‘through-the-cycle’ commitment to businesses is also
supported by other key initiatives such as the SME Business Charter that
expects by 2012 to help a further 300,000 people start in business and to
stage at least 200 customer seminars a year to help them develop their
businesses and to provide additional finance for growth. The Charter
ensures that customer interest rates are transparent and reflect the cost
of funds and risk in lending to Wholesale’s small business customers.
In the fourth quarter of 2009, Commercial held a series of regional
customer events aimed at helping customers plan for the upturn by
providing practical guidance and maximising networking opportunities
through bringing local business communities together.
INTEGRATING THE BUSINESSES
The Corporate and Commercial businesses have made substantial
progress in building on the strengths of both heritages to provide
a single relationship face to its strategic customer segments. Risk
management processes within all the former HBOS businesses have
been brought into line with the more conservative appetite of the
Group. The balance sheet capacity of Wholesale Markets has been
better aligned with the needs of customers by reducing exposure
to assets not specifically required to support its strategic customer
segments. The treasury activities of both heritages have been brought
under one Treasury and Trading business so that Wholesale is able
to provide a single, consistent face to the market. Consolidation and
rationalisation of Asset Finance businesses continues, bringing together
consumer finance businesses under the Black Horse brand and further
centralisation of its sales channel and merging the market-leading
Lex and Autolease contract hire businesses.
additional product migrations and strengthening risk systems. Wholesale
is on track to deliver its annualised cost savings target by 2011.
PRIORITISING BUSINESSES
Wholesale is investing in product and service capability in businesses
where it believes it can grow in a capital and liquidity efficient manner,
build competitive customer propositions drawing on its existing
strengths, and thereby increase the breadth and depth of trusted
customer relationships. Wholesale is building this capability within a
prudent risk framework.
In order to build capacity for this investment, Wholesale has
systematically reviewed its assets, portfolios and businesses to identify
those that are not consistent with its relationship-focused strategic vision.
Wholesale aims to maximise near-term returns in these businesses, whilst
exploring options for divestment during the next three to five years.
These comprise approximately £160 billion of Wholesale’s total assets
and form part of its commitment under the state aid restructuring plan.
FINANCIAL PERFORMANCE
Loss before tax and fair value unwind increased by £1,121 million to
£11,600 million. This increase was driven by increased impairment losses
reflecting the continued weak economic climate and the application
of prudent Lloyds Banking Group impairment assumptions, primarily
in HBOS Corporate Real Estate and HBOS (UK and US) Corporate
businesses, partly offset by an increase in other operating income and a
decrease in operating expenses.
Total income increased by £3,459 million, or 63 per cent, to £8,909 million
driven by a large increase in other income. Prior year income was
significantly lower due to the effect of the market dislocation which
resulted in investment valuation write-downs in Wholesale Markets,
which were not repeated in the current year. Excluding these amounts
total income decreased by 4 per cent as strong performances in
Wholesale Markets and Treasury and Trading due to a more favourable
interest rate environment, good transaction volumes in capital markets
and strong flows of client-driven derivative transactions at improved
spreads were more than offset by higher funding costs.
Operating expenses decreased by £485 million, or 11 per cent, to
£4,106 million. Excluding the cost of settlement of certain historic
US dollar payments practices, expenses decreased by 7 per cent
primarily as a result of reduced levels of operating lease business in
Asset Finance and a continued focus on cost management including
cost savings attributable to the integration programme.
Impairment losses have increased by £5,289 million to £15,683 million
in 2009. Impairment losses for loans and advances as a percentage
of average loans and advances to customers were 5.92 per cent in
2009 compared to 3.32 per cent in 2008. Higher levels of failures, and
application of prudent Lloyds Banking Group provisioning policy,
notably in HBOS Corporate Real Estate and HBOS Corporate (UK and
US) transactions, drove a significant increase in impairments in these
portfolios. However, total impairment losses are expected to have
peaked in the first half of 2009, amounting to £9,738 million, compared
to £5,945 million in the second half, a reduction of 39 per cent.
Wholesale’s integration programme is making good progress and
synergies for the year are ahead of expectations. The initial planning and
organisational design stage has been completed, and the Wholesale
Operating Model has been defined. All major systems platform
decisions have been made and the first product migrations have
been completed. The focus for 2010 is on planning and execution of
Following detailed in depth reviews of all higher risk portfolios, especially
HBOS, Wholesale has applied appropriate assumptions, particularly
on HBOS Corporate Real Estate lending which resulted in prudent
and significant impairment charges in 2009. As a result, Wholesale
is expecting total impairments in 2010 to be significantly lower than
2009 in line with the Group’s base economic assumptions. Wholesale
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
31
Lloyds Banking Group
Annual Report and Accounts 2009
expects the volume of underlying impairments from traditional trading
and manufacturing businesses to increase in 2010, as the full impact of
economic conditions filters into business insolvencies and asset values.
This is a factor of a typical lag effect as the economy passes through the
recession, and reflects guidance provided in the first half of the year.
However, the effects of this are expected to be significantly less than the
benefit of lower absolute impairments from the HBOS Corporate Real
Estate and HBOS (UK and US) Corporate portfolios.
The share of losses from joint ventures and associates reduced by
£224 million to a loss of £720 million. There were fewer write-offs in
2009 as the majority of the book is now valued at nil, with a remaining
portfolio conservative carrying value of approximately £190 million.
Balance sheet reductions reflect active de-risking of the balance sheet
by either selling down or reducing holdings in debt securities and
available-for-sale positions, deleveraging by customers in Wholesale’s
strategic segments and the impact of impairments and foreign exchange
movements. Credit markets rallied in the second half of 2009 which
brought back some strategic buyers for asset-backed securities (ABS) and
allowed Wholesale to sell £3.5 billion notional of non-core ABS positions.
FINANCIAL PERFORMANCE BY BUSINESS UNITS
Corporate Markets
Net interest income
Other income
Total income
2009
£m
3,756
2,541
6,297
2008
£m
4,693
(1,780)
2,913
Change
%
(20)
Operating expenses
(2,461)
(2,583)
5
Trading surplus
Impairment
Share of results of joint ventures
and associates
Loss before tax and
fair value unwind
Cost:income ratio
Impairment losses as a % of
average advances
As at 31 December
Key balance sheet and other items
Loans and receivables:
Loans and advances to
customers
Loans and advances to banks
Debt securities
Available-for-sale financial assets
Customer deposits1
Risk-weighted assets
3,836
330
(14,855)
(9,896)
(717)
(943)
(11,736)
(10,509)
39.1%
88.7%
(50)
24
(12)
6.09%
3.78%
2009
£bn
2008
£bn
Change
%
177.7
216.4
4.5
31.7
32.1
89.7
9.3
40.5
38.3
96.6
263.8
284.7
(18)
(52)
(22)
(16)
(7)
(7)
1
Of which repos represents £35.5 billion (2008: £18.1 billion).
Loss before tax and fair value unwind increased by £1,227 million to
£11,736 million, due to an increase in impairment losses, partly offset
by an increase in other income.
Total income increased by £3,384 million to £6,297 million as a result
of the significantly reduced impact from market dislocation and the
absence of investment write downs in 2009. Performance in key income
drivers across Commercial Banking, Corporate Banking, Wholesale
Markets and Corporate Real Estate are further discussed below.
Commercial Banking net interest income decreased due to the lower
base rate environment which impacted margins on some current
account and savings products, and other operating income decreased
slightly, primarily reflecting lower customer transactions and activity
in their businesses, as a consequence of the depressed economic
environment.
Corporate Banking net interest income increased marginally as
re-pricing reflected changing risk profiles and higher liquidity costs;
however, this was mostly offset by higher funding costs. Average
transaction volumes were maintained year-on-year; however lending
showed a decline through 2009 as customers actively deleveraged their
balance sheets, aligned with a suppressed appetite for new borrowing
in the current economic environment. Other operating income increased
by approximately 18 per cent reflecting improved upfront fees, exit fees
and commitment commissions.
Wholesale Markets net interest income was approximately 34 per cent
lower primarily reflecting the higher cost of funding. Other operating
income increased by £4,472 million, primarily due to the absence of prior
year investment write downs associated with the dislocated markets and
some valuation recoveries in 2009.
Corporate Real Estate net interest income decreased overall due to
the increased funding costs and falling levels of income from impaired
assets, partly offset by increased margins from asset re-pricing.
Operating expenses decreased by £122 million, or 5 per cent to
£2,461 million, as a result of continued focused cost management.
After excluding the cost incurred in 2008 on settlement of certain
historic US dollar payments practices, operating expenses increased by
2 per cent, with integration savings offset by increased investment in
Wholesale’s customer focused business support functions, which now
employ approximately 1,000 people.
Impairment losses increased by £4,959 million to £14,855 million,
due to increased levels of impairments across all areas of Corporate
Markets, notably in the HBOS Corporate Real Estate and the HBOS
(UK and US) Corporate portfolio. The significant increase in impairments
in 2009 was against the backdrop of weaker economic conditions;
application of Lloyds Banking Group prudent valuation assumptions;
portfolio concentration in property lending; material single name
exposures; poorly structured lending agreements; and aggressive
loan-to-value positions at origination in the legacy HBOS portfolios.
However, impairment losses of £9,334 million in the first half of 2009
fell significantly in the second half to £5,521 million, a reduction of
41 per cent.
32
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
WHOLESALE
In 2009, Wholesale has spent a significant amount of time continuing to
analyse and address the issues in the legacy HBOS portfolios, with the
greatest attention paid to over concentrations in real estate, individual
entrepreneurial cases and those other portfolios that fall outside the
legacy Lloyds TSB credit risk appetite. As a result, and in particular,
Wholesale has applied appropriate assumptions about real estate asset
expectations and with the deterioration in the economic conditions
translating into lower commercial property valuations, has taken prudent
and significant impairment charges. Whilst a recent improvement in
property valuations has been noted, this has had a limited impact on the
property development portfolio.
The share of losses from joint ventures and associates of £717 million,
reduced by £226 million. There were fewer write-offs in 2009 as the
majority of the book is now valued at nil with a remaining portfolio
conservative carrying value of approximately £180 million.
Loans and advances to customers decreased by £38.7 billion to
£177.7 billion as an estimated £20 billion of total lending drawdowns
in the year was more than offset by scheduled amortisations and
repayments and the impact of customers deleveraging their balance
sheets by using alternative forms of funding. The decrease was also
driven by the transfer of a £7 billion European loan portfolio to Wealth
and International, significant impairment losses in 2009 and foreign
exchange movements, partially offset by the unwind of fair value
adjustments booked on acquisition of HBOS.
Debt securities and available-for-sale financial assets balances reduced
by £15 billion as Corporate Markets de-risked the balance sheet by
either selling down or not replenishing total holdings after amortisations
or maturities.
Treasury and Trading
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
Profit before tax and
fair value unwind
Cost:income ratio
As at 31 December
Key balance sheet and other items
Loans and receivables:
Loans and advances to customers
Loans and advances to banks
Available-for-sale financial assets
Customer deposits
Risk-weighted assets
2009
£m
544
238
782
(187)
595
–
Change
%
(27)
41
1
63
2008
£m
746
(193)
553
(188)
365
(92)
595
273
23.9%
34.0%
2009
£bn
2008
£bn
Change
%
2.5
14.4
4.8
63.7
8.4
4.8
27.7
35.8
61.3
11.6
(48)
(48)
(87)
4
(28)
Income performance benefited from strong customer demand for
interest rate and foreign exchange products, market volatility and both
internal and external demand for Treasury’s pricing and risk management
service, albeit at more moderate levels in the second half of 2009.
Trading flows are managed with the overriding aim of providing a service
to customers, whilst maintaining Treasury and Trading’s conservative
risk appetite.
Operating expenses reduced by £1 million to £187 million reflecting
a continued focus on cost management and cost savings achieved
through integration.
Impairment losses of £92 million in 2008 reflected the impact of a
number of high profile financial services company failures in the second
half of 2008.
The reduction in available-for-sale financial assets is a result of the
decision to sell the majority of these assets, which were held for liquidity
purposes, and increase deposits with the Bank of England, thereby
improving the quality of the liquid asset portfolio.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
33
Lloyds Banking Group
Annual Report and Accounts 2009
Asset Finance
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures
and associates
Loss before tax and fair value
unwind
Change
%
31
(15)
(8)
20
2009
£m
410
1,420
1,830
2008
£m
313
1,671
1,984
(1,458)
(1,820)
372
(828)
164
(406)
(3)
(1)
(459)
(243)
(89)
Cost:income ratio
79.7%
91.7%
Impairment losses as a % of
average advances
As at 31 December
Key balance sheet and other items
Loans and advances to customers
Operating lease assets
Risk-weighted assets
5.86%
2.53%
2009
£bn
11.6
3.4
13.8
2008
£bn
Change
%
13.4
3.9
14.7
(13)
(13)
(6)
Loss before tax and fair value unwind increased by £216 million to
£459 million due to higher impairment losses, partially offset by a
decrease in operating expenses.
Total income decreased by £154 million, or 8 per cent, to £1,830 million
from lower business volumes on assets held under operating leases,
lower insurance income in the Personal Finance business due to the
move to a monthly premium product, as well as reduced new business
volumes. This was offset in part by margin improvement across the
consumer finance businesses.
Operating expenses decreased by £362 million, or 20 per cent,
to £1,458 million, reflecting the impact of lower business volumes
reducing depreciation charges on assets held under operating lease,
year-on-year improvement in used car values and cost savings achieved
from integration.
Impairment losses increased by £422 million to £828 million, reflecting
increases in impairment in both the retail and non-retail consumer
finance businesses. In retail consumer finance, impairment increases
reflected both the increase in the number of customers going into
arrears and changes in the expected recovery rates on the defaulted
second lien portfolio resulting from house price deflation, which has
now stabilised. The business has also seen a significant increase in the
number of corporate failures within its non-retail books which have also
caused an increase in the impairment charge.
34
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
WEALTH AND INTERNATIONAL
INCREASING THE PENETRATION OF THE
WEALTH OFFERING INTO THE GROUP’S
EXISTING CUSTOMER BASE PROVIDES A
SIGNIFICANT GROWTH OPPORTUNITY
OVERVIEW
KEY OPERATING BRANDS
Lloyds TSB
Wealth and International is a new division formed in 2009 to give
increased focus and momentum to the private banking and asset
management businesses and to closely co-ordinate the management
of our international businesses. The division operates in more than
30 countries around the world.
The Wealth business comprises private banking, wealth and asset
management businesses in the UK and overseas. The key operations
are UK and International Private Banking, which operate under the
Lloyds TSB and Bank of Scotland brands, the Channel Islands and Isle
of Man offshore businesses, the expatriates business and the Asset
Management business which, following the completion of the sale
of Insight Investment, is now consolidated within Scottish Widows
Investment Partnership (SWIP). SWIP is one of the largest asset
managers in the UK, managing £142 billion worth of assets on
behalf of a wide range of institutions. In addition the Group holds a
60 per cent stake in St James’s Place plc and a 55 per cent stake in
Invista Real Estate, respectively the UK’s largest independent listed
wealth manager and real estate fund management Group.
The International business comprises the Groups other international
banking businesses outside of the UK, with the exception of the corporate
business in North America which is managed through the Group’s
Wholesale division. These largely comprise corporate, commercial and
asset finance businesses in Australia, Ireland and Continental Europe and
retail businesses in Ireland, Germany and the Netherlands.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
35
Lloyds Banking Group
Annual Report and Accounts 2009
KEY HIGHLIGHTS
PERFORMANCE SUMMARY
Loss before tax and fair value unwind amounted to £3,298 million,
compared to a profit of £277 million in 2008 due to higher levels of
impairment.
Total income has decreased by 6 per cent to £2,345 million, reflecting
lower net interest margins, and the impact of lower global stock markets
particularly in the first half of the year, partly offset by favourable foreign
exchange movements.
Net interest income has decreased by 7 per cent to £1,217 million,
the banking net interest margin decline of 35 basis points reflects higher
wholesale funding costs and lower deposit margins in the low base rate
environment, partly offset by the impact of strong portfolio management
in International, leading to an underlying gross asset reduction of
7 per cent, and higher asset pricing leading to higher margins.
Targeted cost management has delivered benefits, excluding the
impact of foreign exchange movements and additional costs associated
with transitional services in the Australian business, underlying costs
were slightly lower than 2008 due to cost savings achieved from
integration partly offset by investments into higher growth areas and
business support functions.
Impairment losses amounted to £4,078 million, compared to
£731 million in 2008, reflecting the significant deterioration in the credit
risk environment in Ireland and Australia. The impairment charge for
Wealth and International is expected to have peaked in 2009, although
the economic conditions in Ireland continue to be monitored closely.
Good progress was made in integrating the Lloyds TSB and HBOS
Wealth and International businesses. Wealth and International’s
integration synergies for 2009 were ahead of expectations.
Loans and advances to customers have decreased by 2 per cent
to £63.5 billion, primarily due to net repayments and increased
impairment provisions in the International businesses offset by the
transfer of a £7 billion European loan portfolio from Wholesale division.
Customer deposits have decreased by 15 per cent to £29 billion,
primarily due to outflows in Ireland reflecting aggressive pricing from
competitors who have also benefited from the Irish Government
deposit guarantee.
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
2009
£m
1,217
1,128
2,345
(1,544)
801
(4,078)
2008
£m
1,314
1,191
2,505
(1,476)
1,029
(731)
Change
%
(7)
(5)
(6)
(5)
(22)
Share of results of joint ventures
and associates
(21)
(21)
Profit (loss) before tax
and fair value unwind
Fair value unwind
Profit (loss) before tax
Profit (loss) before tax and fair
value unwind by business unit
Wealth
International
Profit (loss) before tax
and fair value unwind
Banking net interest margin
Cost:income ratio
Impairment losses as a % of
average advances
As at 31 December
Key balance sheet and other
items
Loans and advances to customers
Customer deposits
Risk-weighted assets
(3,298)
942
(2,356)
198
(3,496)
(3,298)
1.71%
65.8%
277
–
277
369
(92)
277
2.06%
58.9%
6.04%
1.05%
2009
£bn
2008
£bn
Change
%
63.5
29.0
63.2
64.6
34.1
61.2
(2)
(15)
3
PERFORMANCE INDICATORS
PROFIT/LOSS BEFORE TAX
£m
INCOME AND COST GROWTH 2009
-2356
2008
2009
CUSTOMER DEPOSITS
(15%)
000000
2008
2009
277
-6
277
(6)
(2,356)
Income
Cost
£bn
WEALTH RELATIONSHIP CLIENTS
7%
34.099998
0
34.1
2008
2009
29.0
307
285,000
307,000
%
5
5
36
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
WEALTH AND INTERNATIONAL
STRATEGIC VISION
Wealth represents a key growth opportunity for the Group and, through
deepening the relationships with existing Group clients alongside
targeted external customer acquisition, Wealth’s goal is to be recognised
as the trusted advisor to expatriate and private banking clients both in
the UK and selected international markets. Wealth’s initial focus in the
UK will be to increase the penetration of its offering into the Group’s
existing customer base by referring wealthier customers to its private
banking businesses where their wider financial needs can be more
effectively met. Outside the UK, Wealth will be building on the strengths
of its brand portfolio and existing expatriate, offshore and international
private banking propositions.
Wealth also represents an opportunity to diversify income growth to
less capital intensive businesses and, following an initial outflow of
price sensitive deposits in 2009, contribute valuable relationship based
customer deposits to improve the Group’s funding profile.
In the International businesses, the priority is to maximise value in
the short to medium term. International’s immediate focus is close
management of the lending portfolio, particularly in the Irish business,
embedding the Group’s risk management policies and procedures and
repricing assets where appropriate. At the same time International will
be delivering operational efficiencies, reshaping the business models
and rightsizing the balance sheet to reflect the ongoing environment.
PROGRESS AGAINST STRATEGIC INITIATIVES
DEEP AND ENDURING CUSTOMER RELATIONSHIPS
In Wealth, the focus has been on driving additional income growth
from the Group’s affluent and high net worth client base through more
effective use of the opportunities afforded by the Retail and Wholesale
franchises to cross-sell Wealth products to these customers. The
total number of Wealth relationship clients increased by 8 per cent
to approximately 300,000 at the end of 2009, including a 13 per cent
increase within UK Wealth. Net new inflows of funds under management
in the year were £7 billion.
MAXIMISING VALUE IN THE SHORT TO MEDIUM TERM
In International, the focus is on managing the impaired asset portfolio
with redeployment of resource from front line activity and the wider
Group to manage arrears and collections. The business is responding to
the challenging environment through strong portfolio management and
repricing assets as opportunities arise.
INTEGRATION
Wealth and International is making good progress with the integration
of its Wealth operations, including private banking and in particular
its asset management businesses. The internal funds management
business of Insight Investment has now been transferred to Scottish
Widows Investment Partnership (SWIP) pushing it into the top five
largest UK active asset managers, with funds under management of
£142 billion. Wealth and International is on track to deliver its annualised
cost savings target by 2011.
On 9 February 2010 the Group announced its intention to reshape the
Irish business to reflect the continuing difficult economic environment
and secure a viable future. The Group intends to close both the Halifax
retail business in the Republic of Ireland and the Bank of Scotland
(Ireland) intermediary business and refocus the Irish business on its
established strengths and long standing ICC Bank heritage of corporate
and commercial banking. The resulting closure of 44 Halifax retail
branches and the majority of the associated job losses are planned to
take place by the end of July 2010.
Change
%
(14)
(8)
(10)
1
(35)
(46)
FINANCIAL PERFORMANCE BY BUSINESS UNIT
Wealth
Net interest income
Other income
Total income
2009
£m
383
1,003
1,386
2008
£m
445
1,096
1,541
Operating expenses
(1,119)
(1,130)
Trading surplus
Impairment
Share of results of joint ventures
and associates
Profit before tax and
fair value unwind
Cost:income ratio
Impairment losses as a % of
average advances
As at 31 December
Key balance sheet and other items
Loans and advances to customers
Customer deposits
Risk-weighted assets
267
(71)
2
411
(23)
(19)
198
80.7%
369
73.3%
0.70%
0.22%
2009
£bn
2008
£bn
Change
%
9.2
23.2
10.0
10.4
26.7
11.6
(12)
(13)
(14)
Profit before tax and fair value unwind decreased by 46 per cent to
£198 million primarily due to lower income.
Total income decreased by £155 million, or 10 per cent, to £1,386 million.
Net interest income decreased by £62 million, or 14 per cent, to
£383 million reflecting margin compression driven by reducing base
rates and a very competitive deposit market which led to an outflow
in deposits of £3.5 billion. Other income decreased by £93 million,
or 8 per cent, to £1,003 million driven by falls in global stock markets
particularly in the first half of 2009, impacting sales volumes and fee
income across all Wealth businesses.
Operating expenses decreased by £11 million to £1,119 million driven
by cost savings from integration, particularly in the asset management
business, offset by investments to increase distribution capacity in
Private Banking to support future growth plans and the negative
impact of foreign exchange movements, principally arising from the
stronger Euro.
Impairment losses have increased by £48 million to £71 million, reflecting
the impact of the economic environment on the UK Private Banking and
Expatriate lending portfolios.
The Wealth results include total income of £66 million and operating
expenses of approximately £65 million relating to the external fund
management business of Insight Investment which was sold in
November 2009. No material gain or loss arose on the disposal.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
37
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£bn
54.3
5.8
53.2
2008
£bn
Change
%
54.2
7.4
49.6
–
(22)
7
2009
£bn
2008
£bn
As at 31 December
Key balance sheet and other items
Loans and advances to customers
Customer deposits
Risk-weighted assets
Funds under management
SWIP and Insight:
Internal
External
Other Wealth:
St. James’s Place
Invista
Other (including Private Banking)
111.7
30.0
141.7
21.4
5.4
15.6
95.0
107.2
202.2
16.3
6.3
20.1
Closing funds under management
184.1
244.9
Opening funds under management
244.9
253.0
Inflows – SWIP and Insight:
internal
external
Other
Outflows – SWIP and Insight:
internal
external
Other
Investment return, expenses and commission
Net operating increase (decrease) in funds1
Sale of Insight
Closing funds under management
7.1
33.1
4.1
44.3
(6.8)
(26.4)
(4.0)
(37.2)
16.4
23.5
(84.3)
184.1
8.4
31.3
5.5
45.2
(11.9)
(15.9)
(3.2)
(31.0)
(22.3)
(8.1)
–
244.9
1
The movement in funds under management includes movements in respect of Insight’s external
fund management business up to disposal on 2 November 2009. All funds which will continue to
be managed by SWIP post-transition are included within closing funds under management.
Excluding the impact of the sale of Insight Investment’s external fund
management business, funds under management are £23.5 billion
higher than December 2008 due to strong inflows and a broad recovery
in equity values in the second half of 2009.
International
Net interest income
Other income
Total income
Operating expenses
Trading surplus
Impairment
2009
£m
834
125
959
(425)
534
(4,007)
Change
%
(4)
32
(1)
(23)
(14)
2008
£m
869
95
964
(346)
618
(708)
Share of results of joint ventures
and associates
Loss before tax and fair value
unwind
Cost:income ratio
(23)
(2)
(3,496)
44.3%
(92)
35.9%
Impairment losses as a % of average
advances
6.99%
1.18%
Loss before tax and fair value unwind increased by £3,404 million to
£3,496 million due to an increase in impairment losses, reflecting the
significant deterioration in the credit risk environment, particularly in
relation to commercial real estate lending in Ireland and Australia, and
concentrations in sectors most impacted by the downturn in Australia
such as printing, media and transport.
Excluding favourable foreign exchange movements of approximately
£120 million, total income fell by 13 per cent to £959 million reflecting
higher wholesale funding costs, the impact on net interest income of the
increase in impaired assets and a very competitive deposit market, partly
offset by improved customer lending margins.
Excluding adverse foreign exchange movements of approximately
£40 million, operating expenses increased by 10 per cent to £425 million
driven by additional costs associated with the transitional services
following the disposal by HBOS of BankWest and St. Andrews Australia
in December 2008, the development of International’s deposit taking
operation in Germany and increased risk management resources to
manage impaired asset portfolios in Ireland and Australia.
Impairment losses and loans and advances to customers are summarised
by key geography in the following table.
Impairment losses
Loans and advances
Ireland
Australia
Wholesale Europe
Latin America/Middle East
Netherlands
2009
£m
2,949
849
129
69
11
2008
£m
526
164
9
2
7
As at
31 December
2009
£bn
24.9
As at
31 December
2008
£bn
29.6
13.0
8.6
0.6
7.2
12.3
3.5
1.0
7.8
54.2
4,007
708
54.3
Impairment losses have increased by £3,299 million to £4,007 million.
Of the total impairment losses £2,949 million arose in Ireland which
experienced a significant deterioration in asset values driven by the
collapse in liquidity and severe decline in the property sector which saw
commercial real estate values fall by over 50 per cent and house prices
by over 25 per cent from their peak. A further £849 million of the total
impairment losses arose in Australia driven by concentrations in property
and in other sectors such as media, printing and transport which have
been hardest hit by the downturn. Business Support Units have been
established in both Ireland and Australia, supplemented by a divisional
sanctioning process, to provide independent divisional oversight and
control of the portfolios.
Loans and advances to customers include the transfer of a £7 billion
European loan portfolio from Wholesale division in the second half
of the year. The impact of this is offset by net repayments across all
businesses and higher impairment provisions.
Customer deposits fell by 22 per cent to £5.8 billion, principally in Ireland
reflecting aggressive pricing from competitors who have also benefited
from the Irish Government deposit guarantee. This was partly offset by
a strong performance in Bank of Scotland Germany, which raised over
€1 billion of deposits since its launch in January 2009.
38
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
INSURANCE
DEVELOPING STRONG AND ENDURING
CUSTOMER RELATIONSHIPS AND DELIVERING
SUSTAINABLE PROFITABLE GROWTH REMAIN
KEY AREAS OF FOCUS
OVERVIEW
KEY OPERATING BRANDS
The Insurance division offers life assurance, pensions, investment
products and general insurance and operates through three main
businesses: Life, Pensions and Investments UK; Life, Pensions and
Investments Europe; and General Insurance.
The UK Life, Pensions and Investment business is the leading
bancassurance provider in the UK and has one of the largest
intermediary sales forces in the industry. The business includes
Scottish Widows which, for a number of years, has been a subsidiary
of the Lloyds TSB Group and the provider of long term savings and
investment products distributed through all Lloyds TSB channels.
Following the acquisition of HBOS, our Life, Pensions and Investments
business also includes business written through the intermediary
and bancassurance channels under the Clerical Medical and Halifax
brands respectively.
The European Life, Pensions and Investments business distributes
products primarily in the German market under the Heidelberger
Leben and Clerical Medical brands.
The combined General Insurance business is a leading distributor of home
and payment protection insurance in the UK, with products distributed
through the branch network, direct channels and strategic corporate
partners. The business is one of the largest underwriters of personal
insurance business in the UK and also operates significant brokerage
operations for personal and commercial insurances. It operates primarily
under the Lloyds TSB, Halifax and Bank of Scotland brands.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
39
Lloyds Banking Group
Annual Report and Accounts 2009
KEY HIGHLIGHTS
PERFORMANCE SUMMARY
Net interest income
Other income
Total income
Insurance claims
Total income, net of
insurance claims
Operating expenses
2009
£m
(287)
2,944
2,657
(637)
2,020
(974)
2008
£m
(345)
3,493
3,148
(481)
2,667
(1,129)
Share of results of joint ventures and
associates
(22)
2
Profit before tax and
fair value unwind
Fair value unwind
Profit before tax
Profit before tax and fair value
unwind by business unit
Life, pensions and investments:
UK business
European business
General insurance
Other1
Profit before tax and
fair value unwind
EEV new business margin
1,024
1,540
(49)
975
–
1,540
617
75
367
(35)
826
149
537
28
1,024
2.5%
1,540
3.1%
Change
%
17
(16)
(16)
(32)
(24)
14
(34)
(37)
(25)
(50)
(32)
(34)
1
Includes certain divisional costs and income not allocated to business units, as well as the
division’s share of results of joint ventures and associates.
Profit before tax and fair value unwind amounted to £1,024 million,
a decrease of £516 million on 2008, resulting from a reduction in income
and an increase in claims, due to factors including demanding market
conditions, partly offset by a decrease in operating expenses.
Total income net of insurance claims has decreased by £647 million
to £2,020 million, due to the non-recurrence of £334 million of
HBOS legacy one-off benefits, a £156 million increase in insurance
claims and the impact of challenging economic conditions driving
lower sales and returns, partially offset by significantly lower charges
for policyholder lapses.
Life, Pensions and Investments UK sales of £12,973 million (PVNBP)
reduced by 26 per cent. In addition to the general contraction in the
market, sales were significantly impacted as the intermediary sales
forces were integrated and a number of HBOS legacy products with
poor returns were withdrawn. These factors led to sales through the
intermediary channel reducing by 35 per cent. Bancassurance sales,
excluding payment protection, were resilient given the challenging
market conditions with a reduction of 11 per cent from 2008. Sales of
OEIC products delivered strong growth of 12 per cent.
Life, Pensions and Investments european embedded value (EEV)
new business margins for the year was 2.5 per cent. The margin for
the second half of 2009 increased to 2.6 per cent from 2.4 per cent
in the first half, reflecting strong cost control and increased focus on the
profitability of the combined product range.
General Insurance profits have decreased by 32 per cent to
£367 million, due to a £156 million increase in claims, primarily
unemployment related, lower investment returns and the market wide
move to monthly premium payment protection business.
Strong cost management delivering benefits. Operating expenses
have decreased by £155 million to £974 million mainly due to continued
focus on cost management and delivering integration synergies.
Underlying operating expenses reduced by 8 per cent allowing for
certain reclassifications and non-recurring items.
Good progress was made in integrating the legacy Lloyds TSB and
HBOS Insurance businesses. Insurance division integration synergies of
£55 million for 2009 were ahead of expectations.
The capital position of the two life insurance groups within the
division remains robust with increases in Insurance Group Directive
(IGD) capital surpluses.
PERFORMANCE INDICATORS
PROFIT BEFORE TAX
(37%)
£m
INCOME AND COST GROWTH 20092
%
2008
2009
975
(14)
1,540
(24)
NEW BUSINESS MARGIN (EEV) LP&I
%
LIFE BANCASSURANCE SALES2
2008
2009
2Excluding payment protection.
2.5
3.1
2008
2009
Income
Cost
£m
7,677
6,844
40
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
INSURANCE
STRATEGIC VISION
The Insurance division’s strategic vision is to be recognised as the best
insurance business in the UK by its customers, staff and shareholders.
The division has set itself four strategic objectives to achieve its vision of
being the best insurance business in the UK:
– complete the integration of its market leading businesses,
– continue to strengthen its leading brands and grow sales profitably in
its targeted markets,
– enhance the capital and operational efficiency of existing and future
business, and
– leverage Lloyds Banking Group strengths in distribution and asset
management.
PROGRESS AGAINST STRATEGIC INITIATIVES
INTEGRATING THE BUSINESSES
The integration of the legacy Life, Pensions and Investments businesses
and the legacy General Insurance businesses have progressed well
with the 2009 synergy benefits of £55 million significantly exceeding
initial expectations. This has been achieved by aligning management
structures, moving to a consistent operating model in each business,
reducing the number of servicing sites in Life, Pensions and Investments
and removing duplicated support functions across both legacies. The
full year impact of integration activities already completed and the
benefit of planned synergies is expected to lead to further cost
reductions in future.
SUSTAINABLE PROFITABLE GROWTH
Delivering profitable new business growth remains a key area of focus
for the division. The intermediary sales forces of Scottish Widows and
Clerical Medical were combined under the Scottish Widows brand on
1 July 2009 and work is well progressed in developing an integrated
bancassurance proposition, planned to be launched mid 2010. The
combined business will seek to build on the strengths inherent in each
of the legacies and will use the financial return and capital disciplines
employed by Scottish Widows. During the year certain legacy HBOS
products were withdrawn and replaced by higher returning Scottish
Widows products. This change in product offering, in keeping with
the division’s strategic objectives, enhances the customer proposition,
improves capital efficiency and increases shareholder return.
In General Insurance, growth in home insurance sales continued along
with a resilient underwriting performance in 2009. Despite adverse
weather claims in the year, the underwriting performance of the home
book remained strong with a claims ratio of 36 per cent.
the repurchase of £0.6 billion of Clerical Medical’s subordinated capital.
In 2009, dividends totalling £0.5 billion were paid by companies in the
Insurance division to the Group and a number of hedging initiatives
were completed with the aim of managing capital and profit volatility.
Leveraging distribution and asset management
For Life, Pensions and Investments work is well progressed in developing
an integrated bancassurance proposition, planned to be launched
mid 2010. In conjunction with Scottish Widows Investment Partnership,
during 2009 Life, Pensions and Investments UK also made good
progress in further developing its OEIC proposition, leading to strong
sales of its new capital protected fund OEIC.
In General Insurance, Home insurance total gross written premiums
through the bancassurance network increased by 5 per cent. Home
retention rates for both brands in the retail business improved in the
second half of the year as a result of a combination of an improving
market and a customer loyalty programme.
LIFE, PENSIONS AND INVESTMENTS
UK BUSINESS
Net interest income
Other income
Total income
Operating expenses
Profit before tax and
fair value unwind
Profit before tax analysis
New business profit:
Insurance business1
Investment business1
Total new business profit
Existing business profit
Expected return on shareholders’
net assets
Profit before tax and
fair value unwind
EEV new business margin (UK)
2009
£m
(273)
1,474
1,201
(584)
2008
£m
(282)
1,758
1,476
(650)
617
826
328
(196)
132
483
465
(247)
218
534
2
74
617
2.6%
826
3.0%
Change
%
3
(16)
(19)
10
(25)
(29)
21
(39)
(10)
(97)
(25)
OPERATIONAL AND CAPITAL EFFICIENCY
The Insurance division continues to focus on cost reduction, with
underlying costs decreasing by 8 per cent after allowing for the
allocation of Lloyds TSB Insurance claims handling expenses to claims
rather than expenses in 2009 and the non-recurrence of certain 2008
HBOS marketing costs. Another major factor has been a reduction
in staff numbers. The synergy savings and additional operational
efficiencies have been achieved without compromising the quality of
customer service with customer satisfaction scores remaining robust
across the businesses.
Improving capital efficiency remained a key priority throughout 2009.
At a product level, initiatives focused on improving return on capital
for example by continuing to move away from products with initial
commission and changes in product design which allow for capital to be
recovered more quickly. Capital efficiency was further enhanced through
1
As required under International Financial Reporting Standards (IFRS), products are split between
insurance and investment contracts depending on the level of insurance risk contained. For
insurance contracts, the new business profit includes the net present value of profits expected
to emerge over the lifetime of the contract, including profits anticipated in periods after the
year of sale; for investment contracts the figure reflects the profit in the year of sale only, after
allowing for the deferral of initial income and expenses. Consequently the recognition of profit
for investment contracts is deferred relative to insurance contracts.
Profit before tax and fair value unwind decreased by £209 million. New
business profit was significantly impacted by the general contraction in
the life, savings and investments market but the reduction also reflects
the integration of the intermediary sales forces and the withdrawal of
a number of legacy HBOS products with poor returns. The EEV new
business margin (UK) fell to 2.6 per cent in 2009 largely due to the
transitional basis of commission payable on legacy HBOS products
through the bancassurance channel. However, the UK margin increased
to 2.7 per cent in the second half of 2009 from 2.5 per cent in the first
reflecting strong cost control and increased focus on the profitability of
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
41
Lloyds Banking Group
Annual Report and Accounts 2009
the combined product range. The margin in respect of Scottish Widows
products increased to 3.5 per cent in 2009 from 3.2 per cent in 2008.
Existing business profit has reduced by 10 per cent. The figure includes
a reduction in expected return, reflecting lower asset values resulting
from adverse investment markets in 2008, a lower assumed rate of return
and the non-recurrence of one-off benefits in HBOS of £211 million
relating to a more market consistent basis of embedded value and
enhancements to the bond proposition. Those impacts have been partly
offset by a significant reduction in charges for policyholder lapses in
2009. The customer loyalty programmes have proved to be increasingly
successful during 2009 but given the potential volatility of behaviour
caused by turbulent markets an appropriately prudent approach has
been taken in the assessment of future trends.
Expected returns on shareholders net assets were impacted both by
a lower assumed rate of return and reduced asset values as a result of
severe market falls in 2008.
The capital positions of the UK life insurance companies within the
Insurance division remain robust. As at 31 December 2009, the estimated
Insurance Groups Directive (IGD) capital surplus for the Scottish Widows
Insurance group was £1.3 billion, with additional surplus within the Long
Term Fund of an estimated £1.1 billion, and the estimated IGD capital
surplus for the HBOS Insurance group was £1.6 billion. The IGD capital
surpluses include £0.5 billion and £0.1 billion respectively of assets in
the Long Term Fund, as allowed by the FSA in December 2009, not
previously recognised in the calculation of IGD capital.
EUROPEAN BUSINESS
Profit before tax decreased by 50 per cent to £75 million. New business
profits reduced by £32 million driven by lower sales, reflecting economic
and market conditions. Existing business profits decreased, primarily
due to lower expected returns. In 2008, as a result of moving to a more
market consistent basis of embedded value in HBOS, a one-off benefit
of £123 million arose. The impact of this was largely offset by a significant
reduction in charges for policyholder lapses in 2009.
NEW BUSINESS
An analysis of the present value of new business premiums for business
written by the Insurance division, split between the UK and European
Life, Pensions and Investments businesses is given below:
Protection
Payment protection
Savings and investments
Individual pensions
Corporate and other pensions
Retirement income
Managed fund business
Life and pensions
OEICs
Analysis by channel
Bancassurance excluding
payment protection
Payment protection
Bancassurance
Intermediary
Direct
UK
£m
519
153
2,689
2,275
2,600
887
146
9,269
3,704
12,973
6,844
153
6,997
5,639
337
12,973
2009
Europe
£m
49
–
312
185
–
–
–
546
–
546
–
–
–
546
–
546
Total
£m
568
153
3,001
2,460
2,600
887
146
9,815
3,704
13,519
6,844
153
6,997
6,185
337
UK
£m
492
679
4,149
4,216
2,940
1,451
216
14,143
3,303
17,446
7,677
679
8,356
8,704
386
13,519
17,446
2008
Europe
£m
51
–
372
306
–
–
–
729
–
729
–
–
–
729
–
729
Total
£m
543
679
4,521
4,522
2,940
1,451
216
14,872
3,303
18,175
7,677
679
8,356
9,433
386
18,175
Change
%
5
(77)
(34)
(46)
(12)
(39)
(32)
(34)
12
(26)
(11)
(77)
(16)
(34)
(13)
(26)
The present value of new business premiums reduced by 26 per cent,
reflecting both a general contraction in the UK and European markets
as well as the re-positioning of the UK intermediary product range.
Sales through the intermediary channel were significantly impacted
as the UK intermediary sales forces were integrated and a number of
legacy HBOS products with poor returns were withdrawn. As a result,
sales in the intermediary channel reduced by 34 per cent. Sales through
the bancassurance channel, excluding payment protection, continued
to perform relatively robustly with a reduction of 11 per cent. This
includes Scottish Widows sales through the bancassurance network
which showed good growth of 18 per cent. Sales of OEIC products were
strong with an increase of 12 per cent in 2009.
42
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
INSURANCE
RESULTS ON A EUROPEAN EMBEDDED
VALUE BASIS
In addition to reporting under IFRS, the Insurance division provides
supplementary financial reporting for its Life, Pensions and Investments
business on an EEV basis. For the purpose of EEV reporting, covered
business is defined as all life, pensions and investments business written
in the Insurance division. This definition therefore excludes the results
of St. James’s Place and the results of the business sold through the
Wealth and International division which is not manufactured by the
Insurance division.
Expected return on existing business has decreased by 33 per cent to
£268 million, reflecting a reduction in the value of the opening balance
sheet, driven by lower asset values from adverse investment markets in
2008, and a reduction in the assumed rate of return. The expected return
on shareholders’ net assets has reduced by 25 per cent to £219 million
for the same reasons.
Net positive experience variances and assumption changes are
predominantly driven by favourable tax experience and other non-
recurring items. The corresponding figure for 2008 includes a number of
adverse impacts within the HBOS legacy business, including significant
charges from policyholder lapses and other modelling changes.
New business profit
Expected return on existing business
Expected return on shareholders’ net
assets
2009
£m
341
268
20081
£m
563
403
219
292
Change
%
(39)
(33)
(25)
Profit before tax, before
experience variances and
assumption changes
Experience variances
Assumption changes
Profit before tax
Volatility
Other items2
Profit (loss) before tax
Taxation
Profit (loss) after tax
EEV new business margin
828
139
(1)
966
228
53
1,247
(349)
898
2.5%
1,258
(301)
(222)
735
(1,675)
56
(884)
396
(488)
3.1%
COMPOSITION OF EEV BALANCE SHEET
Value of in-force business (certainty
equivalent)
Value of financial options and
guarantees
2009
£m
20081
£m
5,623
4,647
(34)
Cost of capital
Non-market risk
Total value of in-force business
31
Shareholders’ net assets
Total EEV of covered business
(5)
1
See above note on restatement.
(176)
(150)
(132)
5,165
3,840
9,005
RECONCILIATION OF OPENING EEV BALANCE SHEET TO
CLOSING EEV BALANCE SHEET ON COVERED BUSINESS
1
2
The 2008 comparative results include the results of the HBOS Life, Pensions and Investments
business as if it had been acquired on 1 January 2008. The 2008 results for the HBOS Life,
Pensions and Investments business have been restated from those previously published
including use of the market consistent economic assumptions as adopted by Scottish Widows,
but excluding the impact of any acquisition-related fair value adjustments. From 1 January 2009
the results reflect additional alignment with Scottish Widows in respect of accounting practices
and non-economic assumptions.
Other items represent amounts not considered attributable to the underlying performance of
the business.
Total profit before tax, before volatility and other items, increased by
£231 million, or 31 per cent, to £966 million. Excluding the impact of
experience variances and assumption changes, the profit before tax
decreased by £430 million or 34 per cent to £828 million.
New business profit has decreased by 39 per cent to £341 million,
reflecting a reduction in sales volumes driven by adverse economic
conditions and the reduction in new business from the withdrawal of
legacy HBOS products with poor returns. The new business margin for
Life, Pensions and Investments UK has increased in the second half of
2009 to 2.7 per cent from 2.5 per cent in the first half, reflecting strong
cost control and increased focus on the profitability of the combined
product range. The margin in respect of the heritage Scottish Widows
products increased to 3.5 per cent in 2009 from 3.2 per cent in 2008.
As at 31 December 20071
Total profit (loss) after tax
Other capital movements
Dividends received from Group
companies
Dividends paid to Group
companies
As at 31 December 20081
Fair value adjustments
As at 31 December 2008 –
restated1
Total profit (loss) after tax
Other capital movements
Dividends paid to Group
companies
As at 31 December 2009
1
See above note on restatement.
Shareholders’
net assets
£m
3,812
275
390
40
(815)
3,702
246
3,948
(112)
191
(187)
3,840
Value of
in-force
business
£m
5,675
(763)
–
–
–
4,912
(757)
4,155
1,010
–
–
5,165
(208)
(152)
(132)
4,155
3,948
8,103
Total
£m
9,487
(488)
390
40
(815)
8,614
(511)
8,103
898
191
(187)
9,005
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
ANALYSIS OF SHAREHOLDERS’ NET ASSETS ON AN EEV BASIS
ON COVERED BUSINESS
United Kingdom (Sterling)
43
Lloyds Banking Group
Annual Report and Accounts 2009
2009
%
4.45
5.05
2008
%
3.74
5.22
0.87 to 4.76
1.11 to 4.24
3.64
4.42
2.75
3.50
Risk-free rate (value of in-force
non-annuity business)
Risk-free rate (value of in-force
annuity business)
Risk-free rate (financial options
and guarantees)
Retail price inflation
Expense inflation
NON-ECONOMIC ASSUMPTIONS
Future mortality, morbidity, lapse and paid-up rate assumptions are
reviewed each year and are based on an analysis of past experience and
on management’s view of future experience. These assumptions are
intended to represent a best estimate of future experience.
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 and the With Profit Fund these can be asymmetric in the
range of potential outcomes for which an explicit allowance is made.
As at 31 December 20071
Total profit (loss) after tax
Other capital movements
Dividends received from Group
companies
Dividends paid to Group
companies
As at 31 December 20081
Fair value adjustments
As at 31 December 2008 –
restated1
Total profit (loss) after tax
Other capital movements
Dividends paid to Group
companies
As at 31 December 20091
1
See above note on restatement.
Required
capital
£m
2,464
(1,063)
–
–
–
1,401
–
1,401
1
106
Free
surplus
£m
Shareholders’
net assets
£m
1,348
1,338
390
40
(815)
2,301
246
2,547
(113)
85
3,812
275
390
40
(815)
3,702
246
3,948
(112)
191
–
1,508
(187)
2,332
(187)
3,840
ECONOMIC ASSUMPTIONS
A bottom-up approach is used to determine the economic assumptions
for valuing the business in order to determine a market consistent
valuation. The results for the HBOS Life, Pensions and Investments
business have been restated from those previously published and have
been produced using the market consistent economic assumptions
adopted by Scottish Widows.
The liabilities in respect of the Group’s UK annuity business are matched
by a portfolio of fixed interest securities, including a large proportion
of corporate bonds. In accordance with the approach adopted in
December 2008, the value of the in-force business asset for annuity
business has been calculated after taking into account an estimate of
the market premium for illiquidity in respect of these corporate bond
holdings.
For December 2008 onwards, the risk-free rate assumed in valuing the
non-annuity in-force business is the 15 year government bond yield
for the appropriate territory. The risk-free rate assumed in valuing
the in-force asset for the UK annuity business is presented as a single
risk-free rate to allow a better comparison to the rate used for other
business. That single risk-free rate has been derived to give the
equivalent value to the UK annuity book, had that book been valued
using the UK gilt yield curve increased to reflect the illiquidity premium
described above. The risk-free rate used in valuing financial options
and guarantees in the Scottish Widows With Profit Fund is defined as
the spot yield derived from the UK gilt yield curve. A similar approach is
taken to valuing the financial options and guarantees in the HBOS Life,
Pensions and Investments business. The table below shows the range of
resulting yields and other key assumptions.
2009
£m
2008
£m
Change
%
GENERAL INSURANCE
Home insurance
Underwriting income
(net of reinsurance)
Commission receivable
Commission payable
Payment protection insurance
Underwriting income
(net of reinsurance)
Commission receivable
Commission payable
Other
Underwriting income
(net of reinsurance)
Commission receivable
Commission payable
Other (including investment income)
897
71
(94)
874
731
13
(395)
349
8
69
(28)
(6)
43
885
50
(70)
865
860
428
(923)
365
20
71
(36)
93
148
Net operating income
1,266
1,378
Claims paid on insurance contracts
(net of reinsurance)
(637)
(481)
Operating income,
net of claims
Operating expenses
Profit before tax
Claims ratio
Combined ratio
629
(262)
367
35%
83%
897
(360)
537
25%
76%
1
42
(34)
1
(15)
(97)
57
(4)
(60)
(3)
22
(71)
(8)
(32)
(30)
27
(32)
44
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
INSURANCE
SENSITIVITY ANALYSIS
The table below shows the sensitivity of the EEV and the new business
profit before tax to movements in some of the key assumptions. The
impact of a change in the assumption has only been shown in one
direction as the impact can be assumed to be reasonably symmetrical.
2009 EEV/NEW BUSINESS PROFIT BEFORE TAX
Impact
on EEV
£m
Impact on
new business
profit before tax
£m
100 basis points reduction in
risk-free rate1
10 per cent reduction in market
values of equity assets2
10 per cent reduction in market
values of property assets3
10 per cent reduction in expenses4
10 per cent reduction in lapses5
5 per cent reduction in annuitant
mortality6
5 per cent reduction in mortality and
morbidity (excluding annuitants)7
100 basis points increase in equity
and property returns8
25 basis points increase in corporate
bond spreads9
10 basis points increase in illiquidity
premium10
224
(276)
(17)
229
205
(87)
57
nil
(107)
56
13
n/a
n/a
51
48
(3)
11
nil
(6)
n/a
1
2
3
4
5
6
7
8
9
10
In this sensitivity the impact takes into account the change in the value of in-force business,
financial options and guarantee costs, statutory reserves and asset values.
The reduction in market values is assumed to have no corresponding impact on dividend yields.
The reduction in market values is assumed to have no corresponding impact on rental yields.
This sensitivity shows the impact of reducing new business, maintenance expenses and
investment expenses to 90 per cent of the expected rate.
This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the
expected rate.
This sensitivity shows the impact on the Group’s annuity and deferred annuity business of
reducing mortality rates to 95 per cent of the expected rate.
This sensitivity shows the impact of reducing mortality rates on non-annuity business to
95 per cent of the expected rate.
Under a market consistent valuation, changes in assumed equity and property returns have no
impact on the EEV.
This sensitivity shows the impact of a 25 basis point increase in corporate bond yields and the
corresponding reduction in market values. Government bond yields, the risk-free rate and
illiquidity premia are all assumed to be unchanged.
This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity
premium. It assumes that the overall corporate bond spreads are unchanged and hence market
values are unchanged. Government bond yields and the non-annuity risk-free rate are both
assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.
In sensitivities (4) to (7) and (9) assumptions have been flexed on the
basis used to calculate the value of in-force business and the realistic
and statutory reserving bases. A change in risk discount rates is not
relevant as the risk discount rate is not an input to a market consistent
valuation.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
45
Lloyds Banking Group
Annual Report and Accounts 2009
Profit before tax and fair value unwind from General Insurance
decreased by £170 million to £367 million.
Claims were £156 million higher than 2008, primarily due to higher
payment protection insurance claims related to unemployment. This
also reflects the reclassification of Lloyds TSB Insurance Claims Handling
expenses into claims paid in 2009. Whilst property claims were impacted
by flooding and freeze claims in the final quarter of the year, benefits
from ongoing investments in claims processes continue to be realised.
Against the background of a particularly competitive market in which
the General Insurance business has a leading position, home insurance
income generated modest growth of 1 per cent to £874 million. Payment
protection insurance income decreased by £16 million, or 4 per cent, to
£349 million as a result of the market wide move to monthly premiums
on payment protection, partly offset by lower distribution commission
payable to the Retail division.
Other income has reduced, primarily reflecting lower interest rates and
the allocation of certain charges.
Operating expenses decreased by £98 million, or 27 per cent, to
£262 million. Adjusting for the reclassification of claims handling
expenses into claims paid and non-recurring marketing spend in 2008,
costs improved by 10 per cent year-on-year, reflecting continued focus
on cost management and cost savings achieved through the integration.
46
Lloyds Banking Group
Annual Report and Accounts 2009
DIVISIONAL RESULTS
GROUP OPERATIONS
OVERVIEW
Group Operations manages the Group’s technology platforms, property estate, operations, procurement services and
security. Through these areas Group Operations drives efficiencies and supports income growth across multiple brands
and channels using scalable platforms, common processes and leveraging the Group’s purchasing power.
The division operates through four primary business functions; Information Technology; Operations; Procurement and
Property. The Information Technology area provides technological expertise to each area of the Group whilst Operations
includes Banking Operations, Collections and Recoveries and Payments and Business Services. The role of Procurement
is to ensure that the Group gets the best value from its external expenditure and strategic suppliers and Property
manages and maintains the Group’s estates portfolio.
STRATEGY
Group Operations aims to be recognised as a world class operations business by colleagues, customers, stakeholders
and peers whilst ensuring value through cost and process efficiency. This will be achieved by providing excellent
technology and effective process to support the businesses; driving simplification, automation and continuous
improvement; developing world class operations, leadership and capability; and maintaining strong controls to protect
the Group.
In addition to this the Integration programme will develop and deliver plans to produce synergy benefits. The focus
throughout 2010 will be to combine systems and process legacies onto a single platform. This will primarily be
achieved by delivering the IT consolidation, a single and centralised operating model, along with excellent disciplined
procurement and rationalisation of the property portfolio.
KEY HIGHLIGHTS
PERFORMANCE SUMMARY
Group Operations’ direct costs decreased by 3 per cent or £90 million in
the year to £3,066 million due to the impact of integration synergies and
a continued focus on cost management.
Analysed by business function, IT costs decreased by £82 million, or
6 per cent, to £1,265 million, driven by the early realisation of synergy
savings due to the consolidation of IT operations across the Group in
addition to lower investment spend as project activity was rationalised
and replaced by integration activity. Within Operations, costs were
broadly flat, increasing by only £13 million to £555 million. Activity during
2009 has focused on centralising and then rationalising the Group’s
operational activities.
A great deal of centralisation activity occurred in the second half of the
year which resulted in increased spend within the division compared
to the first half of the year but in doing so significant efficiencies have
been realised which will become evident in the 2010 run-rate. In addition
increased recruitment in the Collections and Recoveries business meant
that the Group was able to offer pro-active assistance to customers in
financial difficulty thereby helping to minimise the impact of impairment
losses on the Retail, Wholesale and Wealth and International divisions.
Property costs have decreased by £40 million, or 4 per cent, to
£979 million primarily due to the realisation of synergy savings as a result
of the integration and the consolidation of premises, which has been
achieved at a faster rate than originally anticipated. Procurement costs
have increased by £7 million, or 4 per cent, to £166 million due to an
£11 million charge in respect of joint ventures.
Group Operations’ support function costs have increased by £12 million,
or 13 per cent, to £101 million, primarily driven by costs of £15 million
relating to investments to further improve payments filtering and
ensuring that the demands of increased regulation are met. Underlying
support function costs have remained flat compared to 2008.
Net interest income
Other income
Total income
Direct costs:
2009
£m
(69)
20
(49)
Information technology
(1,265)
Operations
Property
Procurement
Support functions
(555)
(979)
(166)
(101)
20081
£m
(59)
35
(24)
(1,347)
(542)
(1,019)
(159)
(89)
Result before recharges
to divisions
Total net recharges to divisions
Share of results of joint ventures
and associates
Loss before tax and
fair value unwind
Fair value unwind
Loss before tax
(3,066)
(3,156)
(3,115)
2,941
(3,180)
3,100
3
(171)
22
(149)
4
(76)
–
(76)
Change
%
(17)
(43)
6
(2)
4
(4)
(13)
3
2
(5)
(25)
(96)
1
2008 comparative figures have been amended to reflect the impact of centralising operations
across the Group as part of the integration programme. To ensure a fair comparison of 2009
performance, 2008 direct costs have been increased with an equivalent offsetting increase in
recharges to divisions.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
47
Lloyds Banking Group
Annual Report and Accounts 2009
CENTRAL ITEMS
Net interest income
Other income
Total income
Operating expenses
Trading surplus (deficit)
Impairment
Share of results of joint ventures
and associates
Profit (loss) before tax and
fair value unwind
Fair value unwind
Loss before tax
2009
£m
(815)
1,780
965
(294)
671
–
(1)
670
(2,119)
(1,449)
2008
£m
(213)
(223)
(436)
(21)
(457)
(60)
–
(517)
–
(517)
Central items includes certain income and expenditure not recharged
to the divisions including the costs of certain central and head office
functions and hedge ineffectiveness.
Central items profit before tax and fair value unwind amounted to
£670 million, compared to a loss of £517 million in 2008. Total income
increased by £1,401 million to £965 million primarily as a result of gains
arising when the Group exchanged certain existing subordinated
debt securities for new securities. These exchanges resulted in a gain
on extinguishment of the existing liability of £1,498 million (of which
£1,468 million is reflected in central items), being the difference between
the carrying amount of the security extinguished and the fair value of the
new security together with related fees and costs.
Operating expenses increased by £273 million to £294 million due to
higher professional fees and other costs associated with a number of
group wide projects including GAPS and an increase in the amount of
pension costs held centrally.
48
Lloyds Banking Group
Annual Report and Accounts 2009
VOLATILITY
The Group’s statutory profit before tax is significantly affected by two
items that impact the underlying financial performance of the Group,
namely insurance volatility, caused by movements in financial markets,
and policyholder interests volatility, which primarily reflects the gross up
of policyholder tax included in the Group tax charge.
During 2009, the Group’s statutory profit before tax included positive
insurance and policyholder interests volatility of £478 million compared
to negative volatility of £2,349 million in 2008 primarily reflecting the
more favourable financial markets in 2009.
Volatility comprises the following:
Insurance volatility
Policyholder interests volatility
Total volatility
Group hedge costs
2009
£m
237
298
535
(57)
478
2008
£m
(1,425)
(924)
(2,349)
–
(2,349)
INSURANCE VOLATILITY
The Group’s insurance businesses have liability products that are
supported by substantial holdings of investments, including equities,
property and fixed interest investments, all of which are subject to
variations in their value. The value of the liabilities does not move exactly
in line with changes in the value of the investments, yet IFRS requires
that the changes in both the value of the liabilities and investments
be reflected within the income statement. As these investments are
substantial and movements in their value can have a significant impact
on the profitability of the Group, management believes that it is
appropriate to disclose the division’s results on the basis of an expected
return in addition to results based on the actual return.
The expected sterling investment returns used to determine the
normalised profit of the business, which are based on prevailing
market rates and published research into historical investment return
differentials, are set out below:
United Kingdom (Sterling)
Gilt yields (gross)
Equity returns (gross)
Dividend yield
Property return (gross)
Corporate bonds in unit linked and
with Profit Funds (gross)
Fixed interest investments backing
annuity liabilities (gross)
2010
%
4.45
7.45
3.00
7.45
2009
%
3.74
6.74
3.00
6.74
2008
%
4.55
7.55
3.00
7.55
5.05
4.34
5.15
5.30
5.72
5.52
The impact on the results due to the actual return on these investments
differing from the expected return (based upon economic assumptions
made at the beginning of the year) is included within insurance volatility.
Changes in market variables also affect the realistic valuation of the
guarantees and options embedded within the With Profits Funds, the
value of the in-force business and the value of shareholders’ funds.
The liabilities in respect of the Group’s annuity business are matched by
a portfolio of fixed interest securities, which includes a large proportion
of corporate bonds. In accordance with the approach adopted in
2008, the value of in-force business for the annuity business has
been calculated after taking into account an estimate of the market
premium for illiquidity in respect of these corporate bond holdings.
The illiquidity premium is estimated to have reduced to 75 basis points
as at 31 December 2009 (31 December 2008: 154 basis points) which
has offset the gains on assets backing the annuity liabilities reducing
the volatility of the results. Overall, the positive volatility in 2009 in
the Insurance division of £237 million, reflected a partial recovery in
financial markets. During 2009, equities have recovered by 22 per cent
and corporate bond spreads have narrowed, offset by a reduction in
gilts reflecting an increase in yields and a reduction in property values
of 6.6 per cent. This contrasts with 2008 where a 33 per cent reduction
in equities was the main driver of the £1,425 million negative volatility
in 2008.
HEDGE COSTS
To protect against further deterioration in equity market conditions, and
the consequent negative impact on the value of business in-force on
the Group balance sheet, the Group purchased put option contracts.
The charge booked for 2009 was £57 million. These options expired on
15 January 2010.
POLICYHOLDER INTERESTS VOLATILITY
The application of accounting standards results in the introduction of
other sources of significant volatility into the pre-tax profits of the life
and pensions business. In order to provide a clearer representation of
the performance of the business, and consistent with the way in which it
is managed, equalisation adjustments are made to remove this volatility
from underlying profits. The effect of these adjustments is separately
disclosed as policyholder interests volatility; there is no impact upon
profit attributable to equity shareholders over the long term.
The most significant of these additional sources of volatility is
policyholder tax. Accounting standards require that tax on policyholder
investment returns should be included in the Group’s tax charge rather
than being offset against the related income. The impact is, therefore,
to either increase or decrease profit before tax with a corresponding
change in the tax charge. Over the longer term the charges levied to
policyholders to cover policyholder tax on investment returns and the
related tax provisions are expected to offset. In practice, timing and
measurement differences exist between provisions for tax and charges
made to policyholders. Consistent with the normalised approach taken
in respect of insurance volatility, differences in the expected levels of
the policyholder tax provision and policyholder charges are adjusted
through policyholder interests volatility. Other sources of volatility
include the minorities’ share of the profits earned by investment vehicles
which are not wholly owned by the long-term assurance funds.
During the year ended 31 December 2009, the statutory profit before tax
in both the Insurance and Wealth and International divisions included
credits to other income which relate to the policyholder interests
volatility charge of £298 million (2008: £924 million). The market recovery
in 2009 increased policyholder tax liabilities and led to a policyholder
tax charge of £346 million during the year in the Group’s tax charge.
This was partly offset by a credit of £48 million relating to differences
in the expected levels of policyholder tax provisions and charges.
This compares to 2008 when substantial policyholder tax losses were
generated as a result of the fall in property, bond and equity values.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
INTEGRATION
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
49
Lloyds Banking Group
Annual Report and Accounts 2009
Annualised cost savings from synergies and other operating efficiencies
of £2 billion are now targeted by the end of 2011, an increase from the
previously forecast cost savings in excess of £1.5 billion. The increase
arises in the main from further efficiency gains leading to role reductions
and, to a lesser extent, property and procurement benefits which are
now more certain following the application of the Lloyds TSB approach
to HBOS.
Total cost reductions from synergies of £534 million are ahead of the
target £450 million. They are analysed by division in the table below
and included in the Group’s combined businesses basis loss before tax
for the year to 31 December 2009. These benefits relate primarily to
reductions in staff numbers and procurement savings.
One-off integration costs of £1,096 million were incurred in the year
which have been excluded from the combined businesses basis loss
before tax. The integration costs relate to severance, IT and business
costs of implementation. The severance provisions are for over 15,000
role reductions announced in the year, of which more than 11,500 relate
to 2009, the balance being delivered in 2010. The overwhelming majority
of role reductions in 2009 were achieved through redeployment, natural
turnover and voluntary redundancy.
The Group’s policy is to use natural turnover and to redeploy people
wherever possible to retain their expertise and knowledge within the
Group. Where it is necessary for colleagues to leave the Company, this
is achieved by offering voluntary severance and by making less use of
contractors and agency colleagues. Compulsory redundancies are a
last resort.
Savings realised year to 31 December 2009
By division
Retail
Wholesale
Wealth and International
Insurance
Group Operations
Central items
By expenditure type
People
Procurement1
IT
Property
Other
£m
124
86
28
55
221
20
534
263
126
57
11
77
risk policies is in place, comprising 71 detailed risk policies applicable
across the combined Group.
Savings to date have been driven largely from role reductions
resulting from deployment of the new Group organisational design
adopting the Lloyds TSB approach. The overwhelming majority of
role reductions in 2009 were achieved through redeployment, natural
turnover and voluntary redundancy. Only a small proportion left via
compulsory redundancy. In addition the Group has ceased occupancy of
83 properties during 2009, well ahead of the start of year target of 50.
Procurement benefits in 2009 have also been significant at £174 million
with approximately £1.5 billion of spend having gone through e-auctions
and the Group has in parallel reviewed and consolidated key supplier
contracts with over 90 per cent of spend now being through its top
1,000 suppliers.
The Group has progressed well through the IT design and is now
focused on building and delivering an integrated technical infrastructure.
Preparations for system integration and data migration are in full
flight with the scale up of IT equipment to handle increased volumes.
Detailed plans are in place, along with testing requirements that are fully
commensurate with an integration of this scale.
In the circular to shareholders regarding the acquisition of HBOS, it was
stated that annual cost savings of £1.5 billion (run-rate) were expected to
be achieved by the end of 2011 at a cost of approximately 140 per cent.
The Group is now expecting £2 billion of savings at an implementation
cost to synergy ratio of around 155 per cent. The increase in the ratio
of implementation costs to annualised cost savings has been driven
principally by a recognition of the relative complexity of the HBOS
systems and processes.
The synergies achieved in the year of £534 million include a number of
one-off savings, which have been excluded from the sustainable run-rate
benefits. There has also been an increase in the rate of savings in the
year resulting in a sustainable run-rate benefit of £766 million. The target
run-rate of £750 million announced in November 2009 has therefore
been surpassed, a key factor in determining the increase to the overall
run-rate target to £2 billion.
With the programme now well underway and ahead of its financial
targets, the Group is confident of delivering the new target, which is
analysed below by division.
2009
Synergy
run-rate
£m
Current view
of synergy
targets
£m
2011
Allocation of
Group
Operations
target to
divisions
£m
Current view
by market
facing
division
£m
157
157
115
99
209
29
766
378
282
213
162
907
58
2,000
489
250
29
77
(907)
62
–
867
532
242
239
–
120
2,000
534
Retail
1
Procurement benefi ts totalling £174 million were achieved, split £126 million against the ongoing
cost base and £48 million within the £1,096 million integration costs.
Over the last year, the Group has mobilised its integration programme,
building systems integration plans whilst delivering financial benefits and
making good progress towards creating a truly integrated organisation.
For example, the Group has published proposals to harmonise
employee terms and conditions across the Group, launched a single
Group Intranet to improve communication and ease contact between
colleagues and enhanced the IT infrastructure to allow colleagues full
connectivity at the Group’s buildings. A single consistent framework of
Wholesale
Wealth and
International
Insurance
Group Operations
Central items
50
Lloyds Banking Group
Annual Report and Accounts 2009
OUR PEOPLE
BUILDING LONG LASTING RELATIONSHIPS
THROUGH PEOPLE
We are a business based on building deep and lasting relationships
with our customers through the efforts of our people. Colleagues
are our most valuable resource, as it is our colleagues who will build
these relationships. Managing our colleagues effectively is therefore
fundamental to the success of the business and achieving our vision of
being the best financial services organisation.
Creating a great place to work is a core priority to enable the Group to
be recognised, both within the financial services sector, but also more
generally in the UK employment market, as the best organisation to
work for.
In creating a great place to work, we believe we will attract and retain
talented and high performing people. We offer excellent learning and
development opportunities so that our colleagues can build fulfilling
careers within the organisation.
We are building a high commitment, high performance organisation.
We are clear about what we expect from our colleagues and what
they can expect from us. Our values guide us in all our relationships
whether they be with colleagues, customers or the wider community. In
Lloyds Banking Group, our values are that we: take ownership; act wisely;
make it simple; stretch ourselves; and succeed together.
INTEGRATION
2009 was significant in relation to people integration. We have
successfully managed the initial stages, working at pace to establish
controls and embed risk management practices, by defining and
implementing the new organisational structure and selecting for it.
The top 400 leaders were in place by month three and over 35,000
colleagues went through selection in 2009. Inevitably in bringing the
two organisations together, there has been an opportunity to rationalise
and this has led to a reduction in roles. Where possible we have either
redeployed colleagues to other areas of the Group or reduced numbers
through natural attrition. Where it has been necessary for colleagues
to leave the company, this has been achieved by offering voluntary
severance and by making less use of contractors and agency colleagues.
Compulsory redundancies are always a last resort.
The focus has been on enabling the business to integrate, while also
building foundations for the future to ensure the organisation can attract,
retain and develop the best talent. People have been at the heart of the
change programme, and a robust communications process has been
followed to ensure that colleagues are aware of the changes before they
happen. We have four recognised Unions who have been consulted
about all proposed changes.
COLLEAGUE ENGAGEMENT
We believe that to create a high commitment, high performance
organisation, we need high levels of colleague engagement. The Group
uses a comprehensive, confidential online engagement survey that all
colleagues can access, to help us measure and assess current levels of
colleague engagement across the organisation. The results are reviewed
on a quarterly basis so the outcomes can be analysed and action plans
developed.
response rates achieved by Lloyds TSB between 2005 and 2008. This is
regarded as ‘best in class’, particularly given the frequency and scope of
the Group survey.
The overall Engagement Index1 for the newly formed
Lloyds Banking Group finished the year at 72 index points for 2009,
2 points above the target. Outputs from the survey are used to inform
local action planning activities across the Group.
TALENT, RECRUITMENT AND RETENTION
Recruiting, retaining and developing talented people continues to
be a high priority for the Group. Top performers are attracted to the
Group because of our strong brand and values; together with top class
development and career opportunities.
Developing colleagues and having depth in our leadership succession
plans is vital in supporting our growth strategy. In autumn 2009, an
‘Organisational Capability Review’ was completed to review the
succession pipeline, identify top talent and review capability gaps
and development plans. As a result, we have strong succession and
development plans for all our senior leaders across the Group and have
collected qualitative data on our top 500 colleagues. We are retaining
people for an average tenure across our business of 12 years.
In 2009 we recruited 141 people into our Graduate Leadership
Programme, offered 42 internships and 10 industrial placements under
the five generalist and specialist streams. Following the launch of the new
Lloyds Banking Group Graduate Programme in 2009, our focus has been
on attracting top talent into the organisation who have the potential to
become senior business leaders of the future. We have also introduced
a ‘customer facing’ element to the main programme so that all our
graduates gain core banking ‘front-line’ experience.
Looking forward to 2010 we will be expanding the foundation element
to include a Risk placement so that our graduates get first hand
experience in financial services control processes. We are consistently
identified in The Times Top 100 organisations for graduate recruitment
and in 2009 the Lloyds TSB heritage climbed to 39th.
We actively track and manage retention of our highest performers,
retaining 95 per cent of top performers in 2009.
PERFORMANCE MANAGEMENT
Our business strategy is translated into the Group’s balanced scorecard
and this is aligned at each level of the organisation. This ensures
colleagues understand how their personal objectives relate to the strategy.
Contribution is measured against five factors: building the business;
customer service; risk management; personal development and financial
control. In addition, colleagues are also measured on how they achieve
their goals against the core values of the company.
Through twice yearly formal reviews and regular feedback, all our people
understand how their performance impacts on colleagues, customers
and our overall business success. Together, these act as effective
processes for differentiating high performance and addressing and
managing underperformance.
In 2009, we extended the scope of the Colleague Survey to include
all UK and International colleagues across both Lloyds TSB and HBOS
legacy organisations. We achieved a record response rate of 81 per cent
in 2009 which represents a significant improvement on previous
1
The Engagement Index is based on the result of a survey conducted quarterly, asking
Lloyds Banking Group colleagues the same 13 questions used by Lloyds TSB since 2005 which
refl ect both the drivers and outcome of engagement. The data captures the percentage of total
responses received which were favourable for each question, combined into a simple average
overall score.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 2563
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
51
Lloyds Banking Group
Annual Report and Accounts 2009
LEARNING AND DEVELOPMENT
We are committed to ensuring that all colleagues have the technical,
management and leadership skills that will enable Lloyds Banking Group
to deliver the high performance needed to be recognised as the best
financial services company.
TECHNICAL CAPABILITIES
To deliver great service and results we ensure that we equip our
colleagues with a range of appropriate technical capabilities to enable
them to support our customers effectively. Our business-focused
learning programmes cover critical business skills such as risk,
relationship and financial management.
As part of this we support a range of programmes linked to professional
qualifications or relevant external certification; these provide colleagues
with relevant performance benchmarks and professional qualifications.
Such programmes enable us to develop our colleagues in line with
recognised industry standards and provide confidence to customers and
other stakeholders.
This year the quality of our programmes has been recognised with two
external awards; ‘Best use of synchronous e-learning’ at the annual
E-Learning Age Awards and the 2009 Security Training Initiative of the
Year Award at the Security Excellence Awards.
In 2009 we have begun to build a leading edge diversity and inclusion
strategy for Lloyds Banking Group, consulting with colleagues across
the group and using the best elements of the respective Lloyds TSB and
HBOS diversity programmes.
Our executive management team has one of the highest female
representations in the FTSE 100, with three female directors.
Elsewhere we have continued our focus on race, disability and sexual
orientation.
In 2009 we sponsored Doing Seniority Differently, a groundbreaking
piece of research by RADAR2 into the career experiences of senior
managers with a disability or long-term health condition. We will
sponsor a new network of senior disabled professionals in 2010.
We continue to make progress on sexual orientation. Lloyds TSB won
first place in Stonewall’s3 2009 Index of the best UK employers for
lesbian, gay and bisexual (LGB) people. Following consultation with LGB
colleagues we will refresh our sexual orientation programme for 2010.
We continue to work closely with Stonewall, and in 2009 colleagues from
Lloyds Banking Group attended their leadership programme.
In 2009 Lloyds TSB was named by the charity Working Families as one of
the UK’s Top 20 Employers for working parents, and we will continue to
focus on ensuring all colleagues can achieve a good balance between
their work and their lives outside.
LEADERSHIP AND MANAGEMENT CAPABILITY
REWARD
Line managers have a vital role in helping bring our values to life for
colleagues and a key focus remains the development and strengthening
of management and leadership skills. In 2009 we have placed particular
emphasis on performance management and leading during a period of
rapid change.
LEARNING @ LLOYDS BANKING GROUP
During 2009 we have developed and launched our new group wide
learning portal, ‘Learning @ Lloyds Banking Group’. This website, which
is accessible from both the corporate intranet and Internet, provides all
colleagues with access to a range of learning and development resources.
In addition to our successful internally developed content our learning
and development teams work with best-practice suppliers to develop
and deliver learning. We continue to use a range of delivery media
including award winning on-line modules and face-to-face workshops
to support skills development.
In 2009 the number of on-line assessments totalled over 899,000. We
delivered an average of 2.9 days formal learning per full time equivalent
(FTE), which is commensurate with the continued investment in
colleague development.
TRAINING DAYS
Number of days formal learning per FTE
2009
2.9
2008
2.9
2007
2.3
DIVERSITY AND INCLUSION
Diversity and Inclusion remains a high priority for Lloyds Banking Group.
In a challenging economic climate we believe more than ever that our
success depends on building strong and enduring relationships with
diverse groups – colleagues, customers and suppliers.
Ensuring that we offer a Total Reward package that is market competitive
and supports our strategy to attract and retain talented people to
the business, continues to be a key driver for our reward framework.
Throughout 2009, we have been developing and consulting with our unions
about proposals for harmonised Terms and Conditions of employment. This
will provide our colleagues with a market competitive Total Reward package
while also supporting choice for our people, enabling us to support the
diverse nature of our workforce.
Our harmonised reward package will support our ‘One Bank’ approach
and reflect the importance of linking individual and Group performance
to rewards within a strong risk framework. Reward is a key element
of how Lloyds Banking Group sets out what it means to work for the
Company and reflects the relationship we have with our people and the
culture of the organisation.
There has been a renewed focus in the regulatory environment,
specifically relating to the link between business risk and the reward
arrangements for individuals. In compliance with these requirements we
have reviewed our governance arrangements to ensure they are best
practice and comply with the FSA and G20 positions. They also ensure
that our rewards are managed fairly and consistently, in line with our
Group values.
This has been a challenge for the industry as a whole and has required
us to operate within a framework of interest from an increasing number
of stakeholders, including organisations such as the FSA and UKFI.
In 2009 we won two Industry awards for our benefits provision, including
Most Effective Use of a Voluntary Benefits Plan and Most Effective All
Employee Share Scheme Strategy. This has set the standard to achieve
for the reward package moving forward.
2
RADAR is the UK’s leading pan disability charity.
Stonewall is the UK’s leading sexual orientation campaigning organisation.
3
52
Lloyds Banking Group
Annual Report and Accounts 2009
CORPORATE RESPONSIBILITY
SUPPORTING OUR BUSINESS STRATEGY
OUR STAKEHOLDERS
Our objective is to be recognised as the best financial services company
in the UK by customers, colleagues and shareholders. We will do this by
building deep, lasting customer relationships which help our customers
achieve what is important to them. We want to be recognised and
recommended as a trusted brand by customers, a good employer by
colleagues and a valued contributor in the community.
Our corporate responsibility strategy is helping us to deliver this vision.
That means:
– Demonstrating financial strength and stability
– Building deep, lasting customer relationships; exceeding their
expectations whenever they touch one of our brands
– Being an employer of choice and maximising our colleagues’ potential
– Understanding, engaging, and investing in the communities in which
our business is based;
– Being committed to environmental protection and better managing
our impacts.
We assess our progress against these objectives on an ongoing basis.
Our active approach to corporate responsibility ensures that the Group
makes a positive contribution to communities all over the UK. This
helps us achieve a competitive advantage and deliver business success,
despite a difficult economic environment. The Group contributed more
than £29 million in 2009 to local charities and community organisations
through our charitable Foundations.
EMBEDDDING CORPORATE RESPONSIBILITY
ACROSS THE GROUP
The board considers individual corporate responsibility issues
throughout the year, and reviews our performance at the end of it. In
2009, we established a new corporate responsibility steering group,
comprising senior executives from across the Group. Chaired by
Angie Risley, Group HR Director, and reporting to the group chief
executive, the steering group meets on a regular basis to review
strategy, monitor progress and make sure we achieve our objectives.
Most of our corporate responsibility activity takes place in the business
divisions. It is driven by a network of senior managers, who act as
corporate responsibility champions. They ensure that we conduct our
business in a responsible way and inform our corporate responsibility
strategy.
In 2009, the former Lloyds TSB Group Code of Conduct was adopted
across all of our operations. The Code of Conduct sets out the core
values and standards that govern the way we conduct our business.
The Code is underpinned by individual corporate responsibility policies
which set minimum requirements for all our business activities. A
rolling review process is also underway, benchmarking our corporate
responsibility policies against best practice. In 2009, for example, we
issued a revised Environmental Policy.
PERFORMANCE IN INDEPENDENT CORPORATE
RESPONSIBILITY BENCHMARKS
We are included in the FTSE4Good Ethical Index; the Dow Jones
Sustainability Index; the Carbon Disclosure Project’s Leadership Index
and we are ranked Platinum in Business in the Community’s Corporate
Responsibility Index.
Our key stakeholders are those who are impacted significantly by the
business or who might impact on it. These include our shareholders,
customers, colleagues, suppliers and wider society and the environment.
Our commitment to our shareholders is covered in the chairman’s
statement, the group chief executive’s review and throughout this annual
report and accounts. In the following pages we cover our approach to
customers, communities and climate change.
OUR PEOPLE
Our approach to colleagues is covered separately on pages 50 and 51.
Issues covered in this section include diversity, colleague engagement,
reward and learning and development. Our philosophy is based on the
premise that our people are a great asset for the Group and important
advocates of our strategy and contribution to society. We are focused on
bringing our corporate responsibility strategy to life with our colleagues
through a range of internal communications throughout the year.
OUR CUSTOMERS
We are dedicated to building deep, lasting customer relationships
that distinguish us as the best bank in the UK. We want to build a great
organisation, which is recognised for operating to high standards and is
built on strong customer relationships. We lent nearly £70 billion in new
lending to homeowners and businesses in 2009. Lloyds TSB was voted the
most trusted brand by Reader’s Digest readers in 2009, for the 9th year
running, and came 1st in the Superbrands Retail Banks Sector survey.
CUSTOMER ADVOCACY
During 2009, we implemented consistent customer advocacy metrics
across the new Group. The Net Promoter Score was introduced as a
measure of customer advocacy in Lloyds TSB in 2008. It was then rolled
out in our Halifax and Bank of Scotland brands in the second half of
2009. This metric measures customer recommendation of our products
and services, rather than customer satisfaction, and, as a result, will give
us a better insight into the service we deliver.
Four thousand customers across the three brands are interviewed
each month, in addition to surveys conducted with customers through
specific channels or products, to establish the likelihood that they would
recommend one of our brands to friends or colleagues. This gives us
good insight on how we are doing. It also informs what we need to
address to improve customer advocacy.
Our vision is to be the best financial services company in the UK. We
will know we have achieved this when our customers tell us so by
recommending us more than any other bank. So we have put in place
several initiatives to improve customer advocacy. These include Net
Promoter Score targets for each of our main brands, and linking these
targets to retail colleagues’ performance – particularly those colleagues
in customer-facing roles.
PLAYING OUR PART IN THE UK’S ECONOMIC
RECOVERY
Lloyds Banking Group is UK’s largest retail bank. We have over 30 million
individual and corporate customers. We play a very active part in the
UK economy and its recovery. We take part in 12 of the Government’s
various financial initiatives aimed at: helping customers enter the
housing market; helping small businesses start up; and helping
customers in financial difficulty.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 2563
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
53
Lloyds Banking Group
Annual Report and Accounts 2009
HELPING HOUSEHOLDS
Lloyds Banking Group is the UK’s largest mortgage lender. In 2009,
we wrote £34.7 billion of new mortgages.
We are the largest provider of finance to first time home buyers. In 2009,
through our Lloyds TSB brand, we launched the market leading ‘Lend
a Hand’ mortgage. This three year mortgage offers first time buyers a
95 per cent loan-to-value mortgage at 4.39 per cent by taking a legal
charge on a savings account belonging to their parents. The legal
charge means the parents retain ownership of their savings while earning
a competitive fixed interest rate of 3.5 per cent.
We are the biggest provider of finance to the social housing sector.
We are committed to funding housing associations to improve existing
housing stock and build new affordable housing, both for rental and
shared ownership. By the end of 2009 we had committed £14 billion to
social housing and had a market share of around 23 per cent.
We worked with the Council of Mortgage Lenders, Department
of Communities and Local Government, Ministry of Justice, the
Civil Justice Council and the financial advice sector throughout the
year on the development of Government initiatives for customers
facing difficulty. We are now participating in the Homeowner Mortgage
Support Scheme, the Mortgage Rescue Scheme and the Support for
Mortgage Interest scheme. We are fully committed to doing everything
reasonably possible to support customers in financial difficulties and
keep them in their homes. Through this focus, the level of Lloyds
Banking Group repossessions has remained well below the Council of
Mortgage Lenders industry average.
WORKING WITH SMALL AND MEDIUM SIZED ENTERPRISES
We are committed to helping small to medium sized enterprises (SMEs)
in the difficult current economic climate. We grew our market share in
lending to SMEs in 2009. Bank of Scotland has returned to lending and
is open for business. We approved over 59,000 overdrafts and over
47,000 loans for small businesses with a turnover of less than £1 million.
During the year we opened in excess of 100,000 new accounts for SMEs,
including a 23 per cent share of the start-up market.
In November 2009, we further underlined our support for UK businesses
with the launch of a new 2012 SME Charter, setting out a series of
commitments that form a three year programme of support for SMEs
to help them grow as the recovery gains momentum. The Charter aims
to encourage enterprise, boost access to finance and provide clear and
fairer pricing for customers, as well as help 300,000 new start-ups across
the country by 2012.
We will be running 200 nationwide seminars every year for the next three
years, providing expert guidance and support for up to 90,000 SMEs on
starting up, employment, exporting, bidding for London 2012 contracts,
sustainability and finance.
We are using our Partnership of London 2012 to promote the Olympic
and Paralympic Games’ benefits to British businesses, many of them our
customers. The Lloyds TSB Official Business Guide for London 2012 is
helping companies of all sizes across the country seize the commercial
opportunities. It offers practical financial advice and lists useful sources
of support. More than 2,000 business guides have been downloaded
and over 45,000 distributed.
RESPONSIBLE LENDING AND ADVICE
We have a responsible lending programme with internal management
reporting and accountability. Our customer-facing employees are trained
to offer the necessary advice and support to help customers manage
their borrowing.
PROVIDING CONSUMER CREDIT
As a responsible lender, we wish to ensure customers only borrow what
they can afford to repay. Each customer’s circumstances are different and
we use an affordability model, to better assess a customer’s ability to
repay, in order to achieve this.
We will only offer a loan facility after carefully assessing customers’
financial circumstances and believe that a loan would be appropriate.
We take into account customers’ current and past management of
financial products to ensure we make the most informed decision
possible.
We have robust systems in place to ensure that our credit card lending
is suitable to the financial circumstances of our customers. We check
customers’ ability to make repayments at the time at which the account
is opened, and then on a regular monthly basis to ensure that the
borrowing remains suitable to their circumstances. We proactively
contact customers showing signs of financial distress to discuss a range
to solutions to help them manage short term difficulties.
HELPING CUSTOMERS MANAGE THEIR BORROWING
Lloyds TSB, Halifax and Bank of Scotland have dedicated Customer
Support and Money Management units to provide specialist help to
customers who are worried about their financial situation. We have an
ongoing programme to train customer-facing colleagues to provide
advice and support to customers on managing their borrowing. We
proactively contact customers that are showing signs of pressure on
their finances. We help them find an appropriate solution, either through
more effective budgeting, or by rescheduling their borrowing with us.
In 2009 we handled over a million calls with customers in difficulty. We
also support independent money advice networks, including the Money
Advice Trust and the Consumer Credit Counselling Service. In 2009 we
contributed more than £6 million to the financial advice sector.
HELPING THE FINANCIALLY EXCLUDED
Our financial inclusion strategy is aligned with the Government’s aims
to increase access to banking and credit while, at the same time,
developing consumers’ financial capability.
We have a 40 per cent market share of customers belonging to the
lowest income groups. With over 4 million accounts, the Group is the
largest provider of social banking accounts in the UK. These accounts
offer facilities such as direct debits but do not provide overdrafts.
Through these accounts, customers are able to pay household bills by
direct debit, saving them money when compared with other methods of
payment. We also work with credit unions throughout the UK, managing
their accounts and offering practical advice and support to help them
improve and extend their service to communities.
The Group has also extended the opportunity for customers without
adequate capital to borrow under the Government’s Enterprise Finance
Guarantee Scheme. We are one of the most active participants in
the Scheme, offering almost a third of the total loans made under
the Scheme.
We have committed £4 million to a new ‘further education’ financial
capability project, working with The Treasury, the Department for
Business, Innovation and Skills and the FSA, to improve the range of web
based resources available to financial capability bodies across the further
education and skills sector in the UK. The programme aims to develop
54
Lloyds Banking Group
Annual Report and Accounts 2009
CORPORATE RESPONSIBILITY continued
the capacity of further education colleges, providers of publicly funded
training for apprenticeships, providers of local authority adult and prison
education to improve the financial skills of the 10 million adults and
young people which they serve. We plan to launch the programme
in 2010.
Much of the Group’s charitable giving is channelled through
the Lloyds TSB Foundations, which cover England and Wales,
Scotland, Northern Ireland and the Channel Islands. In 2009, the
Lloyds TSB Foundations received £29 million in grants from the Group to
support their work in some of the most vulnerable communities in the UK.
The Foundations currently fund a number of financial inclusion
and financial capability projects, including grants for Citizens Advice
Bureaux (CAB) in England, Wales, Scotland and the Channel Islands, to
support their work in providing advice and information to disadvantaged
people. The Lloyds TSB Foundation for England and Wales recently
announced a grant for Calderdale’s Citizen’s Advice Bureau worth
£50,000 to support the salary of a volunteer co-ordinator to enable
the recruitment and support of an additional 30 volunteer advisors to
respond to the increasing demand for its services.
PROTECTING OUR CUSTOMERS AGAINST
FINANCIAL CRIME
We take protecting our customers and their assets extremely seriously.
We continue to invest in activities to deter, detect and prevent fraud and
we operate systems designed to ensure that our products and services
are not abused for the purposes of laundering the proceeds of crime or
for facilitating terrorism. These include transaction monitoring tools to
identify and analyse suspicious account activity; and processes to verify
customers and check the transactions that they make.
We also work to ensure our customers are aware of how to protect
themselves from financial crime. Our various brand websites contain
information to assist customers in understanding how to mitigate
the risks of common types of internet fraud. We run regular financial
crime awareness campaigns, support industry education initiatives and
sponsor the charity Crimestoppers.
OUR COMMUNITIES
Our main contribution to society is as a major employer and purchaser
of goods and services. We are one of the UK’s biggest private sector
employers and have a presence in almost every community. Our
economic contribution to society is supported by our active investment
in these communities and our community giving programme.
OUR COLLEAGUES IN THE COMMUNITY
Our Charity of the Year relationship with the British Heart Foundation
(BHF) went from strength to strength in 2009. Over £2 million has been
raised between June 2008 and December 2009 through a variety of
colleague, customer and shareholder fundraising initiatives. The funds
are already being used to fund 15 specialist BHF Heart Nurses in
communities across the UK, supporting over 8,400 heart patients.
Recognising the value of longer-term relationships, we have extended
our partnership with the BHF for a further 6 months to conclude at the
end of 2010. During this time we will continue to engage our colleagues
in fundraising activities and raise additional funds for the BHF.
OUR COMMUNITY PROJECTS
As the Official Banking and Insurance Partner of the London 2012
Olympic and Paralympic Games, we have a compelling vision: ‘To inspire
and support young people, communities and businesses all over Britain
on their journey to London 2012 and beyond’. London 2012 will touch
every person in Britain and our employees and branches have a vital role
to play in this.
We support the next generation of sporting talent through our
Lloyds TSB Local Heroes Programme, providing funding to more than
250 emerging young athletes each year across Britain, at a time when
they need it most.
Lloyds TSB National School Sport week is the biggest community sport
programme in the UK and uses the power of the London 2012 Games to
inspire young people to understand the benefits of sport and take part
in more sporting activity. The programme is delivered in partnership with
the charity Youth Sport Trust.
Working with teachers, schools and young ambassadors nationwide, it
aims to support the Government’s objective of offering young people
the opportunity to participate in five hours of sport and physical activity a
week, as well as encourage links to sports clubs in the wider community.
Young people are encouraged to try a new Olympic or Paralympic
sport and live the Olympic and Paralympic values. Sporting and PE
achievements are celebrated and profiled as part of the programme to
help maximise its impact and value for children, teachers and parents.
Over 10,500 schools and three million young people across England and
Wales took part in the programme in 2009. 71 per cent of pupils tried a new
sport and 91 per cent of teachers said the week inspired young people to
do more sport. In 2010 the programme will be launched in Scotland in
partnership with sportscotland, under our Bank of Scotland brand.
In 2009 Bank of Scotland partnered with the Scottish Football Association,
the Scottish Government’s ‘cashback for communities’ scheme and
the Scottish Sun newspaper to launch ‘Coaches for Communities’; an
initiative which aims to get more people involved in youth football in
Scotland by providing free football coaching. ‘Coaches for Communities’
provided training to 1,250 people, including 30 of our employees, leading
to a Level One Early Touches qualification. Once qualified, the Scottish
FA and the Scottish Schools’ Football Association will link participants up
with a local community group or team in their area.
The initiative builds on Bank of Scotland’s on-going support for
grassroots football in Scotland. Through a partnership with the Scottish
FA, the bank supports programmes which operate in all 32 local
authorities across Scotland to deliver football training and leagues
involving over 300 schools and 10,000 young people.
WORKING WITH OUR SUPPLIERS
Our suppliers are important to us. We want to ensure we treat them
fairly and pay them on time. In 2009, we became signatories to the new
Prompt Payment Code. We commit to pay suppliers on time and not
change the payment terms agreed at the outset of the contract. The
Code requires that we provide clear guidance on payment procedures,
including redress for any disputes, and encourage similar good practice
amongst our suppliers and other businesses.
We consider a range of factors when selecting suppliers, including their
social, ethical and environmental credentials. In 2009, we launched a
dedicated intranet site across the Group which provides colleagues with
information, guidance and tools on incorporating social, environmental
and ethical criteria in all of our sourcing activities; in the selection
of suppliers and as part of supplier audits. We have collaborative
relationships with suppliers, facilitating continuous improvement and
implementing joint improvement plans. This ensures consistency across
the Group in our approach to corporate responsibility in the supply chain.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 2563
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
55
Lloyds Banking Group
Annual Report and Accounts 2009
PAYMENT OF SUPPLIERS
20091
2008
2007
2006
Number of payments
763,917
335,713
320,579
344,422
Value (£bn)
5.22
Average time to pay (days)
28.33
2.67
26.03
2.20
28.78
2.29
29.72
Number/amount of
compensation payments for
late settlement
No
payments
No
payments
No
payments
No
payments
1
2009 data represents the combined new Group. Historical data is Lloyds TSB only.
OUR ENVIRONMENTAL AGENDA
We have a long-standing commitment to managing our environmental
impacts. We first introduced an environmental policy in 1996. In 2009,
we reviewed the policy against best practice to ensure that it is fit for
purpose across the whole of the Group. Further work will be undertaken
during 2010 to produce and embed an enhanced and integrated
environmental management system.
ENVIRONMENTAL RISK MANAGEMENT
We have introduced policies and procedures to reduce the
environmental impact of our lending activities. We aim to reduce
environmental impacts through effective risk management. In 2009 we
implemented an integrated Groupwide Environmental Risk Policy to
manage these risks. The Policy requires transactions to be assessed for
material risks as part of the credit sanctioning process.
EQUATOR PRINCIPLES
Lloyds Banking Group is a signatory to the Equator Principles. The
Equator Principles are voluntary guidelines for the financial industry to
manage social and environmental issues in project financing.
During 2009 we implemented a harmonised groupwide approach to
monitoring and reporting Equator Principles transactions, and training
colleagues on the Equator Principles. An Equator Principles Review Group
has been formed, comprising experts from both Risk and Project Finance
teams, and supported by external environmental consultants. This Group
is responsible for reviewing all new Equator Principle transactions, to
ensure that each transaction is compliant and is consistent with the Group
Environmental Risk Policy, prior to being sanctioned.
Equator Principles reporting January to December 2009:
CLIMATE CHANGE
The UK Government is committed to reducing the country’s carbon
emissions by 80 per cent from 1990 levels by 2050. A central part of its
strategy is the introduction of a mandatory climate change and energy
savings scheme, the Carbon Reduction Commitment Energy Efficiency
Scheme, due to start in April 2010. We qualify as a participant in this
scheme, which requires a collective 22 per cent emissions reduction
from participants by 2012. We fully understand our obligations and
are committed to driving down CO2 emissions. We are developing a
carbon management policy and strategy to deliver a single approach for
the new combined Group, and continue to invest significant capital in
carbon reduction projects across the Group’s estate.
In 2009 we chaired an initiative with Business in the Community and the
Cambridge Programme for Sustainability Leadership to create a Guide
for Carbon Management in the Supply Chain. The guide has helped
inform our approach and, as a freely downloadable resource, we are
also encouraging our suppliers and customers to use it to help manage
carbon risks in the supply chain.
Lloyds Banking Group is represented by Group Executive Director
Truett Tate on the ‘Corporate Leaders Group on Climate Change’. This
group of leading businesses released the ‘Copenhagen Communiqué’,
widely viewed as the progressive voice of business, for the Copenhagen
Climate Change talks in December 2009.
BUSINESS TRAVEL
In 2009 we introduced a common travel policy across the organisation.
It supports a focus on sustainable travel and helped us deliver a
13 per cent reduction in the costs of travel.
The Group’s Sustainability Network holds events and runs awareness
campaigns to encourage colleagues to play their part. Travel reduction
was one of the Network’s key themes in 2009, inspiring colleagues to
take steps to reduce their travel footprints.
We achieved a reduction of 143,000 journeys in 2009 compared with
2008. Across the combined Group, the volume of teleconferences
increased by over 40 per cent to over 1.1 million. We will continue
to promote virtual conferencing technologies to colleagues as an
environmentally friendly, cost efficient alternative to travelling.
DEALS
Completed
In Progress
Not Completed
Equator Principle risk category
Category A
higher risk
Category B
medium risk
Category C
lower risk
–
–
–
0
7
4
1
12
7
1
0
8
GEOGRAPHY OF COMPLETED TRANSACTIONS
Category A
higher risk
Category B
medium risk
Category C
lower risk
US
Europe
Middle East
–
–
–
0
2
4
1
7
INDUSTRY OF COMPLETED TRANSACTIONS
Renewables
Infrastructure
Energy and utilities
SUMMARY
2
5
0
7
Number
4
7
3
14
Total
14
5
1
20
Total
4
9
1
14
£m
89
376
72
537
Our approach to our key stakeholders underpins our vision to be
recognised as the best financial services company in the UK. We
proactively manage our relationships with all of them.
Understanding what the customer wants is at the heart of our business.
Our new approach to measuring customer advocacy helps provide more
insight into the service we deliver.
We regularly communicate with employees on corporate responsibility
issues. Indeed, engaging colleagues in our corporate responsibility
agenda is central to its success and we will focus on this throughout
2010.
We have a crucial role to play in the recovery of the UK economy. Our
support for households and small businesses was further underlined in
2009 by our participation in twelve Government schemes designed to
help them.
56
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT
AUDITED INFORMATION
THE GROUP’S APPROACH TO RISK
The Group’s approach to risk is founded on robust corporate
governance practices and a risk management culture which guides the
way all employees approach their work, the way they behave and the
decisions they make. The board takes the lead by establishing the ‘tone
at the top’ and approving professional standards and corporate values
for itself, senior management and other colleagues. The board ensures
that senior management implements strategic policies and procedures
designed to promote professional behaviour and integrity. The board
also ensures that senior management implements risk policies and
risk appetites that either limit, or where appropriate, prohibit activities,
relationships, and situations that could diminish the quality of corporate
governance. All colleagues including the group chief executive are
assessed against a balanced scorecard that explicitly addresses their
risk performance.
This board level engagement, coupled with the direct involvement
of senior management in group-wide risk issues at group executive
committee level, ensures that issues are escalated on a timely basis
and appropriate remediation plans are put in place. The interaction
of the executive and non-executive governance structures relies upon
a culture of transparency and openness that is encouraged by senior
management. Key decisions are always taken by more than one person.
The group business risk committee and the group asset and liability
committee are chaired by the group chief executive and include all
members of the group executive committee. The aggregate group wide
risk profile and portfolio appetite are discussed at these monthly
meetings. The risk oversight committee, chaired by the deputy group
chairman, comprises non-executive directors and oversees the Group’s
risk exposures. This second-line-of-defence committee is supported
by the chief risk officer, who is independent of the front line business
units, is a full member of the group executive committee and reports
to the group chief executive. The chief risk officer regularly informs the
risk oversight committee of the aggregate risk profile and has direct
access to the deputy group chairman and the members of the risk
oversight committee.
The Group has a conservative business model embodied by a risk culture
founded on prudence and accountability, where everyone understands
that they are accountable for the risks they take and that the needs of
customers are paramount. The focus has been and remains on building
and sustaining long-term relationships with customers, through good and
bad economic times. The approach is supported by a ‘through the cycle’
approach to risk with strong central control and monitoring.
RISK AS A STRATEGIC DIFFERENTIATOR
The maintenance of a strong control framework remains a priority for
the new Lloyds Banking Group and is the foundation for the delivery
of effective risk management. The Group optimises performance by
allowing divisions and business units to operate within approved capital,
liquidity and risk parameters and within the Group’s policy framework.
The Group’s approach to risk management ensures that business units
remain accountable for risk whilst realising individual strategies to meet
business performance targets. The combination of divisional and group
risk management maintains effective independent oversight.
The Group continues to enhance its capabilities by providing to the
board both qualitative and quantitative data including stress testing
analysis on risks associated with strategic objectives to facilitate
more informed and effective decision making. The Group‘s ability
to take risks which are well understood, consistent with its strategy
and plans and which are appropriately remunerated, is a key driver of
shareholder return.
As part of its integration initiative, the Group has been rolling out
the methodology and financial control framework that was used by
the heritage Lloyds TSB Group; this includes compliance with the
requirements of the US Sarbanes Oxley Act. This project is due to
complete in time for reporting in February 2011.
Risk analysis and reporting capabilities support the identification of
opportunities as well as risks and it provides an aggregate view of the
overall risk portfolio. Risk mitigation strategies clearly aligned with
responsibilities and timescales are monitored at group and divisional level.
Reflecting the importance the Group places on risk management, risk is
included as one of the five principal criteria within the Group’s balanced
scorecard on which individual staff performance is judged. Business
executives have specified risk management objectives, and incentive
schemes take account of performance against these.
Although the layout of the Risk Management section has been left
largely unchanged from previous years, more quantitative and qualitative
information has been provided for Credit and Liquidity.
STATE AID
The Group is subject to European state aid obligations as a result of
the aid it received from HM Treasury. In November 2009 the College
of Commissioners approved the Group’s restructuring plan, which
is designed to address any competition distortions arising from the
benefits of state aid. The Group agreed with HM Treasury in the deed
relating to its withdrawal from GAPS that it will comply with the terms
of the European Commission’s decision. This has placed a number of
requirements on the Group including the disposal of certain portions of
its business over the course of the next four years, including in particular
the disposal of some parts of its retail banking business. This will require
the Group to work closely with EU and UK authorities to demonstrate that
it is complying with the terms of the European Commission’s decision.
HM Treasury currently holds approximately 41.3 per cent of the Group’s
ordinary share capital. There is a risk that this shareholding could in
future be used to seek to exercise infl uence over the affairs or strategic
business plans of the Group, particularly if other Government priorities
or HM Treasury’s interests as a major shareholder in other fi nancial
institutions do not align with their interests purely as a shareholder in
the Group.
United Kingdom Financial Investments has been appointed manager
of HM Treasury’s shareholding and the framework document between
UKFI and HM Treasury states that UKFI will manage the UK fi nancial
institutions in which HM Treasury holds an interest ‘on a commercial
basis and will not intervene in day-to-day management decisions of the
Investee Companies (as defi ned therein)’. This document also makes it
clear that such institutions will continue to be separate economic units
with independent powers of decision and ‘will continue to have their
own independent boards and management teams, determining their
own strategies and commercial policies including business plans and
budgets’.
In addition, the Group has made a number of undertakings to
HM Treasury associated with the state aid it has received, including
the provision of additional lending to certain mortgage and business
sectors, and other matters relating for instance to corporate governance
and staff remuneration. These commitments could limit the operational
fl exibility of the Group or lead HM Treasury to seek to infl uence the
strategy of the Group in other ways.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
57
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
RISK GOVERNANCE
The Group has rolled out the heritage Lloyds TSB approach to risk
appetite, policies, delegations and risk committee structure and has
continued to embed these across all risk disciplines and into the
business. Having achieved alignment of all high level group principles
and appetites on the date of acquisition, the Group has continued to
embed these at all levels.
The risk governance structure is intended to strengthen risk evaluation
and management, whilst also positioning the Group to manage the
changing regulatory environment in an efficient and effective manner.
The risk governance structure for Lloyds Banking Group is shown in
table 1.1.
BOARD AND COMMITTEES
The board, assisted by its key risk committees (risk oversight committee
and group audit committee), approves the Group’s overall risk
management framework. The board also reviews the Group’s aggregate
risk exposures and concentrations of risk to seek to ensure that these are
consistent with the board’s appetite for risk. The role of the board, audit
committee and risk oversight committee are shown in the corporate
governance section on pages 100 to 104, and further key risk oversight
roles are described below.
In particular, the risk oversight committee, which comprises
non-executive directors, oversees the development, implementation
and maintenance of the group’s overall risk management framework and
its risk appetite, strategy, principles and policies, to ensure they are in
line with emerging regulatory, corporate governance and industry best
practice. The risk oversight committee regularly reviews the Group’s risk
exposures across the primary risk drivers and the detailed risk types.
The group executive committee assisted by the group business risk
committee and the group asset and liability committee, 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, whilst also reviewing the Group’s aggregate risk exposures and
concentrations of risk. The GEC’s duties are described in greater detail
on page 102.
The group asset and liability committee is responsible for the strategic
management of the Group’s assets and liabilities and the profit and loss
implications of balance sheet management actions. It is also responsible
for the risk management framework for market risk, liquidity risk, capital
risk and earnings volatility. Group asset and liability committee is
supported by the senior asset and liability committee this senior level
committee, which is responsible for the review of documentation relating
to the management of assets and liabilities in the Group’s balance sheet
and the escalation of issues of group level significance to group asset
and liability committee.
The group business risk committee reviews and recommends the
Group’s risk appetite and risk management framework, high-level
group policies and the allocation of risk appetite. Group business risk
committee periodically reviews risk exposures and risk/reward returns
and monitors the development, implementation and effectiveness of
the Group’s risk governance framework. Within the scope of its work the
committee also considers reputational risk and any issues which could
have a materially adverse impact on the Group.
The group business risk committee is supported by the
following committees:
– The group compliance and operational risk committee, which is
responsible for proactively identifying current and emerging significant
compliance and operational risks or accumulation of risks and control
deficiencies across the Group and reviewing associated oversight
plans to ensure pre-emptive risk management action. The committee
also seeks to ensure that adequate divisional engagement occurs
to develop, implement and maintain the Group’s compliance and
operational risk management framework.
– The group credit risk committee, which is responsible for the
development and effectiveness of the Group’s credit risk management
framework, clear description of the Group’s credit risk appetite, setting
of high level Group credit policy, and compliance with regulatory
credit requirements. On behalf of the group business risk committee,
the group credit risk committee monitors and reviews the Group’s
aggregate credit risk exposures and concentrations of risk.
– The group model governance and approvals committee, which
is responsible for setting the control framework and standards for
models across the Group, including establishing appropriate levels
of delegated authority, the approval of models that are considered to
be material to the Group (including credit risk rating systems), and the
principles underlying the Group’s economic capital framework.
– The group insurance risk committee, which is responsible for
the development and effectiveness of the Group’s insurance risk
management framework, clear articulation of the Group’s insurance
risk appetite, setting of high level insurance risk policy, and ensuring
compliance with regulatory insurance requirements. On behalf of the
group business risk committee, the group insurance risk committee
monitors and reviews the Group’s aggregate insurance risk exposures
and provides proactive and robust challenge around insurance risk and
business activities giving rise to insurance risk.
– During the year, the Group has created divisional financial control
committees to provide governance over financial statements. The
meetings provide review and challenge as to the veracity of the
results, press release and supporting analyst information addressing
the processes that have been followed in drawing them up. Items of
focus are key assumptions and areas of subjectivity in the results and
ensuring proper remediation of control issues that impact internal
controls over financial reporting, the Group’s auditors also report
findings from their audit work.
The group risk directors and divisional risk officers meet on a regular
basis under the chairmanship of the chief risk officer to review and
challenge the risk profile of the Group and seek to ensure that mitigating
actions are appropriate. Aggregate risk reports are reviewed by this
group before submission to group business risk committees and then to
risk oversight committee.
Group executive directors have primary responsibility for measuring,
monitoring and controlling risks within their areas of accountability
and are required to establish control frameworks for their businesses
that are consistent with the Group’s high level policies and within the
parameters set by the board, group executive committee and group
risk. Compliance with policies and parameters is overseen by the risk
oversight committee, the group business risk committee, the group
asset and liability committee, group risk and the divisional risk officers.
RISK MANAGEMENT OVERSIGHT
The chief risk officer, oversees and promotes the development
and implementation of a consistent group-wide risk management
framework. The chief risk officer, supported by the group risk directors
and the divisional risk officers, provides objective challenge to the
Group’s senior management. The group executive committee 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.
58
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
TABLE 1.1: RISK GOVERNANCE STRUCTURES
AUDITED INFORMATION
The Lloyds Banking Group Board
1st line of defence
Business Management
2nd line of defence
Group and Divisional
Oversight Functions
3rd line of defence
Group Audit
Group Executive
Committee
Group Asset
and Liability
Committee
Group Business
Risk Committee
Group
Chief Executive
The Nomination
and Governance
Committee
Remuneration
Committee
Risk Oversight
Committee
Group Audit
Committee
Senior Asset
and
Liability
Committee
Group
Compliance and
Operational Risk
Committee
Group Credit
Risk Committee
Group Model
Governance
Committee
Group Insurance
Risk Committee
Divisional
Financial Control
Committee
Group
Executive
Director
Retail
Group
Executive
Director
Wholesale
Group Executive
Director
Wealth and
International
Group
Executive
Director
Insurance
Group
Operations
Director
Group
Finance
Director
Group
Human
Resources
Director
Chief Risk
Officer
Director of
Group Audit
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Divisional
Risk Officer
Group Risk
Directors
BU Risk
BU Risk
BU Risk
BU Risk
BU Risk
BU Risk
BU Risk
BU Risk
BU Risk
Governance
Committees
Oversight
Business
functions
Reporting line
Functional reporting line from BU risk officer or function to divisional risk officers
Functional reporting line to support the committees
a
Group risk directors who report directly to the chief risk officer, are
allocated responsibility for certain specific risk types and are responsible
for ensuring the adequacy of the framework for their risk types as well as
the oversight of the risk profile across the Group. Divisional risk offi cers
have dual reporting lines to their own divisional executive and also to the
chief risk offi cer and are responsible for the risk profi le within their own
divisions. This matrix approach enables the group executive committee
members to fulfi l their risk management accountabilities.
Divisional risk officers provide oversight of risk management activity
for all risks within each of the Group’s divisions. Reporting directly to
the group executive directors responsible for the divisions and to the
chief risk officer, their day-to-day contact with business management,
business operations and risk initiatives seeks to provide an effective risk
oversight mechanism.
The director of group audit provides independent assurance to the audit
committee and the board that risks within the Group are recognised,
monitored and managed within acceptable parameters. Group audit is
fully independent of group risk, seeking to ensure objective challenge to
the effectiveness of the risk governance framework.
RISK MANAGEMENT IN THE BUSINESS
Line management are directly accountable for the management of
risks arising in their individual businesses. A key objective is to ensure
that business decisions strike an appropriate balance between risk and
reward, consistent with the Group’s risk appetite.
All business units, divisions and group functions complete a control self
assessment annually (see page 104), reviewing the effectiveness of their
internal controls and putting in place a programme of enhancements
where appropriate. Managing directors of each business and each group
executive committee member certify the accuracy of their assessment.
Risk management in the business forms part of a tiered risk management
model, as shown above, with the divisional risk officers and group risk
providing oversight and challenge, as described above, and the chief risk
officer and group committees establishing the group-wide perspective.
This approach seeks to provide the Group with an effective mechanism
for developing and embedding risk policies and risk management
strategies which are aligned with the risks faced by its businesses. It
also seeks to facilitate effective communication on these matters across
the Group.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
59
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
TABLE 1.2: RISK MANAGEMENT FRAMEWORK
The Lloyds Banking Group business strategy and objectives
Policy framework and accountabilities
Risk
Identification
Control
Activities
Risk and Control
Assessment
Risk
Measurement
Independent
Reviews
Monitoring
Risk
Reporting
Action plans and tracking
People
Systems and tools
RISK MANAGEMENT FRAMEWORK
The Group’s risk management principles and risk management
framework cover the full spectrum of risks that a group, which
encompasses both banking and insurance businesses, would encounter.
The risk principles are executed through the policy framework
and accountabilities. These principles are supported by the policy
levels below:
Principles – high level principles for the six primary risk drivers
The Group uses an enterprise-wide risk management framework for
the identification, assessment, measurement and management of
risk. It seeks to maximise value for shareholders over time by aligning
risk management with the corporate strategy, assessing the impact of
emerging risks from legislation, new technologies or the market, and
developing risk tolerances and mitigating strategies. The framework
seeks to: strengthen the Group’s ability to identify and assess risks,
aggregate group-wide risks and define the group risk appetite, develop
solutions for reducing or transferring risk, and where appropriate,
exploit risks to gain competitive advantage, thereby seeking to increase
shareholder value. The principal elements of the risk management
framework are shown in table 1.2. The framework above comprises 11
interdependent activities which map to the components of the internal
control integrated framework issued by the Committee of Sponsoring
Organisations of the Treadway Commission.
The framework is dynamic and allows for proportionate adjustment
of policies and controls where business strategy and risk appetite is
amended in response to changes in market conditions.
The Lloyds Banking Group business strategy and objective 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). 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 committee members
by the group chief executive.
The more detailed description of the risk principles and distribution of
the risk appetite measures amongst the divisions and businesses are
determined by the group chief executive, in consultation with the group
business risk committee and the group asset and liability committee.
High level group policy – policy statements for each of the main risk
types aligned to the risk drivers
Detailed group policy – detailed policy that applies across the Group
Divisional policy – local policy that specifically applies to a division
Business unit policy – local policy that specifically applies to a
business unit
Divisional and business unit policy is only produced by exception and is
not necessary unless there is a specific area for which a particular division
or business unit requires a greater level of detail than is appropriate for
group level policy. The governance arrangements for development of,
and compliance with, group, divisional and business unit policy and
the associated accountabilities are clearly outlined to all colleagues.
Colleagues are expected to be aware of policies and procedures which
apply to them and their work and to observe the relevant policies
and procedures. Line management in each business area has primary
responsibility for ensuring that group policies and the relevant local
policies and procedures are known and observed by all colleagues within
that area.
Group and divisional risk functions have responsibility for overseeing
effective implementation of policy. Group audit provides independent
assurance to the board about the effectiveness of the Group’s control
framework and adherence to policy. Policies are reviewed annually to
ensure they remain fit for purpose.
Execution of the Group’s risk management framework is dependent
upon a clear and consistent risk identifi cation using a common
language to defi ne risks and to categorise them (see table 1.3 below).
Proportionate control activities are in place to design mitigating
controls, to transfer risk where appropriate and seeks to ensure
executives are content with the residual level of risk accepted.
60
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
AUDITED INFORMATION
Risk and control assessments are undertaken to assess the
effectiveness of current mitigations and whether risks taken are
consistent with the Group’s risk appetite (this includes the annual control
self-assessment exercise).
The impact of risks and issues (including financial, reputational and
regulatory capital) are determined through effective risk measurement
including modelling, stress testing and scenario analysis.
The outcomes of independent reviews (including internal and external
audit and regulatory reviews) are integrated into risk management
activities and action plans.
Risk reporting is standardised through the use of standard definitions to
enable risk aggregation. Divisions monitor their risk levels against their
risk appetite, seeking to ensure effective mitigating action is being taken
where appropriate. Divisional risk reports are reviewed by each divisional
executive committee to ensure that respective senior management are
satisfied with the overall risk profile, risk accountabilities and progress
on any necessary action plans and tracking. Reporting, including
that of performance against relevant limits or policies, is in place to
provide a level of detail appropriate to the exposures concerned and
regular information is provided to group risk for review and aggregate
reporting. Any significant issues identified in the monitoring process are
appropriately reported, and an escalation process is in place to report
significant losses to appropriate levels of management. Regular reports
are prepared by group risk on risk exposures and material issues to the
group asset and liability committee, group business risk committee,
group executive committee, risk oversight committee and the board.
At group level, a consolidated risk report is produced which is reviewed
and debated by the group business risk committee, group executive
committee, audit committee, risk oversight committee and the
board to ensure that they are satisfied with the overall risk profile, risk
accountabilities and mitigating actions. The consolidated risk report
provides a regular assessment of the aggregate residual risk for the
primary risk drivers, comparing the assessment with the previous quarter
and providing a forecast for the next 12 months.
PRINCIPAL RISKS
At present the most significant risks faced by the Group, which are derived from the primary risk drivers detailed in table 1.3 below, include:
Risk: Definition
Features
Credit: The risk of reductions in
earnings and/or value, through
fi nancial loss, as a result of the
failure of the party with whom the
Group has contracted to meet
its obligations (both on and off
balance sheet).
Arising in the Retail, Wholesale and Wealth and International divisions, refl ecting the risks inherent in the
Group’s lending activities and in the Insurance division in respect of investment of own funds. Over the last two
years the deteriorating economic outlook, both in the UK and overseas, brought about by the banking crisis
has impacted the fi nancial services industry resulting in further high profi le losses and writedowns. The Group
is impacted by the economic downturn and a further worsening of the business environment could adversely
impact earnings.
This poses a major risk to the Group and its lending to:
– Retail customers (including those in Wealth and International), where reducing affordability and/or asset
values arising from a combination of house price falls, continuing high, or increasing levels of unemployment,
consumer over-indebtedness, and rising interest rates impacts both secured and unsecured retail exposures.
– Wholesale customers (including those in Wealth and International): where companies are facing increasingly
difficult business conditions, resulting in corporate default levels rising and leading to increases in corporate
impairment. The Group has high levels of exposure in both the UK and internationally, including Ireland, USA,
Australia and Spain. There are particular concentrations to: financial institutions, commercial real estate, and
joint ventures, with high leverage and exposures through capital structure.
The Group follows a through the economic cycle, relationship based, business model with risk management
processes, appetites and experienced staff in place.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
61
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
Risk: Definition
Features
Legal and regulatory: The risk of
regulatory action leading to fine
and/or public censure and/or
successful legal action being taken
against the Group as a result of
failure to meet one or more legal
and/or regulatory requirements
either in the UK or overseas.
Liquidity and funding: Liquidity
risk is defined as the risk that
the Group has insufficient
financial resources to meet its
commitments as they fall due,
or can only secure them at
excessive cost.
Funding risk is defined as the risk
that the Group does not have
sufficiently stable and diverse
sources of funding or the funding
structure is inefficient.
The industry is currently subject to a wide range of international and UK consultations on proposals to change
the regulatory requirements. For example the Basel Committee on Banking Supervision has issued proposals
with respect to capital and liquidity requirements for banks (‘Strengthening the resilience of the banking sector’
and ‘International framework for liquidity risk measurement, standards and monitoring’) and draft proposals
have also been issued for new capital requirements for insurers (Solvency II). In the UK we have seen the Turner
review and more recently, proposals have been issued for governance, recovery and resolution (‘Living Wills’)
arrangements and also, potentially conduct of business requirements, which could have significant implications
for past business as well as future product offerings for customers. There is a high level of uncertainty both
as to the financial outcome in terms of specific requirements and the speed of implementation in the UK
and internationally.
The Group is currently assessing the impacts of these regulatory proposals, and will participate in the
consultation and calibration processes to be undertaken by the various regulatory bodies during 2010. The
Group currently meets and exceeds its regulatory capital requirements and expects to continue to do so.
However, the FSA could impose more stringent capital and liquidity requirements, and/or introduce new ratios
and/or change the manner in which it applies existing requirements to recapitalised banks, including those
within the Group. Any one or combination of these events could result in the Group being forced to raise
further capital or to divest assets.
The Group has made good preparations for the FSA’s new liquidity regime (ILAS) and is ready to meet the
reporting implications later in the year.
Lloyds Banking Group’s policy is to maintain high levels of compliance with regulatory requirements and it will
organise its business to maintain this level of compliance as the requirements become clearer, being mindful of
maintaining an appropriate balance between risk and reward.
Arising in the banking business of the Group and impacting the Retail, Wholesale and Wealth and International
divisions reflecting the risk that the Group is unable to attract and retain either retail, wholesale or corporate
deposits or issue debt securities. Like all major banks, the Group is dependent on confidence in the short and
longer term wholesale funding markets; should the Group, due to exceptional circumstances, be unable to
continue to source sustainable funding and provide liquidity when necessary, it could impact its ability to fund
its financial obligations.
The key dependencies for successfully funding the Group’s balance sheet include the continued functioning of
the money and capital markets at their current levels; successful right sizing of the Group’s balance sheet; the
continuation of HM Treasury facilities in accordance with the terms agreed; limited further deterioration in the
UK’s and the Group’s credit rating and no significant or sudden withdrawal of deposits resulting in increased
reliance on money markets or UK Government support schemes. A return to the extreme market conditions of
2008 would place a strain on the Group’s ability to meet its financial commitments.
Liquidity risk is managed within a board approved framework using a range of metrics to monitor the Group’s
profile against its stated appetite and potential market conditions.
62
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
Risk: Definition
Features
AUDITED INFORMATION
Customer treatment: The risk
of regulatory censure and/or
a reduction in earnings/value,
through financial or reputational
loss, from inappropriate or poor
customer treatment.
People: The risk of reduction in
earnings and/or value, through
financial or reputational loss,
from failure to retain, train,
reward, recruit and incentivise
appropriately skilled staff,
inappropriate staff behaviour
or industrial action.
Integration: The risk that
Lloyds Banking Group fails to
realise the business growth
opportunities, revenue benefits,
cost synergies, operational
efficiencies and other benefits
anticipated from, or incurs
unanticipated costs and losses
associated with, the acquisition
of HBOS plc.
Customer treatment and how the Group manages its customer relationships affects all aspects of
Lloyds Banking Group’s operations and is closely aligned with achievement of Lloyds Banking Group’s strategic
aim – to create deep long lasting relationships with its customers. There is currently a high level of scrutiny
regarding the treatment of customers by fi nancial institutions from the press, politicians and regulatory bodies.
The Offi ce of Fair Trading’s (OFT) investigation and legal test case in respect of unarranged overdraft charges
on personal current accounts concluded in 2009, for further details see note 52 (Notes to the consolidated
fi nancial statements). The OFT is however continuing to discuss its concerns in relation to the personal
current account market with the banks, consumer groups and other organisations under the auspices of its
Market Study into personal current accounts. In October 2009, the OFT published voluntary initiatives agreed
with the industry and consumer groups to improve transparency of the costs and benefi ts of personal current
accounts and improvements to the switching process. The OFT aims to report on progress in respect of further
changes it believes are required to make the market work in the best interest of bank customers by the end of
March 2010.
The Group regularly reviews its product range to ensure that it meets regulatory requirements and is
competitive in the market place. Treating Customers Fairly remains the key principle underpinning the
FSA’s consumer protection objective. An additional challenge for Lloyds Banking Group is ensuring the fair
treatment of customers during integration of the two heritage businesses. As a result the customer relationship
management risks posed by integration are carefully considered through the integration governance process
in place. If Lloyds Banking Group is unable to demonstrate the fair treatment of its customers there is the risk of
increased complaints from customers, the potential for regulatory action (which could include reviews of past
business and/or the payment of fi nes and compensation) and adverse media coverage (leading to reputational
damage in the marketplace). The Group has policies, procedures and governance arrangements in place to
facilitate the fair treatment of customers.
The delivery of Lloyds Banking Group’s objectives is underpinned by the ability to attract, retain and develop
the best talent in the industry. The challenges to the people agenda have never been greater with increased
regulatory and public interest in remuneration practices, the effects of the Government shareholding and the
impacts of integration. Lloyds Banking Group welcomes the regulation of remuneration provided there is
an international consensus and will comply with the FSA Code. The Group has managed the initial stages of
integration, working to establish control by defining and implementing the new organisational structures and
continues to manage the relationship with colleagues during this period of change. The Group has policies,
procedures and governance arrangements in place to ensure the effective management of people risk as the
Group integrates and grows its business. The Group has published proposals to harmonise employee terms
and conditions across the Group and is consulting with the various representative unions. The Group actively
manages its relationships with unions, but is aware of the danger of industrial action, business disruption and
reputational impact arising from union behaviour and communications. People risk is closely monitored as a
key risk indicator, as well as being subject to oversight by the board.
The integration of the two legacy organisations presents one of the largest integration challenges that has
been seen in the UK financial services industry. There is a risk that the Group may fail to realise the business
growth opportunities, revenue benefits, cost synergies, operational efficiencies and other benefits anticipated
from the acquisition of HBOS plc by Lloyds TSB Group plc, or may incur unanticipated costs and losses
associated as a result. As a consequence, the Group results may suffer as a result of operational, financial
management and other integration risks. The risk of failure to deliver synergy benefits or to meet publicly
stated targets could potentially result in a loss of shareholder or market confidence with negative perceptions
of the Group’s integration strategy. As the Group goes through the integration process there is a danger of
losing key staff potentially impacting upon integration plans.
The Group has created an integration executive board, chaired by the group operations director, to oversee
the integration process. The Group is now one year into the integration programme and has a fully developed
and functioning governance framework to manage these risks, with clear understanding of the dependencies
and phased deliverables through to 2012. The programme is ahead of plan.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
63
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
TABLE 1.3: RISK DRIVERS
Primary
risk drivers
Business
Risk
Credit
Risk
Market
Risk
Insurance
Risk
Operational
Risk
Financial
Soundness
Detailed
risk types
Strategy setting
Execution of
strategy
Retail
Wholesale
Interest rate
Foreign
exchange
Equity
Credit spread
Mortality
Longevity
Morbidity
Persistency
Property
Expenses
Unemployment
Legal and
regulatory
Customer treatment
People
Integration
Business
process risk
Financial
crime risk
Security risk
Change
Governance
Capital
Liquidity
and funding
Financial and
prudential
regulatory
reporting
Disclosure
Tax
RISK DRIVERS
The Group’s risk language is designed to capture the Group’s ‘primary
risk drivers’. A description of each ‘primary risk driver’, including
definition, appetite, control and exposures, is included below. These
are further sub divided into 29 more granular risk types to enable more
detailed review and facilitate appropriate reporting and monitoring, as
set out in table 1.3.
Through the Group’s risk management processes, these risks are
assessed on an ongoing basis and seek to ensure optimisation of risk
and reward and that, where required, appropriate mitigation is in place.
Both quantitative and qualitative factors are considered in assessing the
Group’s current and potential future risks.
BUSINESS RISK
DEFINITION
Business risk is defined as the risk that the Group’s earnings are adversely
impacted by a sub optimal business strategy or the sub optimal
implementation of the strategy. In assessing business risk, consideration
is given to internal and external factors.
RISK APPETITE
Business risk appetite is encapsulated in the Group’s budget and
medium-term plan, which are sanctioned by the board on an annual
basis. Divisions and business units plans are aligned to the Group’s
overall business risk appetite.
EXPOSURES
The Group’s portfolio of businesses exposes it to a number of internal
and external factors:
– internal factors: resource capability and availability, customer
treatment, service level agreements, products and funding and the risk
appetite of other risk categories; and
– external factors: economic, technological, political, social and ethical,
environmental, legal and regulatory, market expectations, reputation
and competitive behaviour.
MEASUREMENT
An annual business planning process is conducted at group, divisional
and business unit level which includes a quantitative and qualitative
assessment of the risks that could impact the Group’s plans. Within the
planning round, the Group conducts both scenario analysis and stress
tests to assess risks to future earning streams. Stress testing and scenario
analysis are fully embedded in the Group’s risk management practice.
The Group assesses a wide array of scenarios including economic
recessions, regulatory action and scenarios specific to the operations of
each part of the business.
MITIGATION
As part of the annual business planning process, the Group develops
a set of management actions to prevent or mitigate the impact on
earnings in the event that business risks materialise. Additionally,
business risk monitoring, through regular reports and oversight, results in
corrective actions to plans and reductions in exposures where necessary.
Revenue and capital investment decisions require additional formal
assessment and approval. Formal risk assessment is conducted as part
of the financial approval process. Significant mergers and acquisitions by
business units require specific approval by the board. In addition to the
standard due diligence conducted during a merger or acquisition, group
risk conducts, where appropriate, an independent risk assessment of the
target company.
MONITORING
The Group’s strategy is reviewed and approved by the board.
Reputational risk is covered at a number of levels throughout the
organisation, which includes the group executive committee and
the group business risk committee. 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.
APPROACH
The Group has adapted the heritage Lloyds TSB business risk approach
which includes stress testing the medium term plan to changes in
economic assumptions. The output of this stress testing is used to
determine investment decisions.
64
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
AUDITED INFORMATION
CREDIT RISK
DEFINITION
The risk of reductions in earnings and/or value, through financial or
reputational loss, as a result of the failure of the party with whom
the Group has contracted to meet its obligations (both on and off
balance sheet).
RISK APPETITE
Credit risk appetite is set by the board and is described and reported
through a suite of metrics derived from a combination of accounting
and credit portfolio performance measures which in turn use the various
credit risk rating systems as inputs. These metrics are supported by
a comprehensive suite of policies, sector caps, product and country
limits to manage concentration risk and exposures within the Group’s
approved risk appetite.
This statement of the Group’s overall appetite for credit risk is reviewed
and approved annually by the board. With the support of the group
credit risk committee and group business risk committee, the group
chief executive allocates this risk appetite across the Group. Individual
members of the group executive committee ensure that credit risk
appetite is further delegated to an appropriate level within their areas
of responsibility.
EXPOSURES
The principal sources of credit risk within the Group arise from
loans and advances to retail customers, financial institutions and
corporate clients. The credit risk exposures of the Group are set
out in note 54 to the financial statements. Credit risk exposures are
categorised as ‘retail’ arising in the Retail and Wealth and International
Divisions and ‘wholesale’ arising in the Wholesale and Wealth and
International Divisions.
In terms of loans and advances, credit risk arises both from amounts
lent and commitments to extend credit to a customer as required.
These commitments can take the form of loans and overdrafts, or
credit instruments such as guarantees and standby, documentary and
commercial letters of credit. With respect to commitments to extend
credit, the Group is potentially exposed to loss in an amount equal to
the total unused commitments. However, the likely amount of loss is
less than the total unused commitments, as most retail commitments to
extend credit can be cancelled and the credit worthiness of customers
is monitored frequently. In addition, most wholesale commitments to
extend credit are contingent upon customers maintaining specific credit
standards, which are regularly monitored.
Credit risk can also arise from debt securities, private equity investments,
derivatives and foreign exchange activities. Note 18 to the financial
statements shows the total notional principal amount of interest
rate, exchange rate, credit derivative and equity and other contracts
outstanding at 31 December 2009. The notional principal amount does
not, however, represent the Group’s credit risk exposure, which is limited
to the current cost of replacing contracts with a positive value to the
Group. Such amounts are reflected in note 54 on page 231.
Credit risk exposures in the insurance businesses arise primarily from
holding investments and from exposure to reinsurers. A significant
proportion of the investments are held in unit linked and with profit funds
where the shareholder risk is limited, subject to any guarantees given.
MEASUREMENT
In measuring the credit risk of loans and advances to customers and
to banks at a counterparty level, the Group reflects three components:
(i) the ‘probability of default’ by the client or counterparty on its
contractual obligations; (ii) current exposures to the counterparty
and their likely future development, from which the Group derives
the ‘exposure at default’; and (iii) the likely loss ratio on the defaulted
obligations (the ‘loss given default’).
The Group assesses the probability of default of individual counterparties
using internal rating models tailored to the various categories of
counterparty. In its principal retail portfolios and a growing number of
wholesale lending portfolios, exposure at default and loss given default
models are also in use. They have been developed internally and use
statistical analysis, combined, where appropriate, with external data
and subject matter expert judgement. Each rating model is subject to
a rigorous validation process, undertaken by independent risk teams,
which includes benchmarking to externally available data, where
possible. All material rating models are authorised by the group model
governance committee.
Each probability of default model segments counterparties into
a number of rating grades, each representing a defined range of
default probabilities. Exposures migrate between classifications if
the assessment of the obligor probability of default changes. Each
rating system is required to map to a master scale, which supports the
consolidation of credit risk information across portfolios through the
adoption of a common rating scale. Given the differing risk profiles and
credit rating considerations, the underlying risk reporting has been split
into two distinct master scales, a retail master scale and a wholesale
master scale.
(Note 54 to the financial statements provides an analysis of the portfolio
and page 68 relates to the divisional analysis that is set out on pages 69
to 75.)
The rating systems described above assess probability of default,
exposure at default and loss given default, in order to derive an
expected loss. In contrast, impairment allowances are recognised for
financial reporting purposes only for losses that have been incurred at
the balance sheet date based on objective evidence of impairment (see
note 2(H) to the consolidated financial statements on page 138). Due
to the different methodologies applied, the amount of incurred credit
losses provided for in the financial statements differs from the amount
determined from the expected loss models that are used for internal
operational management and banking regulation purposes.
MITIGATION
The Group uses a range of approaches to mitigate credit risk.
Internal control
– Credit principles and policy: group risk sets out the Group credit
principles and policy according to which credit risk is managed,
which in turn is the basis for divisional and business unit credit policy.
Principles and policy are reviewed regularly and any changes are
subject to a review and approval process. Divisional and business unit
policy includes lending guidelines, which define the responsibilities of
lending officers and provide a disciplined and focused benchmark for
credit decisions.
– Counterparty limits: Limits are set against all types of exposure in a
counterparty name, in accordance with an agreed methodology for
each exposure type. This includes credit risk exposure on individual
derivative transactions, which incorporates potential future exposures
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
from market movements. Aggregate facility levels by counterparty are
set and limit breaches are subject to escalation procedures.
– Credit scoring: In its principal retail portfolios, the Group uses
statistically-based decisioning techniques (primarily credit scoring).
Divisional risk departments review scorecard effectiveness and approve
changes, with material changes being subject to group risk approval.
– Individual credit assessment and sanction: Credit risk in wholesale
portfolios is subject to individual credit assessments, which consider
the strengths and weaknesses of individual transactions and the
balance of risk and reward. Exposure to individual counterparties,
groups of counterparties or customer risk segments is controlled
through a tiered hierarchy of delegated sanctioning authorities.
Approval requirements for each decision are based on the transaction
amount, the customer’s aggregate facilities, credit risk ratings and the
nature and term of the risk. The Group’s credit risk appetite criteria for
counterparty underwriting are the same as that for assets intended to
be held over the period to maturity.
– Controls over rating systems: The Group has established an
independent team in group risk that sets common minimum standards,
designed to challenge the discriminatory powers of systems, accuracy
of calibration and seeks to ensure consistency over time and across
obligors. Internal rating systems are developed and implemented by
independent risk functions either in the business units or divisions with
the business unit managing directors having ownership of the systems.
Line management takes responsibility for ensuring the validation of
the respective internal rating systems, supported and challenged by
specialist functions in their respective division.
– Cross-border and cross-currency exposures: Country limits are
authorised by the Country Limits Panel taking into account economic
and political factors.
– Concentration risk: Credit risk management includes portfolio
controls on certain industries, sectors and product lines to reflect risk
appetite. Credit policy is aligned to the Group’s risk appetite and
restricts exposure to certain high risk and more vulnerable sectors
and segments. Note 20 to the accounts provides an analysis of loans
and advances to customers by industry (for wholesale customers) and
product (for retail customers). Exposures are monitored to prevent
excessive concentration of risk. These concentration risk controls are
not necessarily in the form of a maximum limit on lending but may
instead require new business in concentrated sectors to fulfil additional
hurdle requirements. The Group’s large exposures are reported in
accordance with regulatory reporting requirements.
– Stress testing and scenario analysis: The credit portfolio is also
subjected to stress-testing and scenario analysis, to simulate outcomes
and calculate their associated impact. Events are modelled at a group
wide level, at divisional and business unit level and by rating model
and portfolio, for example, for a specific industry sector.
– Specialist expertise: Credit quality is maintained by specialist units
providing, for example: intensive management and control; security
perfection, maintenance and retention; expertise in documentation for
lending and associated products; sector-specific expertise; and legal
services applicable to the particular market place and product range
offered by the business.
– Daily settlement limits: Settlement risk arises in any situation where a
payment in cash, securities or equities is made in the expectation of a
corresponding receipt in cash, securities or equities. Daily settlement
limits are established for each counterparty to cover the aggregate of
all settlement risk arising from the Group’s market transactions on any
single day.
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
65
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
– Risk assurance and oversight: Divisional and group level oversight
teams monitor credit performance trends, review and challenge
exceptions to planned outcomes and test the adequacy of credit risk
infrastructure and governance processes throughout the Group. This
includes tracking portfolio performance against an agreed set of key
risk indicators. Risk assurance teams are engaged where appropriate to
conduct further credit reviews if a need for closer scrutiny is identified.
Collateral
The principal collateral types for loans and advances are:
– mortgages over residential and commercial real estate;
– charges over business assets such as premises, inventory and
accounts receivable;
– charges over financial instruments such as debt securities and
equities; and
– guarantees received from third parties.
The Group maintains guidelines on the acceptability of specific classes
of collateral.
Collateral held as security for financial assets other than loans and
advances is determined by the nature of the instrument. Debt securities,
treasury and other eligible bills are generally unsecured, with the
exception of asset-backed securities and similar instruments, which
are secured by portfolios of financial assets. Collateral is generally not
held against loans and advances to financial institutions, except where
securities are held as part of reverse repurchase or securities borrowing
transactions or where a collateral agreement has been entered into
under a master netting agreement. Collateral or other security is also
not usually obtained for credit risk exposures on derivative instruments,
except where the Group requires margin deposits from counterparties.
It is the Group’s policy that collateral should always be realistically valued
by an appropriately qualified source, independent of the customer,
at the time of borrowing. Collateral is reviewed on a regular basis in
accordance with business unit credit policy, which will vary according
to the type of lending and collateral involved. In order to minimise
the credit loss, the Group may seek additional collateral from the
counterparty as soon as impairment indicators are identified for the
relevant individual loans and advances.
The Group considers risk concentrations by collateral providers and
collateral type, as appropriate, with a view to ensuring that any potential
undue concentrations of risk are identified and suitably managed by
changes to strategy, policy and/or business plans.
Master netting agreements
Where it is efficient and likely to be effective (generally with
counterparties with which it undertakes a significant volume of
transactions), the Group enters into master netting agreements.
Although master netting agreements do not generally result in an offset
of balance sheet assets and liabilities, as transactions are usually settled
on a gross basis, they do reduce the credit risk to the extent that, if an
event of default occurs, all amounts with the counterparty are terminated
and settled on a net basis. The Group’s overall exposure to credit risk on
derivative instruments subject to master netting agreements can change
substantially within a short period since it is affected by each transaction
subject to the agreement.
66
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
Other credit risk transfers
The Group also undertakes asset sales, securitisations and credit derivative
based transactions as a means of mitigating or reducing credit risk, taking
into account the nature of assets and the prevailing market conditions.
MONITORING
– Portfolio monitoring and reporting: In conjunction with group risk,
businesses and divisions identify and define portfolios of credit and
related risk exposures and the key benchmarks, behaviours and
characteristics by which those portfolios are managed in terms of
credit risk exposure. This entails the production and analysis of regular
portfolio monitoring reports for review by senior management. Group
risk in turn produces an aggregated review of credit risk throughout
the Group, including reports on significant credit exposures, which are
presented to both the group credit risk committee and to the group
business risk committee.
– The performance of all rating models is comprehensively monitored
on a regular basis, to seek to ensure that models continue to provide
optimum risk differentiation capability, the generated ratings remain
as accurate and robust as possible and the models assign appropriate
risk estimates to grades/pools. All models are monitored against a
series of agreed key performance indicators. In the event that
monthly monitoring identifies material exceptions or deviations
from expected outcomes, these will be escalated to the group
model governance committee.
APPROACH
The Group has largely adopted the heritage Lloyds TSB credit risk
approach, including governance structure, sanctioning processes and
risk appetite controls and framework. Integrated, prudent through the
cycle credit policies and procedures have mostly all been established
and implemented across the Group, supported by robust early warning
indicators and triggers.
Following a prioritised appointment process an integrated credit risk
management structure is in place throughout the Group, using the most
experienced and skilled resources from both heritages. Substantial work
has been undertaken to analyse portfolios and where necessary the
Group has taken actions to manage effectively its exposure through the
economic downturn. These actions have included revised credit criteria
for key products and a withdrawal from those business sectors that are
outside of the Group’s risk appetite.
The Group has formed a group level Credit Risk Assurance function
with experienced credit professionals from both heritages. Together
with Divisional Risk senior management, this team has carried out an
independent risk-based review of the high risk wholesale and retail
books. Nearly £150 billion of high risk wholesale assets, primarily HBOS
commercial real estate and corporate exposures, have been reviewed
by the team. This has required a detailed file by file review of the
original credit application, subsequent management papers and an
understanding of the supporting collateral. In addition, portfolio level
analysis and investigation, together with statistically robust sampling
of accounts, have been carried out for over £300 billion of retail assets.
These comprehensive reviews have greatly enhanced the Group’s
knowledge and understanding of the legacy portfolios and have
enabled the Group to assess and manage these exposures confidently
and effectively.
AUDITED INFORMATION
To support corporate customers that encounter difficulties during
the current economic downturn the Group has continued to expand
its dedicated Business Support Unit (BSU) model. Teams have been
strengthened in both Wholesale and Wealth and International to
deal with the rise in work loads experienced during the year as the
recessionary conditions took hold both in the UK and overseas. In
Wholesale three teams have been created to cover Corporate Real
Estate, Corporate and Commercial, and Specialist Finance customers
experiencing difficulties. In Wealth and International teams have
been created in Ireland and Australia. Under this model, relationship
management passes early and fully to BSU; because the BSU specialists
receive the customers at an earlier stage in the process they have more
time to develop effective solutions. The strategy is to work alongside
management teams and key stakeholders to turnaround businesses in
distress and re-establish these as viable entities. Where a turnaround
is not feasible, exposure is minimised through a combination of
appropriate asset sales, restructuring and work out strategies.
To support UK Retail customers who are encountering financial
difficulties the Group has launched a cross-channel support programme.
Lloyds TSB branches and telephony units have at least one trained
Financial Health Specialist providing customers with budgeting and
money management advice. In the Group’s Halifax and Bank of Scotland
businesses, customers have a dedicated telephone support line with
trained specialists able to guide them through any financial difficulties.
Support is also available for all customers online, and via a specially
developed support brochure. For those customers requiring more
intensive help, assistance is provided through dedicated support units
where tailored repayment programmes can be agreed. Customers are
actively supported and referred to free money advice agencies where
they have multiple credit facilities that require restructuring.
Within Collections and Recoveries the sharing of best practice and
alignment of policies across the Group, has helped to drive more
effective customer outcomes and achieve operational efficiencies. The
Group has strengthened resources in Collections and Recoveries to help
customers in distress by offering advice and access to a wider range of
options such as short-term repayment plans or the government backed
Homeowners’ Mortgage Support and Mortgage Rescue schemes. A
core element of our relationship management approach is to contact
customers showing signs of financial distress, discussing with them their
circumstances and offering solutions to prevent their accounts falling
into arrears. This year, nearly a quarter of a million customers have been
contacted who were not yet in arrears.
The Group follows a through the economic cycle, relationship based,
business model with robust risk management processes, appropriate
appetites and experienced staff in place. These robust policies and
procedures define chosen target market and risk acceptance criteria.
These have been, and will continue to be, tightened and fine tuned
as appropriate and include the use of early warning indicators to
help anticipate future areas of concern and allow us to take early and
proactive mitigating actions.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
67
Lloyds Banking Group
Annual Report and Accounts 2009
CREDIT RISK MANAGEMENT IN 2009
TABLE 1.4: IMPAIRMENTS ON GROUP LOANS AND ADVANCES
To understand the trends in each portfolio the comparatives for 2008
have been provided for the combined businesses which are unaudited.
Consequently pages 67 to 75 covering credit risk management in 2009
are unaudited.
As at 31 December 2009
Loans and
advances
£m
Impaired
loans
£m
Impaired
loans as
a % of
closing
advances
%
Impair-
ment
provisions1
£m
378,005 11,015
2.9
3,806
210,934 35,114
16.6 17,179
Impair-
ment
provisions
as a % of
impaired
loans
%
34.6
48.9
69,402 12,704
18.3
5,003
39.4
1,663
660,004 58,833
8.9 25,988
44.2
Retail
Wholesale
Wealth and
International
Hedging and
other items
Impairment provisions (25,988)
Fair value adjustments (7,047)
626,969
As at 31 December 2008
Retail
Wholesale
Wealth and
International
Hedging and
other items
Impairment provisions
Fair value adjustments
386,007
10,106
247,138
18,470
2.6
7.5
4,842
8,263
47.9
44.7
67,481
2,728
4.0
1,047
38.4
–
31,304
–
4.4
–
14,152
–
45.2
4,284
704,910
(14,152)
(13,512)
677,246
1
Impairment provisions include collective unimpaired provisions.
To understand how the above portfolios are classified for internal
monitoring purposes the following table sets out the Group’s loans and
advances according to asset quality. Please also refer to page 232 of the
financial statements.
The definitions used below of good quality, satisfactory quality, lower
quality and below standard, but not impaired applying to retail
and wholesale customers are not the same, reflecting the different
characteristics of these exposures and the way they are managed
internally. Wholesale lending has predominantly been classified using
internal probability of default rating models mapped so that they are
comparable to external credit ratings. Good quality lending comprises
the lower assessed default probabilities, with other classifications
reflecting progressively higher default risk. Classifications of retail
lending have predominantly been determined using internal rating
models and for Retail mortgages also incorporate expected recovery
levels and, where applicable expert judgement. Good quality lending
includes the lower assessed default probabilities and all loans with low
expected losses in the event of default, with other categories reflecting
progressively higher risks and lower expected recoveries.
KEY HIGHLIGHTS
– As a result of the significant impairments taken in the first half of 2009
following in-depth reviews of the Group’s high risk portfolios and a
more favourable macroeconomic environment in the second half of
2009, the Group’s total impairment charge levels have reduced in the
second half of the year.
– Whilst the path of the economic recovery remains uncertain, the Group
continues to expect the 2010 charge to be significantly lower than the
total 2009 charge.
– The Group has largely adopted the heritage Lloyds TSB’s credit risk
approach and is implementing prudent, ‘through the cycle’ credit
policies and procedures across the Group.
– The Group has expanded its BSU model and strengthened the
resources within Collections and Recoveries to support the more timely
engagement with customers experiencing difficulties and drive more
effective customer outcomes.
The Group’s total impairment losses increased by £9,108 million to
£23,988 million in 2009. Impairment losses for loans and advances
as a percentage of average gross loans and advances to customers,
increased to 3.25 per cent from 1.81 per cent in 2008. This was principally
due to the material deterioration in UK economic conditions in 2009.
The rapid economic and asset value declines, together with aggressive
lending polices in the heritage HBOS business, caused wholesale
impairment losses to increase substantially during 2009. This was
especially so in the HBOS Corporate Real Estate portfolio which has
been particularly vulnerable to the deterioration in asset values as well as
the HBOS (UK and US) Corporate portfolios.
The Group’s gross loans and advances to customers, before impairment
provisions and fair value adjustments, decreased by £44.9 billion to
£660.0 billion. The reduction in gross advances was primarily driven
by the alignment of heritage risk appetites in Retail, a reduction in
wholesale lending in Corporate Markets and a reduction in Wealth and
International before allowing for a transfer of £7 billion of advances from
the Wholesale division to Wealth and International during the year in
respect of the European loan portfolio.
Total impaired loans increased by £27,529 million to £58,833 million at
31 December 2009 and as a percentage of closing loans and advances
to customers increased to 8.9 per cent from 4.4 per cent at 31 December
2008 driven by the deterioration in the economic environment, and
in particular by declines in commercial real estate values and higher
unemployment. The Group’s coverage ratio (impairment provisions as
a percentage of impaired loans) has decreased to 44.2 per cent from
45.2 per cent in 2008. Whilst the ratio has increased within Wholesale
and Wealth and International, the overall fall is due to the write-off of
unsecured loans and advances within Retail that had been provided
against in earlier years, as reported at the half-year. The Group believes it
has adequate coverage.
The Group remains cautious about a number of downside risks,
including a renewed macro-economic deterioration in the UK and
Ireland. However, based on its latest economic assumptions, the Group
expects a significantly lower impairment charge in 2010 compared
to 2009.
68
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
TABLE 1.5: ASSET QUALITY BY DIVISION
As at 31 December 2009
Asset type
Asset quality
Retail – mortgages
Good
Satisfactory
Lower
Below standard, but not impaired
Past due, but not impaired
Impaired
Retail – other
Good
Satisfactory
Lower
Below standard, but not impaired
Past due, but not impaired
Wholesale
Impaired
Good
Satisfactory
Lower
Below standard, but not impaired
Past due, but not impaired
Impaired
As at 31 December 2008
Asset type
Asset quality
Retail – mortgages
Good
Satisfactory
Lower
Below standard, but not impaired
Past due, but not impaired
Impaired
Retail – other
Good
Satisfactory
Lower
Below standard, but not impaired
Past due, but not impaired
Wholesale
Impaired
Good
Satisfactory
Lower
Below standard, but not impaired
Past due, but not impaired
Impaired
Retail
Division
£m
318,559
7,014
504
876
11,726
7,196
16,179
7,666
955
2,591
663
3,819
13
124
120
–
–
–
Wholesale
Division
£m
–
–
–
–
–
–
12,681
3,838
436
740
709
2,384
52,292
47,729
40,416
13,605
3,374
32,730
378,005
210,934
Retail
Division
£m
328,560
1,896
125
109
14,171
4,756
17,035
8,050
891
2,624
754
5,350
15
102
1,568
–
1
–
Wholesale
Division
£m
–
–
–
–
–
–
15,395
3,601
482
877
947
1,900
72,003
81,594
38,508
10,170
5,091
16,570
Wealth and
International
Division
£m
15,825
2,600
242
574
861
756
2,777
1,150
89
221
501
148
8,230
11,711
5,450
4,719
1,748
11,800
69,402
Wealth and
International
Division
£m
19,672
1,331
246
447
839
356
3,258
2,568
79
114
203
18
6,438
16,806
6,865
3,681
2,206
2,354
Fair value
hedging and
other items
£m
Total
£m
1,098
335,482
–
–
–
–
–
(894)
–
–
–
–
–
1,275
188
–
–
(4)
–
1,663
Fair value
hedging and
other items
£m
82
–
–
–
–
–
539
–
–
–
–
–
3,555
108
–
–
–
–
9,614
746
1,450
12,587
7,952
367,831
30,743
12,654
1,480
3,552
1,873
6,351
56,653
61,810
59,752
45,986
18,324
5,118
44,530
235,520
660,004
Total
£m
348,314
3,227
371
556
15,010
5,112
372,590
36,227
14,219
1,452
3,615
1,904
7,268
64,685
82,011
98,610
46,941
13,851
7,298
18,924
267,635
704,910
386,007
247,138
67,481
4,284
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
69
Lloyds Banking Group
Annual Report and Accounts 2009
LEVERAGE FINANCE LENDING
Leverage finance exposures arise in Wholesale and in Wealth and
International. The Group defines leverage as that business booked
within Lloyds Acquisition Finance in Wholesale and the equivalent
business in Lloyds International. The portfolio is well spread by sector
with the majority of the exposures being UK focused.
TABLE 1.6: LEVERAGE FINANCE LENDING
As at 31 December 2009
Wholesale division
Wealth and International division
As at 31 December 2008
Wholesale division
Wealth and International division
Drawn
£bn
14.4
3.2
17.61
14.9
3.3
18.2
1
Total includes £4.8 billion relating to unsuccessful syndications and £0.3 billion in syndication.
RETAIL
KEY HIGHLIGHTS
– Impairment losses have increased by 14 per cent to £4,227 million
particularly reflecting the impact of increases in unemployment
during 2009 on the unsecured charge, partly offset by a lower secured
impairment charge as the housing market stabilised.
– New lending quality has remained strong, with lower arrears evident.
– Average loan-to-value on new mortgage lending has reduced to
59.3 per cent, compared to 63.1 per cent during 2008.
– Management actions taken, coupled with more favourable recent
economic trends, have reduced overall volumes of customers entering
Collections in the second half of the year.
– The path of economic recovery in the UK remains uncertain; however,
based on current trends, the Group expects impairment losses in 2010
to be lower than 2009.
Retail impairment losses increased by £532 million to £4,227 million in
2009, driven primarily by deteriorating economic conditions in the latter
part of 2008 and the first half of 2009. Impairment losses were lower
in the second half of 2009, compared to the first half, driven by lower
secured impairment losses. The improvement in secured impairment
losses reflected increases in UK house prices, slowing unemployment
growth, better affordability with lower interest rates and management
actions. Impairment losses for loans and advances, as a percentage of
average loans and advances to customers, increased to 1.11 per cent
from 0.97 per cent in 2008.
Retail’s gross loans and advances have reduced by £8 billion to
£378 billion, as a result of management actions to align heritage risk
appetites with a focus on lending to lower risk segments, such as
unsecured franchise customers, and the write-off of £2.1 billion of
unsecured loans and advances which had been provided against in
earlier years, as reported at the half-year.
Total impaired loans increased by £909 million to £11,015 million at
31 December 2009 and as a percentage of closing advances to customers,
increased to 2.9 per cent from 2.6 per cent at 31 December 2008. This is
lower than the £11,394 million reported at 30 June 2009, as there was a
gradual improvement in the second half of the year in secured loans, with
unsecured lending remaining stable.
The Group is cautious about a number of potential downside risks,
including lagged effects of high unemployment, a potential for recent
house price increases to reverse, the challenges to affordability if
interest rates were to rise ahead of real wage growth and other potential
pressures on future affordability. However, based on its latest economic
assumptions, the Group’s expectation is for recent trends to continue
and for Retail to report a lower impairment charge in 2010 compared
to 2009.
70
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
TABLE 1.7: IMPAIRMENTS ON RETAIL LOANS AND ADVANCES
As at 31 December 2009
Secured
Unsecured2
Total Retail
Impaired
loans as
a % of
closing
advances
%
Impair-
ment
provisions1
£m
Impair-
ment
provisions
as a % of
impaired
loans
%
2.1
11.9
2.9
1,693
2,113
3,806
23.5
55.3
34.6
Loans and
advances
£m
Impaired
loans
£m
345,900
32,105
7,196
3,819
378,005 11,015
Impairment provisions
(3,806)
Fair value adjustments
(3,141)
371,058
As at 31 December 2008
Secured
Unsecured2
Total Retail
Loans and
advances
£m
Impaired
loans
£m
349,646
36,361
4,756
5,350
386,007
10,106
Impairment provisions
(4,842)
Fair value adjustments
(4,088)
377,077
Impaired
loans as
a % of
closing
advances
%
Impairment
provisions
as a % of
impaired
loans
%
Impairment
provisions1
£m
1.4
14.7
2.6
1,403
3,439
4,842
29.5
64.3
47.9
1
2
Impairment provisions include collective unimpaired provisions.
The reduction in unsecured advances and impairment provisions reflects the write-off of
£2.1 billion of unsecured loans and advances to customers which had been provided against in
prior years.
The Retail division’s loans and advances to customers are analysed in the
following table:
TABLE 1.8: LOANS AND ADVANCES TO CUSTOMERS
As at 31 December
Secured:
Mainstream
Buy to let
Specialist
Unsecured:
Credit cards
Personal loans
Bank accounts
Others, including joint ventures1
2009
£m
2008
£m
270,069
274,237
44,236
41,364
31,595
34,045
345,900
349,646
12,301
16,940
2,629
13,802
18,102
2,788
235
1,669
32,105
36,361
378,005
386,007
1
Following the Group’s acquisition of the remaining shares in the joint venture with AA, unsecured
lending by that entity is now reported in ‘Personal Loans’ and ‘Credit Cards’ headings, previously
these balances were included in ‘Others’.
SECURED
The UK mortgage market for both house purchase and re-mortgaging
slowed considerably in 2009, with gross market lending falling to
£143 billion from £254 billion in 2008. The re-mortgage market is the
main contributor to this fall, as reductions in base rate have brought the
interest rate on standard variable mortgages to below new business
rates across the industry, thereby reducing the incentive for borrowers
to re-mortgage.
Gross new mortgage lending by Retail in 2009 was £35 billion compared
to £78 billion for 2008, representing a market share of gross new lending
of 24 per cent compared with 31 per cent in 2008. Overall, mortgage
balances outstanding at 31 December 2009 were £345.9 billion, a
reduction of £3.7 billion in the year.
In March 2009, the Group committed to increasing its planned gross
lending to homebuyers by £3 billion in the following 12 months. The
lending provided under this commitment continues to adhere to the
Group’s risk appetite. The Group’s risk appetite is consistent with the
criteria that had proved to be a prudent and successful approach for
Lloyds TSB.
Secured impairment losses were £789 million in 2009, a reduction of
£506 million compared with 2008. The main drivers of the reduction
are internal activities (risk and collections policies) and better
than anticipated external factors (interest rates, house prices and
unemployment). The combination of these factors has resulted in
a reduction in impaired loans in the second half of the year. As a
percentage of average gross loans and advances to customers, secured
impairment losses decreased to 0.23 per cent in 2009 from 0.38 per cent
in 2008.
Management actions taken have resulted in new lending quality
improving to pre-recessionary levels, with fewer customers now going
into arrears. Specialist lending is now closed to new business and this
book is in run-off.
Although impaired loans in the year increased to £7,196 million,
Retail has seen a steady reduction in the second half of the year from
£7,612 million at June 2009. Impaired secured loans, as a percentage of
closing advances, increased to 2.1 per cent at 31 December 2009 from
1.4 per cent in 2008.
The percentage of mortgage cases greater than three months in arrears
(excluding possessions) increased to 2.3 per cent at 31 December 2009
compared to 1.8 per cent at 31 December 2008. Based on the most
recent published figures by the Council of Mortgage Lenders, the Group
is performing marginally better than the industry average.
TABLE 1.9: MORTGAGES GREATER THAN THREE MONTHS IN
ARREARS (EXCLUDING POSSESSIONS)
As at 31 December
Number of cases
Total mortgage
accounts
Value of debt1
Total mortgage
balances
2009
Cases
2008
Cases
2009
%
Mainstream 57,837 46,543
Buy to let
7,557 6,950
Specialist
13,848 12,634
79,242 66,127
2.1
1.9
6.6
2.3
2008
%
1.5
2.0
5.6
2009
£m
2008
£m
2009
%
2008
%
6,407 4,796
1,159 1,053
2,498 2,342
1.8 10,064 8,191
2.4
2.6
7.9
2.9
1.7
2.5
6.9
2.3
1
Value of debt represents total book value of mortgages in arrears but not in possession.
Provisions held against secured assets appropriately reflect the risk of
further losses from events that have already occurred. This includes
adequate allowance for losses yet to emerge on accounts currently
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
71
Lloyds Banking Group
Annual Report and Accounts 2009
on repayment plans or benefiting from the very low interest rate
environment.
The possessions stock has fallen by 32 per cent in 2009, from 4,011
to 2,720 properties. Currently, average proceeds from the sale of
repossessed properties are in excess of average valuations assumed in
Retail’s provisioning models.
The average loan-to-value ratio for new mortgages and further advances
written in 2009 was 59.3 per cent compared with 63.1 per cent in 2008.
The average indexed loan-to-value ratio on the mortgage portfolio was
54.8 per cent compared with 54.9 per cent in 2008 and 13.0 per cent of
the mortgage portfolio had an indexed loan-to-value ratio in excess of
100 per cent (£44.8 billion), compared with 16.2 per cent (£56.8 billion)
in 2008.
TABLE 1.10: ACTUAL AND AVERAGE LTVS ACROSS THE
PRINCIPAL MORTGAGE PORTFOLIOS
As at 31 December 2009
Mainstream Buy to let
%
%
Specialist1
%
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Average loan to value:
Stock of residential
mortgages
New residential lending
Impaired mortgages
As at 31 December 2008
Less than 60%
60% to 70%
70% to 80%
80% to 90%
90% to 100%
Greater than 100%
Average loan to value:
Stock of residential
mortgages
New residential lending
Impaired mortgages
34.4
11.9
15.2
14.3
12.2
12.0
12.0
11.3
20.2
19.1
21.4
16.0
14.3
9.7
17.0
21.5
20.3
17.2
Total
%
29.7
11.6
16.0
15.6
14.1
13.0
100.0
100.0
100.0
100.0
51.0
58.3
71.1
75.2
65.6
91.5
72.3
73.7
85.6
Mainstream
%
Buy to let
%
Specialist
%
34.3
10.7
12.7
13.6
13.5
15.2
11.1
9.6
15.6
20.3
22.1
21.3
14.8
9.4
15.7
21.4
20.8
17.9
54.8
59.3
76.5
Total
%
29.6
10.5
13.3
15.2
15.2
16.2
100.0
100.0
100.0
100.0
52.2
60.7
67.3
77.0
73.1
89.9
71.7
73.1
85.6
54.9
63.1
74.1
1
Specialist lending is now closed to new business and is in run-off.
UNSECURED
Consumer Banking has aligned risk appetite across the business to
focus on lending to its existing customers. Personal loan balances
outstanding at 31 December 2009 were £16.9 billion (31 December 2008:
£18.1 billion), the reduction reflected lower demand, a tightening of
lending criteria and the write-off of unsecured loans and advances which
had been provided against in earlier years, as reported at the half-year.
In credit cards, Retail’s combined brands are market leaders in terms
of new credit card issuance. Credit card balances outstanding at
31 December 2009 were £12.3 billion (31 December 2008: £13.8 billion).
In addition, the Group was the leading UK debit card issuer in 2009.
The impairment charge for unsecured lending was £3,438 million in
2009, an increase of £1,037 million on 2008 which reflects the higher
unemployment levels seen in the year. Consistent with the Group’s
statements at the half-year, Retail’s impairment losses on unsecured
lending were higher in the second half of the year, largely driven by the
standardisation of the treatment for concessionary repayment plans; if
this charge was excluded, impairment losses were stable.
In the second half of 2009 there were signs of improved underlying
performance in all portfolios; management actions reduced the
delinquency rates on new business. If current trends continue, Retail
believes impairment losses in 2010 will be lower than in 2009.
Total impaired unsecured loans were £3.8 billion (31 December 2008:
£5.4 billion) and represented 11.9 per cent of closing advances
compared to 14.7 per cent at 31 December 2008. Provisions as
a percentage of impaired loans decreased to 55.3 per cent (31
December 2008: 64.3 per cent). The reduction in both the level of
impaired loans and the impairment provisions coverage reflected the
write-off of £2.1 billion of unsecured loans which had been provided
against in the prior years, as reported at the half-year.
Personal loans: Impaired personal loans decreased to 10.5 per cent of
closing advances (31 December 2008: 11.6 per cent) and provisions,
as a percentage of closing advances, decreased to 5.9 per cent
(31 December 2008: 7.0 per cent).
Credit cards: Impaired credit cards advances were 13.6 per cent of
closing advances (31 December 2008: 20.2 per cent) and provisions,
as a percentage of closing advances, decreased to 7.1 per cent
(31 December 2008: 13.6 per cent).
Bank accounts: Impaired loans decreased to 13.6 per cent of
closing advances (31 December 2008: 17.0 per cent) and provisions,
as a percentage of closing advances, decreased to 8.9 per cent
(31 December 2008: 10.6 per cent).
WHOLESALE
KEY HIGHLIGHTS
– Established robust credit risk control framework and risk appetite
largely based on Lloyds TSB’s approach, and rolled out across
Wholesale. Divisional Risk continue to undertake robust and
continuous oversight and challenge to the business.
– Significant resources deployed into the Business Support Units focused
on key asset classes.
– As a result of significant impairments taken in the first half of 2009,
notably in HBOS Corporate Real Estate and HBOS (UK and US)
Corporate portfolios, the Group expects this to represent the peak
of total impairments given the Group’s economic assumptions.
However, the Group expects the volume of underlying impairments
from traditional trading and manufacturing businesses to increase in
2010, as the full impact of economic conditions filters into business
insolvencies and asset values. This is a factor of a typical lag effect
as the economy passes through the recession. However, the effects
of this negative trend should be significantly less than the benefit of
lower absolute impairments from the HBOS Corporate Real Estate and
HBOS (UK and US) Corporate portfolios.
72
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
– Volume of individual cases passing into Business Support Units
continued to rise in the second half of 2009.
TABLE 1.11: IMPAIRMENTS ON WHOLESALE LOANS
AND ADVANCES
– The Group remains cautious about the extent of corporate recovery
As at 31 December 2009
in 2010.
Wholesale division impairment losses increased by £5,289 million to
£15,683 million in 2009. Impairment losses for loans and advances as
a percentage of average loans and advances to customers increased
to 5.92 per cent in 2009 from 3.32 per cent in 2008. Higher levels
of failures, notably in HBOS Corporate Real Estate and real estate
related transactions, and the HBOS (UK and US) Corporate portfolio,
drove a significant increase in impairments. However, impairment
losses reduced significantly in the second half of 2009, amounting
to £5,945 million, compared with £9,738 million in the first half, a
reduction of £3,793 million, or 39 per cent.
Wholesale’s gross loans and advances to customers have decreased by
£36.2 billion to £210.9 billion. Since the date of acquisition, all business
originated in Wholesale has been evaluated in accordance with the risk
appetite and credit control criteria that had proved to be a prudent
and successful approach for Lloyds TSB. Early assessment of HBOS
portfolios identified those areas where there was close alignment with
the Lloyds TSB heritage, those which could continue to be supported
once the more restrictive appetite and policy were aligned and those
where it was clear that there would be limited appetite to lend. As
agreed with the UK government, the Group’s lending commitment is
also subject to, and considered in the light of, the Group’s risk appetite
and credit control criteria.
Total impaired loans increased by £16,644 million to £35,114 million at
31 December 2009. Impaired loans as a percentage of closing advances
was 16.6 per cent as at 31 December 2009 compared with 7.5 per cent
as at 31 December 2008, with impairment provisions as a percentage of
impaired loans increasing to 48.9 per cent as at 31 December 2009 from
44.7 per cent as at 31 December 2008. Detailed reviews of vulnerable
portfolios have largely been completed and, where appropriate,
remedial risk mitigating actions are underway. The HBOS impairment
methodology has now been aligned with the Group’s methodology, and
this is reflected in the impairment charge for the year and the first half in
particular. The position has stabilised during the second half with a lower
rate of impairment compared with the first half.
The Lloyds TSB approach to credit risk management, with a focus on
ensuring its risk appetite and credit policies reflect a prudent through
the cycle approach to lending, impairment assessment and review is
being embedded across the enlarged Wholesale division and remains
a key focus in 2010.
Loans and
advances
£m
Impaired
loans
£m
67,293
26,551
7,930
2,597
55,490 18,016
Corporate Markets:
Corporate
Commercial
Real Estate
Specialist Finance
16,088
Wholesale Markets
31,286
2,956
1,646
Impaired
loans as
a % of
closing
advances
%
Impair-
ment
provisions1
£m
Impair-
ment
provisions
as a % of
impaired
loans
%
11.8
3,933
972
8,791
1,621
9.8
32.5
18.4
5.3
49.6
37.4
48.8
54.8
631
38.3
Total Corporate
Markets
196,708 33,145
16.8 15,948
48.1
Treasury and Trading
1,394
–
–
–
Asset Finance
12,832
1,969
15.3
1,231
Total Wholesale
210,934 35,114
16.6 17,179
–
62.5
48.9
Reverse repos
1,108
Impairment provisions (17,179)
Fair value adjustments
(3,055)
Total loans and
advances
As at 31 December 2008
191,808
Corporate Markets:2
Corporate
Commercial
Real Estate
Specialist Finance
Wholesale Markets
Total Corporate
Markets
Loans and
advances
£m
Impaired
loans
£m
81,482
26,785
59,481
26,816
35,652
2,615
1,759
9,536
2,049
1,114
230,216
17,073
Treasury and Trading
2,775
–
Asset Finance
14,147
1,397
Total Wholesale
247,138
18,470
Reverse repos
3,230
Impairment provisions
(8,263)
Fair value adjustments
(7,543)
Total loans and
advances
234,562
Impaired
loans as
a % of
closing
advances
%
Impairment
provisions
as a % of
Impaired
loans
%
Impairment
provisions1
£m
3.2
6.6
16.0
7.6
3.1
7.4
–
9.9
7.5
1,736
597
3,318
1,271
475
7,397
–
866
8,263
66.4
33.9
34.8
62.0
42.6
43.3
–
62.0
44.7
1
2
Impairment provisions include collective unimpaired provisions.
As part of the process of allocating assets to the new management structure, the legacy HBOS
portfolios have been resegmented and the 2008 comparative numbers are presented on an
organisational basis consistent with 2009.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
73
Lloyds Banking Group
Annual Report and Accounts 2009
CORPORATE
The Corporate (UK and US) portfolios felt the impact of the adverse
economic environment in the first half of 2009 but this has stabilised
during the second half with a lower rate of impairments raised against
the portfolio and a slower rate of new cases being transferred into
Business Support Units. A higher volume of impaired cases is expected
in 2010 as the lag from the UK recession bites. This impact is expected
to be biased toward the mid size franchise, of which the HBOS heritage
portfolio is characterised by high levels of obligor concentration to
riskier counterparties many with a property related component, thereby
impacting the level of the impairment charge in 2009. The significant
level of impairments taken in 2009 in the HBOS corporate business is not
expected to be repeated.
As part of its funding, liquidity and general hedging requirements
Lloyds Banking Group maintains relationships with many major
financial institutions throughout the world. Credit quality in general is
improving in the sector, helped significantly by the support mechanisms
established by Governments, Central Banks and regulators. This is
reflected in the firmer trend in market prices now quoted for bank debt.
Some economies continue to experience difficulties, either through low
growth or high borrowing levels, and banking sectors in these countries
remain under strain.
The position in North America has stabilised with a lower rate of
impairments in the second half of 2009. The Group retains some
material single obligor concentrations on weaker credits. Concentrations
remain in gaming, residential real estate and to some poorer sub
prime non-bank financial institutions loan originators. Although the
portfolio is appropriately impaired, a weakening in some of the Group’s
gaming exposures could well result in the need for further impairments
during 2010.
COMMERCIAL
Impairment has been marginally higher than originally expected this
year, reflecting the harsher economic conditions that the Group’s
customers have experienced. The Group continues to refine its risk
management and forecasting tools to reflect the economic environment
and further increase control, monitoring and support of customers. In
addition, the roll out of a combined Lloyds TSB and Bank of Scotland
credit policy and risk strategy will benefit the business going forward,
and the Group’s prudent through the cycle lending policies will ensure
that asset quality remains appropriately robust.
Portfolio metrics and stress testing analysis suggest continued material
impairments through the short to medium term, as expected at
this stage of the economic cycle. Over time, impairment losses as a
percentage of advances are expected to trend towards more normalised
levels reflective of the historic performance of the Lloyds TSB heritage
portfolio. However, in line with past experience, the impairment
improvement is expected to show some lag behind the upturn in
the economy.
CORPORATE REAL ESTATE
The Corporate Real Estate portfolio has endured a significant level
of stress as a consequence of the unprecedented scale and pace of
deterioration in the property sector coupled with the previous aggressive
lending appetite in the heritage HBOS business. Whilst we remain
cautious, the current outlook for the property sector is now a little more
positive with higher levels of equity being raised, yields stabilising and
negative rental growth abating. However, a sustained recovery is not
predicted until 2011. Against this backdrop, Corporate Real Estate is
focusing its attention on improving the risk profile of the existing portfolio
and applying conservative and prudent lending policies in relation to new
business. Clearly the management of the distressed portfolio is key not
only to mitigating loss but also for Lloyds Banking Group as a significant
player within the property sector to ensure that the strategies adopted do
not adversely impact on a market that remains fragile. The Group’s BSU is
making great progress in the achievement of these balanced objectives
with a substantial number of restructurings undertaken over the last six
months.
On the property investment side there are signs of recovery in capital
values but this is most evident at the prime end of the commercial
market. The key concern remains the potential for an increasing level of
tenant defaults against a backdrop of already depressed capital values
and a continuing lack of liquidity in the market. Sustainability of cash flow
has been key to the relative resilience seen in the investment market to
date but a significant rise in tenant defaults would impact adversely on
debt service capability and could lead to increased impairments beyond
those forecast, based on the Group’s current economic assumptions.
Wholesale has invested heavily in implementing the required
infrastructure to deal with the stress which has been experienced in the
portfolio to date and is satisfied that impairment levels are prudent,
with the impairment charge for the second half reducing from the peak
evidenced in the first half. Refinancing risk is an emerging issue with
significant maturities due in the next few years. Against the Group’s
economic assumptions, 2010 is expected to continue to be difficult.
However the Group has made significant strides during 2009 in putting
in place robust and prudent lending policies and processes with the
expectation that, in tandem with a market which is evidencing signs of
recovery, Wholesale will see an improving risk profile across the portfolio
together with continued reduction in impairments.
SPECIALIST FINANCE
Specialised Finance comprises Acquisition Finance and
Corporate Equity.
Acquisition Finance – The Acquisition Finance (leveraged) portfolio
has been impacted significantly by the economic environment, with
a relatively high proportion of deals being restructured, and higher
impairment levels seen than in the same period in 2008. The rate of new
problem loans abated in the second half of 2009.
Corporate Equity – The risk capital (assets representing ‘Equity Risk’
including ordinary equity, preference shares and institutional stock)
portfolio comprises the Lloyds TSB heritage Lloyds Development
Capital (LDC) business, a small Project Finance business, and the HBOS
heritage Integrated Finance Investments, Joint Ventures and Fund
Investments businesses. All new private equity investment activity will in
future be made in the name of LDC, which will continue taking equity
stakes, primarily in privately owned UK businesses. With the exception of
Project Finance the remaining Specialist Finance Risk Capital businesses
are not considered as continuing businesses to Lloyds Banking Group
and as a result are being managed for value. As a result, excluding LDC
and Project Finance, there will be no ‘new’ investments in the portfolios
and they will reduce over time as existing investments are exited.
During the first half of 2009, as a result of significant market volatility, the
value of the portfolio materially reduced. In the second half of the year,
the main share indices have evidenced an upward movement and this
has largely offset continued pressure on earnings across the investment
portfolio, together contributing to a relatively flat position across the
total portfolio. While some positive signs are evident, value recovery
going forward continues to be treated with caution.
74
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
WHOLESALE MARKETS
Wholesale Markets encompasses the securitisation conduits
(Cancara, Grampian and Landale), a portfolio of Structured Credit
Investments and Structured Corporate Finance (which covers shipping,
rail, aviation, corporate asset finance and infrastructure finance).
Global shipping markets, especially the dry bulk and container sectors,
experienced considerable pressure during 2009, leading to higher
impairment levels; while the Group expects continued sector pressure in
2010, it has forecast a lower rate of new problem cases.
2009 has seen a significant reduction in the size of the Treasury Assets
portfolio, both in terms of notional exposure and Risk Weighted
Assets. In addition, the potential for volatility within the portfolio
has been significantly reduced. As financial market conditions have
improved, write-downs of investment securities have eased. Although
both Lloyds TSB and HBOS heritage portfolios contain US residential
mortgage-backed securities, which are exposed to a greater risk
of further impairment, it is believed that previous write-downs
and acquisition fair value adjustments for HBOS Treasury assets
remain adequate to cover the losses the Group expects to incur on
these portfolios.
TREASURY AND TRADING
Treasury and Trading acts as the link between the wholesale markets and
the Group’s balance sheet management activities and provides pricing
and risk management solutions to both internal and external clients. The
majority of Treasury and Trading’s funding and risk management activity
is transacted with investment grade counterparties and much of it is on
a secured basis such as Repo. Derivative transactions with wholesale
counterparties are typically collateralised under CSAs.
ASSET FINANCE
The credit quality profile across the heritage Lloyds TSB Asset Finance
non-retail portfolios has remained broadly stable over the last
12 months. In line with the wider economic difficulties and rise in
corporate failures, there has been a rise in the number of cases requiring
Business Support management although the level of defaults is no
greater than in 2008. However, there has been an increased level of
default in the heritage HBOS Asset Finance non-retail portfolios with the
need for higher impairment charges during 2009, particularly in the
daily/flexi rental end of the Fleet Operator sector and marine sector.
The Asset Finance retail portfolio has come under significant stress in
2009 in line with the broader difficult economic conditions. The rise in
the impairments and expected loss has been driven by a combination
of increased unemployment, falling house prices and fall in motor values
although these have stabilised in 2009 following a large fall in 2008.
Retail second lien secured lending has been impacted by a combination
of stressed factors including the fall in house prices, since the loans
were provided reducing the equity in the property, the restriction in the
retail credit market limiting the ability to refinance and an increase in the
number of defaults due to the stressed economy resulting in larger than
anticipated increases in impairments.
For both the Asset Finance retail and non-retail portfolios the outlook for
2010 remains cautious although the Group expects impairment levels to
reduce compared to 2009.
WEALTH AND INTERNATIONAL
KEY HIGHLIGHTS
– Creation of credit risk teams and the establishment of Business
Support Units in Ireland and Australia supported by divisional BSU
sanctioning in the UK.
– Impairment charges considered to have peaked in Wealth and
International in 2009 given the Group’s economic assumptions
although uncertainty remains over Ireland and the impact of the
continued economic decline on Bank of Scotland (Ireland) impairment
levels.
– Tightening of Risk Appetite following divisional and Business Unit
reviews and independent Group Credit Risk Assurance reviews of all
material heritage HBOS portfolios.
Wealth and International’s impairment losses have increased by
£3,347 million to £4,078 million in 2009. The result was primarily driven by
a severe deterioration in economic conditions in the Irish economy and
to a lesser extent the Australian economy. Impairment losses for loans
and advances as a percentage of average gross loans and advances
to customers increased to 6.04 per cent from 1.05 per cent in 2008.
Included within the total impairment charge was £2,949 million related
to Ireland, £849 million related to Australia with a further £129 million
arising in Wholesale Europe. The impairment charge for Wealth and
International is expected to have peaked in 2009, although the Group
continues to monitor economic conditions in the eurozone and Ireland
in particular.
Wealth and International’s gross loans and advances to customers
increased by £1.9 billion to £69.4 billion following the transfer of a
£7 billion European loan portfolio from Wholesale division offset by
repayments in most portfolios.
Total impaired loans increased by £9,976 million to £12,704 million at
31 December 2009. As a percentage of gross loans and advances to
customers impaired loans increased to 18.3 per cent from 4.0 per cent at
31 December 2008. This increase was driven by deteriorating economic
conditions, particularly in Ireland, as well as the impact of the downturn
on property loans and advances, in both Ireland and Australia, and
concentrations in other sectors most impacted by the downturn, such as
printing, media and transport.
The division has established Credit Risk Policies which have been rolled
out across all of the businesses with local policies being fully aligned.
Reviews of risk appetite were undertaken throughout 2009 which have
reemphasised management’s commitment to maximising value from
existing lending portfolios, seeking to reduce sector concentrations
and move to ‘Trusted Advisor’ status thereby maximising income from
selected clients.
In order to manage impaired loans effectively, BSUs have been
established in Ireland and Australia with divisional oversight provided by
the Business Support Unit Sanctioning area. Reviews of Collections and
Recoveries capability across the retail businesses have been undertaken
to optimise processes and enhance capability.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
75
Lloyds Banking Group
Annual Report and Accounts 2009
The tables below highlight the International credit exposure in Ireland
and Australia which represent approximately 60 per cent of the
division’s lending assets. As at December 2009 37 per cent of customer
advances in Wealth and International division relate to personal
lending, including mortgages. Loans to individuals are by their nature
well diversified amongst a wide range of borrowers. Wholesale assets
comprise 63 per cent of assets with a good spread of risk outwith the
property sector. Wealth and International are seeking to reduce property
concentrations to rebalance the lending portfolio, with Commercial Real
Estate lending currently comprising 31 per cent of the total portfolio.
TABLE 1.12: IMPAIRMENTS ON WEALTH AND INTERNATIONAL
LOANS AND ADVANCES
TABLE 1.13: ANALYSIS OF GROSS LOANS AND ADVANCES
BY ASSET CLASS
As at 31 December 2009
Ireland
£bn
Australia
£bn
Commercial Real Estate
Corporate
Sub total
Mortgages
Other retail
Sub total
11.7
9.1
20.8
7.8
0.5
8.3
6.3
6.1
12.4
–
1.7
1.7
Total loans and advances
29.1
14.1
Other
£bn
3.6
6.8
10.4
13.3
2.5
15.8
26.2
Total
£bn
21.6
22.0
43.6
21.1
4.7
25.8
69.4
As at 31 December 2009
Wealth
International:
Ireland
Australia
Other
Wealth and
International
Impaired
loans as
a % of
closing
advances
%
Impair-
ment
provisions1
£m
Impair-
ment
provisions
as a % of
impaired
loans
%
Loans and
advances
£m
Impaired
loans
£m
9,523
281
3.0
100
35.6
29,104
14,057
16,718
9,712
2,030
681
59,879 12,423
33.4
14.4
4.1
20.7
3,601
966
37.1
47.6
336
49.3
4,903
39.5
69,402 12,704
18.3
5,003
39.4
Impairment provisions
(5,003)
Fair value adjustments
(851)
63,548
As at 31 December 2008
Loans and
advances
£m
Impaired
loans
£m
Impaired
loans as
a % of
closing
advances
%
Impairment
provisions
as a % of
impaired
loans
%
Impairment
provisions1
£
Wealth
International:
Ireland
Australia
Other
Wealth and
International
10,485
205
2.0
70
34.1
31,359
13,055
12,582
1,775
685
63
56,996
2,523
5.7
5.2
0.5
4.4
682
256
39
977
38.4
37.4
61.9
38.7
67,481
2,728
4.0
1,047
38.4
Impairment provisions
(1,047)
Fair value adjustment
(1,881)
64,553
1
Impairment provisions include collective unimpaired provisions.
WEALTH
Impairment losses within Wealth have increased to £71 million for 2009
(June 2009: £26 million) primarily reflecting difficult economic conditions
in Spain as well as the impact of the economic downturn on the
UK Private Banking and ‘Expatriates’ businesses.
IRELAND
The total impairment charge for Ireland is £2,949 million of which
£2,929 million relates to loans and advances and the remaining
£20 million is in respect of equity. Impairment losses for loans and
advances in Ireland represent 9.9 per cent of average gross loans and
advances to customers, which has increased from 3.4 per cent at the
half-year. The most significant contributor to impairment losses in Ireland
is the Commercial Real Estate portfolios which make up 61 per cent
of losses, representing 15.3 per cent of average Commercial Real
Estate advances. As a percentage of Commercial Real Estate assets
that have an impairment allowance, total provision coverage amounts
to 47 per cent. With limited new business being written and very low
levels of roll-off driven by a lack of liquidity in the commercial property
market, overall exposures in local currency remain almost static. The
severe economic downturn has significantly influenced performance with
commercial property prices falling approximately 55 per cent from their
peak, house prices falling approximately 31 per cent from their peak and
unemployment levels currently at 12.5 per cent.
AUSTRALIA
Impairment losses in Australia amount to £849 million, representing
6.2 per cent of average advances as compared with 3.1 per cent as
at June 2009. The Australian economy has fared better than many
others and did not formally enter recession. However, high sector
concentrations in Property and in other sectors hardest hit by the
economic downturn (Printing, Transport and Media) have resulted in
increased impairment losses in 2009.
76
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
MARKET RISK
DEFINITION
The risk of reductions in earnings, value and/or reserves, through
financial or reputational loss, arising from unexpected changes in
financial prices, including interest rates, inflation rates, exchange rates,
credit spreads and prices for bonds, commodities, equities, property
and other instruments. It arises in all areas of the Group’s activities and is
managed by a variety of different techniques.
RISK APPETITE
Market risk appetite is defined with regard to the quantum and
composition of market risk that exists currently in the Group and the
direction in which the Group wishes to manage this.
This statement of the Group’s overall appetite for market risk is reviewed
and approved annually by the board. With the support of the group
asset and liability committee, the group chief executive allocates this risk
appetite across the Group. Individual members of the group executive
committee ensure that market risk appetite is further delegated to an
appropriate level within their areas of responsibility.
EXPOSURES
The Group’s banking activities expose it to the risk of adverse
movements in interest rates, credit spreads, exchange rates and equity
prices, with little or no exposure to commodity risk. The volatility of
market values can be affected by both the transparency of prices and
the amount of liquidity in the market for the relevant asset.
Most of the Group’s trading activity is undertaken to meet the
requirements of wholesale and retail customers for foreign exchange
and interest rate products. However, some interest rate, exchange
rate and credit spread positions are taken using derivatives and other
on-balance sheet instruments with the objective of earning a profit from
favourable movements in market rates.
Market risk in the Group’s retail portfolios and in the Group’s capital
and funding activities arises from the different repricing characteristics
of the Group’s non-trading assets and liabilities. Interest rate risk arises
predominantly from the mismatch between interest rate insensitive
liabilities and interest rate sensitive assets.
Foreign currency risk also arises from the Group’s investment in its
overseas operations.
The Group’s insurance activities also expose it to market risk,
encompassing interest rate, exchange rate, property, credit spreads and
equity risk:
– With Profit Funds are managed with the aim of generating rates of
return consistent with policyholders’ expectations and this involves the
mismatch of assets and liabilities.
– Unit-linked liabilities are matched with the same assets that are used
to define the liability but future fee income is dependent upon the
performance of those assets. (This forms part of the Value of in Force
(ViF) see note 28.)
– For other insurance liabilities the aim is to invest in assets such that
the cash flows on investments will match those on the projected
future liabilities. It is not possible to eliminate risk completely as the
timing of insured events is uncertain and bonds are not available at
all of the required maturities. As a result, the cash flows cannot be
precisely matched and so sensitivity tests are used to test the extent
of the mismatch.
AUDITED INFORMATION
– Surplus assets are held primarily in four portfolios: (a) in the long term
funds of Scottish Widows plc, Clerical Medical Investment Group
Limited and their subsidiaries; (b) in the shareholder funds of life
assurance companies; (c) investment portfolios within the general
insurance business and (d) within the main fund of Heidelberger
Lebensversicherung AG.
The Group’s defined benefit staff pension schemes are exposed to
significant risks from the constituent parts of their assets and from the
present value of their liabilities, primarily equity and real interest rate risk.
For further information on pension scheme assets and liabilities please
refer to note 41.
MEASUREMENT
The primary market risk measure used within the Group is the Value
at Risk (VaR) methodology, which incorporates the volatility of relevant
market prices and the correlation of their movements. This is used for
determining the Group’s overall market risk appetite and for the high
level allocation of risk appetite across the Group.
Although an important measure of risk, VaR has limitations as a result
of its use of historical data, assumed distribution, holding periods and
frequency of calculation. In addition, the use of confidence levels does
not convey any information about potential loss when the confidence
level is exceeded. Where VaR models are less well suited to the nature
of positions, the Group recognises these limitations and supplements
its use with a variety of other techniques. These reflect the nature of
the business activity, and include interest rate repricing gaps, open
exchange positions and sensitivity analysis. Stress testing and scenario
analysis are also used in certain portfolios and at group level, to simulate
extreme conditions to supplement these core measures.
Banking – trading assets and other treasury positions
Based on the commonly used 95 per cent confidence level, assuming
positions are held overnight and using observation periods of the
preceding 300 business days, the VaR for the years ended 31 December
2009 and 2008 based on the Group’s global trading positions was as
detailed in table 1.14.
The risk of loss measured by the VaR model is the potential loss in
earnings given the confidence level and assumptions noted above.
The total and average trading VaR does not assume any diversification
benefit across the four risk types, with the exception of the 2008
HBOS comparatives. VaR is a statistical measure and the trading book
exposures for the two independently managed heritage banks arose
from different management strategies and were measured against
differing risk appetites. Separate disclosures have therefore been
made for each heritage trading book for 2008 as this is considered to
be a more informative approach. The 2008 HBOS comparatives have
also been converted from 99 per cent 1-day to 95 per cent 1-day VaR
numbers. The maximum and minimum VaR reported for each risk
category did not necessarily occur on the same day as the maximum and
minimum VaR reported as a whole. The Group internally uses VaR as the
primary measure for all treasury positions arising from short term market
facing activity, whether trading or banking book. Therefore the numbers
below will include some risks which are also included in Banking
non-trading, primarily those relating to the funding of lending activities.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
TABLE 1.14: BANKING – TRADING ASSETS AND OTHER
TREASURY POSITIONS
Lloyds Banking Group
31 December 2009
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Total VaR
Lloyds TSB
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Total VaR
HBOS (unaudited)
Interest rate risk
Foreign exchange risk
Equity risk
Credit spread risk
Total VaR
Close
£m
12.0
1.1
1.8
16.7
31.6
Average1
£m
Maximum1
£m
Minimum1
£m
20.2
1.7
1.4
17.4
40.7
31.4
9.3
3.3
21.0
53.3
11.8
0.2
0.0
13.6
31.6
31 December 2008
Close
£m
Average
£m
Maximum
£m
Minimum
£m
6.7
3.0
0.0
8.0
17.7
Close
£m
5.9
4.3
0.1
5.9
3.4
1.2
0.3
4.9
9.8
14.7
4.1
2.7
8.1
25.0
1.0
0.1
0.0
4.1
5.4
3.9
5.8
0.1
6.4
11.4
0.8
Suspended
8.5
12.8
2.0
0.9
0.0
3.5
1
For this table the average, minimum and maximum positions reflect the period from 19 January
2009 to 31 December 2009.
Banking – non-trading
Market risk in non-trading books consists almost entirely of exposure to
changes in interest rates. This is the potential impact on earnings and
value that could occur when, if rates fall, liabilities cannot be re-priced as
quickly or by as much as assets; or when, if rates rise, assets cannot be
re-priced as quickly or by as much as liabilities.
Risk exposure is monitored monthly using, primarily, market value
sensitivity. This methodology considers all re-pricing mismatches in the
current balance sheet and calculates the change in market value that
would result from a set of defined interest rate shocks. Where re-pricing
maturity is based on assumptions about customer behaviour these
assumptions are also reviewed monthly.
A limit structure exists to ensure that risks stemming from residual and
temporary positions or from changes in assumptions about customer
behaviour remain within the Group’s risk appetite.
The following table shows, split by material currency, Lloyds Banking
Group sensitivities as at 31 December 2009 to an immediate up and
down 25 basis points change to all interest rates.
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
77
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
TABLE 1.15: BANKING – NON-TRADING
Sterling
US Dollar
Euro
Australian Dollar
Other
2009
2008 (unaudited)
Up 25bps
£m
Down 25bps
£m
Up 25bps
£m
Down 25bps
£m
66.6
(5.5)
4.4
2.2
(0.2)
67.5
(66.4)
(132.5)
5.6
(4.4)
(2.3)
0.2
(15.5)
(0.4)
0.0
0.2
135.1
15.6
0.4
0.0
(0.3)
(67.3)
(148.2)
150.8
Base case market value is calculated on the basis of the Lloyds Banking
Group current balance sheet with re-pricing dates adjusted according
to behavioural assumptions. The above sensitivities show how this
projected market value would change in response to an immediate
parallel shift to all relevant interest rates – market and administered.
This is a risk based disclosure and the amounts shown would be
amortised in the income statement over the duration of the portfolio.
Pension schemes
Management of the assets of the Group’s defined benefit pension
schemes is the responsibility of the Scheme Trustees, who also appoint
the Scheme Actuaries to perform the triennial valuations. The Group
monitors its pensions exposure holistically using a variety of metrics
including accounting and economic deficits and contribution rates.
These and other measures are regularly reviewed by the Pensions
Strategy Committee and used in discussions with the Trustees, through
whom any risk management and mitigation activity must be conducted.
Insurance portfolios
The Group’s market risk exposure in respect of insurance activities
described above is measured using EEV as a proxy for economic value.
The pre-tax sensitivity of EEV to standardised stresses is shown below for
the years ended 31 December 2009 and 2008. The 2008 comparatives
are based on a post acquisition basis assuming the legacy businesses
were combined at the year end and are unaudited. During 2009, the
credit spread sensitivity was changed from a 25 basis point increase to
a 30 per cent widening of the spread between corporate bonds and
the swap curve, including an allowance for the assumed change in the
illiquidity premium. Therefore no 2008 comparative is available. Foreign
exchange risk arises predominantly from overseas holdings of equities.
Impacts have only been shown in one direction but can be assumed
to be reasonably symmetrical. Opening and closing numbers only
have been provided as this data is not volatile and consequently is not
tracked on a daily basis.
31 December 2008
Average
£m
Maximum
£m
Minimum
£m
The measure, however, is simplified in that it assumes all interest rates,
for all currencies and maturities, move at the same time and by the same
amount.
78
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
AUDITED INFORMATION
TABLE 1.16: INSURANCE PORTFOLIOS
As at 31 December
2009
£m
2008
(unaudited)
£m
Equity risk (impact of 10% fall pre-tax)
(383.6)
(429.4)
Interest rate risk (impact of
25 basis point reduction pre-tax)
Credit spread risk (impact of
30% widening)
64.0
(156.4)
59.7
n/a
MITIGATION
Various mitigation activities are undertaken across the Group to manage
portfolios and seek to ensure they remain within approved limits.
Banking – non-trading activities
Interest rate risk arising from the different repricing characteristics of
the Group’s non-trading assets and liabilities, and from the mismatch
between interest rate insensitive liabilities and interest rate sensitive
assets, is managed centrally. Matching assets and liabilities are offset
against each other and internal interest rate swaps are also used.
The corporate and retail businesses incur foreign exchange risk in the
course of providing services to their customers. All non-structural foreign
exchange exposures in the non-trading book are transferred to the
trading area where they are monitored and controlled.
Insurance activities
Investment holdings are diversified across markets and, within markets,
across sectors. Holdings are diversified to minimise specific risk and
the relative size of large individual exposures is monitored closely. For
assets held outside unit-linked funds, investments are only permitted in
countries and markets which are sufficiently regulated and liquid.
MONITORING
The group asset and liability committee regularly reviews high level
market risk exposure including, but not limited to, the data described
above. It also makes recommendations to the group chief executive
concerning overall market risk appetite and market risk policy. Exposures
at lower levels of delegation are monitored at various intervals according
to their volatility, from daily in the case of trading portfolios to monthly
or quarterly in the case of less volatile portfolios. Levels of exposures
compared to approved limits are monitored locally by independent
risk functions and at a high level by group risk. Where appropriate,
escalation procedures are in place.
Banking activities
Trading is restricted to a number of specialist centres, the most
important centre being the treasury and trading business in London.
These centres also manage market risk in the wholesale non-trading
portfolios, both in the UK and internationally. The level of exposure
is strictly controlled and monitored within approved limits. Active
management of the wholesale portfolios is necessary to meet customer
requirements and changing market circumstances.
Market risk in the Group’s retail portfolios and in the Group’s capital and
funding activities is managed within limits defined in the detailed Group
policy for interest rate risk in the banking book, which is reviewed and
approved annually.
Insurance activities
Market risk exposures from the insurance businesses are controlled via
approved investment policies and triggers set with reference to the
Group’s overall risk appetite and regularly reviewed by the group asset
and liability committee:
– The With Profit Funds are managed in accordance with the relevant
fund’s principles and practices of financial management and legal
requirements.
– The investment strategy for other insurance liabilities is determined
by the term and nature of the underlying liabilities and asset/liability
matching positions are actively monitored. Actuarial tools are used to
project and match the cash flows.
– Investment strategy for surplus assets held in excess of liabilities takes
account of the legal, regulatory and internal business requirements for
capital to be held to support the business now and in the future.
The Group also agrees strategies for the overall mix of pension assets
with the pension scheme trustees.
INSURANCE RISK
DEFINITION
The risk of reductions in earnings and/or value, through financial or
reputational loss, due to fluctuations in the timing, frequency and
severity of insured/underwritten events and to fluctuations in the timing
and amount of claim settlements. This includes fluctuations
in profits due to customer behaviour.
RISK APPETITE
Insurance risk appetite is defined with regard to the quantum and
composition of insurance risk that exists currently in the Group and the
direction in which the Group wishes to manage this. It takes account
of the need for each entity in the Group to maintain solvency in excess
of the minimum level required by the entity’s jurisdictional legal or
regulatory requirements.
The Group’s overall appetite for insurance risk is reviewed and approved
annually by the board.
EXPOSURES
The major sources of insurance risk within the Group are the insurance
businesses and the Group’s defined benefit staff pension schemes. The
nature of insurance business involves the accepting of insurance risks
which relate primarily to mortality, longevity, morbidity, persistency,
expenses, property damage and unemployment. The prime insurance
risk carried by the Group’s staff pension schemes is related to longevity.
MEASUREMENT
Insurance risks are measured using a variety of techniques including
stress and scenario testing; and, where appropriate, stochastic
modelling.
Current and potential future insurance risk exposures are assessed and
aggregated using risk measures based on 1-in-20 year stresses and other
supporting measures where appropriate, for example those set out in
Note 37.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
79
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
MITIGATION
A key element of the control framework is the consideration of insurance
risk by a suitable combination of high level committees/boards. For the
life assurance businesses the key control bodies are the board of Scottish
Widows Group Limited and the board of HBOS Financial Services
Limited with the more significant risks also being subject to approval by
the group executive committee and/or Lloyds Banking Group board.
For the general insurance businesses the key control bodies are the
boards of the legal entities including Lloyds TSB General Insurance
Limited, St. Andrew’s Insurance plc and the Irish subsidiaries, with the
more significant risks again being subject to group executive committee
and/or Lloyds Banking Group board approval. All Group staff pension
schemes issues are covered by the group asset and liability committee
and the group business risk committee.
The overall insurance risk is mitigated through pooling and through
diversification across large numbers of uncorrelated individuals,
geographical areas, and different types of risk exposure.
Insurance risk is primarily controlled via the following processes:
– Underwriting (the process to ensure that new insurance proposals are
properly assessed)
– Pricing-to-risk (new insurance proposals are priced to cover the
underlying risks inherent within the products)
– Claims management
– Product design
– Policy wording
– Product management
– The use of reinsurance or other risk mitigation techniques.
In addition, limits are used as a control mechanism for insurance risk at
policy level.
At all times, close attention is paid to the adequacy of reserves, solvency
management and regulatory requirements.
General insurance exposure to accumulations of risk and possible
catastrophes is mitigated by reinsurance arrangements which are
broadly spread over different reinsurers. Detailed modelling, including
that of the potential losses under various catastrophe scenarios, supports
the choice of reinsurance arrangements. Appropriate reinsurance
arrangements also apply within the life and pensions businesses with
significant mortality risk and morbidity risk being transferred to our
chosen reinsurers.
Options and guarantees are incorporated in new insurance products only
after careful consideration of the risk management issues that they present.
In respect of insurance risks in the staff pension schemes, the Group
ensures that effective communication mechanisms are in place for
consultation with the trustees to assist with the management of risk in
line with the Group’s risk appetite.
MONITORING
Ongoing monitoring is in place to track the progression of insurance
risks. This normally involves monitoring relevant experiences against
expectations (for example claims experience, option take up rates,
persistency experience, expenses, non-disclosure at the point of sale), as
well as evaluating the effectiveness of controls put in place to manage
insurance risk. Reasons for any significant divergence from experience
are investigated and remedial action is taken.
Insurance risk exposures are reported and monitored regularly by the
group executive committee.
OPERATIONAL RISK
DEFINITION
The risk of reductions in earnings and/or value, through financial
or reputational loss, from inadequate or failed internal processes
and systems, operational inefficiencies, or from people related or
external events.
There are a number of categories of operational risk:
Legal and regulatory risk
Legal and regulatory risk is the risk of reductions in earnings and/or
value, through financial or reputational loss, from failing to comply with
the laws, regulations or codes applicable.
Customer treatment risk
The risk of reductions in earnings and/or value, through financial or
reputational loss, from inappropriate or poor customer treatment.
People risk
The risk of reductions in earnings and/or value, through financial or
reputational loss, from inappropriate colleague actions and behaviour,
industrial action, legal action in relation to people, or health and safety
issues. Loss can also be incurred through failure to recruit, retain, train,
reward and incentivise appropriately skilled staff to achieve business
objectives and through failure to take appropriate action as a result of
staff underperformance.
Integration risk
The risk that Lloyds Banking Group fails to realise the business growth
opportunities, revenue benefi ts, cost synergies, operational effi ciencies
and other benefi ts anticipated from, or incurs unanticipated costs and
losses associated with, the acquisition of HBOS plc.
Business process risk
The risk of reductions in earnings and/or value, through financial or
reputational loss, resulting from inadequate or failed internal processes
and systems, people-related events and deficiencies in the performance
of external suppliers/service providers.
Financial crime risk
The risk of reductions in earnings and/or value, through financial or
reputational loss, associated with financial crime and failure to comply
with related legal and regulatory obligations (which includes compliance
with economic sanctions), these losses may include censure, fines or the
cost of litigation.
Security risk
The risk of reductions in earnings and/or value, through financial or
reputational loss, resulting from theft of or damage to the Group’s
assets, the loss, corruption, misuse or theft of the Group’s information
assets or threats or actual harm to the Group’s people. This also includes
risks relating to terrorist acts, other acts of war, geopolitical, pandemic or
other such events.
Change risk
The risk of reductions in earnings and/or value, through financial
or reputational loss, from change initiatives failing to deliver to
requirements, budget or timescale, failing to implement change
effectively or failing to realise desired benefits.
80
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
Governance risk
The risk of reductions in earnings and/or value, through financial or
reputational loss, from poor corporate governance at group, divisional
or business unit level. Corporate governance in this context embraces
the structures, systems and processes that provide direction, control and
accountability for the enterprise.
RISK APPETITE
The Group has developed an impact on earnings approach to
operational risk appetite. This involves looking at how much the Group
could lose due to operational risk losses at various levels of certainty.
In setting operational risk appetite, the Group looks at both impact on
solvency and the Group’s reputation.
For legal and regulatory risk the Group has minimal risk appetite for
non-compliance with mandatory requirements and seeks to operate
to high ethical standards. The Group encourages and maintains an
appropriately balanced legal and regulatory compliance culture and
promotes policies and procedures to enable businesses and their staff
to operate in accordance with the laws, regulations and voluntary codes
which impact on the Group and its activities.
EXPOSURES
The main sources of operational risk within the Group relate to the
rate and scale of change arising from the Group’s current integration
programme, particularly in respect of people and business processes,
and the legal and regulatory environment in which financial firms
operate both in the UK and overseas.
Legal and regulatory exposure is driven by the significant volume of
current legislation and regulation with which the Group has to comply,
along with new legislation and regulation which needs to be reviewed,
assessed and embedded into day-to-day operational and business
practices across the Group as a whole. Following the financial crisis,
the pace and extent of regulatory reform proposals both in the UK
and internationally have increased significantly, and can be expected
to remain at high levels. Future changes in regulation, fiscal or other
policies are unpredictable and beyond the control of the Group. Future
changes in regulation, fiscal or other policies are unpredictable and
beyond the control of the Group, but could for instance affect the
Group’s future business strategy, structure or approach to funding.
Further uncertainties arise where regulations are principles-based
without the regulator defining supporting minimum standards either
for the benefit of the consumer or firms. This gives rise to both the risk
of retrospection from any one regulator and also to the risk of differing
interpretation by individual regulators.
For legal and regulatory issues there are significant reputational impacts
associated with potential censure which drive the Group’s stance
on appetites referred to above. There are clear accountabilities and
processes in place for reviewing new and changing requirements. Each
division and significant business areas have a nominated individual with
‘compliance oversight’ responsibility under FSA rules. The role of such
individuals is to advise and assist management to ensure that each
business has a control structure which creates awareness of the rules and
regulations, to which the Group is subject, and to monitor and report on
adherence to these rules and regulations.
Lloyds Banking Group welcomes the regulation of remuneration
provided there is international consensus and we will comply with the
FSA code.
AUDITED INFORMATION
MEASUREMENT
Both Lloyds TSB and HBOS had operational risk management
and measurement frameworks that had been granted, by the FSA,
Advanced Measurement Approach (AMA) Waivers, enabling the use of
an internal model for the calculation of regulatory capital.
Throughout 2009, both frameworks have continued to operate, whilst
a single integrated framework has been in the course of development.
The integrated framework and capital model will be rolled out during
2010 and it is anticipated that the Group will seek a variation from the
FSA to operate under a single AMA waiver.
The Lloyds TSB Group capital model calculations are driven by actual
loss data (internal and external) and forward looking scenarios which
value potential future risk events. External industry-wide data is collected
to help with validating scenarios.
The HBOS capital model calculations are driven by risk and control
assessments, validated by scenarios and internal and external loss events.
MITIGATION
Both Lloyds TSB and HBOS’s operational risk management frameworks
consist of the following key components:
– Identification and categorisation of the key operational risks facing a
business area.
– Risk assessment, including impact assessment of financial and
non-financial impacts (e.g. reputational risk) for each of the key risks to
which the business area is exposed.
– Control assessment, evaluating the effectiveness of the control
framework covering each of the key risks to which the business area
is exposed.
– Loss and incident management, capturing actions to manage any
losses facing a business area.
– The development of Key Risk Indicators for management reporting.
– Oversight and assurance of the risk management framework in
divisions and businesses.
– Scenarios for estimation of potential loss exposures for material risks.
The Group purchases insurance to mitigate certain operational risk events.
MONITORING
Business unit risk exposure is aggregated at divisional level and reported
to group risk where a group-wide report is prepared. The report is
discussed at the monthly group compliance and operational risk
committee. This committee can escalate matters
to the chief risk officer, or higher committees if appropriate.
The insurance programme is monitored and reviewed regularly, with
recommendations being made to the Group’s senior management
annually prior to each renewal. Insurers are monitored on an ongoing
basis, to ensure counterparty risk is minimised. A process
is in place to manage any insurer rating changes or insolvencies.
The Group has adopted a formal approach to operational risk event
escalation. This involves the identification of an event, an assessment of
the materiality of the event in accordance with a risk event impact matrix
and appropriate escalation.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
81
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
FINANCIAL SOUNDNESS
Financial soundness risk has three key risk components covering liquidity
and funding risk; capital risk; and financial and prudential regulatory
reporting, disclosure and tax risk.
LIQUIDITY AND FUNDING RISK
DEFINITION
Liquidity risk is defined as the risk that the Group does not have sufficient
financial resources to meet its commitments when they fall due, or can
secure them only at excessive cost. Funding risk is further defined as the
risk that the Group does not have sufficiently stable and diverse sources
of funding or the funding structure is inefficient.
RISK APPETITE
Liquidity and funding risk appetite for the banking businesses is set
by the board and reviewed on an annual basis. This statement of the
Group’s overall appetite for liquidity risk is reviewed and approved
annually by the board. With the support of the group asset and liability
committee, the group chief executive allocates this risk appetite across
the Group. Individual members of the group executive committee
ensure that liquidity risk appetite is further delegated to an appropriate
level within their areas of responsibility. It is reported through various
metrics that enable the Group to manage liquidity and funding
constraints. The Group chief executive, assisted by the group asset and
liability committee and its sub-committee the senior asset and liability
committee, regularly reviews performance against risk appetite.
EXPOSURE
Liquidity exposure represents the amount of potential outflows in any
future period less committed inflows. Liquidity is considered from both
an internal and regulatory perspective.
MEASUREMENT
A series of measures are used across the Group to monitor both short
and long term liquidity including: ratios, cash outflow triggers, liquidity
gaps, early warning indicators and stress test survival period triggers.
Strict criteria and limits are in place to ensure highly liquid marketable
securities are available as part of the portfolio of liquid assets.
Details of contractual maturities for assets and liabilities form an
important source of information for the management of liquidity risk.
Note 54(4) sets out an analysis of assets and liabilities by relevant
maturity grouping. In order to reflect more accurately the expected
behaviour of the Group’s assets and liabilities, measurement and
modelling of the behavioural aspects of each is constructed. This forms
the foundation of the Group’s liquidity controls.
MITIGATION
The Group mitigates the risk of a liquidity mismatch in excess of its risk
appetite by managing the liquidity profile of the balance sheet through
both short-term liquidity management and long-term funding strategy.
Short-term liquidity management is considered from two perspectives;
business as usual and liquidity under stressed conditions, both of which
relate to funding in the less than one year time horizon. Longer term
funding is used to manage the Group’s strategic liquidity profile which
is determined by the Group’s balance sheet structure. Longer term is
defined as having an original maturity of more than one year.
The Group’s funding and liquidity position is underpinned by its
significant retail deposit base, and has been supported by stable
funding from the wholesale markets with a reduced dependence on
short-term funding. A substantial proportion of the retail deposit base
is made up of customers’ current and savings accounts which, although
repayable on demand, have traditionally in aggregate provided a stable
source of funding. Additionally, the Group accesses the short-term
wholesale markets to raise inter-bank deposits and to issue certificates
of deposit and commercial paper to meet short-term obligations. The
Group’s short-term money market funding is based on a qualitative
analysis of the market’s capacity for the Group’s credit. The Group has
developed strong relationships with certain wholesale market segments,
and also has access to central banks and corporate customers, to
supplement its retail deposit base.
The ability to deploy assets quickly, either through the repo market or
through outright sale, is also an important source of liquidity for the
Group’s banking businesses. The Group holds sizeable balances of high
grade marketable debt securities as set out in Table 1.18 which can be
sold to provide, or used to secure, additional short term funding should
the need arise from either market counterparties or central bank facilities
(European Central Bank, Federal Reserve, Bank of England).
MONITORING
Liquidity is actively monitored at business unit and Group level at
an appropriate frequency. Routine reporting is in place to senior
management and through the Group’s committee structure, in particular
the group asset and liability committee and the senior asset and
liability committee which meet monthly. In a stress situation the level of
monitoring and reporting is increased commensurate with the nature
of the stress event. Liquidity policies and procedures are subject to
independent oversight.
Daily monitoring and control processes are in place to address both
statutory and prudential liquidity requirements. In addition, the
framework has two other important components:
– Firstly, the Group stress tests its potential cash flow mismatch position
under various scenarios on an ongoing basis. The cash flow mismatch
position considers on-balance sheet cash flows, commitments
received and granted, and material derivative cash flows. Specifically,
commitments granted include the pipeline of new business awaiting
completion as well as other standby or revolving credit facilities.
Behavioural adjustments are developed, evaluating how the cash flow
position might change under each stress scenario to derive a stressed
cash flow position. Scenarios cover both Lloyds Banking Group name
specific and systemic difficulties. The scenarios and the assumptions
are reviewed at least annually to gain assurance they continue to be
relevant to the nature of the business.
– Secondly, the Group has a contingency funding plan embedded
within the Group Liquidity Policy which has been designed to identify
emerging liquidity concerns at an early stage, so that mitigating actions
can be taken to avoid a more serious crisis developing.
The Group has invested considerable resource to ensure that it will
satisfy the governance, reporting and stress testing requirements of the
FSA’s new ILAS liquidity regime. This work will continue in 2010 as further
parts of the ILAS regime take effect. The Group has noted the industry
move towards strategic balance sheet measures of the funding profile
and has started to monitor the market’s net stable funding ratio and the
FSA’s structural funding ratio. The Group is aware that the regulatory
AUDITED INFORMATION
82
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
liquidity landscape is subject to potential change. Specifi cally, in relation
to the consultation papers issued by the Basel Committee on Banking
Supervision (‘Strengthening the resilience of the banking sector’ and
‘International framework for liquidity risk measurement, standards and
monitoring’) the Group is actively participating in the industry-wide
consultation and calibration exercises taking place through 2010.
During the year, the individual entities within the Group, and the Group,
complied with all of the externally imposed liquidity and funding
requirements to which they are subject.
APPROACH
The Group has adopted the heritage Lloyds TSB liquidity and funding
approach which involves reduced risk appetite and increasing the
diversity of funding sources, supported by extensive analysis of funding
needs and strong governance.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
LIQUIDITY AND FUNDING MANAGEMENT IN 2009
To understand the trends in liquidity and funding the comparatives have
been provided for 2008 for the combined businesses. Consequently,
pages 83 to 85 covering liquidity and funding management in 2009
are unaudited.
During 2009, the Group has seen a stabilisation in the customer deposit
base, in marked contrast to the volatility observed by parts of the
heritage HBOS businesses in the second half of 2008. The customer
loan/deposit ratio improved slightly to 169 per cent compared with
177 per cent at the previous year end. The challenge facing the Group
over the medium term is to continue to access the term funding
markets, and for the Group to continue to reduce its utilisation of
government sponsored funding schemes. The combination of a clear
focus on right-sizing the balance sheet, developing the Group’s retail
liability base, and strategically accessing the capital markets will enable
the Group to continue to strengthen its funding base.
In keeping with the Group’s strategy of right-sizing the balance sheet,
total funding has reduced by £73 billion. During the year the Group
has reduced its dependency on the repo market whilst also reducing
its wholesale funding requirements. Additionally there has been a
managed reduction in certain types of non-bank deposits, in particular
certain aggressively priced corporate deposits which were sourced from
HBOS customers during the crisis in the second half of 2008. Actions
taken to right size the balance sheet have reduced the portion of the
Group’s funding that is derived from wholesale markets.
1
2
3
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
83
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£bn
20081
£bn
2009
Change
%
627.0
153.6
780.6
677.2
189.2
866.4
1,027.3
1,126.7
371.2
325.5
63.1
44.1
803.9
381.0
342.9
116.9
35.7
876.5
(7.4)
(18.8)
(9.9)
(8.8)
(2.6)
(5.1)
(46.0)
23.5
(8.3)
1,027.3
1,126.7
(8.8)
TABLE 1.17: GROUP BALANCE SHEET
As at 31 December
Assets
Loans and advances to customers
Wholesale assets2
Banking assets
Total assets
Liabilities
Non-bank deposits3
Wholesale funding
Repo
Total equity
Total funding
Total liabilities and
shareholders’ equity
Adjusted to reflect the completion of the assessment of the fair value of the identifiable net
assets of the HBOS Group.
Wholesale assets comprise balances arising from banking businesses and includes cash and
balances at central banks, loans and advances to banks, debt securities and available-for-sale
financial assets.
Non-bank deposits comprise balances arising from banking businesses and consist of customer
deposits.
The global upheaval in the financial markets that occurred during
2008 has abated during the latter part of 2009. The steps taken in 2008
by HM Treasury, through the introduction of the Government Credit
Guarantee (‘CGS’) for senior funding and other facilities including
the Special Liquidity Scheme have together continued to provide
assurance of liquidity support to the banking markets. Notwithstanding
the improvement in market liquidity during 2009, the Group continues
to be reliant upon these facilities in order to maintain its wholesale
funding position. At 31 December 2009, the Group’s overall support
from government and central bank sponsored funding facilities totalled
£157 billion, with a significant portion maturing over the course of the
next two years. The Group’s balance sheet reduction plans will avoid the
necessity to refinance much of this funding.
The key dependencies on successfully funding the Group’s balance
sheet include the continued functioning of the money and capital
markets at their current levels; successful rightsizing of the Group’s
balance sheet; the continuation of HM Treasury facilities in accordance
with the terms agreed; limited further deterioration in the UK’s and
the Group’s credit rating and no significant or sudden withdrawal
of deposits resulting in increased reliance on money markets or
UK Government support schemes. A return to the extreme market
conditions of 2008 would place a strain on the Group’s ability to meet its
financial commitments.
84
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
GROUP RETAIL AND WHOLESALE FUNDING MIX
Loans and advances to customers is set out on page 67.
Wholesale funding has been analysed between that monitored by the
London Treasury and Trading operations and the Group’s overseas Treasury
operations. The wholesale funding shown excludes any repo activity.
The composition and quality of wholesale deposits are regularly
reviewed by management and comprises deposits from corporates and
government agencies that roll over on a regular basis and are reinvested.
TABLE 1.18: WHOLESALE FUNDING BY TYPE
As at 31 December
Bank deposits
Debt securities in issue:
Certifi cates of deposit
Medium term notes
Covered bonds
Commercial paper
Securitisation
Subordinated debt
Total wholesale
(excluding non-bank
deposits)
Customer deposits
Total Group funding1
1
Excludes repos and total equity.
2009
£bn
48.6
50.9
89.7
28.1
35.0
35.8
239.5
37.4
2009
%
7.0
7.3
12.9
4.0
5.0
5.1
34.3
5.4
325.5
371.2
696.7
46.7
53.3
100.0
2008
£bn
54.9
77.5
63.5
29.1
28.9
43.6
242.6
45.4
342.9
381.0
723.9
2008
%
7.6
10.7
8.8
4.0
4.0
6.0
33.5
6.3
47.4
52.6
100.0
TERM FUNDING
The Group has been able to take advantage of the improved market
sentiment, by extending the duration of its money market funding, and
by successfully accessing the term debt markets in unguaranteed format
and through the issuance of Permanent RMBS. The reduction in the
volume of money market funding has contributed to an improvement
in the Group’s term funding ratio (wholesale funding with a remaining
life of over one year) which has improved to 50 per cent at 31 December
2009 from 44 per cent at the previous year end. The Group’s long term
target for this ratio is 40 per cent, this seeks to ensure that maturing
liabilities are spread over subsequent years.
Lloyds Banking Group has continued to extend the term of its wholesale
funding. The following significant capital market transactions were
undertaken in 2009:
– £13.5 billion rights issue
– €5 billion public senior unguaranteed debt
– £4 billion public RMBS
– US$2 billion tier 1 capital securities
Lloyds Banking Group will continue to access the term capital markets,
and has already successfully executed benchmark transactions in
January 2010:
– US$5 billion equivalent of public senior term funding
– £2.5 billion equivalent of public RMBS
The Group had limited access to the term capital markets for large
periods of 2009 due to highly market sensitive on-going negotiations
around the Government Asset Protection Scheme and market
recapitalisation.
Total wholesale funding is analysed by residual maturity as follows:
TABLE 1.19: WHOLESALE FUNDING BY RESIDUAL MATURITY
As at 31 December
Less than one year
One to two years
Two to fi ve years
More than fi ve years
2009
£bn
161.8
48.8
68.7
46.2
2009
%
49.7
15.0
21.1
14.2
2008
£bn
192.3
29.8
62.2
58.6
2008
%
56.1
8.7
18.1
17.1
Total wholesale funding
325.5
100.0
342.9
100.0
During the period the Group has changed the definition of wholesale to
align with that used by other international market participants to include
interbank deposits, debt securities in issue and subordinated debt within
this category.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
85
Lloyds Banking Group
Annual Report and Accounts 2009
The table below illustrates the Group’s holding of highly liquid
unencumbered assets. This liquidity is available for deployment at
immediate notice and is a key component of the Group’s liquidity
management process.
TABLE 1.20: ELIGIBLE COLLATERAL
As at 31 December
Primary liquidity1
Secondary liquidity2
2009
£bn
88.4
62.4
2008
£bn
46.2
58.3
150.8
104.5
1
2
Primary liquidity is defined as FSA eligible liquid assets (UK Gilts, US Treasuries, Euro AAA
government debt, unencumbered cash balances held at central banks).
Secondary liquidity comprises a diversified pool of highly rated unencumbered collateral
(including retained issuance)
The following tables reconcile figures reported on page 84 with those in
the balance sheet.
TABLE 1.21: RECONCILIATION OF WHOLESALE FUNDING FIGURE
FROM TABLE 1.18 TO THE BALANCE SHEET
As at 31 December 2009
Bank deposits
Debt securities in issue
Subordinated debt
Total wholesale funding
Customer deposits
As at 31 December 2008
Bank deposits
Debt securities in issue
Subordinated debt
Total wholesale funding
Customer deposits
Included in
funding
analysis
£bn
48.6
239.5
37.4
325.5
371.2
696.7
Repos and
conduits
£bn
27.6
–
–
27.6
35.5
63.1
Fair value
and other
accounting
methods
£bn
6.3
(6.0)
(2.7)
Balance
sheet
£bn
82.5
233.5
34.7
–
406.7
Included in
funding
analysis
£bn
Repos and
conduits
£bn
Fair value
and other
accounting
methods
£bn
Balance
sheet
£bn
155.1
249.7
42.2
4.4
4.1
(3.2)
10.1
409.2
54.9
242.6
45.4
342.9
381.0
723.9
95.8
3.0
–
98.8
18.1
116.9
86
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
AUDITED INFORMATION
CAPITAL RISK
DEFINITION
Capital risk is defined as the risk that the Group has insufficient capital to
provide a sufficient resource to absorb losses or that the capital structure
is inefficient.
RISK APPETITE
Capital risk appetite is set by the board and reported through various
metrics that enable the Group to manage capital constraints and
shareholder expectations. One of the key metrics is the Group’s core
tier 1 capital ratio for which the board has set a target of more than
7 per cent. The chief executive, assisted by the group asset and liability
committee, regularly reviews performance against risk appetite. The
board formally reviews capital risk on an annual basis.
EXPOSURE
A capital exposure arises where the Group has insufficient regulatory
capital resources to support its strategic objectives and plans, and to meet
external stakeholder requirements and expectations. The Group’s capital
management approach is focused on optimising value for shareholders.
MEASUREMENT
The Group’s regulatory capital is divided into tiers depending on level
of subordination and ability to absorb losses. Core tier 1 capital as
defined in the FSA letter to the British Bankers Association in May 2009,
comprises mainly shareholders’ equity and minority interests, after
deducting goodwill, other intangible assets and 50 per cent of the
net excess of expected loss over accounting provisions and certain
securitisation positions. Accounting equity is adjusted in accordance
with FSA requirements, particularly in respect of pensions and available
for sale assets. Tier 1 capital, as defined by the European Community
Banking Consolidation Directive as implemented in the UK by the
Financial Services Authority’s General Prudential Sourcebook (GENPRU),
is core tier 1 capital plus tier 1 capital securities. Tier 2 capital, defined
by GENPRU, comprises qualifying subordinated debt after deducting
50 per cent of the excess of expected loss over accounting provisions,
and certain securitisation positions. Total capital is the sum of tier 1 and
tier 2 capital after deducting investments in subsidiaries and associates
that are not consolidated for regulatory purposes. In the case of
Lloyds Banking Group, this means that the net assets of its life assurance
and general insurance businesses are excluded from its total regulatory
capital.
A number of limits are imposed by the FSA on the proportion of the
regulatory capital base that can be made up of subordinated debt and
preferred securities, for example the amount of qualifying tier 2 capital
cannot exceed that of tier 1 capital. The Group seeks to ensure that
even in the event of such restrictions the total capital ratio will remain
adequate.
The Capital Resources Requirement (CRR), is 8 per cent of risk
weighted assets and represents the capital required under Pillar 1 of
the Basel II framework. In addition, the FSA currently sets Individual
Capital Guidance (ICG) for each UK bank calibrated by reference to the
CRR, to address the requirements of pillar 2 of the Basel II framework.
A key input into the FSA’s ICG setting process is each bank’s Internal
Capital Adequacy Assessment Process. The FSA’s approach is to monitor
the available capital resources in relation to the ICG requirement. The
Group has been given an ICG by the FSA and the board has also agreed
a formal buffer to be maintained in addition to this requirement. The
FSA has made it clear that each ICG remains a confidential matter
between each bank and the FSA.
In addition to the minimum requirement for total capital, the FSA has
made further statements to explain the approach it has taken to the
capital framework. These include core tier 1 and tier 1 targets under
stressed conditions.
The Group undertook an extensive series of stress analysis during the
year to determine the adequacy of the Group’s capital resources against
the FSA minimum requirements.
The Group is subject to extensive regulation and regulatory supervision
in relation to the levels of capital in its business. Specifically in relation
to the consultation papers issued by the Basel Committee on Banking
Supervision ‘Strengthening the resilience of the banking sector’ the
group is participating in the industry-wide consultation and calibration
exercises taking place through 2010.
MITIGATION
The Group has developed procedures meant to ensure that compliance
with both current and potential future requirements are understood and
that policies are aligned to its risk appetite.
The Group is able to raise equity either via a rights issue, placing or
an open offer. Placing and open offers were completed in January as
part of the Group’s participation in the recapitalisation of the banking
sector and in June when the Group repaid preference shares which were
issued to HM Treasury as part of GAPS, and a rights issue and liability
management exercise was completed in December.
The Group is also able to raise Tier 2 capital by issuing subordinated
liabilities. The cost and availability of subordinated liability finance are
influenced by credit ratings of both the Group and the UK’s sovereign
rating. A reduction in these ratings could increase the interest rate
payable and could reduce market access.
The Group has in issue enhanced capital notes (ECNs) which will convert
to core tier 1 capital in the event that Group’s published core tier 1 ratio
(as defined by the FSA in May 2009) falls below 5 per cent.
MONITORING
Capital is actively managed at an appropriate level of frequency and
regulatory ratios are a key factor in the Group’s budgeting and planning
processes with updates of expected ratios reviewed regularly during
the year by the group asset and liability committee. Capital raised takes
account of expected growth and currency of risk assets. Capital policies
and procedures are subject to independent oversight. Regular reporting
of actual and projected ratios is made to the senior asset and liability
committee and to the group asset and liability committee. As part of this
reporting any guidance to the market is regularly reviewed.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
TABLE 1.22: CAPITAL RESOURCES
Core tier 1
Ordinary share capital and reserves
Regulatory post-retirement benefi t adjustments
Available-for-sale revaluation reserve
Cash fl ow hedging reserve
Other items
Less deductions from core tier 1
Goodwill and other intangible assets
Other deductions
Core tier 1 capital
Perpetual non-cumulative preference shares
Preference share capital
Innovative tier 1 capital instruments
Preferred securities
Less: restriction in amount eligible
Total tier 1 capital
Tier 2
Available-for-sale revaluation reserve in respect of equities
Undated subordinated debt
Innovative capital restricted from tier 1
Eligible provisions
Dated subordinated debt
Deductions from tier 2
Other deductions
Total tier 2 capital
Supervisory deductions
Unconsolidated investments – life
Unconsolidated investments – other
Total supervisory deductions
Total capital resources
Risk-weighted assets (unaudited)
Ratios (unaudited)
Core tier 1 ratio
Tier 1 capital ratio
Total capital ratio
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
87
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
2009
£m
44,275
434
914
305
231
2008
£m
9,573
435
2,982
15
(108)
46,159
12,897
(5,779)
(445)
39,935
(2,256)
(1,099)
9,542
2,639
1,966
4,956
–
47,530
221
2,575
–
2,694
20,068
(445)
25,113
(10,015)
(1,551)
(11,566)
61,077
3,169
(976)
13,701
8
5,189
976
21
5,091
(1,099)
10,186
(4,208)
(550)
(4,758)
19,129
493,307
170,490
8.1%
9.6%
12.4%
5.6%
8.0%
11.2%
As part of the exchange offer announced in November 2009, certain preference shares, preferred securities and undated subordinated notes issued
by the Group were exchanged for new ordinary shares with settlement in February 2010. Had the exchange settled in December 2009, the core tier 1
ratio would have been 8.4 per cent (unaudited).
88
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
AUDITED INFORMATION
TIER 1 CAPITAL
Core tier 1 capital increased by £30.4 billion largely reflecting the
issuance of share capital during the year and retained profits.
RISK WEIGHTED ASSETS – (unaudited)
The following table sets out the Group’s risk weighted assets that
primarily arise in its banking businesses.
Tier 1 capital increased by £33.8 billion principally as a result of the
increase in core tier 1 capital. The remainder of the increase reflects the
inclusion of HBOS tier 1 instruments, an increase in innovative securities
of £2 billion as part of a liability management exercise to exchange
upper tier 2 debt and a further issuance of £1.2 billion innovative
securities in December 2009. This increase is offset by the effects of the
offer of enhanced capital notes during December 2009; as part of the
Group’s recapitalisation and exit from GAPS, certain preference shares
and preferred securities were exchanged for enhanced capital notes
included within tier 2 capital.
TABLE 1.23: MOVEMENTS IN CORE TIER 1 AND TIER 1 CAPITAL
DURING THE YEAR
As at 31 December 2008
Profi t attributable to ordinary shareholders
Core tier 1
£m
9,542
2,827
Tier 1
£m
13,701
2,827
Issue of ordinary shares
29,139
29,139
Recognition of HBOS tier 1 capital instruments
–
5,653
Movement in goodwill and other intangible
assets
Movement in tier 1 securities relating to ECNs
exchange offer
Innovative securities exchange
Innovative issuance
Other movements
(2,526)
(2,526)
–
–
–
953
(5,447)
1,959
1,235
989
As at 31 December 2009
39,935
47,530
TIER 2 CAPITAL
Tier 2 capital has increased in the period by £14.9 billion, largely due to
the acquisition of HBOS. The liability management exercises undertaken
reduced tier 2 capital and increased tier 1 capital. The enhanced capital
notes exchange offer completed during 2009 resulted in the exchange
of certain existing tier 1 and tier 2 securities for tier 2 notes valued at
£7.2 billion for regulatory purposes. Under certain specified conditions,
these securities would convert to ordinary share capital and increase
core tier 1 capital.
SUPERVISORY DEDUCTIONS
Supervisory deductions mainly consist of investments in subsidiary
undertakings that are not within the banking group for regulatory
purposes. These investments are primarily the Scottish Widows and
Clerical Medical life and pensions businesses.
TABLE 1.24: ANALYSIS OF RISK WEIGHTED ASSETS
As at 31 December
Credit risk
Operational risk
Market and counterparty risk
Divisional analysis
Retail
Wholesale
Insurance
Wealth and International
Group Operations and Central items
2009
(unaudited)
£bn
2008
(unaudited)
£bn
452.1
25.3
15.9
493.3
128.6
286.0
1.1
63.2
14.4
149.6
12.3
8.5
170.4
49.7
106.8
0.1
11.0
2.8
493.3
170.4
Risk-weighted assets increased by £322.9 billion to £493.3 billion,
principally as a result of the acquisition of HBOS plc which had
risk-weighted assets of £328.0 billion at 31 December 2008. Subsequent
to the acquisition, deteriorating economic conditions have led to
increased average risk weightings. This has been offset, primarily within
Whoesale, by a reduction in exposures due to impairments and asset
run-off, and movements due to currency retranslations.
TABLE 1.25: ANALYSIS OF CAPITAL RATIOS
Lloyds TSB Bank Group
BOS Group
2009
£m
18,307
7,677
2008
£m
13,574
10,437
2009
£m
25,565
14,112
2008
(unaudited)
£m
17,328
15,238
(5,182)
(4,758)
(1,062)
(919)
20,802
19,253
38,615
31,647
Tier 1
Tier 2
Supervisory
deductions
Total capital
RWAs (unaudited)
174,472
170,490
322,866
326,703
Ratios (unaudited)
Core tier 1
Tier 1
Total capital
7.1%
10.5%
11.9%
5.5%
8.0%
7.5%
7.9%
11.3%
12.0%
4.7%
5.3%
9.7%
Capital is managed at Group level and surplus capital is retained,
where possible, at Lloyds Banking Group holding company level as
this provides the Group with maximum flexibility on how to deploy
its capital.
Capital ratios increased from the prior year in both Lloyds TSB and
BOS Group primarily due to capital downstreamed in the year by
Lloyds Banking Group.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
89
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
FINANCIAL AND PRUDENTIAL REGULATORY
REPORTING, DISCLOSURE AND TAX RISK
BASIS OF DETERMINING REGULATORY CAPITAL OF
THE LIFE INSURANCE BUSINESSES
DEFINITION
The risk of reputational damage, loss of investor confidence and/or
financial loss arising from the adoption of inappropriate accounting
policies, ineffective controls over financial, prudential regulatory and tax
reporting, failure to manage the associated risks of changes in taxation
rates, law, ownership or corporate structure and the failure to disclose
information about the Group on a timely basis.
RISK APPETITE
The risk appetite is set by the board and reviewed on an annual basis.
It includes complying with disclosure requirements within prescribed
timescales and avoiding the need for restatement of published financial
and prudential regulatory reporting, publicly disclosed information or tax
reporting.
EXPOSURE
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 prevent and detect financial
reporting fraud and to manage the Group’s tax position.
MITIGATION
The Group maintains a system of internal controls, which is designed
to be consistently applied and enable the preparation and disclosure
of financial reporting, prudential regulatory reporting and tax returns in
accordance with International Financial Reporting Standards, statutory
and regulatory requirements. The system of internal control is designed
to ensure that accounting policies are consistently applied, transactions
are recorded and undertaken in accordance with delegated authorities
and that assets are safeguarded and liabilities are properly recorded.
MONITORING
The Group has in place a disclosure committee whose responsibility
is to review all significant disclosures made by the Group and to
assist the group chief executive and group finance director fulfil their
responsibilities under the Listing Rules and regulations emanating from
the US Sarbanes-Oxley Act of 2002. A programme of work is undertaken
and is designed to support an annual assessment of the effectiveness
of internal controls over financial reporting, in accordance with the
requirements of section 404 of the US Sarbanes-Oxley Act. It also has in
place an assurance mechanism over its prudential regulatory reporting;
additionally, monitoring activities are designed to identify and maintain
tax liabilities and to assess the impact of emerging regulation and
legislation on financial, prudential regulatory and tax reporting.
LIFE INSURANCE BUSINESSES
At 31 December 2009, the principal subsidiaries involved in the Group’s
life insurance operations were Scottish Widows plc (Scottish Widows)
and Clerical Medical Investment Group Limited (Clerical Medical).
These subsidiaries hold the only large with-profit funds managed by
Lloyds Banking Group.
AVAILABLE CAPITAL RESOURCES
Available capital resources represent the excess of assets over liabilities
calculated in accordance with detailed regulatory rules issued by the
FSA. Additional rules may apply depending on the nature of the fund, as
detailed below.
Statutory basis. Assets are generally valued on a basis consistent with
that used for accounting purposes (with the exception that, in certain
cases, the value attributed to assets is limited) and which follows a
market value approach where possible. Liabilities are calculated using
a projection of future cash flows after making prudent assumptions
about matters such as investment return, expenses and mortality.
Discount rates used to value the liabilities are set with reference to the
risk adjusted yields on the underlying assets in accordance with the
FSA rules. Other assumptions are based on recent actual experience,
supplemented by industry information where appropriate. The
assessment of liabilities does not include future bonuses for with-profits
policies that are at the discretion of management, but does include a
value for policyholder options likely to be exercised.
‘Realistic’ basis. The FSA requires each life insurance company which
contains a with-profit fund in excess of £500 million to also carry out
a ‘realistic’ valuation of that fund. The Group has two such funds; one
within Scottish Widows and one within Clerical Medical. The word
‘realistic’ in this context reflects the terminology used for reporting to the
FSA and is an assessment of the financial position of a with-profits fund
calculated under a prescribed methodology.
The valuation of with-profits assets in a with-profits fund on a realistic
basis differs from the valuation on a statutory basis as, in respect of
non-profits business written in a with-profits fund (a relatively small
amount of business in the case of Scottish Widows and Clerical Medical),
it includes the present value of the anticipated future release of the
prudent margins for adverse deviation. The realistic valuation uses the
market value of assets without the limit affecting the statutory basis
noted above.
The realistic valuation of liabilities is carried out using a stochastic
simulation model which values liabilities on a basis consistent with
tradable market option contracts (a ‘market-consistent’ basis). The model
takes account of policyholder behaviour on a best-estimate basis and
includes an adjustment to reflect future uncertainties where the exercise
of options by policyholders might increase liabilities. Further details
regarding the stochastic simulation model are given in the section entitled
‘Options and guarantees’ on page 94.
REGULATORY CAPITAL REQUIREMENTS
Each life insurance company must retain sufficient capital to meet the
regulatory capital requirements mandated by the FSA; 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 regulatory capital requirement is deducted from the
available capital resources to give ‘statutory excess capital’.
90
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
For Scottish Widows and Clerical Medical, no amount is required to
cover the impact of stress tests on the actuarial reserves. However,
a further test is required in respect of the with-profit funds, which
compares the level of ‘realistic excess capital’ to the ‘statutory excess
capital’ of each with-profit fund. In circumstances where the ‘realistic
excess capital’ position is less than ‘statutory excess capital’, the
company is required to hold additional capital to cover the shortfall,
but only to the extent it exceeds the value, calculated in a prescribed
way, of internal transfers from the with-profit fund. Any additional capital
requirement under this test is referred to as the With-Profits Insurance
Capital Component. The ‘realistic excess capital’ is calculated as the
difference between realistic assets and realistic liabilities of the with-
profit fund with a further deduction to cover various stress tests.
The determination of realistic liabilities of the with-profit funds includes
the value of internal transfers expected to be made from each with-profit
fund to the non-profit fund held within the same life insurance entity.
These internal transfers include charges on policies where the associated
costs are borne by the non-profit fund. The With-Profits Insurance
Capital Component may be reduced by the value, calculated in the
stress test scenario, of these internal transfers, but only to the extent
that credit has not been taken for the value of these charges in deriving
actuarial reserves for the relevant non-profit fund.
TABLE 1.26: CAPITAL RESOURCES
AUDITED INFORMATION
CAPITAL STATEMENT
The following table provides more detail regarding the capital resources
available to meet regulatory capital requirements in the life insurance
businesses. The figures quoted are based on management’s current
expectations pending completion of the annual financial returns to the
FSA. The figures allow for a transfer of £261 million and an anticipated
transfer of £147 million from long-term funds to the UK life shareholder
funds as at 31 December 2009.
Following the acquisition of the life companies within HBOS plc,
the format of the capital position statement has been revised to
accommodate the reporting of all life assurance businesses within
the Group.
Scottish Widows
With Profit Fund
£m
Clerical Medical
With Profit Fund
£m
UK non-profit
funds
£m
UK life
shareholder
funds
£m
Overseas life
business
£m
Total
life business
£m
As at 31 December 2009
Shareholders’ funds:
Held outside the long-term funds
Held within the long-term funds
Total shareholders’ funds
Adjustments onto a regulatory basis:
–
–
–
–
–
–
Unallocated surplus within insurance business
310
772
Value of in-force business
Other differences between IFRS and regulatory
valuation of assets and liabilities
Estimated share of ‘realistic’ liabilities consistent
with the FSA reporting treatment
Qualifying loan capital
Support arrangement assets
Available capital resources
–
–
(407)
–
354
257
–
–
(40)
–
–
732
–
8,011
8,011
–
(5,513)
1,048
–
1,048
–
–
253
(154)
–
–
(354)
2,397
–
1,165
–
2,059
651
405
1,056
–
(793)
108
–
–
–
371
1,699
8,416
10,115
1,082
(6,306)
207
(447)
1,165
–
5,816
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
91
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
As at 31 December 2008 (statutory basis)
Shareholders’ funds
Held outside the long-term funds
Held within the long-term funds
Total shareholders’ funds
Adjustments onto a regulatory basis:
Unallocated surplus within insurance business
Value of in-force business
Other differences between IFRS and regulatory valuation of
assets and liabilities
Estimated share of ‘realistic’ liabilities consistent with the
FSA reporting treatment
Qualifying loan capital
Support arrangement assets
Available capital resources
Scottish Widows
With Profit Fund
£m
UK non-profit
funds
£m
UK life
shareholder funds
£m
Overseas
life business
£m
Total
life business
£m
–
–
–
293
–
–
(406)
–
371
258
–
3,762
3,762
–
(1,893)
25
–
–
(371)
1,523
865
-
865
–
–
(317)
–
604
–
1,152
2
13
15
–
–
(4)
–
–
–
11
867
3,775
4,642
293
(1,893)
(296)
(406)
604
2,944
Available capital resources for with-profit funds are presented in the
table on a ‘realistic’ basis.
FORMAL INTRA-GROUP CAPITAL ARRANGEMENTS
Scottish Widows has a formal arrangement with one of its subsidiary
undertakings, Scottish Widows Unit Funds Limited, whereby the
subsidiary company can draw down capital from Scottish Widows to
finance new business which is reinsured from the parent to its subsidiary.
Scottish Widows has also provided subordinated loans to its fellow
group undertaking Scottish Widows Bank plc.
Constraints over available capital resources
SCOTTISH WIDOWS
Scottish Widows was created following the demutualisation of Scottish
Widows Fund and Life Assurance Society in 2000. The terms of the
demutualisation are governed by a Court-approved Scheme of Transfer
(the ‘Scheme’) which, inter alia, created a With Profit Fund and a
Non-Participating Fund and established protected capital support for
the with-profits policyholders in existence at the date of demutualisation.
Much of that capital support is held in the Non-Participating Fund and,
as such, the capital held in that fund is subject to the constraints noted
below.
Requirement to maintain a Support Account: The Scheme requires
the maintenance of a ‘Support Account’ within the Non-Participating
Fund. The quantum of the Support Account is calculated with reference
to the value of assets backing current with-profits policies which also
existed at the date of demutualisation and must be maintained until
the value of these assets reaches a minimum level. Assets can only be
transferred from the Non-Participating Fund if the value of the remaining
assets in the fund exceeds the value of the Support Account. Scottish
Widows has obtained from the FSA permission to include the value of
the Support Account (or,if greater, the excess of realistic liabilities for
business written before demutualisation over the relevant assets) in
assessing the realistic value of assets available to the With Profit Fund.
At 31 December 2009, the estimated value of surplus admissible assets
in the Non-Participating Fund was £1,627 million (31 December 2008:
£1,523 million) and the estimated value of the Support Account was
£222 million (31 December 2008: £200 million).
Further Support Account: The Further Support Account is an extra
tier of capital support for the with-profits policies in existence at the
date of demutualisation. The Scheme requires that assets can only be
transferred from the Non-Participating Fund if the economic value of
the remaining assets in the fund exceeds the aggregate of the Support
Account and Further Support Account. Unlike the Support Account
test, the economic value used for this test includes both admissible
assets and the present value of future profits of business written in the
Non-Participating Fund or by any subsidiaries of that fund. The balance
of the Further Support Account is expected to reduce to nil by the year
2030. At 31 December 2009, the estimated net economic value of the
Non-Participating Fund and its subsidiaries for the purposes of this test
was £3,823 million (31 December 2008: £3,605 million) and the estimated
combined value of the Support Account and Further Support Account
was £2,495 million (31 December 2008: £2,582 million).
Other restrictions in the Non-Participating Fund: In addition to the
policies which existed at the date of demutualisation, the With Profit
Fund includes policies which have been written since that date.
As a result of statements made to policyholders that investment
policy will usually be the same for both types of business, there is an
implicit requirement to hold additional regulatory assets in respect
of the business written after demutualisation. The estimated amount
required to provide such support at 31 December 2009 is £132 million
(31 December 2008: £171 million). Scottish Widows has obtained from
the FSA permission to include the value of this support in assessing
the realistic value of assets available to the With Profit Fund. There is
a further test requiring that no amounts can be transferred from the
Non-Participating Fund of Scottish Widows unless there are sufficient
assets within the Long Term Fund to meet both policyholders’
reasonable expectations in light of liabilities in force at a year end and
the new business expected to be written over the following year.
92
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
AUDITED INFORMATION
CLERICAL MEDICAL
The surplus held in the Clerical Medical With Profit Fund can only
be applied to meet the requirements of the fund itself or distributed
accordingly to the prescribed rules of the fund. Shareholders are entitled
to an amount not exceeding one ninth of the amount distributed to
policyholders in the form of bonuses. The use of capital within the fund
is also subject to the terms of the scheme of demutualisation effected
in 1996 and the conditions contained in the Principles and Practices of
Financial Management of the fund. Capital within the Clerical Medical
Non-Profit Fund is available to meet the With Profit Fund requirements.
OTHER LIFE INSURANCE BUSINESSES
Except as described above capital held in UK non-profit funds is
potentially transferable to other parts of the Group, subject to meeting
the regulatory requirements of these businesses. There are no prior
arrangements in place to allow capital to move freely between life
insurance entities or other parts of the Group.
Overseas life business includes several life companies outside the
UK, including Germany and Ireland. In all cases the available capital
resources are subject to local regulatory requirements, and transfer to
other parts of the Group is subject to additional complexity surrounding
the transfer of capital from one country to another.
MOVEMENTS IN REGULATORY CAPITAL
The movements in the Group’s available capital resources in the life business can be analysed as follows:
TABLE 1.27: MOVEMENTS IN AVAILABLE CAPITAL RESOURCES
As at 31 December 2008
Acquisition of life businesses
Changes in estimations and in
demographic assumptions used to
measure life assurance liabilities
Changes in regulatory requirements
Dividends and capital transfers
Change in support arrangements
New business and other factors
As at 31 December 2009
Scottish Widows
With Profit Fund
£m
Clerical Medical
With Profit Fund
£m
UK non-profit
funds
£m
UK life
shareholder funds
£m
Overseas
life business
£m
258
–
–
–
–
(17)
16
257
–
511
19
–
–
–
202
732
1,523
1,205
1,152
1,342
(208)
–
(438)
17
298
43
–
(453)
–
(25)
2,397
2,059
11
250
36
–
(14)
–
88
371
Total
life business
£m
2,944
3,308
(110)
–
(905)
–
579
5,816
WITH-PROFIT FUNDS
Available capital in the Scottish Widows With Profit Fund has decreased
from £258 million at 31 December 2008 to an estimated £257 million at
31 December 2009.
Available capital in the Clerical Medical With Profit Fund has increased
from £511 million at acquisition to an estimated £732 million at
31 December 2009.
UK LIFE SHAREHOLDER FUNDS
Available capital in the UK life shareholder funds has increased from
£1,152 million at 31 December 2008 to an estimated £2,059 million at
31 December 2009. The acquisition of Clerical Medical resulted in a
£1,342 million increase. Redemption of subordinated debt (shown within
dividends and capital transfers) has been partly offset by actual and
proposed transfers from the long term funds.
UK NON-PROFIT FUNDS
Available capital in the UK non-profit funds has increased from
£1,523 million at 31 December 2008 to an estimated £2,397 million at
31 December 2009. The acquisition of Clerical Medical resulted in a
£1,205 million increase. Further increases due to new business were
offset by changes in assumptions and actual and proposed transfers to
the UK life shareholders funds.
OVERSEAS LIFE BUSINESS
The acquisition of Clerical Medical business resulted in a £250 million
increase. Further increases were due to new business and changes in
assumptions.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
Five year financial summary
18
24
50
52
56
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
93
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
Analysis of policyholder liabilities reported in the balance sheet in respect of the group’s life insurance business is as follows. With-profit fund
liabilities are valued in accordance with FRS 27.
TABLE 1.28: ANALYSIS OF POLICYHOLDER LIABILITIES
Scottish Widows
With Profit Fund
£m
Clerical Medical
With Profit Fund
£m
UK non-profit
funds
£m
Overseas
life business
£m
Total
life business
£m
13,347
10,225
5
–
23,577
As at 31 December 2009
With-profi t fund liabilities
Unit-linked business (excluding that accounted for as
non-participating investment contracts)
Other life insurance business
–
–
–
–
Insurance and participating investment contract liabilities
13,347
10,225
Non-participating investment contract liabilities
Total policyholder liabilities
–
–
13,347
10,225
As at 31 December 2008
With-profi t fund liabilities
Unit-linked business (excluding that accounted for as
non-participating investment contracts)
Other life insurance business
Insurance and participating investment contract liabilities
Non-participating investment contract liabilities
Total policyholder liabilities
32,816
11,449
44,270
45,328
89,598
6,864
183
7,047
1,020
8,067
Scottish Widows
With Profit Fund
£m
UK non-profit
funds
£m
39,680
11,632
74,889
46,348
121,237
Total
life business
£m
13,293
–
13,293
–
–
13,293
–
13,293
11,480
8,364
19,844
14,243
34,087
11,480
8,364
33,137
14,243
47,380
94
Lloyds Banking Group
Annual Report and Accounts 2009
RISK MANAGEMENT continued
CAPITAL SENSITIVITIES
SHAREHOLDERS’ FUNDS
Shareholders’ funds outside the long-term business fund, other than
those used to match regulatory requirements, are mainly invested in
assets that are less sensitive to market conditions.
WITH-PROFIT FUNDS
The with-profit realistic liabilities and the available capital for the with-
profit funds are sensitive to both market conditions and changes to
a number of non-economic assumptions that affect the valuation of
the liabilities of the fund. The available capital resources (and capital
requirements) are sensitive to the level of the stock market, with
the position worsening at low stock market levels as a result of the
guarantees to policyholders increasing in value. However, the exposure
to guaranteed annuity options increases under rising stock market levels.
An increase in the level of equity volatility implied by the market cost
of equity put options also increases the market consistent value of the
options given to policyholders and worsens the capital position.
The most critical non-economic assumptions are the level of take-up
of options inherent in the contracts (higher take-up rates are more
onerous), mortality rates (lower mortality rates are generally more
onerous) and lapses prior to dates at which a guarantee would apply
(lower lapse rates are generally more onerous where guarantees
are in the money). The sensitivity of the capital position and capital
requirements of the with-profit funds is partly mitigated by the actions
that can be taken by management.
OTHER LONG-TERM FUNDS
Outside the with-profit funds, assets backing actuarial reserves in respect
of policyholder liabilities are invested so that the values of the assets
and liabilities are broadly matched. The most critical non-economic
assumptions are mortality rates in respect of annuity business written
(lower mortality rates are more onerous). Reinsurance arrangements are
in place to reduce the Group’s exposure to deteriorating mortality rates
in respect of life insurance contracts. In addition, poor cost control would
gradually depreciate the available capital and lead to an increase in the
valuation of the liabilities (through an increased allowance for future costs).
Assets held in excess of those backing actuarial reserves are invested
across a range of investment categories including fixed interest
securities, equities, properties and cash. The mix of investments is
determined in line with the policy of Lloyds Banking Group to minimise
the working capital (defined as available capital less minimum required
capital) required to ensure all capital requirements continue to be met
under a range of stress tests.
OPTIONS AND GUARANTEES
The Group has sold insurance products that contain options and
guarantees, both within the with-profit funds and in other funds.
OPTIONS AND GUARANTEES WITHIN THE
WITH-PROFIT FUNDS
The most significant options and guarantees provided from within the
with-profit funds are in respect of guaranteed minimum cash benefits
on death, maturity, retirement or certain policy anniversaries, and
guaranteed annuity options on retirement for certain pension policies.
For those policies written in Scottish Widows pre-demutualisation
containing potentially valuable options and guarantees, under the terms
of the Scheme a separate memorandum account was set up within
AUDITED INFORMATION
the With Profit Fund of Scottish Widows called the Additional Account
which is available, inter alia, to meet any additional costs of providing
guaranteed benefits in respect of those policies. The Additional Account
had a value at 31 December 2009 of £1.6 billion (2008: £2.0 billion). The
eventual cost of providing benefits on policies written both pre and
post demutualisation is dependent upon a large number of variables,
including future interest rates and equity values, demographic factors,
such as mortality, and the proportion of policyholders who seek to
exercise their options. The ultimate cost will therefore not be known for
many years.
As noted above, under the realistic capital regime of the FSA, the
liabilities of the with-profit funds are valued using a market-consistent
stochastic simulation model. This model is used in order to place a value
on the options and guarantees which captures both their intrinsic value
and their time value.
The most significant economic assumptions included in the model are:
– Risk-free yield. The risk-free yield is defined as spot yields derived from
the UK gilt yield curve.
– Investment volatility. The calibration of the stochastic simulation
model uses implied volatilities of derivatives where possible, or
historical observed volatility where it is not possible to observe
meaningful prices. For example, as at 31 December 2009, the 10 year
equity-implied at-the-money assumption was set at 26.6 per cent
(31 December 2008: 34.6 per cent). The assumption for property
volatility was 15 per cent (31 December 2008: 15 per cent). The
volatility of interest rates has been calibrated to the implied volatility
of swaptions which was broadly 15 per cent (31 December 2008:
16 per cent).
The model includes a matrix of the correlations between each of the
underlying modelled asset types. The correlations used are consistent
with long-term historical returns. The most significant non-economic
assumptions included in the model are management actions (in respect
of investment policy and bonus rates), guaranteed annuity option
take-up rates and assumptions regarding persistency (both of which are
based on recent actual experience and include an adjustment to reflect
future uncertainties where the exercise of options by policyholders might
increase liabilities), and assumptions regarding mortality (which are
based on recent actual experience and industry tables).
OPTIONS AND GUARANTEES OUTSIDE THE
WITH-PROFIT FUNDS
Certain personal pension policyholders in Scottish Widows, for whom
reinstatement to their occupational pension scheme was not an option,
have been given a guarantee that their pension and other benefits
will correspond in value to the benefits of the relevant occupational
pension scheme. The key assumptions affecting the ultimate value of the
guarantee are future salary growth, gilt yields at retirement, annuitant
mortality at retirement, marital status at retirement and future investment
returns. There is currently a provision, calculated on a deterministic
basis, of £64 million (31 December 2008: £65 million) in respect of those
guarantees. If future salary growth were 0.5 per cent per annum greater
than assumed, the liability would increase by some £3 million. If yields
were 0.5 per cent lower than assumed, the liability would increase by
some £11 million.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary 95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FIVE YEAR FINANCIAL SUMMARY
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
95
Lloyds Banking Group
Annual Report and Accounts 2009
The statutory financial information set out in the table below has been derived from the annual report and accounts of Lloyds Banking Group plc for
each of the past five years.
The financial statements for each of the years presented have been audited by PricewaterhouseCoopers LLP, independent auditors.
Income statement data for the year ended 31 December (£m)
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Gain on acquisition
Profi t before tax
Profi t for the year
Profi t for the year attributable to equity shareholders
Total dividend for the year1
Balance sheet data (£m)
Share capital
Shareholders’ equity
Net asset value per ordinary share
Customer deposits
Subordinated liabilities
Loans and advances to customers
Total assets
Share information
Basic earnings per ordinary share
Diluted earnings per ordinary share
Total dividend per ordinary share1
Market price (year end)
Number of shareholders (thousands)
Number of ordinary shares in issue (millions)2
Financial ratios (%)3
Dividend payout ratio
Post-tax return on average shareholders’ equity
Cost:income ratio4
Capital ratios (%)5
Total capital
Tier 1 capital
2009
20086
20076
20066
20056
23,278
(15,984)
7,294
(16,673)
11,173
1,042
2,953
2,827
–
9,868
(6,100)
3,768
(3,012)
–
760
798
772
648
10,696
(5,568)
5,128
(1,796)
–
3,999
3,320
3,288
2,026
11,098
(5,300)
5,798
(1,555)
–
4,249
2,908
2,804
1,927
10,543
(5,481)
5,062
(1,299)
–
3,810
2,545
2,483
1,915
31 December
2009
31 December
2008
31 December
2007
31 December
2006
31 December
2005
10,472
43,278
68p
406,741
34,727
626,969
1,027,255
2009
7.5p
7.5p
–
50.7p
2,834
63,775
2009
–
8.8
68.7
1,513
9,393
155p
170,938
17,256
240,344
436,033
2008
6.7p
6.6p
11.4p
126.0p
824
5,973
2008
83.9
7.0
61.8
1,432
12,141
212p
156,555
11,958
209,814
353,346
2007
28.9p
28.7p
35.9p
472.0p
814
5,648
2007
61.6
28.1
52.1
1,429
11,155
195p
139,342
12,072
188,285
343,598
2006
24.8p
24.5p
34.2p
571.5p
870
5,638
2006
68.7
26.6
47.8
1,420
10,195
180p
131,070
12,402
174,944
309,754
2005
22.0p
21.8p
34.2p
488.5p
920
5,603
2005
77.1
25.5
52.0
31 December
2009
31 December
2008
31 December
2007
31 December
2006
31 December
2005
12.4
9.6
11.2
8.0
11.0
8.1
10.7
8.2
10.9
7.9
1
2
3
4
5
6
Annual dividends comprise both interim and estimated final dividend payments. Under IFRS, the total dividend for the year represents the interim dividend paid during the year and the final dividend
which will be paid and accounted for during the following year.
This figure excludes 81 million (2005 to 2008: 79 million) limited voting ordinary shares.
Averages are calculated on a monthly basis from the consolidated financial data of Lloyds Banking Group.
The cost:income ratio is calculated as total operating expenses as a percentage of total income (net of insurance claims).
Capital ratios for 2009 and 2008 are in accordance with Basel II requirements; ratios for 2007 and earlier years reflect Basel I.
Restated for IFRS 2 (Revised) and to separate share of results of joint ventures and associates from total income.
96
Lloyds Banking Group
Annual Report and Accounts 2009
THE BOARD
NON-EXECUTIVE DIRECTORS
Sir Winfried Bischoff
Chairman
Lord Leitch
Deputy Chairman
Senior Independent Director
Dr Wolfgang C G Berndt
Independent Director
Sir Julian Hor n-Smith
Independent Director
Chairman of the nomination and governance
committee and a member of the
remuneration and risk oversight committees
Member of the audit, nomination and
governance, and remuneration committees
and chairman of the risk oversight committee
Member of the nomination and governance
committee and chairman of the
remuneration committee
Joined the board in 2003. Joined Procter
and Gamble in 1967 and held a number
of senior and general management
appointments in Europe, South America
and North America, before retiring in 2001.
A non-executive director of Cadbury, GfK
AG and MIBA AG. Aged 67.
Joined the board and was appointed chairman
on 15 September 2009. Previously chairman
of Citigroup Inc. from December 2007 to
February 2009. He joined J Henry Schroder
& Co in January 1966 and became managing
director of Schroders Asia in 1971, group
chief executive of Schroders Plc in 1984 and
chairman in 1995. Following the acquisition
of Schroders’ investment banking business
by Citigroup in 2000 became chairman of
Citigroup Europe before being appointed
acting chief executive offi cer of Citigroup
in 2007 and subsequently as chairman in
the same year. A non-executive director of
Eli Lilly and Company, and The McGraw
Hill Companies Inc. in the United States,
and chairman of the UK Career Academy
Foundation. A member of the Akbank
International advisory board. Aged 68.
Joined the board in 2005 and was appointed
deputy chairman in May 2009. Appointed
chairman of Scottish Widows in 2007. Held a
number of senior and general management
appointments in Allied Dunbar, Eagle Star
and Threadneedle Asset Management
before the merger of Zurich Group and
British American Tobacco’s fi nancial services
businesses in 1998. Subsequently served
as chairman and chief executive offi cer of
Zurich Financial Services United Kingdom,
Ireland, Southern Africa and Asia Pacifi c,
until his retirement in 2004. Chairman of the
Government’s Review of Skills (published
in December 2006) and deputy chairman
of the Commonwealth Education Fund.
Chairman of BUPA and Intrinsic Financial
Services and a non-executive director
of Paternoster. Former chairman of the
National Employment Panel. Aged 62.
Member of the nomination and governance,
remuneration and risk oversight committees
Joined the board in 2005. Held a number
of senior and general management
appointments in Vodafone from 1984
to 2006 including a directorship of that
company from 1996, group chief operating
offi cer from 2001 and deputy chief
executive offi cer from 2005. Previously
held positions in Philips from 1978 to 1982
and Mars GB from 1982 to 1984. A non-
executive director of De La Rue, Digicel
Group and Emobile (Japan), a director
of Sky Malta, a member of the Altimo
International advisory board and a senior
advisor to UBS and CVC Capital Partners in
relation to the global telecommunications
sector. Pro vice-chancellor of University
of Bath. A former chairman of The Sage
Group. Aged 61.
T Timothy Ryan, Jr
Independent Director
Martin A Scicluna
In dependent Director
Anthony Watson CBE
Inde pendent Director
Member of the audit and risk oversight
committees
Chairman of the audit committee and a
member of the risk oversight committee
Member of the audit and risk oversight
committees
Joined the board on 1 March 2009. President
and chief executive of the Securities
Industry and Financial Markets Association.
Held a number of senior appointments
in JP Morgan Chase from 1993 to 2008
including vice chairman, fi nancial institutions
and governments, from 2005. A director
of the US-Japan Foundation, Great-West
Life Annuity Insurance Co. and Putnam
Investments and a member of the Global
Markets Advisory Committee for the
National Intelliegence Council. A former
director in the Offi ce of Thrift Supervison,
US Department of the Treasury and Koram
Bank and the International Foundation of
Election Systems. Aged 64.
Joined the board in September 2008.
Chairman of Deloitte UK from 1995 to 2007
and a member of the board from 1991 to
2007. Joined the fi rm in 1973 and was a
partner from 1982 until he retired in 2008.
A member of the board of directors of
Deloitte Touche Tohmatsu from 1999 to
2007. Chairman of Great Portland Estates.
A member of the council of Leeds University
and a governor of Berkhamsted School.
Aged 59.
Joined the board on 2 April 2009. Previously
chief executive of Hermes Pensions
Management. Held a number of senior
appointments in AMP Asset Management
from 1991 to 1998. A non-executive director
of Hammerson, Vodafone and Witan
Investment Trust, a member of the Norges
Bank Investment Management advisory
board and chairman of Marks and Spencer
Pension Trust, Asian Infrastructure Fund and
Lincoln’s Inn investment committee. A former
chairman of MEPC and of the Strategic
Investment Board (Northern Ireland) and a
former member of the Financial Reporting
Council. Aged 64.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
97
Lloyds Banking Group
Annual Report and Accounts 2009
EXECUTIVE DIRECTORS
APPOINTMENTS
FROM 1 MARCH 2010
Glen R Moreno
Senior Independent Director
Chairman of the risk oversight committee
and a member of the remuneration
committee
Chairman of Pearson, the media group,
since October 2005. He is a director of
Fidelity International, one of the world’s
largest fund management companies,
and chairman of its audit committee. From
1987 to 1991 he was chief executive of
Fidelity International. Until mid 2009, he
was a non-executive director and senior
independent director of Man Group, the
FTSE 100 fi nancial services group, and acting
chairman of UKFI. He was a group executive
at Citigroup; from 1969 to 1987 he held a
number of senior positions at the bank in
Europe and Asia. Aged 66
David L Roberts
Independent Director
Member of the audit and remuneration
committees
Executive director, member of the group
executive committee and chief executive,
International Retail and Commercial Banking
at Barclays until December 2006. He joined
Barclays in 1983 and held various senior
management positions, including chief
executive, Personal Financial Services and
chief executive, Business Banking. He was
also a non-executive director of BAA until
June 2006 and a non-executive director of
Absa Group Limited, one of South Africa’s
largest fi nancial services groups, until
October 2006. From 2007 to 2009 he was
also the chairman and chief executive of
BAWAG P.S.K. AG, the second largest retail
bank in Austria. He is currently a member
of the strategy board for Henley Business
School, non-executive chairman of The
Mind Gym and a non-executive director of
Campion Willcocks. Aged 47.
J Eric Daniels
Group Chief Executive
Archie G Kane
Group Executive Director Insurance
(Board Representative for Scotland)
G Truett Tate
Group Executive Director
Wholesale
Joined the board in 2001 as group executive
director, UK retail banking before his
appointment as group chief executive in
June 2003. Served with Citibank from 1975
and held a number of senior and general
management appointments in the USA,
South America and Europe before becoming
chief operating offi cer of Citibank Consumer
Bank in 1998. Following the Citibank/
Travelers merger in 1998, he was chairman
and chief executive offi cer of Travelers Life
and Annuity until 2000. Chairman and chief
executive offi cer of Zona Financiera from
2000 to 2001. A non-executive director of
BT Group. Aged 58.
Joined the group in 1986 and held a
number of senior and general management
appointments before being appointed to the
board in 2000, as group executive director, IT
and operations. Appointed group executive
director, insurance and investments in
October 2003. After some 10 years in the
accountancy profession, joined General
Telephone & Electronics Corporation in
1980, serving as fi nance director in the
UK from 1983 to 1985. Chairman of the
Association of British Insurers and a
member of The Takeover Panel. Aged 57.
Joined the group in 2003 as managing
director, corporate banking before being
appointed to the board in 2004. Served with
Citigroup from 1972 to 1999, where he held a
number of senior and general management
appointments in the USA, South America,
Asia and Europe. He was president and chief
executive offi cer of eCharge Corporation
from 1999 to 2001 and co-founder and
vice chairman of the board of Chase
Cost Management Inc from 1996 to 2003.
A non-executive director of BritishAmerican
Business Inc. Chairman of Arora Holdings
and a director of Business in the Community
and a director and trustee of In Kind Direct.
Aged 59.
Tim J W Tookey
Group Finance Director
Helen A Weir CBE
Group Executive Director Retail
Harry F Baines
Company Secretary
Join ed the group in 2006 as deputy group
fi nance director, before being appointed
acting group fi nance director in April 2008.
Appointed to the board in October 2008 as
group fi nance director. Previously fi nance
director for the UK and Europe at Prudential
from 2002 to 2006 and group fi nance director
of Heath Lambert Group from 1996 to 2002.
Prior to that, he spent 11 years at KPMG.
Aged 47.
Joined the board in 2004 as group fi nance
director. Appointed as group executive
director, UK retail banking in April 2008.
Group fi nance director of Kingfi sher from
2000 to 2004. Previously fi nance director
of B&Q, having joined that company in
1995 from McKinsey & Co where she was
a senior manager. Began her career at
Unilever. Member of the Financial Services
Practitioner Panel and the Said Business
School Advisory Board. Chair of the British
Bankers’ Association Retail Committee.
A former member of the Accounting
Standards Board. Fellow of the Chartered
Institute of Management Accountants.
Aged 47.
98
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REPORT
RESULTS
The consolidated income statement shows a profit attributable to equity shareholders for the year ended 31 December 2009 of £2,827 million.
PRINCIPAL ACTIVITIES, BUSINESS REVIEW, FUTURE DEVELOPMENTS AND FINANCIAL RISK MANAGEMENT
OBJECTIVES AND POLICIES
The Company is a holding company and its subsidiary undertakings provide a wide range of banking and financial services through branches and
offices in the UK and overseas. A review of the development and performance of the business during the financial year and an indication of the
likely future developments are given on pages 4 to 94. Key performance indicators are shown on page 5. Information regarding the financial risk
management objectives and internal control policies of the Company and its subsidiary undertakings in relation to the preparation of consolidated
financial statements is given within the corporate governance report on pages 100 to 104. The financial risk management objectives and internal
control policies in relation to the use of financial instruments, is given on pages 56 to 94 and in notes 53 and 54 on pages 221 to 243.
GROUP STRUCTURE
On 16 January 2009, Lloyds TSB Group plc changed its name to Lloyds Banking Group plc, following the acquisition of HBOS plc.
POST BALANCE SHEET EVENTS
Details are given in note 57 on page 248.
DIRECTORS
Biographical details of directors are shown on pages 96 and 97. Particulars of their emoluments and interests in shares in the Company are given
on pages 105 to 125.
Six directors stood down from the board during the year, as follows: Mr J P du Plessis (17 April), Mr Ewan Brown (5 June), Sir Victor Blank
(15 September), Mr P N Green (23 October), Sir David Manning (2 November) and Ms C J McCall (31 December).
Mr T T Ryan and Mr Anthony Watson joined the board on 1 March 2009 and 2 April 2009, respectively.
Sir Winfried Bischoff joined the board on 15 September 2009 and Mr G R Moreno and Mr D L Roberts have been appointed directors from
1 March 2010. In accordance with the articles of association, they offer themselves for election at the annual general meeting.
Dr W C G Berndt, Mr J E Daniels and Mrs H A Weir retire at the annual general meeting and offer themselves for re-election.
DIRECTORS’ INDEMNITIES
The directors have entered into individual deeds of indemnity with the Company which constituted ‘qualifying third party indemnity provisions’ and
‘qualifying pension scheme indemnity provisions’ for the purposes of the Companies Act 2006. These deeds were in force during the whole of the
financial year or from the date of appointment in respect of the three directors who joined the board in 2009. The indemnities remain in force for the
duration of a director’s period of office. Deeds for existing directors are available for inspection at the Company’s registered office.
SHARE CAPITAL
Information about share capital is shown in note 45 on pages 203 to 205; in the corporate governance report on pages 100 to 104; and in the
directors’ remuneration report on pages 105 to 125.
CHANGE OF CONTROL
The Company is party to significant contracts that are subject to change of control provisions in the event of a takeover bid as follows:
The Company is party to a deed of covenant with each of the four Lloyds TSB Foundations (the ‘Foundations’) which hold limited voting shares in the
Company (the limited voting shares are further described in note 45 on page 205). Under the terms of the deeds of covenant, the Company makes
an annual payment to each of the Foundations. In the event of a successful offer for more than 50 per cent of the issued ordinary share capital of
the Company, each limited voting share would convert to an ordinary share under the terms of the Company’s articles of association. The payment
obligation under the deeds of covenant would come to an end one year following the conversion of the limited voting shares.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
99
Lloyds Banking Group
Annual Report and Accounts 2009
EMPLOYEES
Lloyds Banking Group is committed to providing employment practices and policies which recognise the diversity of our workforce and ensure
equality for employees regardless of sex, race, disability, age, sexual orientation or religious belief.
In the UK, Lloyds Banking Group belongs to the major employer groups campaigning for equality for the above groups of staff, including Employers’
Forum on Disability, Employers’ Forum on Age, Stonewall and the Race for Opportunity. Our involvement with these organisations enables us to
identify and implement best practice for our staff.
Employees are kept closely involved in major changes affecting them through such measures as team meetings, briefings, internal communications
and opinion surveys. There are well established procedures, including regular meetings with recognised unions, to ensure that the views of
employees are taken into account in reaching decisions.
Schemes offering share options or the acquisition of shares are available for most staff, to encourage their financial involvement in
Lloyds Banking Group.
DONATIONS
The income statement includes a charge for charitable donations totalling £33,477,000 in 2009 (2008: £29,603,000), including £28,228,000
(2008: £28,997,000) which will be paid under the deeds of covenant to the four Lloyds TSB Foundations during 2010.
POLICY AND PRACTICE ON PAYMENT OF CREDITORS
The Company has signed up to the ‘Prompt Payment Code’ published by the Department for Business Innovation and Skills (BIS), regarding the
making of payments to suppliers. A copy of the code and information about it may be obtained from BIS as shown on page 261.
The Company’s policy is to agree terms of payment with suppliers and these normally provide for settlement within 30 days after the date of the
invoice, except where other arrangements have been negotiated. It is the policy of the Company to abide by the agreed terms of payment, provided
the supplier performs according to the terms of the contract.
The number of days required to be shown in this report, to comply with the provisions of the Companies Act 2006, is 32. This bears the same
proportion to the number of days in the year as the aggregate of the amounts owed to trade creditors at 31 December 2009 bears to the aggregate
of the amounts invoiced by suppliers during the year.
DIRECTORS’ RESPONSIBILITY STATEMENT
Each of the current directors, whose names and functions are shown on pages 96 and 97 of this annual report, confirms that, to the best of his or
her knowledge:
– the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European Union, give a true
and fair view of the assets, liabilities, financial position and profit or loss of the Company and Group; and
– the management report contained in the business review includes a fair review of the development and performance of the business and the
position of the Company and Group, together with a description of the principal risks and uncertainties they face.
AUDITORS AND AUDIT INFORMATION
Each person who is a director at the date of approval of this report confirms that, so far as the director is aware, there is no relevant audit information
of which the Company’s auditors are unaware and each director has taken all the steps that he or she ought to have taken as a director to
make himself or herself aware of any relevant audit information and to establish that the Company’s auditors are aware of that information. This
confirmation is given and should be interpreted in accordance with the provisions of the Companies Act 2006.
Resolutions concerning the re-appointment of PricewaterhouseCoopers LLP as auditors and authorising the audit committee to set their
remuneration will be proposed at the annual general meeting.
On behalf of the board
Harry F Baines
Company Secretary
25 February 2010
Company number 95000
100
Lloyds Banking Group
Annual Report and Accounts 2009
CORPORATE GOVERNANCE
Lloyds Banking Group aspires to the highest standards of corporate governance. The events of the past two years have led to unprecedented
challenges for the Group and the markets as a whole. Throughout this period we have constantly reviewed and refreshed our approach to corporate
governance to ensure that it is robust, well embedded and at the forefront of best practice.
This report gives detailed information on our corporate governance arrangements for 2009 and outlines how we apply the principles of the 2006
Combined Code (the ‘Code’). The Company believes it has complied throughout the year with all of the provisions of section 1 of the Code.
THE BOARD AND ITS COMMITTEES
At the year end, the board comprised the chairman, five executive directors and seven independent non-executive directors. Sir Winfried Bischoff
succeeded Sir Victor Blank as chairman on 15 September 2009. Details of his selection and appointment process are set out on page 102. Details of
other directors that joined and left the board during 2009 are shown on page 98.
The board considers that it is of an appropriate size to oversee the Group’s businesses, with a suitable diversity of backgrounds and mix of
experience and expertise to maximise its effectiveness. The composition of the board is kept under continuous review by the chairman, with the
support of the nomination and governance committee, to ensure the right balance of skills and experience. All director appointments are subject
to detailed due diligence which includes a robust search and selection process overseen by the nominations and governance committee. On
11 February 2010, the Company announced the appointments of Mr Moreno and Mr Roberts to take effect on 1 March 2010. Their details are
included in the biographies on pages 96 and 97.
The chairman is responsible for leading the board and ensuring its effectiveness while the group chief executive manages the Group’s
business – these are distinct functions.
The chairman is responsible for the clarity and timeliness of information provided to the board and for facilitating the effective contribution of all
directors and ensures that directors receive appropriate induction and ongoing training.
The chairman has a key role in the development (jointly with the group chief executive) of the Group’s strategy, as well as oversight of strategy
implementation and performance delivery. He ensures that there is a constructive, close working relationship with the group chief executive and the
rest of the board.
MEETINGS
Responding to the challenges faced by the Company, the board held 28 meetings during 2009. In addition there was regular contact with directors
outside of these meetings. The time commitment demanded of directors, in particular, non-executive directors, was far in excess of that anticipated
in the normal course of business. All directors showed themselves to be willing and able to devote the additional time required often at short notice
and at unsociable hours.
INDEPENDENCE
All the non-executive directors are considered by the board to be independent both in character and judgment and free of relationships or
circumstances which could affect their judgement. Throughout the year at least half of the board comprised independent non-executive directors.
INDUCTION AND TRAINING
All new directors and committee members receive a full and tailored induction. The primary aim of the induction programme is to provide directors
with a comprehensive introduction to the Group; its individual businesses; business models; strategy; and risks. This enables directors to make
an early, informed and effective contribution to board debates, based on an understanding of the key challenges facing the Group, the Group’s
businesses, and the business model. The induction programme is supplemented by ongoing training and development.
The current induction and training programmes are being reviewed and enhanced to ensure that they meet the requirement for a ‘substantive and
personalised’ programme as recommended by the Walker Review of Corporate Governance of UK Banking Industry published in November 2009.
BOARD EVALUATION
In autumn 2009, the board, supported by JCA Group, conducted a rigorous process of evaluating its effectiveness, and the effectiveness of its
principal committees. The process included confidential, unattributable, one-on-one interviews with every board member and with UKFI and the
Group’s external auditors. The review covered corporate governance, board effectiveness, strategy development, risk management and board and
committee organisation, composition, operation and dynamics. In addition, although early in his tenure, the review also considered the performance
of the chairman, including the effectiveness of his relationships with the group chief executive and other members of the board. The outcomes of the
review were subsequently discussed by the board as a whole.
The review was conducted during a period of significant change for the board with several members leaving and a number of relatively new
members.
The board members individually and collectively considered that the board is working as an effective whole. After the significant challenges faced
by the Group and the board in 2009, the review highlighted the importance of returning to a more normal operating mode by focusing on delivering
the integration, developing the future strategy, and reviewing the operations and risk management for the Group as a whole and within each
of the key areas. In addition, the review encouraged continued vigorous debate in the board and committees and emphasised the importance of
succession plans for the management team and non-executive directors. An action plan has been developed to ensure that the chief conclusions
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
101
Lloyds Banking Group
Annual Report and Accounts 2009
of the review are addressed in a timely manner. As part of this, it has been agreed that issues of risk, liquidity and funding should receive particularly
high attention in 2010.
ELECTION AND RE-ELECTION OF DIRECTORS
All directors are subject to election by shareholders at the first annual general meeting (AGM). Following their appointment, Sir Winfried Bischoff,
Mr Moreno and Mr Roberts will stand for election at the forthcoming AGM.
The Company requires all directors to stand for re-election at intervals of no more than three years. At the 2010 AGM, Dr Berndt, Mr Daniels and
Mrs Weir will retire and seek re-election by shareholders.
The chairman has endorsed the effectiveness and commitment of all directors standing for election or re-election at the AGM, and the senior
independent director has given a similar endorsement in respect of the chairman’s election.
COMPANY SECRETARY AND INDEPENDENT ADVICE
The Company Secretary, Mr Baines, is responsible for advising the board on corporate governance matters and, in conjunction with the chairman, for
ensuring good information flows between the board, its committees, non-executive directors and senior executives. All directors have access to his
advice and services. Additionally, if required in the furtherance of their duties, non-executive directors (along with any other members of the board’s
main committees) are entitled to seek independent, professional advice at the Company’s expense.
DIRECTORS’ CONFLICTS OF INTEREST
The board, as permitted by the Group’s articles of association, has authorised all potential conflicts of interest declared by individual directors.
Decisions regarding these conflicts of interest could only be taken by directors who had no interest in the matter. In taking the decision, the directors
acted in a way they considered, in good faith, would be most likely to promote the Company’s success. The directors had the ability to impose
conditions, if thought appropriate, when granting authorisation. Any authorities given will be reviewed at least every 15 months. No director is
permitted to vote on any resolution or matter where he or she has an actual or potential conflict of interest.
RELATIONS WITH SHAREHOLDERS
The investor relations team has primary, day-to-day responsibility for managing communications with institutional shareholders through a
combination of briefings to analysts and institutional shareholders (both at the interim and year end results and throughout the year), site visits and
individual discussions between institutional shareholders and board members and key senior executives. Regular dialogue with shareholders helps
to ensure that the Company’s strategy is understood and that any queries or other issues are addressed in a constructive way. In 2009, there has been
extensive and regular engagement with institutional shareholders and UKFI, the body set up to manage the Government’s investments in banks. The
board receives weekly reports on market and investor sentiment and opinion which helps it develop a balanced understanding of the views of major
shareholders.
The company secretary oversees communications with private shareholders. Shareholders are encouraged to attend and participate in the
Group’s AGM.
AUDIT COMMITTEE
The audit committee comprises Mr Scicluna (chairman), Lord Leitch, Mr Ryan and Mr Watson. The committee’s terms of reference are available from
the company secretary and are displayed on our website, www.lloydsbankinggroup.com.
During the year, the audit committee received reports from, and held discussions with, management and the external auditors. In discharging its
duties, the committee has approved the auditors’ terms of engagement, including their remuneration and, in discussion with them, has assessed
their independence and objectivity (more information about which is given in note 11 to the consolidated financial statements, in relation to the
procedure for approving fees for audit and non-audit work) and recommended their re-appointment at the AGM. The committee also reviewed
the financial statements published in the name of the board and the quality and acceptability of the related accounting policies, practices and
financial reporting disclosures; the scope of the work of the group audit department, reports from that department and the adequacy of its
resources; the effectiveness of the systems for internal control, risk management and compliance with financial services legislation and regulations
(more information about which is given in the note about internal control on page 104); the results of the external audit and its cost effectiveness;
and reports from the external auditors on audit planning and their findings on accounting and internal control systems. Procedures for handling
complaints regarding accounting, internal accounting controls or auditing matters and for staff to raise concerns in confidence have been
established by the committee. The committee also had a meeting with the auditors, without executives present, and a meeting with the group audit
director alone.
CHAIRMAN’S COMMITTEE
The chairman’s committee, comprising the chairman, deputy chairman and the group chief executive, meets to assist the chairman in ensuring the
effectiveness and efficiency of board meetings. The committee exercises specific powers delegated to it by the board from time to time.
102
Lloyds Banking Group
Annual Report and Accounts 2009
CORPORATE GOVERNANCE continued
NOMINATION AND GOVERNANCE COMMITTEE
To ensure that the Group’s governance arrangements take due account of best practice developments, the nomination and governance committee
has expanded its terms of reference to expressly include governance issues.
The nomination and governance committee is chaired by Sir Winfried Bischoff. Lord Leitch, Dr Berndt and Sir Julian Horn-Smith are members.
The committee reviews the structure, size and composition of the board; oversees the selection process for prospective directors; makes
recommendations to the board on potential appointments and re-appointments of directors at the end of their specified term; and considers
board succession. Following expansion of its terms of reference, it also reviews the board’s governance arrangements and oversees the Company’s
implementation of governance requirements eg under the Walker Review and Combined Code.
The committee is responsible for overseeing the process for appointments of new non-executive directors and making recommendations to the
board. In 2009, two new non-executive director appointments were announced. A further two appointments were announced on 11 February 2010.
All appointments are subject to a rigorous search and selection process.
In addition, on 26 July 2009, the appointment of Sir Winfried Bischoff as chairman of Lloyds Banking Group was recommended to, and approved by,
the board, following the process set out below.
The committee’s terms of reference are available from the company secretary and are displayed on our website, www.lloydsbankinggroup.com.
Chairman’s succession
On 18 May 2009, following Sir Victor Blank’s decision to step down from the board, a sub-committee of the nomination committee was established
to oversee the chairman’s succession. The committee was chaired by Sir Julian Horn-Smith. Membership was made-up entirely of independent
non-executive directors, namely Dr Berndt, Mr Green, Sir David Manning and Mr Watson. There was an open invitation to other non-executive
directors to attend meetings. Ms McCall was a regular attendee; Mr Ryan and Mr Scicluna also attended a number of meetings. As deputy chairman,
Lord Leitch was kept advised of developments and, towards the latter end of the process, was invited to join meetings. The committee was advised
by the group human resources director and the head of secretariat. Sir Victor Blank did not participate in any part of the process.
Following a tender process, the committee appointed Jan Hall of JCA Group, as executive search advisor.
The sub-committee met 10 times. Activities included agreeing the role specification and selection criteria; reviewing applicant profiles and agreeing
short lists; reviewing shareholder feedback and ultimately recommending the appointment of Sir Winfried Bischoff to the board. In conjunction with
the remuneration committee, the committee also proposed the terms and conditions of appointment for the new chairman. Between meetings,
there were regular updates on progress.
Short listed candidates were subject to an extensive interview process, initially by panels of committee members along with other directors.
Ms McCall and Lord Leitch also participated in the interview process. All executive and non-executive directors were given the opportunity to meet
the candidates prior to any decision being made. Detailed referencing and due diligence, both formal and informal, was also carried out. The
appointment was subject to, and received, approval from the Financial Services Authority.
The views of institutional shareholders including UKFI were sought prior to any decision being made. Those shareholders consulted confirmed that
they were satisfied that the search and selection process had been robust and extensive.
REMUNERATION COMMITTEE
Information about the remuneration committee’s membership and work is given in the directors’ remuneration report on pages 105 to 125. Its terms
of reference are available from the company secretary and are displayed on the Company’s website, www.lloydsbankinggroup.com.
RISK OVERSIGHT COMMITTEE
The risk oversight committee comprises Lord Leitch (chairman), Sir Winfried Bischoff, Sir Julian Horn-Smith, Mr Ryan, Mr Scicluna and Mr Watson.
There is a standing invitation for all other non-executive directors to attend meetings of the committee. The risk oversight committee’s duties include
overseeing the development, implementation and maintenance of the Group’s overall risk management framework, and its risk appetite, strategy,
principles and policies, to ensure they are in line with emerging regulatory, corporate governance and industry best practice. The committee also
oversees the Group’s risk exposures; facilitates the involvement of non-executive directors in risk issues and aids their understanding of these issues;
oversees adherence to Group risk policies and standards and considers any material amendments to them; and reviews the work of the group
risk division.
GROUP EXECUTIVE COMMITTEE
The group executive committee, comprising the group chief executive, all the group executive directors (as shown on page 97), together with the
chief risk officer, the group human resources director and the director of group operations, meets to assist the group chief executive in performing
his duties. Specifically, the committee considers the development and implementation of strategy, operational plans, policies and budgets; the
monitoring of operating and financial performance; the assessment and control of risk; the prioritisation and allocation of resources; and the
monitoring of competitive forces in each area of operation. The committee, assisted by its sub-committees, the group business risk and group asset
and liability committees, also supports the group chief executive in endeavouring to ensure the development, implementation and effectiveness of
the Group’s risk management framework and the clear articulation of the Group’s risk policies, and in reviewing the Group’s aggregate risk exposures
and concentrations of risk.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
103
Lloyds Banking Group
Annual Report and Accounts 2009
ATTENDANCE AT MEETINGS
The attendance of directors at board meetings and at meetings of the audit, nomination and governance, remuneration and risk oversight
committees during 2009 were as follows:
Number of meetings during the year
Current directors who served
during 2009
Dr W C G Berndt
Sir Winfried Bischoff 1
J E Daniels
Sir Julian Horn-Smith
A G Kane
Lord Leitch 2
T T Ryan3
M A Scicluna
G T Tate
T J W Tookey
Anthony Watson4
H A Weir
Former directors who served
during 2009
Sir Victor Blank 5
Ewan Brown 6
J P du Plessis 7
P N Green 8
Sir David Manning 9
C J McCall 10
Board meetings
Regular
Ad hoc
9
9
3
9
8
9
8
7
9
8
9
7
9
6
4
2
7
7
9
19
15
7
19
17
19
19
14
18
18
19
11
19
11
6
6
10
15
11
Total
28
Audit
committee
8
Nomination and
governance
committee
Remuneration
committee
Risk oversight
committee
2
2
2
2
24
10 (max 10)
28
25
28
27
7
21 (max 22)
5 (max 5)
8
27
26
28
18 (max 20)
3 (max 3)
28
17 (max 18)
10 (max 12)
8 (max 9)
17 (max 22)
22 (max 26)
20
4 (max 5)
3 (max 4)
6 (max 7)
1 (max 1)
1 (max 2)
1 (max 1)
4
13
13
3 (max 3)
1 (max 1)
8
4 (max 5)
10 (max 10)
3
4
3 (max 3)
4
2 (max 2)
3 (max 3)
2 (max 2)
1 (max 2)
7 (max 11)
12 (max 12)
4)
7 (max 12)
1
2
3
4
5
6
7
8
9
10
Appointed to the board, nomination and governance, remuneration and risk oversight committees on 15 September 2009.
Appointed to the remuneration committee on 4 August 2009.
Appointed to the board, audit and risk oversight committees on 1 March 2009.
Appointed to the board on 2 April 2009. Appointed to the audit and risk oversight committees on 6 May 2009.
Left the board on 15 September 2009.
Left the board on 5 June 2009.
Left the board on 17 April 2009.
Left the board on 23 October 2009.
Left the board on 2 November 2009.
Appointed to the remuneration committee on 23 January 2009. Left the board on 31 December 2009.
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The directors are responsible for preparing the annual report, the directors’ remuneration report and the financial statements in accordance with
applicable law and regulations.
Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the
consolidated and parent company financial statements in accordance with International Financial Reporting Standards as adopted by the European
Union. The financial statements are required by law to give a true and fair view of the state of affairs of the Company and the Group and of the profit
or loss of the Group for that period. The directors consider that in preparing the financial statements on pages 127 to 260 the Company and the
Group have used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and
that all accounting standards which they consider applicable have been followed.
The directors have responsibility for ensuring that the Company and the Group keep proper accounting records which disclose with reasonable
accuracy the financial position of the Company and the Group and which enable them to ensure that the financial statements and the directors’
remuneration report comply with the Companies Act 2006 and, as regards the consolidated financial statements, Article 4 of the IAS Regulation.
They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and the Group and
to prevent and detect fraud and other irregularities.
104
Lloyds Banking Group
Annual Report and Accounts 2009
CORPORATE GOVERNANCE continued
A copy of the financial statements of the Company is placed on our website, www.lloydsbankinggroup.com. The directors are responsible for the
maintenance and integrity of statutory and audited information on the Company’s website. Information published on the internet is accessible
in many countries with different legal requirements. Legislation in the United Kingdom governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
COMPLIANCE WITH THE BRITISH BANKERS’ ASSOCIATION DRAFT CODE FOR FINANCIAL REPORTING
DISCLOSURE
In October 2009, the British Bankers’ Association published a draft Code for Financial Reporting Disclosure (the ‘Disclosure Code’). The draft
Disclosure Code sets out five disclosure principles together with supporting guidance. The principles are that UK banks: commit to providing high
quality, meaningful and decision-useful disclosures; commit to ongoing review of, and enhancement to, their financial instrument disclosures for key
areas of interest; will assess the applicability and relevance of good practice recommendations to their disclosures acknowledging the importance of
such guidance; will seek to enhance the comparability of financial statement disclosures across the UK banking sector; and will clearly differentiate in
their annual reports between information that is audited and information that is unaudited.
The Group and other major UK banks have voluntarily adopted the draft Disclosure Code in their 2009 financial statements. The Group’s 2009
financial statements have therefore been prepared in compliance with the draft Disclosure Code’s principles.
INTERNAL CONTROL
The board of directors is responsible for the establishment and review of Lloyds Banking Group’s system of internal control, which is designed to
ensure effective and efficient operations, quality of internal and external reporting, internal control, and compliance with laws and regulations. It
should be noted, however, that such a system is designed to manage, rather than eliminate, the risk of failure to achieve business objectives. In
establishing and reviewing the system of internal control, the directors have regard to the nature and extent of relevant risks, the likelihood of a
loss being incurred and the costs of control. It follows, therefore, that the system of internal control can only provide reasonable but not absolute
assurance against the risk of material loss.
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 2009. All returns have been satisfactorily
completed and appropriately certified.
The effectiveness of the internal control system is reviewed regularly by the board and the audit committee, which also receives reports of reviews
undertaken around Lloyds Banking Group by group risk and group audit. The audit committee receives reports from the Company’s auditors,
PricewaterhouseCoopers LLP (which include details of significant internal control matters that they have identified), and has a discussion with the
auditors at least once a year without executives present, to ensure that there are no unresolved issues of concern.
AUDITOR INDEPENDENCE AND REMUNERATION
Both the board and the external auditors have safeguards in place to protect the independence and objectivity of the external auditors. The audit
committee has a comprehensive policy to regulate the use of auditors for non-audit services. This policy sets out the nature of work the external
auditors may not undertake, which includes work which will ultimately be subject to external audit, internal audit services and secondments to senior
management positions in the Group that involve decision-making. It also includes the Group’s policy on hiring former external audit staff. For those
services that are deemed appropriate for the auditors to carry out, the policy sets out the approval process that must be followed for each type of
assignment. The chairman of the audit committee must be consulted regarding potential instructions in respect of defined non-audit services with a
value above defined limits.
Each year the audit committee establishes a limit on the fees that can be paid to the external auditors in respect of non-audit services and monitors
quarterly the amounts paid to the auditors in this regard. The external auditors also report regularly to the committee on the actions that they have
taken to comply with professional and regulatory requirements and current best practice in order to maintain their independence. This includes the
rotation of key members of the audit team. Total auditor remuneration analysed between audit and other services is shown in note 11 to the accounts
on page 158.
GOING CONCERN
The going concern of the Company and the Group is dependent on successfully funding their respective balance sheets and maintaining adequate levels
of capital. In order to satisfy themselves that the Company and the Group have adequate resources to continue to operate for the foreseeable future, the
directors have considered a number of key dependencies which are set out in the risk management section under Principal Risks: Liquidity and Funding
on page 61 and Financial Soundness on pages 81 to 89 and additionally have considered projections for the Group’s capital and funding position. Having
considered these, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
105
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT
This is a report made by the board of Lloyds Banking Group plc, on the recommendation of the remuneration committee. It covers the current and
proposed components of the remuneration policy and details the remuneration for each serving director during 2009.
CONTENT OF REMUNERATION REPORT
– Statement by the chairman of the remuneration committee
– Remuneration decisions for 2009/10 key highlights
– Governance and risk management, including the role, membership and advisors to the committee
– Directors’ remuneration policy
– Remuneration for 2010
– Remuneration for 2009
– Dilution limits
– Pensions
– Service agreements
– External appointments
– Performance graph
– Audited information
STATEMENT BY THE CHAIRMAN OF THE REMUNERATION COMMITTEE
It is my privilege once again to introduce the board’s report on remuneration policy and practice.
INTRODUCTION
This last year has been one of the most challenging for remuneration in banking, following on from 2008 which was a year of unprecedented change
and turmoil across the sector. The committee is also aware that remuneration is a sensitive issue for society as well. At the same time, the Group
has been faced with the immense task of integrating the Lloyds TSB and HBOS businesses - one of the biggest integrations ever undertaken in the
sector and where considerable progress has been made during the first year of the three year programme, as described elsewhere in this report.
In making decisions on remuneration, the remuneration committee has continually had to balance the current operating environment and the fact
that the Group is in a loss making position with the need to motivate the executives to run the business in a way to maximise the returns for the
shareholder, including the tax payer. The committee has sought to strike this balance by maintaining the prudent approach to reward overall that it
has adopted in previous years, whilst ensuring that the right incentives are in place to reward future performance. At the same time the committee
has during 2009 built on the work of 2008 to ensure that the Group’s remuneration policy and arrangements comply with the FSA Code of Practice
on Remuneration.
A PRUDENT REMUNERATION POLICY
The committee reviewed very carefully the decisions made in respect of remuneration for 2009. There were no salary increases for executives,
executives waived any entitlement to annual incentives in respect of the 2008 performance year and the Long Term Incentive Plan (LTIP) opportunity
was reduced from 2008 levels by up to 175 per cent of salary. Awards under the annual incentive plan for 2009 have been made based on a rigorous
assessment of performance against targets. In reaching its decisions, the committee has sought to take into account the Group’s performance
against the main financial targets where the outcomes were better than expected as well as the delivery of a number of milestones that are a key part
of the Group’s medium term recovery plan. It is important to note that 100 per cent of the award will be deferred into shares and released in 2012
unless subject to clawback at that time.
The committee’s approach has continued in the review of remuneration for 2010, with any decisions on remuneration discussed extensively by the
committee and shareholders consulted ahead of any decisions made. The committee does have concerns that by continuing to hold base pay levels
at 2008 levels, remuneration for the executive directors is likely to become uncompetitive versus our peer group. However, by adding the share
price related element to the 2010 LTIP it is hoped that this will go some way to addressing this. But this is an area that will be kept under close and
continuous review by the committee and one where we will continue to engage with shareholders during 2010 as their views are essential in this
debate.
Extensive work has been undertaken in 2009 and will continue in 2010 to ensure compliance with the FSA Code of Practice on Remuneration.
The terms of reference of the remuneration committee were revised during 2009 to extend the remit of the committee to include the overall
remuneration policy and philosophy for all colleagues, whilst retaining direct responsibility for the remuneration for certain colleagues. Divisional
remuneration committees were introduced in 2009 to provide a robust framework for decisions on remuneration throughout the Group. The role of
risk in remuneration decision making has been formalised and the chief risk officer now attends remuneration committee meetings as appropriate
and divisional and group risk officers are members of the divisional remuneration committees. This work will continue in 2010 as the FSA refines its
Code and takes into account the recommendations in Sir David Walker’s review of corporate governance in UK banks and other financial industry
entities. The committee will take into account any change in disclosure requirements as they are formalised and reflect them in the 2010 report.
106
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
2010 REMUNERATION DESIGN
The committee has determined that the design of remuneration for 2010 will remain broadly as for 2009. There will again be no base pay increases
for executive directors in 2010, with base pay levels held at 2008 levels. The structure and annual incentive opportunity remain unchanged from 2009.
The maximum LTIP opportunity has been increased from the 2009 level (which reflected the extraordinary circumstances of that year). However, the
maximum level of award made to executive directors remains below 2008 levels, by up to 100 per cent of base salary and is lower than the historical
sector average. Performance conditions for the LTIP will continue to be based on EPS and economic profit, with an additional performance measure
for 2010 related directly to achieving stretching share price performance over the next three years. Following discussions with shareholders two
key changes have been made to the proposed design of the 2010 LTIP. Firstly the performance conditions have been made even more stretching.
Secondly, further alignment of the interests of the executive directors with those of the shareholders has been created through an additional
requirement that any shares vesting in 2013 as a result of the share price performance element of the 2010 LTIP must be retained for a further
two years. Furthermore, and reflecting shareholder representation on this matter, the committee will review performance against the targets for the
2010 annual incentive plan at the end of the year, taking into account the overall operating performance of the business in determining how much of
any bonus will be paid out. The committee also reserves the right to exercise its discretion in reducing any payment that otherwise would have been
earned, if they deem this appropriate.
CONCLUSION
Our approach to remuneration has been developed with extensive input and consultation from both our shareholders and regulators during 2009
and the early part of 2010. The remuneration committee believes that this approach strikes the best balance possible given the unique circumstances
that exist for the Group at this time and the need to continue to motivate and retain the management team. The committee does have concerns
that by continuing to hold base pay levels at 2008 levels, remuneration for the executive directors is likely to become uncompetitive versus our peer
group. However, by adding the share price related element to the 2010 LTIP it is hoped that this will go some way to addressing this. But this is an
area that will be kept under close and continuous review by the committee and one where we will continue to engage with shareholders during 2010
as their views are essential in this debate. The committee believes that the approach this year achieves an appropriate balance between recognition
of the sensitivity of the current environment and this longer term policy objective.
We therefore recommend this report to shareholders and ask for your support at the forthcoming AGM.
Dr Wolfgang Berndt
Chairman, remuneration committee
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
107
Lloyds Banking Group
Annual Report and Accounts 2009
REMUNERATION DECISIONS FOR 2009/2010 KEY HIGHLIGHTS
In 2010, our remuneration package will continue to have the same main elements as for 2009:
– Base salary
– Annual incentive
– Long-term incentive plan
In addition, executive directors participate in pension arrangements and receive benefits such as life assurance and medical insurance.
The following key decisions have been made for 2009/2010 remuneration:
– 2010 base salaries for executive directors will continue to be frozen at 2008 levels
– At his own request the group chief executive waived his award under the annual incentive plan for 2009
– Awards under the annual incentive plan for 2009 for executive directors amounted to between 150 per cent and 185 per cent of salary
– All awards under the annual incentive plan are deferred into shares and subject to clawback, with any awards released in 2012
– LTIP award below historic award levels at a maximum of 275 per cent of salary subject to stretching performance conditions based on EPS,
economic profit and the achievement of stretching share price targets
– Any shares vesting as a result of the element of the LTIP relating to the share price targets must be retained for a further two years post vesting
The approximate make-up of the main components of our new package for executive directors on an expected value basis is shown below:
Long-term incentive
Short-term incentive
Salary
40%
30%
30%
Based on a combination of performance targets comprising
earnings per share, economic profit and the achievement of
stretching share price targets
Paid in shares after
three years
Based half on financial measures and half on a balanced
scorecard of non-financial measures
Deferred into shares until
2012, subject to clawback
Based on role, market competitiveness, and performance
Paid in cash
(The split in the components in the above chart are for executive directors. Comparable numbers for the group chief executive are:
long term incentive 40 per cent, short term incentive 32 per cent and salary 28 per cent)
The 2010 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 at the end of three years
– Deferred annual incentive is subject to clawback; ie it is not released when information subsequently comes to light about the performance on
which the incentive award is based, which had it been known prior to the determination of the awards would have affected the original award
decision
– 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 target used in both the annual incentive plan and the LTIP
– Shares resulting from the vesting of the share price performance part of the LTIP must be retained for a further two years post vesting
We believe that these arrangements are well aligned with the FSA’s Code of Practice on Remuneration.
108
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
GOVERNANCE AND RISK MANAGEMENT
An essential component of our approach to remuneration is the governance process that underpins it. This ensures that our policy is robustly applied
and risk is managed appropriately.
The overarching purpose of the remuneration committee is to consider, agree and recommend to the board an overall remuneration policy and
philosophy for the Group that is aligned to its long-term business strategy, its business objectives, its risk appetite and values, and recognises the
interests of relevant stakeholders. The remuneration policy and philosophy covers the whole Group, but the committee pays particular attention to
the top management group and those colleagues who perform significant influence functions for the Group and those who could have a material
impact on the Group’s risk profile. The committee’s role is to ensure that these colleagues are provided with appropriate incentives to encourage
them to enhance the performance of the Group and that they are rewarded for their individual contribution to the success of the organisation, whilst
ensuring that there is no reward for excessive risk taking.
The committee determines the pensions policy for all colleagues and advises on other major changes to employee benefits schemes. It also agrees
the policy for authorising claims for expenses from the group chief executive and the chairman. It has delegated power for settling remuneration for
the chairman, the group executive directors, the company secretary and any group employee whose salary exceeds a specified amount, currently
£350,000, and/or whose short-term incentive opportunity exceeds £250,000.
The committee monitors the application of the authority delegated to the group executive committee and the divisional remuneration committees
to ensure that policies and principles are being fairly and consistently applied. The committee liaises with the risk oversight committee and the risk
function in relation to risk-adjusted performance measures.
All the independent non-executive directors are invited to attend meetings if they wish, and they receive the minutes and have the opportunity to
comment and have their views taken into account before the committee’s decisions are implemented.
The committee’s terms of reference are available from the company secretary and are displayed on the Group’s website,
www.lloydsbankinggroup.com.
The committee met on 13 occasions during 2009, and the members were as follows:
– Dr Wolfgang Berndt (chairman)
– Sir Victor Blank (until 14 September 2009)
– Sir Winfried Bischoff (from 15 September 2009)
– Mr Philip Green (until 23 October 2009)
– Sir Julian Horn-Smith
– Lord Leitch (from 18 May 2009)
– Sir David Manning (until 2 November 2009)
– Ms Carolyn McCall (from 23 January 2009 until 31 December 2009)
The committee welcomed Lord Leitch and Ms Carolyn McCall to the committee and Sir Winfried Bischoff, on his appointment as chairman of
the Group. We thank Sir Victor Blank, Mr Philip Green, Ms Carolyn McCall and Sir David Manning for their contributions to the committee during
2009 up until their departures from the Group.
We also thank all committee members for their commitment during the last year and attendance at the unprecedented number of meetings.
The committee appoints independent consultants to provide advice on specific matters according to their particular expertise. Towers Perrin,
Hewitt New Bridge Street and Kepler Associates were retained by the committee during 2009 to advise on various matters relating to executive
remuneration. In addition, PricewaterhouseCoopers LLP (PwC) were also retained in 2009 specifically to complete the committee’s project to review
executive remuneration arrangements in light of the acquisition of HBOS, given their particular expertise in the remuneration aspects of transactions.
This project had commenced in 2008. As PwC are also the auditors to Lloyds Banking Group and to mitigate any threat to audit independence,
Kepler Associates continue to be retained as the remuneration committee’s primary independent advisors, and were commissioned to provide
comment on PwC’s advice.
In addition to their advice on executive remuneration, during 2009 Towers Perrin also provided market remuneration data as well as other
remuneration consulting services to the Group, Hewitt New Bridge Street provided pension consulting services.
During 2009, Alithos Limited continued to provide information on behalf of the committee for the testing of total shareholder return (TSR) (calculated
by reference to both dividends and growth in share price) performance conditions for the Group’s long-term incentive schemes.
Mr Daniels, Mrs Risley (Group Human Resources Director) and Ms Kemp (HR Director, Total Reward) provided guidance to the committee (other than
for their own remuneration). Mrs Carol Sergeant (Chief Risk Officer) also attended the committee to advise on risk matters.
The remuneration committee ensures 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.
During 2009 as part of the review of compliance with the new FSA Code of Practice on Remuneration and the developing governance environment,
the committee reviewed and adopted new terms of reference. In addition divisional remuneration committees were established to ensure a strong
oversight from the group remuneration committee into the divisions.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
109
Lloyds Banking Group
Annual Report and Accounts 2009
The key developments in the committee’s terms of reference are:
– Extension of its direct responsibilities to include all those colleagues who perform significant influence functions for the Group and those who could
have a material impact on the Group’s risk profile;
– Formalising the periodic review of the adequacy and effectiveness of the Group’s remuneration policy;
– Formalising annual reporting to the board on the substance of the Group’s remuneration policy and propose any substantive changes. This report
will be supported by independent commentary from the chief risk officer in the context of the Group’s risk appetite and by positive assurance
from each group executive director that all remuneration arrangements within their division/function reflect fully the Group’s overall approach to
remuneration; and
– The chief risk officer will attend the remuneration committee for at least two meetings a year.
The role of the divisional remuneration committees is to ensure a strong oversight from the group remuneration committee into the divisions.
Specifically:
– The relevant group executive director will be accountable for the effective implementation of the remuneration policy in their division;
– The divisional remuneration committee, which will have representation from both divisional and group reward and risk functions, will ensure that the
policy is effectively and efficiently executed in the division;
– Formal positive assurance (through annual reporting) as to how the remuneration policy is being applied across the group will be provided to the
group remuneration committee from each divisional remuneration committee; and
– The divisional remuneration committee will be responsible for ensuring the effective governance of divisional specific remuneration arrangements,
especially the design and outcome of short-term incentive/bonus schemes.
We believe our approach is well aligned with the FSA Code of Practice on Remuneration but we will continue to work with the FSA to ensure
ongoing compliance and implement changes as appropriate.
DIRECTORS’ REMUNERATION POLICY
The Group’s remuneration policy supports our business strategy, which is based on building long-term relationships with our customers and
employees, and managing the financial consequences of our business decisions across the entire economic cycle. The policy is to position base
salaries to reflect the relevant market median and the total package is designed to enable upper quartile performance to be rewarded with upper
quartile remuneration levels. Overall the policy is designed to ensure that cost effective packages are provided which attract and retain executive
directors and senior management of the highest calibre and motivate them to perform to the highest standards. At the same time, the objective is to
align individual rewards with the Group’s performance, the interests of its shareholders, and a prudent approach to risk management. In this way we
balance the requirements of our various stakeholders: customers, shareholders, employees, and regulators. We believe that this approach is in line
with the Association of British Insurers best practice code on remuneration as well as the FSA Code of Practice on Remuneration, as the policy seeks
to reward long-term value creation whilst not encouraging excessive risk taking.
We summarise below how each of these policy objectives is met by our remuneration packages.
Policy objective
How achieved
Building long-term
relationships
We build relationships with our customers and people rather than viewing them as counterparties in a money-making
transaction and are in the process of extending this philosophy across the integrated Group. This means that working
for the Lloyds Banking Group should be about more than pay. While our relationship with our people means that we
will pay them fairly and competitively, our pay is positioned conservatively against the market and we will not seek to
be among the highest payers in the sector. In setting pay for executive directors, we take account of the terms and
conditions applying to other employees of the Group.
Our incentive measures are not just financial. Half of the annual incentive for executives is linked to a scorecard
including how they perform against targets that measure how satisfied our customers are, and the extent to which our
employees feel engaged with and committed to working for the Lloyds Banking Group, both of which are important
foundations of a relationship-based strategy.
Managing the financial
consequences of our
business through the
economic cycle
Economic profit is a key measure by which we manage our business. This measure takes into account the level of capital
required to generate profits as well as the risks taken. The same level of profit generated at lower risk results in higher
economic profit. Economic profit also measures risk based on an assessment of how business will perform through the
economic cycle.
Therefore, for example, in good times, when default rates on loans are low, we adjust the economic profit measure
downwards based on a higher average expected default experience over the economic cycle. This encourages us to
avoid business and funding strategies that are only profitable during boom times but turn bad in a recession. Economic
profit plays a prominent role in our incentive plans for executives, a role which was further enhanced in 2009, with its
inclusion in the long-term incentive plan performance measures.
110
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
Policy objective
How achieved
Aligning individual
rewards with Group
performance and
shareholders
The majority of our executives’ pay is linked to stretching performance targets through annual and long-term
incentives. Performance measures on the annual incentive are directly aligned to the Group’s financial and non-financial
performance.
Executives are aligned with shareholders through the long-term incentive plan, which pays out based on
performance against Group targets over a three year period, and which is paid in shares to further improve alignment
with shareholders.
This objective of aligning the interests of executives with those of shareholders throughout the economic cycle can be
seen through the vesting outcomes of awards made to executives under the LTIP plans. In 2009, historic LTIP and option
plans from 1999, 2005 and 2006 lapsed as their performance conditions were not met. The same outcome is envisaged
for the 2007 LTIP with a performance period ending in 2010.
Executives are required to build up a holding in Lloyds Banking Group shares of value equal to 1.5 times salary for
executive directors (2 times salary for the group chief executive). They are expected to retain 100 per cent of the
net-of-tax proceeds of the 2009 LTIP until they reach this target. In addition they are required to retain any shares
vesting from the share price performance element of the 2010 LTIP for a further two years post vesting.
Finally, we operate tough contract provisions whereby no executive has an entitlement to more than 12 months’ notice,
compensation on termination is limited to basic salary, and any compensation is paid monthly over 12 months and is
mitigated if the executive gets another job. This approach avoids the risk of payment for failure. These requirements are
among the toughest in the FTSE 100.
A prudent approach to
risk management
Economic profit measures profit relative to the risk taken to generate that profit. Its use in our incentive plans therefore
encourages executives to take a prudent approach to risk.
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.
For the 2009 annual incentive we increased the alignment to long-term prudent risk management by deferring all of the
award. For executive directors any cash incentive earned will be deferred 100 per cent into shares and paid out in 2012.
If the performance that led to the incentive is found to be unsustainable during the deferral period, then some or all of
the award may be forfeited.
We pay competitively but not excessively. Our prudent approach to positioning compensation means that we reduce
the incentives to take excessive risk for personal gain. This means that we do not attract employees with an extreme
appetite for risk.
We have a robust governance framework with an independent remuneration committee reviewing all compensation
decisions. This approach to governance and review is cascaded through the organisation.
Cost effective packages
to attract and retain
executives
We aim to ensure that the totality of remuneration for executive directors is competitive against our benchmark
groups. These groups are other major UK banks, and also the top 20 companies in the FTSE 100, reflecting practices
in comparably sized large UK companies across all sectors. We aim to be competitively but conservatively positioned
against the market.
We aim to choose incentive plan targets that are directly linked to the business strategy and priorities. This not only
ensures alignment with company performance, but also means that the targets are meaningful to executives and
therefore motivating. This ensures that incentive packages are valued by executives and are cost effective.
REMUNERATION FOR 2010
The remuneration committee undertook an extensive review of executive remuneration during late 2008 and into 2009 in light of the HBOS
acquisition. That review in conjunction with detailed consultation with shareholders led to the remuneration decisions for 2009. The committee
continued to review remuneration during 2009 in light of the FSA Code of Practice on Remuneration, the outcomes of the G20 meeting in
September 2009 and Sir David Walker’s review of corporate governance in UK banks and other financial industry entities. This ongoing review process
has found that the structure of the remuneration package, in particular the focus on risk through the long-term incentive plan measures and balanced
scorecard, was well aligned with emergent best practice in the sector.
The review process has highlighted the concern on how to maintain an appropriately competitive incentive for the senior executives of the Group,
following the significant reduction in incentive levels in 2009, whilst recognising the sensitivity of the operating environment and the fact that the
Group is still in a loss-making position. Following consultation with shareholders, the remuneration committee is proposing a package for 2010 that is
closely based on the structure and principles of 2009, but with an additional LTIP performance measure based on the achievement of stretching share
price targets. With the addition of this performance measure, the maximum LTIP award for 2010 will be 275 per cent of salary, still 100 per cent of
salary lower than the 2008 maximum level. To achieve maximum vesting of this award, not only will stretching EPS and economic profit targets need
to be achieved but also stretching share price targets.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
111
Lloyds Banking Group
Annual Report and Accounts 2009
SUMMARY OF REMUNERATION ELEMENTS
The key remuneration elements for 2010 are summarised below. Each individual element is then described in more detail in the subsequent
sub-sections.
Element
Base salary
Annual incentive
Long-term
incentive plan
Level/design for 2010
Key purpose
Base pay should be set competitively relative to FTSE 20 and
banking sector competitors
Meet essential commitments of executive
Retention
In light of circumstances, no increase for 2010 and base salaries
held at same level as for 2008
200 per cent of salary maximum (225 per cent for group chief
executive), as for 2009
Based 50 per cent on Group financial targets relating to profit
before tax and economic profit
Alignment with Group performance
Alignment with sound risk management
Based 50 per cent on balanced scorecard covering, customers,
people, risk and build franchise
Motivation of executives
Subject to deferral and clawback
275 per cent of salary maximum, split as follows:
Motivation and retention of executives
100 per cent on earnings per share
100 per cent on economic profit
75 per cent on absolute share price growth
Alignment with sound risk management
Any shares vesting from the absolute share price growth element
retained for a further 2 years post vesting
Alignment with long-term shareholder interests
Pension
A mixture of final salary and defined contribution pension
arrangements
Enable executives to build long-term retirement
savings
From April 2012, executive directors with final salary pensions will
move to a defined contribution pension arrangement, with no
compensation
Retention
GENERAL CONSIDERATIONS
When deciding the approach to take for remuneration in 2010, the remuneration committee considered a range of factors. The environment for
remuneration in the banking sector remains very sensitive and the committee is aware of this. Consistent with best practice, shareholders were fully
consulted during the process and their views have been taken into account in the decisions the committee has made. At the same time, the ongoing
challenges of the HBOS integration to create the UK’s leading consumer bank were also considered by the committee as is the need to retain and
motivate the management team to build on the outstanding start made to this process in 2009.
BASE SALARY
Basic salaries are reviewed annually, usually in December, taking into account individual performance and market information (which is provided by
Towers Perrin and supplemented with information from Kepler Associates as appropriate) and then adjusted from 1 January of the following year.
The remuneration committee confirmed during the 2009 review that the FTSE 20 was the most appropriate comparator group to use to benchmark
overall competitiveness of the remuneration package whilst taking particular account of the remuneration practice of our direct competitors, namely
the major UK banks. The FTSE 20 is regarded as providing a realistic and relevant comparison in terms of company size and complexity, as well as
being a key market for talent.
However, in recognition of the current operating environment base salaries for 2010 remain unchanged from the salaries set for 2008. Base salary
increases for other employees across the Group will remain in line with any market movement, but will, in general be significantly lower than in
previous years.
Name
As at 1 January 2010
J E Daniels
A G Kane
G T Tate
T J W Tookey
H A Weir
£1,035,000
£590,000
£640,000
£600,000
£625,000
112
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
ANNUAL INCENTIVE PLAN
The combination of financial and non-financial measures, which support our prudent approach to managing risk, are retained in the annual incentive
plan, whilst the operation of the plan is enhanced in order to increase the alignment between risk and reward still further. The committee recognises
the challenges of setting robust targets in the current operating environment. Furthermore, the committee will review the performance against the
targets for the 2010 annual incentive plan at the end of the year, taking into account the overall operating performance of the business in determining
how much of any bonus will be paid out. The committee reserves the right to exercise its discretion in reducing any payment that otherwise would
have been earned, if they deemed this appropriate.
Consistent with the aim of ensuring that short-term financial results are only achievable sustainably, the committee has decided that the incentive will
be deferred and released in tranches over a three year period. The deferred incentive will be subject to 100 per cent clawback if the performance that
generated the incentive is found to be unsustainable.
The maximum annual incentive opportunity remains unchanged at 200 per cent (225 per cent for the group chief executive) of base salary for the
achievement of exceptional performance targets.
The remuneration committee believes that the structure of the incentive – in particular the use of risk-adjusted and non-financial measures – has been
highly successful in promoting a long-term focus within the senior management team.
LONG-TERM INCENTIVE AWARD
Given the extraordinary circumstances during 2008, the remuneration committee made a reduced maximum LTIP award of 200 per cent of salary in
2009, 175 per cent less than the maximum award for 2008. For 2010, the remuneration committee continues to believe that it is appropriate to make
LTIP awards below the maximum levels that the plan allows (400 per cent) and less than the award levels for 2008 (maximum award 375 per cent).
Notwithstanding the increased size and complexity of the Group since the HBOS acquisition and the concerns about retention and motivation, the
committee believes that the current environment requires a demonstration of continued restraint in relation to remuneration. At the same time, the
committee believes in the importance of aligning shareholder and executive motivation and therefore it has approved maximum awards for the
group chief executive and executive directors for 2010 of 275 per cent of base salary of which 200 per cent of the award will be based on the same
performance conditions as for 2009, namely EPS and economic profit, with the remaining 75 per cent based on the achievement of stretching share
price targets.
LONG-TERM INCENTIVE PERFORMANCE MEASURES
In continuing with the same financial performance measures as for 2009, the remuneration committee has continued to create a focus on long-term
performance, taking appropriate account of risk.
Performance targets have been set by reference to analysts’ expectations, internal business plans, competitive performance assessments and
probability modelling. Stretch performance will be equated to the remuneration committee’s assessment of an upper quartile performance level or
greater. Shareholders have been consulted on the targets and the targets have been made more stretching as a consequence of those discussions.
The details of the targets for the proposed measures are set out below:
Earnings per share (applying to award of 100 per cent of salary)
Earnings per share continues to be an important measure of our profitability and ability to generate cash. The committee has therefore decided to
retain this well-recognised measure in our incentive system.
For the EPS element of the award, performance will be measured based on EPS growth over a three year period from the baseline EPS of 2009.
Threshold
Maximum
Vesting
(%)
25%
100%
EPS absolute
percentage
improvement
158%
180%
Economic profit (applying to award of 100 per cent of salary)
The use of economic profit has been very successful in introducing a long-term, risk-based approach to managing our business. Economic profit is
calculated on a through-the-cycle basis, considering the impact of decisions over an entire economic cycle, encouraging prudent risk management
of our portfolio.
For the economic profit element of the award, performance will be based on the compound annual growth rate (CAGR) from the 2009 base over a
three year period.
Threshold
Maximum
Vesting
(%)
25%
100%
CAGR
growth in EP
57% pa
77% pa
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
113
Lloyds Banking Group
Annual Report and Accounts 2009
Absolute share price growth (applying to award of 75 per cent of salary)
The absolute share price element of the award will fully align shareholder and executives’ interests during a period of share price recovery.
Performance will be measured based on the average absolute share price achieved during the 90 days at the end of the three year period.
Threshold
Maximum
Vesting %
0%
100%
Absolute share
price achieved
75p
114p
There will be an underpin to the absolute share price element of the award such that shares making up that element may only be released if both the
EPS and the economic profit element have achieved a threshold level of vesting as above.
Any shares vesting as a result of this element of the 2010 award will be required to be held for a further two years post vesting.
Vesting between threshold and maximum will be on a straight line basis for all three elements.
PENSION
As stated last year, in April 2012, all executive directors will transition to defined contribution pension arrangements with contributions of 25 per cent
of base salary for the group chief executive and other executive directors, with no compensation for ceasing final salary accrual.
OTHER SHARE PLANS
The executive directors are also eligible to participate in the Group’s ‘sharesave’ and ‘shareplan’ schemes. These are ‘all-employee’ share schemes.
CHAIRMAN’S REMUNERATION
The chairman’s remuneration comprises salary and benefits. He does not participate in the annual bonus and long-term incentive arrangements, nor
is he entitled to pension benefits.
The chairman’s salary was reviewed at the time of the appointment of Sir Winfried Bischoff in 2009. The review took into account the market
information and also the significant amount of time the chairman would be expected to focus on the Group’s activities particularly during the current
period. The chairman was appointed on a salary of £700,000 per annum. His salary will next be reviewed at the end of 2010, with any adjustments
effective 1 January 2011.
INDEPENDENT NON-EXECUTIVE DIRECTORS’ FEES
The fees of the independent non-executive directors are agreed by the board within a total amount determined by the shareholders. Directors may
also receive fees, agreed by the board, for membership of board committees. The fees are designed to recognise the various responsibilities of a
non-executive director’s role and to attract individuals with relevant skills, knowledge and experience. The fees are neither performance related nor
pensionable and are comparable with those paid by other companies. The annual fees from 1 January 2010 are unchanged and are listed below.
Board
Audit committee chairmanship
Audit committee membership
Nomination and governance committee membership
Remuneration committee chairmanship
Remuneration committee membership
Risk oversight committee membership
£65,000
£50,000
£20,000
£5,000
£30,000
£15,000
£15,000
Independent non-executive directors who serve on the boards of subsidiary companies may also receive fees from the subsidiaries. The fees paid in
2009 to the current non-executive directors are shown in the table in the following section.
114
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
REMUNERATION FOR 2009
2009 ANNUAL INCENTIVE SCHEME
The annual incentive scheme for executive directors is designed to reflect specific goals linked to the performance of the business.
Incentive awards for executive directors are based upon individual contribution and overall corporate results. Half of the incentive opportunity is
driven by corporate performance based on the stretching target relating to profit before tax and economic profit. The level of achievement against
the targets for profit before tax and economic profit that results in the lower payout will determine the extent to which the target has been met. The
other half of the incentive opportunity is determined by divisional achievement driven through individual performance. Individual targets relevant to
improving overall business performance are contained in a balanced scorecard and are grouped under the following headings:
– Financial
– Franchise growth
– Customer service
– Risk
– People development
These targets are weighted differently for each of the executive directors, reflecting differing strategic priorities. The non-financial measures include
key performance indicators relating to process efficiency, service quality and employee engagement.
The maximum annual incentive opportunity is 200 per cent (225 per cent for the group chief executive) of basic salary for the achievement
of exceptional performance targets. The maximum payment under the corporate half of the annual incentive is only available if exceptional
performance is achieved against the stretching corporate target. An amount equal to 50 per cent of this element of the incentive is available on the
achievement of the stretching corporate target. Failure to achieve at least 90 per cent of the stretching target would result in no payment under the
corporate half of the incentive.
In 2009, the Group delivered a resilient trading performance against the backdrop of a marked slow down in the UK economic environment and
continued challenges in financial markets. This has been a year of substantial achievement with the creation of a sound platform for future growth of
the combined franchise. Positive trends have been established in margins, costs and impairments. The interest margin improved in the second half
of the year and is expected to increase in 2010, with further improvements expected in subsequent years. Costs fell by five per cent in the year as
integration related savings have started to be realised, with £534 million of cost synergy savings in 2009. Impairments peaked in the first half of the
year, falling off by 21 per cent in the second half. A similar rate of improvement is expected through 2010. The Group’s funding and liquidity positions
were also strengthened during the year.
A number of actions were taken during the year to create a robust capital position, including the £4 billion ordinary share placing and compensating
open offer in June and the successful £22.5 billion equity raising at the end of the year.
Franchise growth has been strong in both Retail and Wholesale and there has been a 48 per cent improvement in cross sales income from the
Lloyds TSB customers. There were strong levels of mortgage lending with over £34 billion of gross new lending. The Lloyds TSB conservative
approach to risk management has been implemented across the Group. All new lending is within the Group’s risk appetite. Our employee
engagement index has remained high through the year and has performed well against the UK norm.
Additionally a number of significant activities were delivered on during 2009 which were not anticipated when the targets were set. These activities
have contributed to placing the Group in the best position possible to grow and develop the combined franchise. They include the largest ever
capital raising and the successful conclusion of negotiations with the European Commission on State Aid. These have all been achieved at the same
time as delivering the ‘business as usual’ agenda and the integration programme.
Any payments under the plan are deferred 100 per cent in shares until June 2012 and subject to claw back.
The calculation of the annual incentive plan payments for executive directors, based on the achievement of performance against targets in respect of
performance in 2009, has been independently checked. The bonuses awarded to directors are shown in the table below:
Name
Opportunity
Bonus awarded
% awarded
A G Kane
200%
G T Tate
T J W Tookey
200%
200%
H A Weir
200%
£885,000
£1,120,000
£1,110,000
£1,062,000
150
175
185
170
The group chief executive has chosen to waive any payment under the scheme for the second successive year.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
115
Lloyds Banking Group
Annual Report and Accounts 2009
2009 LONG-TERM INCENTIVE PLAN AWARDS
The current LTIP rules allow for awards to be made of up to 400 per cent of base salary. Under normal circumstances, awards are made of
300 per cent of salary with the additional 100 per cent available for circumstances that the remuneration committee deems to be exceptional. In
2008, awards were made of 375 per cent of base salary to the chief executive and two of the executive directors for retention purposes, and in light
of data reviewed by the committee which showed total remuneration to be behind median both for the FTSE 20 and the other major UK banks.
Further information viewed by the committee through 2008 continued to show that total remuneration for the executive directors was materially
behind the median of our peer groups, even before allowing for the increased responsibilities of running the combined bank and the magnitude
of the task of integrating the two businesses. However, due to the external environment and following extensive consultation with shareholders, the
committee determined that for 2009 the grant level for executive directors should be set at 200 per cent of base salary, 175 per cent less than the
maximum award for 2008.
Details of the plan, including the specific performance conditions, can be found on page 124.
2009 NON-EXECUTIVE DIRECTORS’ FEES (£)
Lloyds Banking Group fees
Audit
committee
Remuneration
committee
Nomination
and governance
committee
30,000
5,000
Board
65,000
Risk oversight
committee
SW Board
Fees1
28,314
8,665
6,581
19,451
14,962
1,496
4,489
16,288
7,540
12,216
15,000
5,000
1,885
15,000
5,655
30,000
12,560
4,187
12,560
14,090
16,667
41,136
48,504
13,095
12,500
15,000
9,821
52,936
65,000
204,028
54,424
65,000
54,167
65,000
2009
Total
100,000
43,560
40,398
81,440
100,000
249,108
83,731
79,090
83,334
121,136
71,420
W C G Berndt
Ewan Brown
(until 5 June 2009)
J P du Plessis
(until 17 April 2009)
P N Green
(until 23 October 2009)
Sir Julian Horn-Smith
Lord Leitch2
Sir David Manning
(until 2 November 2009)
C J McCall
(until 31 December 2009)
T T Ryan
(from 1 March 2009)
M A Scicluna
Anthony Watson
(from 2 April 2009)
Scottish Widows Services Ltd.
1
2
Lord Leitch was appointed deputy chairman on 17 May 2009 when his remuneration was consolidated into an annual fee of £300,000.
116
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
AUDITED INFORMATION
DILUTION LIMITS
The following charts illustrate the shares available for the Group’s share schemes.
ALL SCHEMES (10% IN ANY CONSECUTIVE 10 YEARS)
2008
2009
489.2
347.1
EXECUTIVE SCHEMES (5% IN ANY CONSECUTIVE 10 YEARS)
2008
35.6
2009
244.0
PENSIONS
250.2
5,888.3
263.0
2,944.7
Shares used (million)
Shares available (million)
Shares used (million)
Shares available (million)
Executive directors are either entitled to participate in the Group’s defined benefit pension schemes (based on salary and length of service, with
a maximum pension of two thirds of final salary), or the Group’s defined contribution scheme (under which their pension entitlement will be based
upon both employer and employee contributions). The defined benefit schemes are closed to new entrants on recruitment.
Pension accruals under the defined benefits scheme for Messrs Daniels and Kane will continue until April 2012. Thereafter they will have the
opportunity to either participate in a defined contribution scheme or to receive a cash supplement with no compensation for ceasing final
salary accrual. There is no entitlement to an immediate and unreduced pension should their employment be terminated before the normal date
of retirement.
SERVICE AGREEMENTS
The Group’s policy is for executive directors to have service agreements with notice periods of no more than one year. All current executive directors
are entitled to receive 12 months’ notice from the Group, but would be required to give six months’ notice if they wished to leave. Executive directors
normally retire at age 60. However, following the implementation of The Employment Equality (Age) Regulations 2006, they may now choose to delay
their retirement until age 65.
It is the Group’s policy that where compensation on early termination is due, it should be paid on a phased basis, mitigated in the event that
alternative employment is secured, and that bonus payments should relate to the period of actual service, rather than the full notice period, and will
be determined on the basis of performance.
Any entitlements under the pension scheme or equity plans will be in accordance with the scheme rules on leaving.
Notice to be given by the Company
Date of service agreement/letter of appointment
Sir Winfried Bischoff
J E Daniels
A G Kane
G T Tate
T J W Tookey
H A Weir
Former director who served during 2009
Sir Victor Blank
6 months
12 months
12 months
12 months
12 months
12 months
6 months
27 July 2009
22 January 2009
23 January 2009
9 February 2009
26 January 2009
21 January 2009
25 January 2006
Independent non-executive directors do not have service agreements and their appointment may be terminated, in accordance with the articles of
association, at any time without compensation.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
117
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
EXTERNAL APPOINTMENTS
The Group recognises that executive directors may be invited to become non-executive directors of other companies and that these appointments
may broaden their knowledge and experience, to the benefit of the Group. Fees are normally retained by the individual directors as the post entails
personal responsibility.
Executive directors are generally allowed to accept one non-executive directorship.
During 2009, Mr Daniels and Mrs Weir received fees of £75,000 and £30,208 respectively, which were retained by them, for serving as non-executive
directors of other companies.
PERFORMANCE GRAPH
The graph below illustrates the performance of the Group measured by TSR against a ‘broad equity market index’ over the past five years. The
Group has been a constituent of the FTSE 100 index throughout this five year period.
TOTAL SHAREHOLDER RETURN – FTSE 100 INDEX
160
140
120
100
80
60
40
20
0
31 Dec
2004
31 Dec
2005
31 Dec
2006
31 Dec
2007
31 Dec
2008
31 Dec
2009
Lloyds Banking Group plc
Rebased to 100 on 31 December 2004
FTSE 100 Index
Source: Bloomberg
118
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
AUDITED INFORMATION
DIRECTORS’ EMOLUMENTS FOR 2009
Current directors who served during 2009
Executive directors
J E Daniels
A G Kane
G T Tate
T J W Tookey
H A Weir
Non-executive directors
Sir Winfried Bischoff (from 15 September 2009)
W C G Berndt
Sir Julian Horn-Smith
Lord Leitch
T T Ryan (from 1 March 2009)
M A Scicluna
Anthony Watson (from 2 April 2009)
Former directors who served during 2009
Sir Victor Blank4 (until 14 September 2009)
Ewan Brown (until 5 June 2009)
J P du Plessis (until 17 April 2009)
P N Green (until 23 October 2009)
Sir David Manning (until 2 November 2009)
C J McCall (until 31 December 2009)
Others
Salaries/
fees
£000
1,035
590
640
600
625
207
100
100
249
83
121
71
640
44
40
81
84
79
Other benefits
Cash
£0001
Non-cash
£0002
Performance-
related
payments
£0003
2009
Total
£000
2008
Total
£000
8
24
20
1
21
885
1,120
1,110
1,062
78
24
27
25
59
4
5
38
1,121
1,523
1,807
1,736
1,767
211
100
100
249
83
121
71
683
44
40
81
84
79
1,151
635
689
108
742
100
100
165
33
669
122
119
100
67
16
807
5,623
5,389
222
112
4,177
9,900
1
2
3
4
The cash column under ‘other benefits’ includes flexible benefits payments (4 per cent of basic salary), the tax planning allowance for Mr Daniels, payments to certain directors who elect to take cash
rather than a company car under the car scheme and the cash balance of a pension allowance for Mrs Weir. Sir Winfried Bischoff has elected to take cash rather than a company car.
The non cash column includes amounts relating to the use of a company car, use of a company driver and private medical insurance and the cost of home security in respect of Sir Victor Blank. It also
includes the value of any matching shares which are received under the terms of Shareplan, through which employees have the opportunity to purchase shares up to a maximum of £125 per month
and receive matching shares on a one for one basis up to a maximum value of £30 per month, rounded down to the nearest whole share.
The group chief executive waived his entitlement to any bonus in respect of 2009 performance. There were no free shares awarded under Shareplan in respect of 2009.
Sir Victor Blank donated his salary from 30 September 2009 until 31 December 2009, amounting to £160,000 to charity. The Group was obligated to pay Sir Victor Blank’s remuneration in lieu of
services rendered during 2010 of £53,333. This was also donated to charity.
DIRECTORS’ PENSIONS
The executive directors are currently members of one of the pension schemes provided by the Lloyds TSB Group with benefits either on a defined
benefit or defined contribution basis. Those directors who joined the Lloyds TSB Group after 1 June 1989 and are members of a defined benefit
scheme have pensions provided on salary in excess of the earnings cap through membership of or by an unfunded pension promise. Retirement
pensions accrue at rates of between 1/60 and 1/30 of basic salary.
For those directors who are members of a defined benefit pension scheme, pension will continue to accrue until 5 April 2012. On 6 April 2012,
defined benefit pension accrual will cease and directors will be offered the option to participate in the defined contribution pension scheme in
operation at that date. Alternatively, they may choose not to join the scheme and elect to receive a pension cash allowance.
Directors have a normal retirement age of 60. However, following the implementation of The Employment Equality (Age) Regulations 2006, they
may now choose to delay their retirement until age 65. In the event of death in service, a lump sum of four times salary is payable plus, for members
of a defined benefit scheme, a spouse’s pension of two-thirds of the member’s prospective pension. On death in retirement, a spouse’s pension of
two-thirds of the member’s pension is payable. The defined benefit schemes are non-contributory. Members of defined contribution schemes are
required to contribute.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
119
Lloyds Banking Group
Annual Report and Accounts 2009
DEFINED CONTRIBUTION SCHEME MEMBERS
During the year to 31 December 2009 the employer has made the following contributions to the defined contribution scheme:
G T Tate
T J W Tookey
H A Weir
DEFINED BENEFIT SCHEME MEMBERS
£000
159
147
122
Accrued
pension at
31 December
2009
£000
(a)
192
357
Accrued
pension at
31 December
2008
£000
(b)
175
342
Change in
accrued
pension
£000
(a)-(b)
17
15
Transfer
value at
31 December
2009
£000
(c)
3,844
6,889
Transfer
value at
31 December
2008
£000
(d)
3,263
6,146
J E Daniels
A G Kane
The disclosures in columns (a) to (d) are as required under section 421 of the Companies Act 2006.
Change in
transfer
value
£000
(c)-(d)
581
743
Additional
pension
earned to
31 December
2009
£000
(e)
8
–
Transfer
value of the
increase
£000
(f)
169
–
Columns (a) and (b) represent the deferred pension to which the directors would have been entitled had they left the Group on 31 December 2009
and 2008, respectively.
Column (c) is the transfer value of the deferred pension in column (a) calculated as at 31 December 2009 based on factors supplied by the actuary of
the relevant Lloyds TSB Group pension scheme. The basic method used to arrive at the factors has not changed during the year.
Column (d) is the equivalent transfer value, but calculated as at 31 December 2008 on the assumption that the director left service at that date.
Column (e) is the increase in pension built up during the year, recognising (i) the accrual rate for the additional service based on the pensionable
salary in force at the year end, and (ii) where appropriate the effect of pay changes in ‘real’ (inflation adjusted) terms on the pension already earned at
the start of the year.
Column (f) is the capital value of the pension in column (e).
The disclosures in columns (e) and (f) are as required by the UK Listing Authority listing rules. The requirements of the listing rules differ from those
of the Companies Act. The listing rules require the additional pension earned over the year to be calculated as the difference between the pension
accrued at the end of the financial year and the pension accrued at the start of the financial year less the increase in the pension earned over the
year solely due to inflation. The transfer value in column (f) can differ significantly from the change in transfer value as required by the Companies Act
because the additional pension accrued over the year calculated in accordance with the listing rules makes allowance for inflation, and the change
in the transfer value required by the Companies Act will be significantly influenced by changes in the assumptions underlying the transfer value
calculation at the beginning and end of the financial year.
Members of the Lloyds TSB Group’s pension schemes have the option to pay additional voluntary contributions: neither the contributions nor the
resulting benefits are included in the above table.
Major changes to the legislation governing the provision of pensions in the UK (known as pension simplification) came into effect in April 2006.
Benefits from an approved pension scheme will be limited to the Lifetime Allowance, currently £1.75 million which is equivalent to an annual pension
of £87,500. Any benefit in excess of this amount will incur a tax charge for the individual. The Group has agreed that if an executive director has
benefits in excess of the Lifetime Allowance they may cease to accrue benefits in the Scheme and receive a salary supplement as an alternative. This
will not cost the Group more than the current arrangements. The Group will not compensate any individual in respect of any increased tax liability
arising from pension simplification. To date, the executive directors affected have elected to continue to accrue benefits in the approved scheme.
120
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
AUDITED INFORMATION
DIRECTORS’ INTERESTS
The interests, all beneficial, of those who were directors at 31 December 2009 in shares in Lloyds Banking Group were:
NUMBER OF SHARES
Executive directors
J E Daniels
A G Kane
G T Tate
T J W Tookey
H A Weir
Non-executive directors
Sir Winfried Bischoff
W C G Berndt
Sir Julian Horn-Smith
Lord Leitch
T T Ryan
M A Scicluna
Anthony Watson
At 1 January 2009
(or later date of
appointment)
At 31 December
2009
At 25 February1
2010
2,558,383
1,225,527
526,629
98,294
425,729
423,018
204,061
75,072
2,493
61,822
–
170,000
5,000
10,000
–
10,000
13,209
2,557,816
1,224,960
526,061
97,727
425,162
585,000
948,429
27,890
55,787
63,451
56,226
51,357
1
The changes in beneficial interests between 31 December 2009 and 25 February 2010 related to ‘partnership’ and ‘matching’ shares acquired under the Lloyds TSB Group Shareplan.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
121
Lloyds Banking Group
Annual Report and Accounts 2009
Granted
during
the year
Exercised
during
the year
Lapsed
during
the year
At
31 December
2009
INTERESTS IN SHARE OPTIONS
J E Daniels
A G Kane
G T Tate
T J W Tookey
H A Weir
At
1 January
2009
131,484
430,547
6,906
27,000
64,786
11,841
34,759
73,255
247,891
6,906
64,400
27,357
247,891
6,906
6,906
77,868
247,891
6,906
Other share plan
T J W Tookey
35,305
Former director who served during 2009
Sir Victor Blank
6,906
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35,305
–
–
–
–
27,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
131,484
430,547
6,906
–
64,786
11,841
34,759
73,255
247,891
6,906
64,400
27,357
Exercise
price
419.25p
474.25p
139p
887.5p
549.5p
615.5p
655p
419.25p
474.25p
Exercise periods
From
To
Notes
18/3/2007
17/3/2014
17/3/2008
16/3/2015
1/1/2012
30/6/2012
d, f
e, f
a, h
4/3/2002
3/3/2009
b, g, i
6/3/2003
5/3/2010
8/8/2003
7/8/2010
6/3/2004
5/3/2011
18/3/2007
17/3/2014
17/3/2008
16/3/2015
139p
1/1/2012
30/6/2012
419.25p
18/3/2007
17/3/2014
403p
12/8/2007
11/8/2014
247,891
474.25p
17/3/2008
16/3/2015
6,906
6,906
77,868
247,891
6,906
139p
139p
424.75p
474.25p
1/1/2012
30/6/2012
1/1/2012
30/6/2012
29/4/2007
28/4/2014
17/3/2008
16/3/2015
139p
1/1/2012
30/6/2012
– (see page 125)
20/4/2009
19/10/2009
6,906
139p
1/2/2010
31/7/2010
c, g
c, g
c, g
d, f
e, f
a, h
d, f
d, f
e, f
a, h
a, h
d, f
e, f
a, h
j
a, k
a Sharesave.
b Executive option granted between March 1999 and August 1999.
c Executive option granted between March 2000 and March 2001.
d Executive option granted between March 2004 and August 2004.
e Executive option granted from March 2005.
f Exercisable to the extent at which the performance condition vested.
g Not exercisable as the performance conditions had not been met.
h Not exercisable as the option has not been held for the period required by the relevant scheme.
i Option lapsed as not exercised by 10th anniversary of date of grant.
j Mr Tookey exercised his option on 8 May 2009. Market price on day of exercise was 100.70p.
k Exercisable only in the period shown.
Sir Victor Blank retired as chairman on 14 September 2009 but remained employed by the Group until 31 January 2010.
None of the other directors at 31 December 2009 had options to acquire shares in Lloyds Banking Group plc or its subsidiaries.
The market price for a share in the Company at 1 January 2009 and 31 December 2009 was 126p and 50.69p, respectively. The range of prices
between 1 January 2009 and 31 December 2009 was 40.30p to 140.70p.
The following table contains information on the performance conditions for executive options granted since 1999. The remuneration committee
chose the relevant performance condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.
122
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
AUDITED INFORMATION
Options granted
Performance conditions
March 1999 – 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.
March 2000 – March 2001
March 2004 – August 2004
March 2005 – August 2005
As the performance condition had not been met, the options lapsed in 2009.
As for March 1999 – August 1999 except that there must have been growth in the earnings per share equal to the
change in the retail price index plus three percentage points for each complete year of the relevant period.
That the Company’s ranking based on TSR over the relevant period against a comparator group
(17 UK and international fi nancial services companies including Lloyds Banking Group) must be at least ninth,
when 14 per cent of the option will be exercisable. If the Company is ranked fi rst in the group, then 100 per cent
of the option will be exercisable and if ranked tenth or below the performance condition is not met.
Options granted in 2004 became exercisable as the performance condition was met on the re-test.
The performance condition vested at 24 per cent for Mr Tate’s March option and at 14 per cent for all other
options granted to executive directors during 2004.
That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies
including Lloyds Banking Group) must be at least eighth, when 30 per cent of the option will be exercisable.
If the Company is ranked fi rst to fourth position in the group, then 100 per cent of the option will be exercisable
and if ranked ninth or below, the performance condition is not met.
Options granted in 2005 became exercisable as the performance condition was met when tested.
The performance condition vested at 82.5 per cent for all options granted to executive directors.
LLOYDS TSB PERFORMANCE SHARE PLAN
Under the plan, executive directors were required to defer 50 per cent of their bonus awards in 2006 into shares in the Company, known as bonus
shares. The number of bonus shares awarded was calculated after the deduction of income tax and national insurance from the deferred element of
the bonus.
The bonus shares are held on behalf of the executive for a period of three years before release.
Executives received a further award of ’performance shares’ on the basis of two performance shares for each bonus share. The receipt of the
performance shares is dependent on the satisfaction of a TSR performance condition measured over three financial years of the Company.
The following table details the number of bonus and performance shares released in respect of their 2005 bonus.
J E Daniels
A G Kane
G T Tate
H A Weir
Bonus shares
Performance shares
At
1 January
2009
Released
20 March
2009
At
31 December
2009
At
1 January
2009
Lapsed
20 March
2009
At
31 December
2009
50,944
20,531
27,358
20,062
50,944
20,531
27,358
20,062
–
–
–
–
172,694
172,694
69,598
92,738
68,008
69,598
92,738
68,008
–
–
–
–
Award
price
566.10p
566.10p
566.10p
566.10p
The following table contains information on the performance conditions for performance shares. The remuneration committee chose the relevant
performance condition because it was felt to be challenging, aligned to shareholders’ interests and appropriate at the time.
Performance shares awarded
Performance conditions
March 2006
That the Company’s ranking based on TSR over the relevant period against a comparator group (15 companies
including Lloyds Banking Group) must be at least eighth for any shares to be received. If ranked ninth or below
no shares would be received. The maximum of two performance shares for each bonus share will be awarded
only if the Company is first in the comparator group; one performance share will be awarded for each bonus
share if the Company is placed fifth; and one performance share for every two bonus shares if the Company is
placed eighth. Between first and fifth positions and fifth and eighth positions a sliding scale will apply.
Whilst income tax and national insurance was deducted from the deferred bonus before the conversion to
bonus shares, where a match of performance shares is justified, these shares will be awarded as if income tax and
national insurance had not been deducted. This maintains the original design of the plan prior to the issue of
guidance from HM Revenue & Customs in December 2004.
The performance condition attached to the March 2006 award was not met, with Lloyds Banking Group ranked in
ninth place. Bonus shares were released on 20 March 2009, at which time the performance shares lapsed.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
123
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
LLOYDS TSB LONG-TERM INCENTIVE PLAN
The following are conditional share awards available under the plan. Further information regarding this plan can be found on pages 124 and 125.
J E Daniels
A G Kane
G T Tate
T J W Tookey
H A Weir
At
1 January
2009
507,692
534,322
838,735
288,460
306,122
413,309
297,114
333,951
518,638
54,258
52,875
71,220
288,460
320,037
506,482
Awarded
during
the year
Adjusted
number
of shares
Lapsed
during
the year
At
31 December
2009
Year of
vesting
Notes
165,403
259,637
353,829
530,743
94,762
127,943
201,700
302,549
103,377
160,548
218,792
328,189
16,367
22,046
205,118
307,677
99,069
156,785
213,665
320,497
507,692
288,460
297,114
54,258
288,460
699,725
1,098,372
1,496,843
2,245,265
400,884
541,252
853,273
1,279,909
437,328
679,186
925,583
1,388,376
69,242
93,266
867,735
1,301,603
419,106
663,267
903,891
1,355,836
1,143,014
1,714,522
651,573
977,360
706,791
1,060,187
662,617
993,926
690,226
1,035,339
2009
2010
2011
2012
2012
2009
2010
2011
2012
2012
2009
2010
2011
2012
2012
2009
2010
2011
2012
2012
2009
2010
2011
2012
2012
a
a
a, b
a, b
a
a
a, b
a, b
a
a
a, b
a, b
a
a
a, b
a, b
a
a
a, b
a, b
a Conditional awards of shares made under this plan were adjusted on 2 July 2009 as a result of the Placing and Compensatory Open Offer. The adjustment was made using a standard HMRC
formula, to negate the dilutionary impact of the capital raising event.
b Original award price 72.44p, award price post adjustment 55.31p.
124
Lloyds Banking Group
Annual Report and Accounts 2009
DIRECTORS’ REMUNERATION REPORT continued
AUDITED INFORMATION
The following table contains information on the performance conditions for awards made under the long-term incentive plan. The remuneration
committee chose the relevant performance conditions because they were felt to be challenging, aligned to shareholders’ interests and appropriate
at the time.
LTIP award
May 2006
Performance conditions
For 50 per cent of the award (the ‘EPS Award’) – the percentage increase in earnings per share of the Group (on
a compound annualised basis) over the relevant period must be at least an average of 6 percentage points per
annum greater than the percentage increase (if any) in the retail price index over the same period. If it is less than
3 per cent per annum, the EPS Award will lapse. If the increase is more than 3 per cent but less than 6 per cent
per annum, then the proportion of shares released will be on a straight line basis between 17.5 per cent and
100 per cent. The relevant period commenced on 1 January 2006 and ended on 31 December 2008.
For the other 50 per cent of the award (the ‘TSR Award’) – it will be necessary for the Group’s TSR to exceed
the median of a comparator group (14 companies) over the relevant period by an average of 7.5 per cent per
annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award will vest where the Group’s TSR is equal
to median and vesting will occur on a straight line basis in between these points. Where the Group’s TSR is below
the median of the comparator group, the TSR Award will lapse. The relevant period commenced on 1 January
2006 and ended on 31 December 2008.
When tested at the end of the relevant performance period, neither the EPS nor the TSR performance conditions
were met and all awards made in 2006 lapsed.
March 2007
For 50 per cent of the award (the ‘EPS Award’) – the performance condition was as described for May 2006 with the
relevant performance period commencing on 1 January 2007 and ending on 31 December 2009.
For the other 50 per cent of the award (the ‘TSR Award’) – the performance condition was as described for
May 2006 with the relevant performance period commencing on 8 March 2007 (the date of award) and ending on
7 March 2010.
March and April 2008
For 50 per cent of the award (the ‘EPS Award’) – the performance condition was as described for May 2006 with the
relevant performance period commencing on 1 January 2008 and ending on 31 December 2010.
For the other 50 per cent of the award (the ‘TSR Award’) – the performance condition was as described for
May 2006 with the relevant performance period commencing on 6 March 2008 (the date of the March award) and
ending on 5 March 2011.
April 2009
EPS: The release of 50 per cent of the shares will be dependent on the extent to which the growth in EPS achieves
cumulative EPS targets over the three year period.
Economic profit: The release of the remaining 50 per cent of shares will be dependent on the extent to which
Lloyds Banking Group achieves cumulative Economic Profit targets over a three year period.
The EPS and economic profit performance measures applying to this 2009 LTIP award were set on the basis that the
Group would enter into GAPS. Now that the Group is not participating in GAPS, the remuneration committee has
determined that these performance measures will be restated on a basis consistent with the EPS and economic profit
measures used for the 2010 LTIP awards. This restatement will be undertaken in 2010.
The current targets prior to restatement are:
EPS
Threshold
Maximum
Economic profit
Threshold
Maximum
Vesting
25%
100%
Vesting
25%
100%
Growth in EPS
55%
81%
Absolute Improvement in EP
100%
185%
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
96
98
Corporate governance
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
125
Lloyds Banking Group
Annual Report and Accounts 2009
AUDITED INFORMATION
April 2009
Integration award
Synergy Savings: The release of 50 per cent of the shares will be dependent on the achievement of target run-rate
synergy savings in 2009 and 2010 as well as the achievement of sustainable synergy savings of at least £1.5 billion
by the end of 2011. The award will be broken down into three equally weighted annual tranches. Performance
will be assessed at the end of each year against annual performance targets based on a trajectory to meet
the 2011 target. The extent to which targets have been achieved will determine the proportion of shares to
be banked each year. Any release of shares will be subject to the remuneration committee judging the overall
success of the delivery of the integration programme.
Integration Balanced Scorecard: The release of the remaining 50 per cent of the shares will be dependent on the
outcome of a Balanced Scorecard of non-financial measures of the success of the integration in each of 2009,
2010 and 2011. The Balanced Scorecard element will be broken down into three equally weighted tranches.
The tranches will be crystallised and banked for each year of the performance cycle subject to separate annual
performance targets across the four measurement categories of Building the Business, Customer, Risk and
People and Organisation Development.
Performance against the first year of the award has been assessed and all targets have been met or exceeded.
Alithos Limited provided information for the testing of the TSR performance conditions for the Company’s long-term incentive schemes. EPS is the
Group’s normalised earnings per share as shown in the Group’s report and accounts, subject to such adjustments as the remuneration committee
regards as necessary for consistency.
OTHER SHARE PLAN
LLOYDS TSB GROUP EXECUTIVE SHARE PLAN 2003
Mr Tookey was granted an option under this plan to acquire 35,305 ordinary shares in Lloyds Banking Group plc. The option was not subject to any
performance condition but would normally have become exercisable only if he remained an employee, and had not given notice of resignation, as at
19 April 2009. As Mr Tookey remained an employee, the option vested on 19 April 2009, and was exercised on 8 May 2009.
In addition, on 26 March 2008 (prior to his appointment as an executive director), Mr Tookey was granted an award under the Lloyds TSB Executive
Retention Plan 2006. The award is satisfied in cash only and, subject to continued employment, gives Mr Tookey the right to receive an amount equal
to the value of 141,880 Lloyds Banking Group shares on the date of vesting. The award was adjusted on 2 July 2009 as a result of the placing and
compensatory open offer. The adjustment was made using a standard HMRC formula, to negate the dilutionary impact of the capital raising event.
The award vests as to 50 per cent on 26 March 2011 and 50 per cent on 26 March 2013. Mr Tookey has agreed to reinvest the cash proceeds into
Lloyds Banking Group shares. As an executive director, he is no longer eligible to be granted awards under this plan.
None of those who were directors at the end of the year had any other interest in the capital of Lloyds Banking Group plc or its subsidiaries.
The register of directors’ interests, which is open to inspection, contains full particulars of directors’ shareholdings and options to acquire shares
in Lloyds Banking Group.
On behalf of the board
Harry F Baines
Company Secretary
25 February 2010
126
Lloyds Banking Group
Annual Report and Accounts 2009
REPORT OF THE INDEPENDENT AUDITORS ON THE
CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LLOYDS BANKING GROUP PLC
We have audited the group financial statements of Lloyds Banking Group plc for the year ended 31 December 2009 which comprises the
consolidated income statement, consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes
in equity, consolidated cash flow statement and the related notes. The financial reporting framework that has been applied in their preparation is
applicable law and International Financial Reporting Standards as adopted by the European Union.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As explained more fully in the Directors’ Responsibilities Statement on page 99, the directors are responsible for the preparation of the group
financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the group financial statements in
accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part 16 of
the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to
any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall presentation of the financial statements.
OPINION ON FINANCIAL STATEMENTS
In our opinion the group financial statements:
– give a true and fair view of the state of the group’s affairs as at 31 December 2009 and of its profit and cash flows for the year then ended;
– have been properly prepared in accordance with IFRSs as adopted by the European Union; and
– have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the lAS Regulation.
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion:
– the information given in the Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the
group financial statements; and
– the information given in the Corporate Governance Statement set out on pages 100 to 104 with respect to internal control and risk management
systems and about share capital structures is consistent with the financial statements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in our opinion:
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit; or
– a corporate governance statement has not been prepared by the parent company.
Under the Listing Rules we are required to review:
– the directors’ statement, on page 104, in relation to going concern; and
– the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the June 2008 Combined Code
specified for our review.
OTHER MATTER
We have reported separately on the parent company financial statements of Lloyds Banking Group plc for the year ended 31 December 2009 and on
the information in the Directors’ Remuneration Report that is described as having been audited.
Ian Rankin
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
25 February 2010
(a)
The maintenance and integrity of the Lloyds Banking Group plc website is the responsibility of the directors; the work carried out by the auditors
does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred
to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other
jurisdictions.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
127
Lloyds Banking Group
Annual Report and Accounts 2009
CONSOLIDATED INCOME STATEMENT
for the year ended 31 December 2009
Interest and similar income
Interest and similar expense
Net interest income
Fee and commission income
Fee and commission expense
Net fee and commission income
Net trading income
Insurance premium income
Other operating income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures and associates
Gain on acquisition
Profit before tax
Taxation
Profit for the year
Profit attributable to minority interests
Profit attributable to equity shareholders
Profit for the year
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of the consolidated financial statements.
1
Restated for IFRS 2 (Revised)
Note
5
6
7
8
9
10
11
12
13
14
15
16
16
2009
£ million
28,238
(19,212)
9,026
4,254
(1,517)
2,737
19,098
8,946
5,490
36,271
45,297
(22,019)
23,278
(15,984)
7,294
(16,673)
(752)
11,173
1,042
1,911
2,953
126
2,827
2,953
7.5p
7.5p
20081
£ million
17,569
(9,851)
7,718
3,231
(694)
2,537
(9,186)
5,412
528
(709)
7,009
2,859
9,868
(6,100)
3,768
(3,012)
4
–
760
38
798
26
772
798
6.7p
6.6p
128
Lloyds Banking Group
Annual Report and Accounts 2009
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2009
Profi t for the year
Other comprehensive income
Movements in revaluation reserve in respect of available-for-sale fi nancial assets, net of tax:
Change in fair value
Transferred to income statement in respect of disposals
Transferred from income statement in respect of impairment
Other transfers to income statement
Movement in cash fl ow hedging reserve, net of tax:
Effective portion of changes in fair value taken to other comprehensive income
Net gains transferred to the income statement
Currency translation differences, net of tax
Other comprehensive income for the year, net of tax
Total comprehensive income for the year
Total comprehensive income attributable to minority interests
Total comprehensive income attributable to equity shareholders
Total comprehensive income for the year
1
Restated for IFRS 2 (Revised)
2009
£ million
2,953
20081
£ million
798
1,936
(2,031)
(74)
453
(67)
(19)
102
(66)
2,248
(2,014)
(382)
92
(290)
(219)
1,739
4,692
107
4,585
4,692
(24)
12
(12)
(362)
(2,388)
(1,590)
54
(1,644)
(1,590)
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
CONSOLIDATED BALANCE SHEET
at 31 December 2009
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
129
Lloyds Banking Group
Annual Report and Accounts 2009
Assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other financial assets at fair value through profit or loss
Derivative financial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Investment properties
Investments in joint ventures and associates
Goodwill
Value of in-force business
Other intangible assets
Tangible fixed assets
Current tax recoverable
Deferred tax assets
Other assets
Total assets
The accompanying notes are an integral part of the consolidated financial statements.
The directors approved the consolidated fi nancial statements on 25 February 2010.
Sir Winfried Bischoff
Chairman
J Eric Daniels
Group Chief Executive
Tim J W Tookey
Group Finance Director
17
18
19
20
23
25
26
13
27
28
29
30
42
31
Note
2009
£ million
2008
£ million
5,008
946
45,064
28,884
38,733
240,344
4,416
283,493
55,707
2,631
55
2,256
1,893
197
2,965
300
833
38,994
1,579
150,011
49,928
35,361
626,969
32,652
694,982
46,602
4,757
479
2,016
6,685
4,087
9,224
680
5,006
12,225
1,027,255
5,801
436,033
130
Lloyds Banking Group
Annual Report and Accounts 2009
CONSOLIDATED BALANCE SHEET
at 31 December 2009
Equity and liabilities
Liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
Trading and other financial liabilities at fair value through profit or loss
Derivative financial instruments
Notes in circulation
Debt securities in issue
Liabilities arising from insurance contracts and participating investment contracts
Liabilities arising from non-participating investment contracts
Unallocated surplus within insurance businesses
Other liabilities
Retirement benefit obligations
Current tax liabilities
Deferred tax liabilities
Other provisions
Subordinated liabilities
Total liabilities
Equity
Share capital
Share premium account
Other reserves
Retained profits
Shareholders’ equity
Minority interests
Total equity
Total equity and liabilities
The accompanying notes are an integral part of the consolidated financial statements.
Note
2009
£ million
2008
£ million
32
33
34
18
35
36
38
39
40
41
42
43
44
45
46
47
48
82,452
406,741
1,037
28,271
40,485
981
233,502
76,179
46,348
1,082
29,320
780
51
209
983
34,727
983,148
10,472
14,472
7,086
11,248
43,278
829
44,107
66,514
170,938
508
6,754
26,892
–
75,710
33,792
14,243
270
11,456
1,771
–
–
230
17,256
426,334
1,513
2,096
(2,476)
8,260
9,393
306
9,699
1,027,255
436,033
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
131
Lloyds Banking Group
Annual Report and Accounts 2009
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Balance at 1 January 2008
Total comprehensive income
Dividends
Private placement of ordinary shares
Purchase/sale of treasury shares
Employee share option schemes:
Value of employee services
Proceeds from shares issued
Repayment of capital to minority shareholders
Balance at 31 December 2008
Total comprehensive income
Dividends
Issue of ordinary shares:
Placing and open offer
Issued on acquisition of HBOS
Placing and compensatory open offer
Rights issue
Issued to Lloyds TSB Foundations
Transfer to merger reserve
Redemption of preference shares
Purchase/sale of treasury shares
Employee share option schemes:
Value of employee services
Adjustment on acquisition
Extinguishment of minority interests
Balance at 31 December 2009
1
Restated for IFRS 2 (Revised)
Attributable to equity shareholders
Share capital
and premium
£ million
2,730
–
–
760
–
–
119
–
3,609
–
–
649
1,944
3,905
13,112
41
(1,000)
2,684
–
–
–
–
Other
reserves
£ million
(60)
(2,416)
–
–
–
–
–
–
(2,476)
1,758
–
3,781
5,707
–
–
–
1,000
(2,684)
–
–
–
–
Retained
profits1
£ million
9,471
772
(2,042)
–
16
43
–
–
8,260
2,827
–
–
–
–
–
–
–
–
45
116
–
–
24,944
7,086
11,248
Minority
interests
£ million
284
54
(29)
–
–
–
–
(3)
306
107
(116)
–
–
–
–
–
–
–
–
–
5,567
(5,035)
829
Total1
£ million
12,425
(1,590)
(2,071)
760
16
43
119
(3)
9,699
4,692
(116)
4,430
7,651
3,905
13,112
41
–
–
45
116
5,567
(5,035)
44,107
132
Lloyds Banking Group
Annual Report and Accounts 2009
CONSOLIDATED CASH FLOW STATEMENT
for the year ended 31 December 2009
Profit before tax
Adjustments for:
Change in operating assets
Change in operating liabilities
Non-cash and other items
Tax received (paid)
Net cash (used in) provided by operating activities
Cash flows from investing activities
Purchase of available-for-sale financial assets
Proceeds from sale and maturity of available-for-sale financial assets
Purchase of fixed assets
Proceeds from sale of fixed assets
Acquisition of businesses, net of cash acquired
Disposal of businesses, net of cash disposed
Net cash provided by (used in) investing activities
Cash flows from financing activities
Dividends paid to equity shareholders
Dividends paid to minority interests
Interest paid on subordinated liabilities
Proceeds from issue of subordinated liabilities
Proceeds from issue of ordinary shares
Repayment of subordinated liabilities
Repayment of capital to minority shareholders
Net cash provided by financing activities
Effects of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
The accompanying notes are an integral part of the consolidated financial statements.
1
Restated for IFRS 2 (Revised)
Note
55(A)
55(B)
55(C)
55(F)
55(G)
55(E)
55(E)
55(E)
55(E)
55(E)
55(D)
2009
£ million
1,042
61,942
(105,927)
8,907
301
(33,735)
(455,816)
490,561
(2,689)
2,129
16,227
411
50,823
–
(116)
(2,622)
4,187
21,533
(6,897)
(33)
16,052
(210)
32,930
32,760
65,690
20081
£ million
760
(43,025)
80,933
(4,017)
(810)
33,841
(144,680)
110,470
(1,436)
579
(19)
–
(35,086)
(2,042)
(29)
(771)
3,021
879
(381)
(3)
674
1,440
869
31,891
32,760
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
133
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 BASIS OF PREPARATION
The consolidated financial statements of Lloyds Banking Group plc (prior to 16 January 2009 known as Lloyds TSB Group plc) have been prepared
in accordance with International Financial Reporting Standards as adopted by the European Union (EU). IFRS comprises accounting standards
prefixed IFRS issued by the International Accounting Standards Board (IASB) and those prefixed IAS issued by the IASB’s predecessor body as
well as interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and its predecessor body. The EU endorsed
version of IAS 39 Financial Instruments: Recognition and Measurement relaxes some of the hedge accounting requirements; the Group has not taken
advantage of this relaxation, and therefore there is no difference in application to the Group between IFRS as adopted by the EU and IFRS as issued
by the IASB.
The financial information has been prepared under the historical cost convention, as modified by the revaluation of investment properties,
available-for-sale financial assets, trading securities and certain other financial assets and liabilities at fair value through profit or loss and all derivative
contracts. As stated on page 104, the directors consider that it is appropriate to continue to adopt the going concern basis in preparing the accounts.
To provide a more relevant presentation of the Group’s financial instruments, additional line items have been added to the consolidated balance sheet
to show debt securities classified as loans and receivables separately. Comparatives have been reclassified to conform to the revised presentation.
The following IFRS pronouncements relevant to the Group have been adopted in these consolidated financial statements:
(i)
(ii)
IAS 1 Presentation of Financial Statements. The revised standard prohibits the presentation of items of income and expense (that is ‘non-owner
changes in equity’) in the statement of changes in equity, requiring ‘non-owner changes in equity’ to be presented separately from owner
changes in equity. All non-owner changes in equity are required to be shown in a performance statement. Entities can choose whether to
present one performance statement (the statement of comprehensive income) or two statements (the income statement and statement of
comprehensive income). The Group has elected to present two statements: an income statement and a statement of comprehensive income.
The financial statements have been prepared under the revised disclosure requirements; the application of this revised standard, which affects
presentation only, has not had any impact on amounts recognised in these financial statements.
Amendment to IFRS 2 Share-based Payment – ‘Vesting Conditions and Cancellations’. This amendment to IFRS 2 restricts the definition of
‘vesting condition’ to a condition that includes an explicit or implicit requirement to provide services. Any other conditions are non-vesting
conditions, which have to be taken into account to determine the fair value of the equity instruments granted. In the case that the award does
not vest as the result of a failure to meet a non-vesting condition that is within the control of either the entity or the counterparty, this must be
accounted for as a cancellation. The main impact of this amendment for the Group arises from cancellations by employees of contributions to
the Group’s Save-As-You-Earn (SAYE) schemes; in the event of a cancellation the Group must recognise immediately the amount of the expense
that would have otherwise been recognised over the remainder of the vesting period. Under the former IFRS 2, such cancellations would
have resulted in the reversal of the costs recognised in current and prior periods in respect of the SAYE schemes concerned for the relevant
employees. The amendment is applied retrospectively and has resulted in a restatement of the 2008 comparatives. The effect has been to
increase operating expenses and reduce profit before tax by £43 million in 2009 (2008: £47 million) but has had no effect on the Group’s balance
sheet or shareholders’ equity as the increased expense is offset by movements in retained profits.
(iii) Amendments to IFRS 7 Financial Instruments: Disclosures – ‘Improving Disclosures about Financial Instruments’. The amendments require
enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of a three level fair value
measurement hierarchy for financial instruments carried on the Group’s balance sheet at fair value. As the amendments only result in additional
disclosures, the amendments have not had any impact on amounts recognised in these financial statements.
(iv) IFRS 8 Operating Segments. This new standard replaces IAS 14 Segment Reporting and requires reporting of financial and descriptive
information about operating segments which are based on how financial information is reported and evaluated internally. The segment
information for the year ended 31 December 2009 and for the corresponding comparative period is presented in note 4. The application
of this new standard, which affects disclosures only, has not had any impact for amounts recognised in these financial statements.
The application of the following IFRS pronouncements which all became effective in 2009 has had no material impact on these financial statements:
– Amendments to IFRIC 9 Reassessment of Embedded Derivatives and IAS 39 Financial Instruments: Recognition and Measurement. This
amendment clarifies that a reassessment of embedded derivatives is required whenever a financial asset has been reclassified out of the fair value
through profit or loss category.
– IFRIC 13 Customer Loyalty Programmes. This interpretation addresses accounting by entities who grant customer loyalty award credits to
customers as part of sales transactions and which can be redeemed in the future for free or discounted goods or services. The majority of customer
loyalty award schemes are operated by third parties.
– IFRIC 16 Hedges of a Net Investment in a Foreign Operation. This interpretation provides guidance on accounting for hedges of net investments in
foreign operations in an entity’s consolidated financial statements.
– IAS 23 Borrowing Costs. This revised standard requires interest and other costs incurred in connection with the borrowing of funds to be recognised
as an expense excepting that those which are directly attributable to the acquisition, construction or production of assets that take a substantial
period of time to get ready for their intended use or sale must be capitalised as part of the cost of those assets.
– Amendments to IAS 32 and IAS 1 Puttable Financial Instruments and Obligations Arising on Liquidation. The amendments require some puttable
financial instruments (being those which give the holder the right to put the instrument back to the issuer for cash or another financial asset) and
some financial instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on
liquidation to be classified as equity.
134
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1 BASIS OF PREPARATION continued
– Improvements to IFRSs (issued May 2008). Sets out minor amendments to IFRS standards as part of annual improvements process. Most
amendments clarified existing practice.
Details of those IFRS pronouncements which will be relevant to the Group but which were not effective at 31 December 2009 and which have not
been applied in preparing these financial statements are given in note 56.
2 ACCOUNTING POLICIES
The Group’s accounting policies are set out below.
(A) CONSOLIDATION
The assets, liabilities and results of Group undertakings (including special purpose entities) are included in the financial statements on the basis of
accounts made up to the reporting date. Group undertakings include subsidiaries, associates and joint ventures.
(1) Subsidiaries
Subsidiaries include entities over which the Group has the power to govern the financial and operating policies which generally accompanies
a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or
convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which
control is transferred to the Group; they are de-consolidated from the date that control ceases. Details of the principal subsidiaries are given in note 9
to the parent company financial statements.
Investment vehicles, such as Open Ended Investment Companies (OEICs), where the Group has control, typically through acting as fund manager
and the life funds having a beneficial interest greater than 50 per cent, are consolidated. The minority unitholders’ interest is reported in other
liabilities.
Intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated.
The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority
interests result in gains and losses for the Group that are recorded in the income statement. Purchases from minority interests result in goodwill,
being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.
(2) Joint ventures and associates
Joint ventures are entities over which the Group has joint control under a contractual arrangement with other parties. Associates are entities over
which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is the
power to participate in the financial and operating policy decisions of the entity and is normally achieved through holding between 20 per cent and
50 per cent of the voting share capital of the entity.
The Group utilises the venture capital exemption for investments where significant influence or joint control is present and the business unit
operates as a venture capital business. These investments are designated at initial recognition at fair value through profit or loss. Otherwise, the
Group’s investments in joint ventures and associates are accounted for by the equity method of accounting and are initially recorded at cost and
adjusted each year to reflect the Group’s share of the post-acquisition results of the joint venture or associate based on audited accounts which are
coterminous with the Group or made up to a date which is not more than three months before the Group’s reporting date. The share of any losses is
restricted to a level that reflects an obligation to fund such losses.
(B) GOODWILL
Goodwill arises on business combinations, including the acquisition of subsidiaries, and on the acquisition of interests in joint ventures and
associates; goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the identifiable assets, liabilities and
contingent liabilities acquired. Where the fair value of the Group’s share of the identifiable assets, liabilities and contingent liabilities of the acquired
entity is greater than the cost of acquisition, the excess is recognised immediately in the income statement.
Goodwill is recognised as an asset at cost and is tested at least annually for impairment. If an impairment is identified the carrying value of the
goodwill is written down immediately through the income statement and is not subsequently reversed. Goodwill arising on acquisitions of associates
and joint ventures is included in the Group’s investment in joint ventures and associates. At the date of disposal of a subsidiary, the carrying value of
attributable goodwill is included in the calculation of the profit or loss on disposal except where it has been written off directly to reserves in the past.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
135
Lloyds Banking Group
Annual Report and Accounts 2009
2 ACCOUNTING POLICIES continued
(C) OTHER INTANGIBLE ASSETS
Other intangible assets include brands, core deposit intangibles, purchased credit card relationships, customer-related intangibles and capitalised
software enhancements. Intangible assets which have been determined to have a finite useful life are amortised on a straight line basis over their
estimated useful life as follows:
Capitalised software enhancements
Brands (which have been assessed as having finite lives)
Customer-related intangibles
Core deposit intangibles
Purchased credit card relationships
up to 5 years
10-15 years
up to 10 years
up to 8 years
5 years
Intangible assets with finite useful lives are reviewed at each reporting date to assess whether there is any indication that they are impaired. If
any such indication exists the recoverable amount of the asset is determined and in the event that the asset’s carrying amount is greater than its
recoverable amount, it is written down immediately. Certain brands have been determined to have an indefinite useful life and are not amortised.
Such intangible assets are reassessed annually to reconfirm that an indefinite useful life remains appropriate. In the event that an indefinite life is
inappropriate a finite life is determined and an impairment review is performed on the asset.
(D) REVENUE RECOGNITION
Interest income and expense are recognised in the income statement for all interest-bearing financial instruments, except for those classified at
fair value through profit or loss, using the effective interest method. The effective interest method is a method of calculating the amortised cost of
a financial asset or liability and of allocating the interest income or interest expense over the expected life of the financial instrument. The effective
interest rate is the rate that exactly discounts the estimated future cash payments or receipts over the expected life of the financial instrument or,
when appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability.
The effective interest rate is calculated on initial recognition of the financial asset or liability by estimating the future cash flows after considering all
the contractual terms of the instrument but not future credit losses. The calculation includes all amounts expected to be paid or received by the
Group including expected early redemption fees and related penalties and premiums and discounts that are an integral part of the overall return.
Direct incremental transaction costs related to the acquisition, issue or disposal of a financial instrument are also taken into account in the calculation.
Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognised
using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss (see accounting policy 2(H)).
Fees and commissions which are not an integral part of the effective interest rate are generally recognised when the service has been provided. Loan
commitment fees for loans that are likely to be drawn down are deferred (together with related direct costs) and recognised as an adjustment to
the effective interest rate on the loan once drawn. Where it is unlikely that loan commitments will be drawn, loan commitment fees are recognised
over the life of the facility. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group retains no
part of the loan package for itself or retains a part at the same effective interest rate for all interest-bearing financial instruments, including loans and
advances, as for the other participants.
Dividend income is recognised when the right to receive payment is established.
Revenue recognition policies specific to life insurance and general insurance business are detailed below (see accounting policy 2(O)).
(E) FINANCIAL ASSETS AND LIABILITIES
On initial recognition, financial assets are classified into fair value through profit or loss, available-for-sale financial assets or loans and receivables.
Financial liabilities are measured at amortised cost, except for trading liabilities and other financial liabilities designated at fair value through profit
or loss on initial recognition which are held at fair value. Purchases and sales of securities and other financial assets and liabilities are recognised on
trade date, being the date that the Group is committed to purchase or sell an asset.
(1) Financial instruments at fair value through profit or loss
Financial instruments are classified at fair value through profit or loss where they are trading securities or where they are designated at fair value
through profit or loss by management. Derivatives are carried at fair value (see accounting policy 2(F)).
Trading securities are debt securities and equity shares acquired principally for the purpose of selling in the short term or which are part of a portfolio
which is managed for short-term gains. Such securities are classified as trading securities and recognised in the balance sheet at their fair value. Gains
and losses arising from changes in their fair value together with interest coupons and dividend income are recognised in the income statement within
net trading income in the period in which they occur.
136
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
2 ACCOUNTING POLICIES continued
Other financial assets and liabilities at fair value through profit or loss are designated as such by management upon initial recognition. Such assets
and liabilities are carried in the balance sheet at their fair value and gains and losses arising from changes in fair value together with interest coupons
and dividend income are recognised in the income statement within net trading income in the period in which they occur. Financial assets and
liabilities are designated at fair value through profit or loss on acquisition in the following circumstances:
– it eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets and liabilities or recognising
gains or losses on different bases. The main type of financial assets designated by the Group at fair value through profit or loss are assets backing
insurance contracts and investment contracts issued by the Group’s life insurance businesses. Fair value designation allows changes in the fair
value of these assets to be recorded in the income statement along with the changes in the value of the associated liabilities, thereby significantly
reducing the measurement inconsistency had the assets been classified as available-for-sale financial assets.
– the assets and liabilities are part of a group which is managed, and its performance evaluated, on a fair value basis in accordance with a
documented risk management or investment strategy, with management information also prepared on this basis. As noted in accounting
policy 2(A)(2), certain of the Group’s investments are managed as venture capital investments and evaluated on the basis of their fair value and
these assets are designated at fair value through profit or loss.
– where the assets and liabilities contain one or more embedded derivatives that significantly modify the cash flows arising under the contract and
would otherwise need to be separately accounted for.
The fair values of assets and liabilities traded in active markets are based on current bid and offer prices respectively. If the market is not active the
Group establishes a fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments
that are substantially the same, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market
participants. Refer to note 3 (Critical accounting estimates and judgements: Valuation of financial instruments) and note 53(3) (Financial instruments:
Fair values of financial assets and liabilities) for details of valuation techniques and significant inputs to valuation models.
The Group is permitted to reclassify, at fair value at the date of transfer, non-derivative financial assets (other than those designated at fair value
through profit or loss by the entity upon initial recognition) out of the trading category if they are no longer held for the purpose of being sold or
repurchased in the near term, as follows:
– if the financial assets would have met the definition of loans and receivables (but for the fact that they had to be classified as held for trading at
initial recognition), they may be reclassified into loans and receivables where the Group has the intention and ability to hold the assets for the
foreseeable future or until maturity;
– if the financial assets would not have met the definition of loans and receivables, they may be reclassified out of the held for trading category into
available-for-sale financial assets in ‘rare circumstances’.
(2) Available-for-sale financial assets
Debt securities and equity shares that are not classified as trading securities, at fair value through profit or loss or as loans and receivables
are classified as available-for-sale financial assets and are recognised in the balance sheet at their fair value, inclusive of transaction costs.
Available-for-sale financial assets are those intended to be held for an indeterminate period of time and may be sold in response to needs for
liquidity or changes in interest rates, exchange rates or equity prices. Gains and losses arising from changes in the fair value of investments classified
as available-for-sale are recognised directly in other comprehensive income, until the financial asset is either sold, becomes impaired or matures, at
which time the cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement. Interest
calculated using the effective interest method and foreign exchange gains and losses on debt securities denominated in foreign currencies are
recognised in the income statement.
The Group is permitted to transfer, at fair value at the date of transfer, a financial asset from the available-for-sale category to the loans and
receivables category where that asset would have met the definition of loans and receivables at the time of reclassification (if the financial asset had
not been designated as available-for-sale) and where there is both the intention and ability to hold that financial asset for the foreseeable future.
For assets transferred, gains or losses recognised in equity in respect of these assets as at the date of transfer are amortised to profit or loss over the
remaining life of the asset using the effective interest method.
(3) Loans and receivables
Loans and receivables include loans and advances to banks and customers and eligible assets including those transferred into this category out
of the fair value through profit or loss or available-for-sale financial assets categories. Loans and receivables are initially recognised when cash is
advanced to the borrowers at fair value inclusive of transaction costs or, for eligible assets transferred into this category, their fair value at the date of
transfer. Financial assets classified as loans and receivables are accounted for at amortised cost using the effective interest method (see accounting
policy 2(D)) less provision for impairment (see accounting policy 2(H)).
The Group has entered into securitisation and similar transactions to finance certain loans and advances to customers. These loans and advances to
customers continue to be recognised by the Group, together with a corresponding liability for the funding.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
137
Lloyds Banking Group
Annual Report and Accounts 2009
2 ACCOUNTING POLICIES continued
(4) Borrowings
Borrowings (which include deposits from banks, customer deposits, debt securities in issue and subordinated liabilities) are recognised initially at fair
value, being their issue proceeds net of transaction costs incurred. These instruments are subsequently stated at amortised cost using the effective
interest method.
Preference shares and other instruments which carry a mandatory coupon or are redeemable on a specific date are classified as financial liabilities.
The coupon on these instruments is recognised in the income statement as interest expense.
An exchange of financial liabilities on substantially different terms is accounted for as an extinguishment of the original financial liability and the
recognition of a new financial liability. The difference between the carrying amount of a financial liability extinguished and the new financial liability is
recognised in profit or loss together with any related costs or fees incurred.
When a financial liability is exchanged for an equity instrument, the new equity instrument is recognised at fair value and any difference between
the original carrying value of the liability and the fair value of the new equity is recognised in the profit or loss together with any related costs or
fees incurred.
(5) Sale and repurchase agreements
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.
Securities lent to counterparties are retained in the financial statements. Securities borrowed are not recognised in the financial statements, unless
these are sold to third parties, in which case the obligation to return them is recorded at fair value as a trading liability.
(6) Derecognition of financial assets and liabilities
Financial assets are derecognised when the contractual right to receive cash flows from those assets has expired or when the Group has transferred
its contractual right to receive the cash flows from the assets and either:
– substantially all of the risks and rewards of ownership have been transferred; or
– the Group has neither retained nor transferred substantially all the risks and rewards, but has transferred control.
Financial liabilities are derecognised when they are extinguished (ie when the obligation is discharged), cancelled or expire.
(F) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
All derivatives are recognised at their fair value. Fair values are obtained from quoted market prices in active markets, including recent market
transactions, and using valuation techniques, including discounted cash flow and option pricing models, as appropriate. Derivatives are carried in the
balance sheet as assets when their fair value is positive and as liabilities when their fair value is negative. Refer to note 3 (Critical accounting estimates
and judgements: Valuation of financial instruments) and note 53(3) (Financial instruments: Fair values of financial assets and liabilities) for details of
valuation techniques and significant inputs to valuation models.
Changes in the fair value of any derivative instrument that is not part of a hedging relationship are recognised immediately in the income statement.
Derivatives embedded in financial instruments and insurance contracts (unless the embedded derivative is itself an insurance contract) are treated
as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not
carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in the income
statement. In accordance with IFRS 4 Insurance Contracts, a policyholder’s option to surrender an insurance contract for a fixed amount is not treated
as an embedded derivative.
The method of recognising the movements in the fair value of the derivatives depends on whether they are designated as hedging instruments
and, if so, the nature of the item being hedged. Hedge accounting allows one financial instrument, generally a derivative such as a swap, to be
designated as a hedge of another financial instrument such as a loan or deposit or a portfolio of the same. At the inception of the hedge relationship,
formal documentation is drawn up specifying the hedging strategy, the hedged item and the hedging instrument and the methodology that will be
used to measure the effectiveness of the hedge relationship in offsetting changes in the fair value or cash flow of the hedged risk. The effectiveness
of the hedging relationship is tested both at inception and throughout its life and if at any point it is concluded that it is no longer highly effective in
achieving its documented objective, hedge accounting is discontinued.
The Group designates certain derivatives as either: (1) hedges of the fair value of the particular risks inherent in recognised assets or liabilities (fair
value hedges); (2) hedges of highly probable future cash flows attributable to recognised assets or liabilities (cash flow hedges); or (3) hedges of net
investments in foreign operations (net investment hedges). These are accounted for as follows:
138
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
2 ACCOUNTING POLICIES continued
(1) Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with
the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk; this also applies if the hedged asset is classified
as an available-for-sale financial asset. If the hedge no longer meets the criteria for hedge accounting, changes in the fair value of the hedged item
attributable to the hedged risk are no longer recognised in the income statement. The cumulative adjustment that has been made to the carrying
amount of the hedged item is amortised to the income statement using the effective interest method over the period to maturity.
(2) Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other
comprehensive income in the cash flow hedge reserve. The gain or loss relating to the ineffective portion is recognised immediately in the income
statement. Amounts accumulated in equity are reclassified to the income statement in the periods in which the hedged item affects profit or loss.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss
existing in equity at that time remains in equity and is recognised in the income statement when the forecast transaction is ultimately recognised
in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is
immediately transferred to the income statement.
(3) Net investment hedges
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating
to the effective portion of the hedge is recognised in other comprehensive income, the gain or loss relating to the ineffective portion is recognised
immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the foreign operation is
disposed of. The hedging instrument in net investments hedges may include non-derivative liabilities as well as derivative financial instruments.
(G) OFFSET
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right of set-off and
there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. In certain situations, even though master netting
agreements exist, the lack of management intention to settle on a net basis results in the financial assets and liabilities being reported gross on the
balance sheet.
(H) IMPAIRMENT OF FINANCIAL ASSETS
(1) Assets accounted for at amortised cost
At each balance sheet date the Group assesses whether, as a result of one or more events occurring after initial recognition and prior to the balance
sheet date, there is objective evidence that a financial asset or group of financial assets has become impaired.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss include:
– Delinquency in contractual payments of principal and/or interest;
– 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
– Initiation of bankruptcy or individual voluntary arrangement proceedings.
For impaired debt instruments which are classified as loans and receivables, impairment losses are recognised in subsequent periods when it is
determined that there has been a further negative impact on expected future cash flows. A reduction in fair value caused by general widening of
credit spreads would not, of itself, result in additional impairment.
The estimated period between a loss occurring and its identification is determined by local management for each identified portfolio. In general, the
periods used vary between two months and twelve months.
If there is objective evidence that an impairment loss has been incurred, an allowance is established which is calculated as the difference between the
balance sheet carrying value of the asset and the present value of estimated future cash flows discounted at that asset’s original effective interest rate.
If an asset has a variable interest rate, the discount rate used for measuring the impairment loss is the current effective interest rate.
For the Group’s portfolios of smaller balance homogenous loans, such as the residential mortgage, personal lending and credit card portfolios,
allowances are calculated for groups of assets taking into account historical cash flow experience. For the Group’s other lending portfolios,
allowances are established on a case-by-case basis. The calculation of the present value of the estimated future cash flows of a collateralised asset or
group of assets reflects the cash flows that may result from foreclosure less the costs of obtaining and selling the collateral, whether or not foreclosure
is probable.
If there is no objective evidence of individual impairment the asset is included in a group of financial assets with similar credit risk characteristics and
collectively assessed for impairment. Segmentation takes into account such factors as the type of asset, industry, geographical location, collateral
type, past-due status and other relevant factors. These characteristics are relevant to the estimation of future cash flows for groups of such assets
as they are indicative of the borrower’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
139
Lloyds Banking Group
Annual Report and Accounts 2009
2 ACCOUNTING POLICIES continued
flows are estimated on the basis of the contractual cash flows of the assets in the Group and historical loss experience for assets with similar credit
risk characteristics. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did
not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist
currently. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences
between loss estimates and actual loss experience.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after
the impairment was recognised, such as an improvement in the borrower’s credit rating, the allowance is adjusted and the amount of the reversal is
recognised in the income statement.
A loan or advance is normally written off, either partially or in full, against the related allowance when the proceeds from realising any available
security have been received or there is no realistic prospect of recovery (as a result of the customer’s insolvency, ceasing to trade or other reason) and
the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses
recorded in the income statement.
Equity securities acquired in exchange for loans in order to achieve an orderly realisation are accounted for as a disposal of the loan and an
acquisition of equity securities. Where control is obtained over an entity as a result of the transaction, the entity is consolidated; where the Group has
significant influence over an entity as a result of the transaction, the investment is accounted for by the equity method of accounting (see accounting
policy 2(A)). Any subsequent impairment of the assets or business acquired is treated as an impairment of the relevant asset or business and not as an
impairment of the original instrument.
(2) Available-for-sale financial assets
The Group assesses at each balance sheet date whether there is objective evidence that an available-for-sale financial asset is impaired. In addition
to the criteria for financial assets accounted for at amortised cost set out above, this assessment involves reviewing the current financial circumstances
(including creditworthiness) and future prospects of the issuer assessing the future cash flows expected to be realised and, in the case of equity
shares, considering whether there has been a significant or prolonged decline in the fair value of the asset below its cost. If an impairment loss has
been incurred, the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortisation) and
the current fair value, less any impairment loss on that asset previously recognised, is reclassified from equity to the income statement. For impaired
debt instruments, impairment losses are recognised in subsequent periods when it is determined that there has been a further negative impact on
expected future cash flows; a reduction in fair value caused by general widening of credit spreads would not, of itself, result in additional impairment.
If, in a subsequent period, the fair value of a debt instrument classified as available-for-sale increases and the increase can be objectively related
to an event occurring after the impairment loss was recognised, an amount not greater than the original impairment loss is credited to the income
statement; any excess is taken to other comprehensive income. Impairment losses recognised in the income statement on equity instruments are not
reversed through the income statement.
(I) INVESTMENT PROPERTY
Investment property comprises freehold and long leasehold land and buildings that are held either to earn rental income or for capital appreciation
or both. The Group’s investment property primarily relates to property held for long-term rental yields and capital appreciation within the life
insurance funds. Investment property is carried in the balance sheet at fair value, being the open market value as determined in accordance with the
guidance published by the Royal Institution of Chartered Surveyors. If this information is not available, the Group uses alternative valuation methods
such as discounted cash flow projections or recent prices. These valuations are reviewed at least annually by an independent valuation expert.
Investment property being redeveloped for continuing use as investment property, or for which the market has become less active, continues to be
measured at fair value. Changes in fair value are recognised in the income statement as net trading income for investment property within the life
insurance funds and as other operating income for other investment property.
(J) TANGIBLE FIXED ASSETS
Tangible fixed assets are included at cost less accumulated depreciation. The value of land (included in premises) is not depreciated. Depreciation on
other assets is calculated using the straight-line method to allocate the difference between the cost and the residual value over their estimated useful
lives, as follows:
Premises (excluding land):
– Freehold/long and short leasehold premises: shorter of 50 years or the remaining period of the lease
– Leasehold improvements: shorter of 10 years or, if lease renewal is not likely, the remaining period of the lease
Equipment:
– Fixtures and furnishings: 10-20 years
– Other equipment and motor vehicles: 2-8 years
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In
the event that an asset’s carrying amount is determined to be greater than its recoverable amount it is written down immediately. The recoverable
amount is the higher of the asset’s fair value less costs to sell and its value in use.
140
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
2 ACCOUNTING POLICIES continued
(K) LEASES
(1) As lessee
The leases entered into by the Group are primarily operating leases. Operating lease rentals payable are charged to the income statement on a
straight-line basis over the period of the lease.
When an operating lease is terminated before the end of the lease period, any payment made to the lessor by way of penalty is recognised as an
expense in the period of termination.
(2) As lessor
Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership to the
lessee but not necessarily legal title. All other leases are classified as operating leases. When assets are subject to finance leases, the present value
of the lease payments, together with any unguaranteed residual value, is recognised as a receivable, net of provisions, within loans and advances to
banks and customers. The difference between the gross receivable and the present value of the receivable is recognised as unearned finance lease
income. Finance lease income is recognised in interest income over the term of the lease using the net investment method (before tax) so as to give
a constant rate of return on the net investment in the leases. Unguaranteed residual values are reviewed regularly to identify any impairment.
Operating lease assets are included within tangible fixed assets at cost and depreciated over their estimated useful lives, which equates to the lives
of the leases, after taking into account anticipated residual values. Operating lease rental income is recognised on a straight line basis over the life of
the lease.
The Group evaluates non-lease arrangements such as outsourcing and similar contracts to determine if they contain a lease which is then accounted
for separately.
(L) PENSIONS AND OTHER POST-RETIREMENT BENEFITS
The Group operates a number of post-retirement benefit schemes for its employees including both defined benefit and defined contribution
pension plans. A defined benefit scheme is a pension plan that defines an amount of pension benefit that an employee will receive on retirement,
dependent on one or more factors such as age, years of service and salary. A defined contribution plan is a pension plan into which the Group pays
fixed contributions; there is no legal or constructive obligation to pay further contributions.
Full actuarial valuations of the Group’s principal defined benefit schemes are carried out every three years with interim reviews in the intervening
years; these valuations are updated to 31 December each year by qualified independent actuaries, or in the case of the Scottish Widows Retirement
Benefits Scheme, by a qualified actuary employed by Scottish Widows. For the purposes of these annual updates scheme assets are included at their
fair value and scheme liabilities are measured on an actuarial basis using the projected unit credit method adjusted for unrecognised actuarial gains
and losses. The defined benefit scheme liabilities are discounted using rates equivalent to the market yields at the balance sheet date on high-quality
corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms
of the related pension liability.
The Group’s income statement charge includes the current service cost of providing pension benefits, the expected return on the schemes’ assets,
net of expected administration costs, and the interest cost on the schemes’ liabilities. Actuarial gains and losses arising from experience adjustments
and changes in actuarial assumptions are not recognised unless the cumulative unrecognised gain or loss at the end of the previous reporting
period exceeds the greater of 10 per cent of the scheme assets or liabilities (‘the corridor approach’). In these circumstances the excess is charged or
credited to the income statement over the employees’ expected average remaining working lives. Past service costs are charged immediately to the
income statement, unless the charges are conditional on the employees remaining in service for a specified period of time (the vesting period). In this
case, the past service costs are amortised on a straight-line basis over the vesting period.
The Group’s balance sheet includes the net surplus or deficit, being the difference between the fair value of scheme assets and the discounted value
of scheme liabilities at the balance sheet date adjusted for any cumulative unrecognised actuarial gains or losses. Surpluses are only recognised to
the extent that they are recoverable through reduced contributions in the future or through refunds from the schemes.
The Group recognises the effect of material changes to the terms of its defined benefit pension plans which reduce future benefits as curtailments;
gains and losses are recognised in the income statement when the curtailments occur.
The costs of the Group’s defined contribution plans are charged to the income statement in the period in which they fall due.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
141
Lloyds Banking Group
Annual Report and Accounts 2009
2 ACCOUNTING POLICIES continued
(M) SHARE-BASED COMPENSATION
The Group operates a number of equity-settled, share-based compensation plans in respect of services received from certain of its employees. The
value of the employee services received in exchange for equity instruments granted under these plans is recognised as an expense over the vesting
period of the instruments, with a corresponding increase in equity. This expense is determined by reference to the fair value of the number of equity
instruments that are expected to vest. The fair value of equity instruments granted is based on market prices, if available, at the date of grant. In
the absence of market prices, the fair value of the instruments at the date of grant is estimated using an appropriate valuation technique, such as a
Black-Scholes option pricing model. The determination of fair values excludes the impact of any non-market vesting conditions, which are included
in the assumptions used to estimate the number of options that are expected to vest. At each balance sheet date, this estimate is reassessed and
if necessary revised. Any revision of the original estimate is recognised in the income statement over the remaining vesting period, together with a
corresponding adjustment to equity. Cancellations by employees of contributions to the Group’s Save As You Earn plans are treated as non-vesting
conditions and in accordance with the revised IFRS 2 the Group recognises, in the year of cancellation, the amount of the expense that would have
otherwise been recognised over the remainder of the vesting period. Modifications are assessed at the date of modification and any incremental
charges are charged to the income statement over any remaining vesting period.
(N) TAXATION
Current income tax which is payable on taxable profits is recognised as an expense in the period in which the profits arise.
For the Group’s long-term insurance businesses, the tax charge is analysed between tax that is payable in respect of policyholders’ returns and tax
that is payable on equity holders’ returns. This allocation is based on an assessment of the rates of tax which will be applied to the returns under
current UK tax rules.
Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their
carrying amounts in the consolidated financial statements. However, deferred tax is not accounted for if it arises from initial recognition of an asset
or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.
Deferred tax is determined using tax rates that have been enacted or substantially enacted by the balance sheet date which are expected to apply
when the related deferred tax asset is realised or the deferred tax liability is settled.
Deferred tax assets are recognised where it is probable that future taxable profit will be available against which the temporary differences can be
utilised. Income tax payable on profits is recognised as an expense in the period in which those profits arise. The tax effects of losses available for
carry forward are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised.
Deferred tax related to gains and losses on the fair value re-measurement of available-for-sale investments and cash flow hedges, where these gains
and losses are recognised in other comprehensive income, is also recognised in other comprehensive income. Such deferred tax is subsequently
transferred to the income statement together with the deferred gain or loss.
Deferred and current tax assets and liabilities are offset when they arise in the same tax reporting group and where there is both a legal right of offset
and the intention to settle on a net basis or to realise the asset and settle the liability simultaneously.
(O) INSURANCE
The Group undertakes both life insurance and general insurance business.
Products sold by the life insurance business are classified into three categories:
Insurance contracts – these contracts transfer significant insurance risk and may also transfer financial risk. The Group defines significant insurance risk
as the possibility of having to pay benefits on the occurrence of an insured event which are significantly more than the benefits payable if the insured
event were not to occur. These contracts may or may not include discretionary participation features.
Investment contracts containing a discretionary participation feature (‘participating investment contracts’) – these contracts do not transfer significant
insurance risk, but contain a contractual right which entitles the holder to receive, in addition to the guaranteed benefits, further additional
discretionary benefits or bonuses that are likely to be a significant proportion of the total contractual benefits and the amount and timing of which is
at the discretion of the Group and based upon the performance of specified assets.
Non-participating investment contracts – these contracts do not transfer significant insurance risk or contain a discretionary participation feature.
The general insurance business issues only insurance contracts.
(1) Life insurance business
(i) ACCOUNTING FOR INSURANCE AND PARTICIPATING INVESTMENT CONTRACTS
Premiums and claims
Premiums received in respect of insurance and participating investment contracts are recognised as revenue when due except for unit-linked
contracts on which premiums are recognised as revenue when received. Claims are recorded as an expense on the earlier of the maturity date or the
date on which the claim is notified.
142
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
2 ACCOUNTING POLICIES continued
Liabilities
– Insurance and participating investment contracts in the Group’s with-profi t funds
Liabilities of the Group’s with-profit funds, including guarantees and options embedded within products written by these funds, are stated at their
realistic values in accordance with the Financial Services Authority’s realistic capital regime, except that projected transfers out of the funds into other
Group funds are recorded in unallocated surplus (see below). Further details on the realistic capital regime are given on page 89. Changes in the
value of these liabilities are recognised through insurance claims.
– Insurance and participating investment contracts which are not unit-linked or in the Group’s with-profi t funds
A liability for contractual benefits that are expected to be incurred in the future is recorded when the premiums are recognised. The liability is
calculated by estimating the future cash flows over the duration of in-force policies and discounting them back to the valuation date allowing for
probabilities of occurrence. The liability will vary with movements in interest rates and with the cost of life insurance and annuity benefits where future
mortality is uncertain.
Assumptions are made in respect of all material factors affecting future cash flows, including future interest rates, mortality and costs.
Changes in the value of these liabilities are recognised in the income statement through insurance claims.
– Insurance and participating investment contracts which are unit-linked
Liabilities for unit-linked insurance contracts and participating investment contracts are stated at the bid value of units plus, an additional allowance
where appropriate (such as for any excess of future expenses over charges). The liability is increased or reduced by the change in the unit prices and
is reduced by policy administration fees, mortality and surrender charges and any withdrawals. Changes in the value of the liability are recognised
in the income statement through insurance claims. Benefit claims in excess of the account balances incurred in the period are also charged through
insurance claims. Revenue consists of fees deducted for mortality, policy administration and surrender charges.
Unallocated surplus
Any amounts in the with-profit funds not yet determined as being due to policyholders or shareholders are recognised as an unallocated surplus
which is shown separately from liabilities arising from insurance contracts and participating investment contracts.
(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 income allocated to
non-participating investment contracts are included in insurance claims.
Deposits and withdrawals are not accounted for through the income statement but are accounted for directly in the balance sheet as adjustments to
the non-participating investment contract liability.
The Group receives investment management fees in the form of an initial adjustment or charge to the amount invested. These fees are in respect
of services rendered in conjunction with the issue and management of investment contracts where the Group actively manages the consideration
received from its customers to fund a return that is based on the investment profile that the customer selected on origination of the contract.
These services comprise an indeterminate number of acts over the lives of the individual contracts and, therefore, the Group defers these fees and
recognises them over the estimated lives of the contracts, in line with the provision of investment management services.
Costs which are directly attributable and incremental to securing new non-participating investment contracts are deferred. This asset is subsequently
amortised over the period of the provision of investment management services and is reviewed for impairment in circumstances where its carrying
amount may not be recoverable. If the asset is greater than its recoverable amount it is written down immediately through fee and commission
expense in the income statement. All other costs are recognised as expenses when incurred.
(iii) VALUE OF IN-FORCE BUSINESS
The Group recognises as an asset the value of in-force business in respect of insurance contracts and participating investment contracts. The asset
represents the present value of the shareholders’ interest in the profits expected to emerge from those contracts written at the balance sheet date.
This is determined after making appropriate assumptions about future economic and operating conditions such as future mortality and persistency
rates and includes allowances for both non-market risk and for the realistic value of financial options and guarantees. Each cash flow is valued using
the discount rate consistent with that applied to such a cash flow in the capital markets. The asset in the consolidated balance sheet is presented
gross of attributable tax and movements in the asset are reflected within other operating income in the income statement.
The Group’s contractual rights to benefits from providing investment management services in relation to non-participating investment contracts
acquired in business combinations and portfolio transfers is measured at fair value at the date of acquisition. The resulting asset is amortised over
the estimated lives of the contracts. At each reporting date an assessment is made to determine if there is any indication of impairment. Where
impairment exists, the carrying value of the asset is reduced to its recoverable amount and the impairment loss recognised in the income statement.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
143
Lloyds Banking Group
Annual Report and Accounts 2009
2 ACCOUNTING POLICIES continued
(2) General insurance business
The Group both underwrites and acts as intermediary in the sale of general insurance products. Underwriting premiums are included in insurance
premium income, net of refunds, in the period in which insurance cover is provided to the customer; premiums received relating to future periods are
deferred in the balance sheet within liabilities arising from insurance contracts and participating investment contracts and only credited to the income
statement when earned. Broking commission is recognised when the underwriter accepts the risk of providing insurance cover to the customer.
Where appropriate, provision is made for the effect of future policy terminations based upon past experience.
The underwriting business makes provision for the estimated cost of claims notified but not settled and claims incurred but not reported at the
balance sheet date. The provision for the cost of claims notified but not settled is based upon a best estimate of the cost of settling the outstanding
claims after taking into account all known facts. In those cases where there is insufficient information to determine the required provision, statistical
techniques are used which take into account the cost of claims that have recently been settled and make assumptions about the future development
of the outstanding cases. Similar statistical techniques are used to determine the provision for claims incurred but not reported at the balance sheet
date. Claims liabilities are not discounted.
(3) Liability adequacy test
At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract
liabilities net of related deferred cost assets and value of in-force business. In performing these tests current best estimates of discounted future
contractual cash flows and claims handling and policy administration expenses, as well as investment income from the assets backing such liabilities,
are used. Any deficiency is immediately charged to the income statement, initially by writing off the relevant assets and subsequently by establishing
a provision for losses arising from liability adequacy tests.
(4) Reinsurance
Contracts entered into by the Group with reinsurers under which the Group is compensated for losses on one or more contracts issued by the Group
and that meet the classification requirements for insurance contracts are classified as reinsurance contracts held.
The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of
short-term balances due from reinsurers as well as longer term receivables that are dependent on the expected claims and benefits arising under
the related reinsured contracts. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the
reinsured contracts and in accordance with the terms of each reinsurance contract and are regularly reviewed for impairment. Premiums payable for
reinsurance contracts are recognised as an expense when due within insurance premium income. Changes in the reinsurance recoverable assets are
recognised in the income statement through insurance claims.
(P) FOREIGN CURRENCY TRANSLATION
Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment
in which the entity operates (the ‘functional currency’). The consolidated financial statements are presented in sterling, which is the Company’s
functional and presentation currency.
Foreign currency transactions are translated into the appropriate functional currency using the exchange rates prevailing at the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange
rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when recognised in other
comprehensive income as qualifying cash flow or net investment hedges. Non-monetary assets that are measured at fair value are translated using
the exchange rate at the date that the fair value was determined. Translation differences on equities and similar non-monetary items held at fair value
through profit and loss are recognised in profit or loss as part of the fair value gain or loss. Translation differences on available-for-sale non-monetary
financial assets, such as equity shares, are included in the fair value reserve in equity unless the asset is a hedged item in a fair value hedge.
The results and financial position of all group entities that have a functional currency different from the presentation currency are translated into the
presentation currency as follows:
– The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on the acquisition of a foreign entity, are
translated into sterling at foreign exchange rates ruling at the balance sheet date.
– The income and expenses of foreign operations are translated into sterling at average exchange rates unless these do not approximate to the
foreign exchange rates ruling at the dates of the transactions in which case income and expenses are translated at the dates of the transactions.
Foreign exchange differences arising on the translation of a foreign operation are recognised in other comprehensive income and accumulated
in a separate component of equity together with exchange differences arising from the translation of borrowings and other currency instruments
designated as hedges of such investments (see accounting policy 2(F)(3)). On disposal of a foreign operation, the cumulative amount of exchange
differences relating to that foreign operation are reclassified from equity and included in determining the profit or loss arising on disposal.
144
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
2 ACCOUNTING POLICIES continued
(Q) PROVISIONS
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.
The Group recognises provisions in respect of vacant leasehold property where the unavoidable costs of the present obligations exceed anticipated
rental income.
Contingent liabilities are possible obligations whose existence depends on the outcome of uncertain future events or those present obligations
where the outflows of resources are uncertain or cannot be measured reliably. Contingent liabilities are not recognised in the financial statements but
are disclosed unless they are remote.
(R) SHARE CAPITAL
(1) Share issue costs
Incremental costs directly attributable to the issue of new shares or options or to the acquisition of a business are shown in equity as a deduction, net
of tax, from the proceeds.
(2) Dividends
Dividends paid on the Group’s ordinary shares are recognised as a reduction in equity in the period in which they are paid.
(3) Treasury shares
Where the Company or any member of the Group purchases the Company’s share capital, the consideration paid is deducted from shareholders’
equity as treasury shares until they are cancelled. Where such shares are subsequently sold or reissued, any consideration received is included in
shareholders’ equity.
(S) CASH AND CASH EQUIVALENTS
For the purposes of the cash flow statement, cash and cash equivalents comprise cash and non-mandatory balances with central banks and amounts
due from banks with a maturity of less than three months.
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of the Group’s financial statements requires management to make judgements, estimates and assumptions in applying the
accounting policies that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates,
actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions
are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be
reasonable under the circumstances.
The significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty in these
financial statements, which together are deemed critical to the Group’s results and financial position, are discussed below.
ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES
The Group’s accounting policy for losses arising on financial assets classified as loans and receivables is described in note 2(H)(1). The allowance for
impairment losses on loans and receivables is management’s best estimate of losses incurred in the portfolio at the balance sheet date. Impairment
allowances are established to recognise incurred impairment losses in the Group’s loan portfolios carried at amortised cost. In determining whether
an impairment has occurred at the balance sheet date the Group considers whether there is any observable data indicating that there has been a
measurable decrease in the estimated future cash flows or their timings. Where this is the case, the impairment loss is the difference between the
carrying value of the loan and the present value of the estimated future cash flows discounted at the loan’s original effective interest rate.
At 31 December 2009 gross loans and receivables totalled £710,362 million (2008: £287,220 million) against which impairment allowances of
£15,380 million (2008: £3,727 million) had been made (see note 24). Impairment allowances are made up of two components, those determined
individually and those determined collectively.
Individual component
All impaired loans which exceed a certain threshold, principally within the Group’s Wholesale division, are individually assessed for impairment having
regard to expected future cash flows including those that could arise from the realisation of security. The determination of these allowances often
requires the exercise of considerable judgement by management involving matters such as local economic conditions and the resulting trading
performance of the customer and the value of the security held, for which there may not be a readily accessible market. In particular, significant
judgement is required by management in the current economic environment in assessing the borrower’s cash flows and debt servicing capability
together with the realisable value of commercial real estate collateral. The actual amount of the future cash flows and their timing may differ
significantly from the assumptions made for the purposes of determining the impairment allowances and consequently these allowances can be
subject to variation as time progresses and the circumstances of the customer become clearer.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
145
Lloyds Banking Group
Annual Report and Accounts 2009
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued
Collective component
Impairment allowances for portfolios of smaller balance homogenous loans, such as residential mortgages, personal loans and credit card balances
that are below the individual assessment thresholds, and for loan losses that have been incurred but not separately identified at the balance sheet
date, are determined on a collective basis. Collective impairment allowances are calculated on a portfolio basis using models which take into account
factors such as historical experience of accounts progression through the various stages of delinquency, historical loss rates, the credit quality of the
portfolio, and the value of any collateral held, which is estimated, where appropriate, using indices such as house price indices.
The calculation of the collective impairment allowance is therefore subject to estimation uncertainty. The variables used in the collective impairment
models are kept under regular review to ensure that as far as possible they reflect current economic circumstances. However, significant management
judgement is applied in assessing whether current economic conditions and borrowers’ behaviour are fully reflected in the historical loss data and
other inputs to the impairment models.
The collective impairment allowance is sensitive to changes in economic and credit conditions, including the interdependency of house prices,
unemployment rates, interest rates, borrowers’ behaviour, and consumer bankruptcy trends. It is, however, inherently difficult to estimate how
changes in one or more of these factors might impact the collective impairment allowance.
Given the relative size of the Group’s mortgage portfolio, a key variable is UK 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 within the Group’s mortgage portfolio were 10 per cent lower than those estimated at 31 December 2009, the house price
index related impact on the impairment charge would be an increase of approximately £350 million.
In the Wholesale division, the collective unimpaired provision is sensitive to the time between the loss event and the date the impairment is
recognised. This is known as the loss emergence period (LEP). If the LEP moved by one month in respect of the loan portfolio assessed for collective
unimpaired provisions, this would result in an increase in the collective unimpaired provision of approximately £420 million.
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
IMPAIRMENT OF AVAILABLE-FOR-SALE FINANCIAL ASSETS
In determining whether an impairment loss has been incurred in respect of an available-for-sale financial asset, the Group performs an objective
review of the current financial circumstances and future prospects of the issuer and, in the case of equity shares, considers whether there has been
a significant or prolonged decline in the fair value of that asset below its cost. This consideration requires management judgement. Among factors
considered by the Group is whether the decline in fair value is a result of a change in the quality of the asset or a downward movement in the market
as a whole. An assessment is performed of the future cash flows expected to be realised from the asset, taking into account, where appropriate, the
quality of underlying security and credit protection available. The increase in the fair value of available-for-sale financial assets during the year was
£2,234 million (2008: reduction of £2,721 million). Impairment losses in respect of available-for-sale financial assets transferred from reserves to the
income statement totalled £602 million (2008: £130 million).
VALUATION OF FINANCIAL INSTRUMENTS
Financial instruments classified by management as trading and other financial assets and liabilities at fair value through profit or loss, derivative
financial instruments and available-for-sale financial assets are carried at fair value which is determined as being the amount for which the instrument
could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Management judgement is required in
determining the appropriate classification of financial instruments.
In 2009, the Group adopted ‘Amendments to IFRS 7 ‘Financial Instruments: Disclosures – Improving Disclosures about Financial Instruments’ which,
among other matters, established a three level valuation hierarchy for disclosure of fair value measurements of financial instruments carried on the
Group’s balance sheet at fair value.
Management judgement is required in determining the categorisation of the Group’s financial instruments that are carried at fair value. Financial
instruments categorised as level 1 are valued using quoted market prices and therefore there is less judgement applied in determining fair value.
However, the fair value of financial instruments categorised as level 2 and level 3 is determined using valuation techniques including discounted cash
flow analysis and valuation models. These require management judgement and therefore contain significant estimation uncertainty (note 53).
In particular significant judgement is required by management in determining appropriate assumptions to be used for level 3 financial instruments.
At 31 December 2009, the Group classified £7,460 million of financial assets and £235 million of financial liabilities as level 3 (note 53).
The largest asset class classified as level 3 is the Group’s venture capital and unlisted equity investments. Venture capital investments are valued using
International Private Equity and Venture Capital (IPEV) Guidelines which require significant management judgement in determining appropriate
earnings multiples to be applied in determining fair value. Unlisted equity investments are valued using a number of different techniques which
require management to select the most appropriate assumptions, including earnings multiples, valuations relative to net assets, and estimated future
cash flows. Certain of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are also
classified as level 3. Fair value is determined using valuation models which require significant judgement in determining appropriate values for inputs
including prepayment rates, probability of default, loss given default and yield curves.
The valuation techniques used are set out in note 53 on page 224. This provides details of the inputs into valuation models that have the potential to
significantly impact the value determined, sets out the assumptions used for those inputs and provides the effects of applying reasonably possible
alternative assumptions.
146
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued
TAXATION
At 31 December 2009 the Group carried deferred tax assets on its balance sheet of £5,006 million (2008: £833 million) and deferred tax liabilities of
£209 million (2008: £nil) (note 42).
This statutory presentation takes into account the ability of the Group to net deferred tax assets and liabilities only where there is a legally
enforceable right of offset. Note 42 also presents the Group’s deferred tax assets and liabilities by tax category. The largest category of deferred tax
asset which contains significant estimation uncertainty and which requires management judgement in assessing its recoverability relates to tax losses
carried forward. At 31 December 2009, the Group recognised a deferred tax asset of £5,925 million (2008 £856 million) in respect of tax losses carried
forward. The significant increase reflects the taxable losses generated by certain Group companies, primarily Bank of Scotland plc in the last two
years and Lloyds TSB Bank plc during 2009.
Applicable accounting standards permit the recognition of deferred tax assets only to the extent that it is probable that future taxable profits will
be available to utilise the tax losses carried forward. The assessment of future taxable profits involves significant estimation uncertainty, principally
relating to an assessment of management’s projections of future taxable income based on business plans and ongoing tax planning strategies.
These projections include assumptions about the future strategy of the Group, the economic and regulatory environment in which the Group
operates, future tax legislation, customer behaviour, and the ability of the Group to deliver expected integration benefits, amongst other variables.
At 31 December 2009, management has concluded that future taxable profits generated by the Group companies with tax losses carried forward are
expected to be sufficient to utilise the tax losses carried forward in full.
At 31 December 2009 the Group carried an asset for current tax recoverable of £680 million (2008: £300 million) and current tax liabilities of
£51 million (2008: £nil). In determining the carrying value of these balances, management have taken account of tax issues that are subject to ongoing
discussion with HM Revenue & Customs and other tax authorities. Inherent in this is management’s assessment of legal and professional advice, case
law and other relevant guidance. The determination of the outcome of such matters requires significant management judgement in assessing the
various risks and applying appropriate probability weightings in determining the carrying value of current and deferred tax balances.
PENSIONS
The net liability recognised in the balance sheet at 31 December 2009 in respect of the Group’s retirement benefit obligations was £780 million
(2008: £1,771 million) of which £619 million (2008: £1,657 million) related to defined benefit pension schemes. As explained in note 2(L), the Group
adopts the corridor approach to pensions accounting and consequently does not recognise actuarial losses of £2,936 million (2008: £267 million).
The defined benefit pension schemes’ gross deficit totalled £3,555 million (2008: £1,924 million) representing the difference between the schemes’
liabilities and the fair value of the related assets at the balance sheet date.
The schemes’ liabilities are calculated using the projected unit credit method, which takes into account projected earnings increases, using actuarial
assumptions that give the best estimate of the future cash flows that will arise under the scheme liabilities. The resulting estimated cash flows are
discounted at a rate equivalent to the market yield at the balance sheet date on high quality bonds with a similar duration and currency to the
schemes’ liabilities. In order to estimate the future cash flows, a number of financial and non-financial assumptions are made by management,
changes to which could have a material impact upon the overall deficit or the net cost recognised in the income statement.
Two important assumptions are the rate of inflation and the expected lifetime of the schemes’ members. The assumed rate of inflation affects
the rate at which salaries are projected to grow and therefore the size of the pension that employees receive upon retirement and also the rate at
which pensions in payment increase. Over the longer term rates of inflation can vary significantly. At 31 December 2009 it was assumed that the rate
of inflation would be 3.4 per cent per annum (2008: 3.0 per cent), although if this was increased by 0.2 per cent the overall deficit would increase
by approximately £795 million and the annual cost by approximately £69 million. A reduction of 0.2 per cent would reduce the overall deficit by
approximately £763 million and the annual cost by approximately £60 million.
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, however given the rate of advance in medical science and increasing
levels of obesity, it is uncertain whether they will ultimately reflect actual experience. Assumptions used by management reflect recent longevity
experience and extrapolate the improving trend. An increase of one year in the expected lifetime of scheme members would increase the overall
deficit by approximately £590 million and the annual cost by approximately £79 million; a reduction of one year would reduce the overall deficit by
approximately £603 million and the annual cost by approximately £76 million.
The size of the overall deficit is also sensitive to changes in the discount rate, which is affected by market conditions and therefore potentially subject
to significant variations. At 31 December 2009 the discount rate used was 5.7 per cent (2008: 6.3 per cent); a reduction of 0.2 per cent would increase
the overall deficit by approximately £985 million and the annual cost by approximately £82 million, while an increase of 0.2 per cent would reduce the
net deficit by approximately £937 million and the annual cost by approximately £68 million.
FAIR VALUE OF IDENTIFIABLE NET ASSETS OF HBOS
The acquisition of the HBOS Group in January 2009 was accounted for in accordance with applicable accounting standards which require the
recognition of the identifiable assets acquired and liabilities assumed at their acquisition-date fair values. As part of this process, it is also necessary
to identify and recognise certain assets and liabilities which are not included on the acquiree’s balance sheet, for example the value of the internally
generated brands and other intangible assets.
The exercise to fair value the HBOS Group balance sheet was inherently highly subjective and required management to make a number of
assumptions and estimates. The overall effect was to reduce the book value of the assets acquired by £11,975 million, after the recognition of brands
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
147
Lloyds Banking Group
Annual Report and Accounts 2009
3 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS continued
and other intangibles not previously included on the HBOS Group balance sheet totalling £4,650 million. This was offset by a reduction in the value of
the HBOS Group’s liabilities of £13,216 million, resulting in a net increase in the value of the net assets acquired of £1,241 million (note 14).
The fair value adjustments to the HBOS Group’s assets principally reflect a reduction of £13,512 million in the value of customer lending. For a
significant proportion of these balances there was no active market and therefore in determining the acquisition-date fair values discounted cash flow
models have been used. The calculations were performed using benchmark interest rates and market-based credit spreads for the different lending
portfolios, having regard to management’s view of the level of expected credit losses. The size of the adjustment reflects the market-wide reduction
in interest rates since the lending was originated and a deterioration in the credit quality of the portfolio in the worsening economic environment.
The reduction in the value of the HBOS Group’s liabilities was largely due to the lower values attributed to debt instruments issued by HBOS, for
example commercial paper, medium-term notes and subordinated debt. In many cases market prices were available to value these instruments and
the lower fair values reflect market concern in January 2009 over the creditworthiness of HBOS.
During 2009, the effects of the fair value adjustments have started to unwind and be recognised in the Group’s income statement. The determination
of the extent to which the adjustments unwind often requires significant judgement principally relating to the assessment of the extent to which
losses incurred subsequent to the date of acquisition were expected and consequently reflected in the fair value adjustment made to write down
the value of the lending. In the period since the acquisition impairment losses of £6,859 million have been incurred which were reflected in the
acquisition fair value adjustments.
GOODWILL
At 31 December 2009 the Group carried goodwill on its balance sheet totalling £2,016 million (2008: £2,256 million), all of which relates to acquisitions
made a number of years ago.
The Group reviews the goodwill for impairment at least annually or when events or changes in economic circumstances indicate that impairment may
have taken place. The impairment review is performed by projecting future cash flows, excluding finance and tax, based upon budgets and plans
and making appropriate assumptions about rates of growth and discounting these using a rate that takes into account prevailing market interest
rates and the risks inherent in the business. If the present value of the projected cash flows is less than the carrying value of the underlying net assets
and related goodwill an impairment charge is required in the income statement. This calculation requires the exercise of significant judgement by
management; if the estimates made prove to be incorrect or performance does not meet expectations which affects the amount and timing of future
cash flows, goodwill may become impaired in future periods. Further details are given in note 27.
The Group’s goodwill is allocated to cash generating units in the Insurance division (Scottish Widows) and in the Asset Finance business in the
Wholesale division. Goodwill attributable to the Group’s Asset Finance business, for which an impairment charge was recognised in the Group’s
financial statements for the year ended 31 December 2008, has been reviewed for impairment due to the continuing uncertainties over the
short-term macroeconomic environment. As a consequence, the carrying value of the consumer finance cash generating unit within Asset Finance
has been reassessed and has resulted in the related element of the goodwill being written off and the Group recognising a further impairment
charge of £240 million in the year ended 31 December 2009. Further details are given in note 27.
LIFE INSURANCE BUSINESS
The Group carries in its balance sheet a value in-force asset, representing the present value of future profits expected to arise from the portfolio of
in-force life insurance and participating investment contracts, of £5,140 million at 31 December 2009 (2008: £1,893 million). The Group also recognises
an acquired value in-force asset of £1,545 million at 31 December 2009 (2008: nil) representing contractual rights to benefits from providing
investment management services in relation to non-participating investment contracts acquired in business combinations and portfolio transfers.
The methodology used to value these assets is set out in note 2(O)(1). The valuation or recoverability of these assets requires assumptions to be
made about future economic and operating conditions. These assumptions are inherently uncertain and changes could significantly affect the value
attributed to these assets.
At 31 December 2009 the Group carried substantial liabilities to holders of life, pensions and investment contracts in its balance sheet. Liabilities
arising from insurance contracts and participating investment contracts were £56,800 million and £18,089 million respectively (2008: £21,518 million
and £11,619 million) and those arising from non-participating investment contracts totalled £46,348 million (2008: £14,243 million). The methodology
used to value the liabilities is described in note 2(O)(1). Elements of the liability valuations require assumptions to be made about future investment
returns, future mortality rates and future policyholder behaviour.
The process for determining key assumptions that have been made for life insurance assets and liabilities at 31 December 2009 is detailed in notes 28
and 36. The impact on profit before tax of changes in key assumptions is detailed in note 37.
GENERAL INSURANCE BUSINESS
At 31 December 2009 the Group held a provision of £502 million (2008: £183 million) in respect of the estimated cost of claims notified but not settled
and claims incurred but not reported at the balance sheet date. The methodology for valuing these liabilities, which includes the use of statistical
techniques, is described in note 2(O)(2).
While management believes that the liability carried at year end is adequate, the application of statistical techniques requires significant judgement.
An increase of 10 per cent in the cost of claims would result in the recognition of an additional loss of approximately £48 million. Similarly, an increase
of 10 per cent in the ultimate number of such claims would lead to an additional loss of approximately £44 million; some relief would arise from
reinsurance contracts held.
148
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
4 SEGMENTAL ANALYSIS
The Group is a leading financial services group, whose businesses provide a wide range of banking and financial services in the UK and in certain
locations overseas.
The group executive committee has been determined to be the chief operating decision maker for the Group. The Group’s operating segments
reflect its organisational and management structures. The group executive committee reviews the Group’s internal reporting based around these
segments in order to assess performance and allocate resources. This assessment includes a consideration of each segment’s net interest revenue
and consequently the total interest income and expense for all reportable segments is presented on a net basis. The segments are differentiated by
the type of products provided, by whether the customers are individuals or corporate entities and by the geographical location of the customer.
During 2009, following the acquisition of HBOS, the Group’s activities were reorganised into four financial reporting segments: Retail, Wholesale,
Wealth and International and Insurance. Consequently, the comparative information has been restated to be consistent with the reorganised
structure of the Group. The segmental results and comparatives are presented on the basis reviewed by the chief operating decision maker in 2009
and therefore include the pre-acquisition results of HBOS for 2008 and for the period from 1 January 2009 to 16 January 2009.
The Retail division, with its brands including Lloyds TSB, Halifax, Bank of Scotland, Birmingham Midshires and Cheltenham & Gloucester, is a UK
provider of current accounts, savings, personal loans, credit cards and mortgages serving over 30 million customers through a large branch network
in the UK. The division is also a general insurance and bancassurance distributor selling a wide range of long-term savings, investment and general
insurance products.
The Wholesale division serves in excess of a million businesses ranging from start-ups and small enterprises to global corporations, with a range of
propositions fully segmented according to customer need. The enlarged division, following the acquisition of HBOS, comprises Corporate Markets,
Treasury and Trading and Asset Finance. Corporate Markets comprises Corporate, Commercial, Corporate Real Estate, Specialist Finance and
Wholesale Markets.
Wealth and International was created to give increased focus and momentum to the Group’s private banking and asset management activities and
to closely co-ordinate the management of its international businesses. Wealth comprises the Group’s private banking, wealth and asset management
businesses in the UK and overseas. International comprises corporate, commercial, asset finance and retail businesses in Australia, Ireland and
continental Europe.
The Insurance division is a bancassurance provider in the UK providing a wide range of long-term savings, investment and protection products,
together with individual and corporate pensions. It is also a distributor of payment protection and home insurance in the UK. The division consists of
three business units: life, pensions and investments UK; life, pensions and investments Europe; and general insurance.
Other includes the results of managing the Group’s technology platforms, branch and head office property estate, operations (including payments,
banking operations and collections) and procurement services, the costs of which are predominantly recharged to the other divisions. It also reflects
other items not recharged to the divisions, including hedge ineffectiveness. The improvement in revenue of £1,376 million in 2009 compared to 2008
primarily reflects gains arising on the extinguishment of certain existing liabilities in 2009.
Inter-segment services are generally recharged at cost, with the exception of the internal commission arrangements between the UK branch
and other distribution networks and the insurance product manufacturing businesses within the Group, where a profit margin is also charged.
Inter-segment lending and deposits are generally entered into at market rates, except that non-interest bearing balances are priced at a rate that
reflects the external yield that could be earned on such funds.
For those derivative contracts entered into by business units for risk management purposes, the business unit retains the amount that would have
been recognised on an accrual accounting basis (an amount equal to the interest element of the next payment on the swap) and transfers the
remainder of the fair value of the swap to the central group segment where the resulting accounting volatility is managed though the establishment
of hedge accounting relationships. Any change in fair value of the hedged instrument attributable to the hedged risk is also recorded within the
central group segment. This allocation of the fair value of the swap and change in fair value of the hedged instrument attributable to the hedged risk
avoids accounting asymmetry in segmental results and records volatility in the central group segment where it is managed.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
149
Lloyds Banking Group
Annual Report and Accounts 2009
4 SEGMENTAL ANALYSIS continued
Year ended 31 December 2009
Net interest income
Other income (net of fee and
commission expense)
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus
Impairment
Share of results of joint ventures and associates
Profit (loss) before tax and fair value unwind
Fair value unwind
Profit (loss) before tax
External revenue
Inter-segment revenue
Segment revenue
Segment external assets
Segment customer deposits
Other segment items reflected in income
statement above:
Depreciation and amortisation
Movement in value of in-force business
Defined benefit scheme charges
Other segment items:
Additions to tangible fixed assets
Investments in joint ventures and associates at
end of year
Retail
£m
Wholesale
£m
Wealth and
International
£m
Insurance
£m
Other
£m
Reported basis
total
£m
7,970
4,710
1,217
(287)
(884)
12,726
1,804
9,774
–
9,774
(4,566)
5,208
(4,227)
(6)
975
407
1,382
14,221
(4,447)
9,774
383,588
224,149
196
–
190
65
30
4,199
8,909
–
8,909
(4,106)
4,803
(15,683)
(720)
(11,600)
6,897
(4,703)
5,965
2,944
8,909
394,057
153,389
1,284
–
112
2,969
1,128
2,345
–
2,345
(1,544)
801
(4,078)
(21)
(3,298)
942
(2,356)
2,859
(514)
2,345
94,051
29,037
84
(5)
40
53
189
123
2,944
2,657
(637)
2,020
(974)
1,046
–
(22)
1,024
(49)
975
3,780
(1,123)
2,657
1,800
916
–
916
(419)
497
–
2
499
(2,097)
(1,598)
(2,224)
3,140
916
11,875
24,601
(637)
23,964
(11,609)
12,355
(23,988)
(767)
(12,400)
6,100
(6,300)
24,601
–
24,601
135,814
19,745
1,027,255
–
166
406,741
152
1,097
39
255
(14)
147
–
156
487
151
1,863
1,092
537
3,829
479
150
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
4 SEGMENTAL ANALYSIS continued
Year ended 31 December 2008
Net interest income
Other income (net of fee and
commission expense)
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus (defi cit)
Impairment
Share of results of joint ventures and associates
Profit (loss) before tax
External revenue
Inter-segment revenue
Segment revenue
Segment external assets
Segment customer deposits
Other segment items reflected in income
statement above:
Depreciation and amortisation
Movement in value of in-force business
Defined benefit scheme charges
Other segment items:
Additions to tangible fixed assets
Investments in joint ventures and associates at
end of year
Retail
£m
Wholesale
£m
Wealth and
International
£m
Insurance
£m
Other
£m
Reported basis
total
£m
8,454
5,752
1,314
(345)
2,739
11,193
–
11,193
(4,963)
6,230
(3,695)
7
2,542
15,228
(4,035)
11,193
393,827
216,282
197
–
163
127
78
(302)
5,450
–
5,450
(4,591)
859
(10,394)
(944)
(10,479)
(150)
5,600
5,450
517,269
157,941
1,603
–
106
2,241
1,032
1,191
2,505
–
2,505
(1,476)
1,029
(731)
(21)
277
1,883
622
2,505
86,394
34,095
71
–
31
254
117
3,493
3,148
(481)
2,667
(1,129)
1,538
–
2
1,540
6,020
(2,872)
3,148
127,249
–
80
(625)
36
411
(38)
(272)
(188)
(460)
–
(460)
(77)
(537)
(60)
4
(593)
(1,145)
685
(460)
1,979
844
343
–
(1)
735
50
14,903
6,933
21,836
(481)
21,355
(12,236)
9,119
(14,880)
(952)
(6,713)
21,836
–
21,836
1,126,718
409,162
2,294
(625)
335
3,768
1,239
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
151
Lloyds Banking Group
Annual Report and Accounts 2009
4 SEGMENTAL ANALYSIS continued
RECONCILIATION OF REPORTED BASIS TO STATUTORY RESULTS
The reported basis is the basis on which financial information is presented to the chief operating decision maker which excludes certain items
included in the statutory results. The table below reconciles the statutory results to the reported basis.
Year ended 31 December 2009
Net interest income
Other income
Total income
Insurance claims
Lloyds
Banking
Group
statutory
£m
9,026
36,271
45,297
(22,019)
Total income, net of insurance claims
23,278
Operating expenses
Trading surplus (deficit)
Impairment
Share of results of joint ventures and
associates
Gain on acquisition
Fair value unwind
Profit (loss) before tax
(15,984)
7,294
(16,673)
(752)
11,173
–
1,042
Pre-acquisition
results of HBOS
£m
Acquisition
related1
£m
Volatility
£m
Insurance
gross up
£m
Fair value
unwind
£m
Reported
basis
£m
Removal of:
243
(1,123)
(880)
1,349
469
(293)
176
(456)
–
–
–
–
–
–
–
–
4,589
4,589
–
–
(11,173)
–
(280)
(6,584)
11
(479)
(468)
–
(468)
–
(468)
–
(10)
–
–
(478)
1,280
(21,659)
(20,379)
20,318
(61)
61
–
–
–
–
–
–
Removal of:
2,166
(1,135)
1,031
(285)
746
18
764
(6,859)
(5)
–
6,100
–
12,726
11,875
24,601
(637)
23,964
(11,609)
12,355
(23,988)
(767)
–
6,100
(6,300)
1
Includes gain on acquisition, integration costs, amortisation of purchased intangibles and goodwill impairment.
Statutory
basis1
£m
HBOS
statutory
£m
Reclassifi-
cations
£m
Results of
BankWest and
St. Andrews
£m
7,718
(709)
7,009
2,859
9,868
(6,100)
3,768
(3,012)
4
–
–
8,171
(4,559)
3,612
6,192
9,804
(6,880)
2,924
(12,050)
(956)
56
(799)
760
( 10,825)
1,906
(234)
1,672
(1,570)
102
–
102
–
–
(56)
(46)
–
(524)
(148)
(672)
–
(672)
400
(272)
182
–
–
845
755
Amortisation
of purchased
intangibles
and goodwill
impairments
£m
Insurance
gross up
£m
Reported
basis
£m
–
–
–
–
–
258
258
–
–
–
–
(2,359)
10,225
7,866
(7,962)
(96)
86
(10)
–
–
–
–
14,903
6,933
21,836
(481)
21,355
(12,236)
9,119
(14,880)
(952)
–
–
Volatility
£m
(9)
2,358
2,349
–
2,349
–
2,349
–
–
–
–
2,349
258
(10)
(6,713)
Statutory
basis
£m
HBOS
statutory
£m
436,033
689,917
Reclassifi-
cations
£m
15,198
Lloyds TSB
and HBOS
share issues2
£m
Fair value
adjustments
£m
Consolidation
adjustments
£m
16,770
(11,975)
(19,225)
Reported
basis
£m
1,126,718
Year ended 31 December 2008
Net interest income
Other income
Total income
Insurance claims
Total income, net of insurance claims
Operating expenses
Trading surplus (deficit)
Impairment
Share of results of joint ventures and
associates
Non-operating income
Loss on disposal
Profit (loss) before tax
As at 31 December 2008
Assets
Restated for IFRS 2 (Revised)
Includes £4,500 million of ordinary share capital and £1,000 million of preference shares issued by Lloyds TSB Group plc to HM Treasury on 13 January 2009 and 15 January 2009, respectively and
£8,500 million of ordinary share capital and £3,000 million of preference shares issued by HBOS plc to HM Treasury on 15 January 2009 (net of costs).
1
2
152
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
4 SEGMENTAL ANALYSIS continued
GEOGRAPHICAL AREAS
The Group’s activities are focused in the UK and the analyses of income and assets below are based on the location of the branch or entity recording
the income or assets.
2009
Total income
Total assets
UK
£m
42,572
916,734
Non-UK
£m
2,725
Total
£m
45,297
110,521
1,027,255
There was no individual non-UK country contributing more than 5 per cent of total income or total assets.
As the activities of the Group were predominantly carried out in the UK prior to the acquisition of HBOS, no comparative geographical analysis is
presented.
5 NET INTEREST INCOME
Interest and similar income:
Loans and advances to customers
Loans and advances to banks
Debt securities held as loans and receivables
Lease and hire purchase receivables
Interest receivable on loans and receivables
Available-for-sale financial assets
Total interest and similar income
Interest and similar expense:
Deposits from banks
Customer deposits
Debt securities in issue
Subordinated liabilities
Liabilities under sale and repurchase agreements
Interest payable on liabilities held at amortised cost
Other
Total interest and similar expense
Net interest income
Weighted average
effective interest rate
2009
%
3.58
1.18
3.68
6.01
3.43
1.78
3.32
0.95
1.23
2.56
10.05
1.95
2.13
14.92
2.30
2008
%
6.33
4.74
2.52
7.62
6.11
4.58
5.98
3.65
3.27
4.10
5.82
4.45
3.67
–
3.61
2009
£m
24,171
769
1,469
852
27,261
977
28,238
(883)
(4,410)
(6,318)
(4,325)
(1,655)
(17,591)
(1,621)
(19,212)
9,026
2008
£m
13,808
1,847
61
706
16,422
1,147
17,569
(1,540)
(4,932)
(2,227)
(896)
(256)
(9,851)
–
(9,851)
7,718
Included within interest receivable is £971 million (2008: £435 million) in respect of impaired financial assets. Net interest income also includes a
charge of £121 million (2008: charge of £16 million) transferred from the cash flow hedging reserve (see note 47).
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
6 NET FEE AND COMMISSION INCOME
Fee and commission income:
Current accounts
Insurance broking
Credit and debit card fees
Trust and other fiduciary fees
Other
Fee and commission expense
Net fee and commission income
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
153
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
1,088
539
765
395
1,467
4,254
(1,517)
2,737
2008
£m
707
549
581
413
981
3,231
(694)
2,537
As discussed in note 2(D), fees and commissions which are an integral part of the effective interest rate form part of net interest income shown in
note 5. Fees and commissions relating to instruments that are held at fair value through profit or loss are included within net trading income shown
in note 7.
7 NET TRADING INCOME
Foreign exchange translation gains
Gains on foreign exchange trading transactions
Total foreign exchange
Investment property losses (note 26)
Securities and other gains (losses)
Net trading income
2009
£m
283
488
771
(214)
18,541
19,098
2008
£m
66
75
141
(1,058)
(8,269)
(9,186)
Securities and other gains (losses) comprise net gains (losses) arising on assets and liabilities held at fair value through profit or loss and for trading as
follows:
Net income (expense) arising on assets held at fair value through profit or loss:
Debt securities, loans and advances
Equity shares
Total net income (expense) arising on assets held at fair value through profit or loss
Net expense arising on liabilities held at fair value through
profit or loss – debt securities in issue
Total net gains (losses) arising on assets and liabilities held at fair value through profit or loss
Net gains (losses) on financial instruments held for trading
Securities and other gains (losses)
2009
£m
4,297
11,475
15,772
(125)
15,647
2,894
18,541
2008
£m
938
(7,759)
(6,821)
(232)
(7,053)
(1,216)
(8,269)
154
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
8 INSURANCE PREMIUM INCOME
Life insurance
Gross premiums
Ceded reinsurance premiums
Net earned premiums
Non-life insurance
Gross premiums written
Ceded reinsurance premiums
Net premiums
Change in provision for unearned premiums (note 36(2))
Change in provision for ceded unearned premiums (note 36(2))
Net earned premiums
Total net earned premiums
Life insurance gross written premiums can be further analysed as follows:
Life and pensions
Annuities
Other
Gross premiums
Non-life insurance gross written premiums can be further analysed as follows:
Credit protection
Home
Health
2009
£m
7,768
(308)
7,460
1,390
(101)
1,289
171
26
1,486
8,946
2009
£m
7,070
685
13
7,768
2009
£m
417
968
5
1,390
2008
£m
4,841
(41)
4,800
651
(23)
628
(16)
–
612
5,412
2008
£m
4,182
645
14
4,841
2008
£m
203
441
7
651
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
9 OTHER OPERATING INCOME
Operating lease rental income
Rental income from investment properties (note 26)
Other rents receivable
Gains less losses on disposal of available-for-sale financial assets (note 47)
Movement in value of in-force business (note 28)
Gain on capital transactions
Other income
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
155
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
1,509
358
51
97
1,169
1,498
808
5,490
2008
£m
392
209
32
19
(325)
–
201
528
GAIN ON CAPITAL TRANSACTIONS
During 2009, as part of the Group’s management of capital, the Group exchanged certain existing subordinated debt securities for new securities as
described below. These exchanges resulted in a gain on extinguishment of the existing liability of £1,498 million, being the difference between the
carrying amount of the security extinguished and the fair value of the new security together with related fees and costs.
In the first half of 2009, undated subordinated notes issued by a number of Group companies were exchanged for innovative tier 1 securities and
senior unsecured notes issued by Lloyds TSB Bank plc. These exchanges resulted in a gain of £745 million.
In July 2009, dated and undated subordinated liabilities issued by Clerical Medical Finance plc were exchanged for senior unsecured notes issued by
Lloyds TSB Bank plc resulting in a gain of £30 million.
In November 2009, as part of the restructuring plan that was a requirement for European Commission approval of state aid received by the Group,
the Group agreed to suspend the payment of coupons and dividends on certain of the Group’s preference shares and preferred securities for the
two year period from 31 January 2010 to 31 January 2012. This suspension gave rise to a partial extinguishment of the original liability, equivalent
to the present value of the suspended cash flows. During December 2009, as part of the Group’s recapitalisation and exit from GAPS, preference
shares, preferred securities and undated subordinated notes were exchanged for enhanced capital notes. These exchanges, together with the partial
extinguishment of liabilities arising from the suspension of payments of coupons, resulted in a gain of £723 million.
156
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
10 INSURANCE CLAIMS
Insurance claims comprise:
Life insurance and participating investment contracts
Claims and surrenders:
Gross
Reinsurers’ share
Change in insurance and participating investment contract liabilities (note 36(1)):
Change in gross liabilities
Change in reinsurers’ share of liabilities
Change in non-participating investment contract liabilities
Change in gross liabilities
Change in reinsurers’ share of liabilities
Change in unallocated surplus (note 39)
Total life insurance and participating investment contracts
Non-life insurance
Claims and claims paid:
Gross
Reinsurers’ share
Change in liabilities (note 36(2)):
Gross
Reinsurers’ share
Total non-life insurance
Total insurance claims (expense) credit
Life insurance gross claims can also be analysed as follows:
Deaths
Maturities
Surrenders
Annuities
Other
A non-life insurance claims development table is included in note 36.
2009
£m
2008
£m
(8,010)
146
(7,864)
(5,922)
177
(5,745)
(7,458)
–
(7,458)
(318)
(21,385)
(542)
16
(526)
(111)
3
(108)
(634)
(22,019)
(637)
(2,107)
(4,225)
(710)
(331)
(8,010)
(4,710)
65
(4,645)
4,332
40
4,372
3,041
–
3,041
284
3,052
(219)
7
(212)
24
(5)
19
(193)
2,859
(289)
(1,888)
(1,960)
(516)
(57)
(4,710)
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
157
Lloyds Banking Group
Annual Report and Accounts 2009
11 OPERATING EXPENSES
Staff costs:
Salaries
Social security costs
Pensions and other post-retirement benefit schemes (note 41)
Restructuring costs
Other staff costs
Premises and equipment:
Rent and rates
Hire of equipment
Repairs and maintenance
Other
Other expenses:
Communications and data processing
Advertising and promotion
Professional fees
Other
Depreciation and amortisation:
Depreciation of tangible fixed assets (note 30)
Amortisation of acquired value of in-force non-participating investment contracts (note 28)
Amortisation of other intangible assets (note 29)
Goodwill impairment (note 27)
Total operating expenses excluding GAPS fee
GAPS fee
Total operating expenses
The average number of persons on a headcount basis employed by the Group during the year was as follows:
UK
Overseas
1
Restated for IFRS 2 (Revised)
2009
£m
4,369
383
744
412
767
6,675
569
20
226
341
1,156
668
335
540
1,310
2,853
1,716
75
769
2,560
240
13,484
2,500
15,984
2009
125,109
6,891
132,000
20081
£m
2,230
176
235
14
323
2,978
318
16
151
165
650
455
194
229
808
1,686
648
–
38
686
100
6,100
–
6,100
2008
64,355
2,118
66,473
The UK government has published draft legislation which, when enacted, will introduce a bank payroll tax of 50 per cent applicable to discretionary
bonuses and other amounts over £25,000 awarded to bank employees in the period 9 December 2009 to 5 April 2010. The legislation has yet to be
finalised and there remain significant uncertainties over aspects of its detailed application and the Group continues to assess its ultimate liability
in respect of all of its schemes. However, in accordance with the requirements of IAS 19 ‘Employee Benefits’ the Group has provided in full for the
estimated cost of the bank payroll tax; the amount is not significant.
158
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
11 OPERATING EXPENSES continued
Fees payable for the audit of the Company’s current year annual report
Fees payable for other services:
Audit of the Company’s subsidiaries pursuant to legislation
Other services supplied pursuant to legislation
Total audit fees
Other services – audit related fees
Total audit and audit related fees
Services relating to taxation
Other non-audit fees:
Services relating to corporate finance transactions
Other services
Total other non-audit fees
Total fees payable to the Company’s auditors by the Group
2009
£m
2.2
18.8
4.2
25.2
5.3
30.5
1.0
0.3
8.9
9.2
40.7
During the year, the auditors also earned fees payable by entities outside the consolidated Lloyds Banking Group in respect of the following:
Audits of Group pension schemes
Audits of the unconsolidated Open Ended Investment Companies managed by the Group
Reviews of the financial position of corporate and other borrowers
Acquisition due diligence and other work performed in respect of potential
venture capital investments
2009
£m
0.3
0.6
19.3
1.4
20081
£m
1.1
8.5
3.0
12.6
5.3
17.9
0.5
0.4
0.7
1.1
19.5
20081
£m
0.2
0.5
1.4
1.0
1
The allocation of fees between those payable for the audit of the Company’s current year audit and those for the audit of the Company’s subsidiaries has been restated. There is no change in total
fees payable.
Other non-audit fees include the costs associated with the Group’s preparations for ensuring the HBOS Group complies fully with the requirements
of the Sarbanes-Oxley Act by 31 December 2010.
The following types of services are included in the categories listed above:
Audit fees: This category includes fees in respect of the audit of the Group’s annual financial statements and other services in connection with
regulatory filings. Other services supplied pursuant to legislation relate primarily to the costs associated with the Sarbanes-Oxley Act audit
requirements together with the cost of the audit of the Group’s Form 20-F filing.
Audit related fees: This category includes fees in respect of services for assurance and related services that are reasonably related to the performance
of the audit or review of the financial statements, for example acting as reporting accountants in respect of prospectuses and circulars required by
the UKLA listing rules.
Services relating to taxation: This category includes tax compliance and tax advisory services.
Other non-audit fees: This category includes due diligence relating to corporate finance, including venture capital transactions and other assurance
and advisory services.
It is the Group’s policy to use the auditors on assignments in cases where their knowledge of the Group means that it is neither efficient nor cost
effective to employ another firm of accountants. Such assignments typically relate to the provision of advice on tax issues, assistance in transactions
involving the acquisition and disposal of businesses and accounting advice.
The Group has procedures that are designed to ensure auditor independence, including that fees for audit and non-audit services are approved
in advance. This approval can be obtained either on an individual engagement basis or, for certain types of non-audit services, particularly those of
a recurring nature, through the approval of a fee cap covering all engagements of that type provided the fee is below that cap. All statutory audit
work as well as non-audit assignments where the fee is expected to exceed the relevant fee cap must be pre-approved by the audit committee on
an individual engagement basis. On a quarterly basis, the audit committee receives a report detailing all pre-approved services and amounts paid to
the auditors for such pre-approved services.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
159
Lloyds Banking Group
Annual Report and Accounts 2009
12 IMPAIRMENT
Impairment losses on loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities classified as loans and receivables
Total impairment losses on loans and receivables (note 24)
Impairment of available-for-sale financial assets
Other credit risk provisions (note 43)
Total impairment charged to the income statement
2009
£m
(3)
15,783
248
16,028
602
43
16,673
13 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES
The Group’s share of results of and investments in joint ventures and associates comprises:
Joint ventures
Associates
Total
Income
Expenses
Impairment
Insurance claims
Profit (loss) before tax
Tax
Share of post-tax results
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Share of net assets
At 1 January
Adjustment on acquisition
Additional investments
Acquisitions
Disposals
Share of post-tax results
Dividends paid
Exchange and other adjustments
At 31 December
2009
£m
708
(544)
(272)
(465)
(573)
24
(549)
2,754
4,662
(2,175)
(4,871)
370
55
956
140
3
(199)
(549)
(21)
(15)
370
2008
£m
29
(22)
–
–
7
(2)
5
68
11
(17)
(7)
55
50
–
–
–
–
5
–
–
55
2009
£m
5
(96)
(114)
–
(205)
2
(203)
605
1,611
(494)
(1,613)
109
–
219
12
60
(39)
(203)
–
60
109
2008
£m
16
(17)
–
–
(1)
–
(1)
89
44
(86)
(47)
–
9
–
–
–
(6)
(1)
(2)
–
–
2009
£m
713
(640)
(386)
(465)
(778)
26
(752)
3,359
6,273
(2,669)
(6,484)
479
55
1,175
152
63
(238)
(752)
(21)
45
479
20081
£m
135
2,584
157
2,876
130
6
3,012
2008
£m
45
(39)
–
–
6
(2)
4
157
55
(103)
(54)
55
59
–
–
–
(6)
4
(2)
–
55
160
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
13 INVESTMENTS IN JOINT VENTURES AND ASSOCIATES continued
The Group’s unrecognised share of losses of associates for the year is £64 million (2008: £nil) and of joint ventures is £424 million (2008: £nil).
For entities making losses, subsequent profits earned are not recognised until previously unrecognised losses are extinguished. The Group’s
unrecognised share of losses net of unrecognised profits on a cumulative basis of associates is £64 million (2008: £nil) and of joint ventures is
£424 million (2008: £nil).
The Group’s principal joint venture investments at 31 December 2009 were:
esure Holdings Limited (see below)
Nature of
business
Insurance
Type of
shares held
Ordinary
Group’s interest
Statutory accounts
made up to
Principal area of
operations
70% 31 December
Sainsbury’s Bank plc
Banking
Ordinary
50% 31 December
Preference
100%
UK
UK
All of the interests in the joint ventures above are incorporated in the UK. All interests in joint ventures are held by subsidiaries. Where entities have
statutory accounts drawn up to a date other than 31 December management accounts are used when accounting for them by the Group.
Subsequent to the year end, on 11 February 2010 the Group announced the sale of its 70 per cent stake in esure to a management buyout vehicle.
14 GAIN ON ACQUISITION
On 16 January 2009, the Group acquired 100 per cent of the ordinary share capital of HBOS plc, which together with its subsidiaries undertakes
banking, insurance and other financial services related activities in the UK and in certain overseas locations.
The table below sets out the fair value of the identifiable net assets acquired.
At the time of the recommended offer for HBOS in September 2008, it had become increasingly difficult for HBOS to raise funds in wholesale
markets and their board sought to restore confidence and stability through an agreement to be acquired by Lloyds TSB Group plc announced on
18 September 2008 at the original terms of 0.833 Lloyds TSB Group plc shares for each HBOS share. However turbulence in the markets continued
and the UK Government decided in October 2008 that it would be appropriate for the UK banking sector to increase its level of capitalisation. As a
consequence of the recapitalisation of HBOS and the impact of the deteriorating market conditions the terms of the final agreed offer were revised
down to a ratio of 0.605 per HBOS share.
As the fair value of the identifiable net assets acquired was greater than the total consideration paid, negative goodwill arises on the acquisition. The
negative goodwill is recognised as ‘Gain on acquisition’ in the income statement for the year ended 31 December 2009.
Assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other financial assets at fair value through profit or loss
Derivative financial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale financial assets
Investment properties
Investments in joint ventures and associates
Value of in-force business
Other intangible assets
Tangible fixed assets
Current tax recoverable
Deferred tax assets
Other assets
Total assets
Book value
as at
16 January
2009
£m
2,123
523
83,857
54,840
15,751
450,351
39,819
27,151
3,002
1,152
3,152
104
5,721
1,050
2,556
7,601
Fair value
adjustments
£m
–
–
–
(808)
43
(13,512)
(1,411)
–
–
23
561
4,650
(14)
–
(602)
(905)
Fair value
as at
16 January
2009
£m
2,123
523
83,857
54,032
15,794
436,839
38,408
27,151
3,002
1,175
3,713
4,754
5,707
1,050
1,954
6,696
698,753
(11,975)
686,778
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
161
Lloyds Banking Group
Annual Report and Accounts 2009
14 GAIN ON ACQUISITION continued
Liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
Trading and other financial liabilities at fair value through profit or loss
Derivative financial instruments
Notes in circulation
Debt securities in issue
Liabilities arising from insurance contracts and participating investment contracts
Liabilities arising from non-participating investment contracts
Unallocated surplus within insurance businesses
Other liabilities
Retirement benefit obligations
Current tax liabilities
Deferred tax liabilities
Other provisions
Subordinated liabilities
Total liabilities
Net assets acquired
Fair value of net assets acquired
Adjust for:
Preference shares1
Minority interests
Adjusted net assets of HBOS acquired
Consideration of acquisition costs:
Issue of 7,776 million ordinary shares of 25p in Lloyds Banking Group plc 2
Fees and expenses related to the transaction
Total consideration
Gain on acquisition
Book value
as at
16 January
2009
£m
87,731
223,859
521
16,360
45,798
936
Fair value
adjustments
£m
109
835
–
–
–
–
Fair value
as at
16 January
2009
£m
87,840
224,694
521
16,360
45,798
936
191,566
(6,247)
185,319
36,405
28,168
526
14,732
(474)
58
245
146
29,240
675,817
22,936
282
13
–
(312)
832
–
(142)
606
(9,192)
(13,216)
1,241
36,687
28,181
526
14,420
358
58
103
752
20,048
662,601
24,177
24,177
(3,917)
(1,300)
18,960
(7,651)
(136)
(7,787)
11,173
1
2
On 16 January 2009, the Group cancelled the following HBOS preference share issuances in exchange for preference shares issued by Lloyds Banking Group plc: 6.475 per cent non-cumulative
preference shares of £1 each, 6.3673 per cent non-cumulative fixed to floating preference shares of £1 each and 6.0884 per cent non-cumulative preference shares of £1 each. The fair value of the
Lloyds Banking Group preference shares issued is deducted from the net assets acquired for the purposes of calculating the gain arising on acquisition.
The calculation of consideration is based on the closing price of Lloyds TSB ordinary shares of 98.4p on 16 January 2009; 12,852 million HBOS shares were exchanged for Lloyds Banking Group shares
at a ratio of 0.605 shares per HBOS share.
The post acquisition loss before tax of HBOS plc covering the period from 17 January 2009 to 31 December 2009 which is included in the Group
statutory consolidated income statement for the year to 31 December 2009 is £5,613 million.
Had the acquisition date of HBOS plc been 1 January 2009, Lloyds Banking Group consolidated total income would have been £880 million lower
at £44,417 million and Lloyds Banking Group consolidated profit before tax would have been £280 million lower at £762 million.
DISPOSAL OF BUSINESS
On 12 August 2009, the Group announced the sale of Insight Investment Management Limited, a subsidiary in which the Group held a 100 per cent
interest. The sale completed on 8 November 2009 and resulted in no gain or loss on disposal. Customer related intangible assets of £170 million that
arose on the acquisition of HBOS were included in the disposal (note 29).
162
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
15 TAXATION
(A) ANALYSIS OF TAX CREDIT FOR THE YEAR
UK corporation tax:
Current tax on profi t for the year
Adjustments in respect of prior years
Double taxation relief
Foreign tax:
Current tax on profi t for the year
Adjustments in respect of prior years
Current tax charge
Deferred tax (note 42):
Origination and reversal of temporary differences
Adjustments in respect of prior years
Tax credit
The credit for tax on the profit for 2009 is based on a UK corporation tax rate of 28.0 per cent (2008: 28.5 per cent).
The above income tax credit is made up as follows:
Tax (charge) credit attributable to policyholders
Shareholder tax credit (charge)
2009
£m
(227)
(310)
(537)
10
(527)
(221)
40
(181)
(708)
2,429
190
2,619
1,911
2009
£m
(410)
2,321
1,911
2008
£m
(667)
(19)
(686)
91
(595)
(144)
4
(140)
(735)
625
148
773
38
2008
£m
461
(423)
38
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
15 TAXATION continued
Year ended 31 December 2009
Movements in available-for-sale financial assets:
Change in fair value
Transferred to income statement in respect of disposals
Transferred to income statement in respect of impairment
Other transfers to income statement
Movement in cash flow hedge:
Effective portion of changes in fair value taken to other comprehensive income
Net gains transferred to the income statement
Currency translation differences
Other comprehensive income for the year
Year ended 31 December 20081
Movements in available-for-sale financial assets:
Change in fair value
Transferred to income statement in respect of disposals
Transferred to income statement in respect of impairment
Other transfers to income statement
Movement in cash flow hedge:
Effective portion of changes in fair value taken to other comprehensive income
Net gains transferred to the income statement
Currency translation differences
Other comprehensive income for the year
1
Restated for IFRS 2 (Revised)
163
Lloyds Banking Group
Annual Report and Accounts 2009
Total tax
£m
After tax
amount
£m
Before
tax
amount
£m
2,234
(97)
621
(93)
2,665
(530)
121
(409)
(37)
2,219
(298)
23
(168)
26
(417)
148
(29)
119
(182)
(480)
Before
tax amount
£m
Total tax
£m
(2,721)
(19)
130
(91)
(2,701)
(33)
16
(17)
(1,304)
(4,022)
690
–
(28)
25
687
9
(4)
5
942
1,634
1,936
(74)
453
(67)
2,248
(382)
92
(290)
(219)
1,739
After tax
amount
£m
(2,031)
(19)
102
(66)
(2,014)
(24)
12
(12)
(362)
(2,388)
164
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
15 TAXATION continued
(B) FACTORS AFFECTING THE TAX CREDIT FOR THE YEAR
A reconciliation of the charge that would result from applying the standard UK corporation tax rate to profit before tax to the tax credit for the year is
given below:
Profit before tax
Tax charge thereon at UK corporation tax rate of 28 per cent (2008: 28.5 per cent)
Factors affecting charge:
Goodwill
Disallowed and non-taxable items
Overseas tax rate differences
Gains exempted or covered by capital losses
Policyholder interests
Tax losses where no deferred tax provided
Adjustments in respect of previous years
Effect of profit (loss) in joint ventures and associates
Other items
Tax credit on profit on ordinary activities
1
Restated for IFRS 2 (Revised)
2009
£m
1,042
(292)
3,022
447
(352)
(14)
(295)
(332)
(66)
(211)
4
1,911
20081
£m
760
(217)
(28)
(116)
(39)
27
330
–
101
–
(20)
38
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
16 EARNINGS PER SHARE
Profi t attributable to equity shareholders – basic and diluted
Weighted average number of ordinary shares in issue – basic
Adjustment for share options and awards
Weighted average number of ordinary shares in issue – diluted
Basic earnings per share
Diluted earnings per share
1
Restated, see below
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
165
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
2,827
2009
million
37,674
255
37,929
7.5p
7.5p
20081
£m
772
20081
million
11,581
79
11,660
6.7p
6.6p
Basic earnings per share are calculated by dividing the net profit attributable to equity shareholders by the weighted average number of ordinary
shares in issue during the year, which has been calculated after deducting 10 million (2008: 11 million restated) ordinary shares representing the
Group’s holdings of own shares in respect of employee share schemes.
The basic and diluted weighted average number of ordinary shares in issue reflects the issue of 2,597 million ordinary shares on 13 January 2009,
the issue of 7,776 million ordinary shares as purchase consideration for the acquisition of 100 per cent of the ordinary share capital of HBOS plc on
16 January 2009, the capitalisation issue of 408 million ordinary shares on 11 May 2009, the issue of 10,409 million ordinary shares on 16 June 2009 in
respect of a placing and compensatory open offer, the issue of 36,505 million shares in respect of the rights issue on 27 November 2009 and the issue
of 108 million ordinary shares on 11 December 2009. To the extent that such shares contain a bonus element, the average number of shares for 2009
has been adjusted to reflect that bonus element for the full year. Average shares for 2008 have been adjusted accordingly (see below).
For the calculation of diluted earnings per share the weighted average number of ordinary shares in issue is adjusted to assume conversion of all
dilutive potential ordinary shares. The Company has dilutive potential ordinary shares in respect of share options and awards granted to employees.
The number of shares that could have been acquired at the average annual share price of the Company’s shares based on the monetary value of the
subscription rights attached to outstanding share options and awards is determined. This is deducted from the number of shares issuable under such
options and awards to leave a residual bonus amount of shares which are added to the weighted-average number of ordinary shares in issue, but no
adjustment is made to the profit attributable to equity shareholders.
In December 2009, as part of the Group’s recapitalisation and exit from GAPS, the Group entered into an agreement with holders of certain existing
liabilities to exchange these for ordinary shares or for cash on 18 February 2010. The weighted average number of anti-dilutive shares arising from this
transaction that have been excluded from the calculation of diluted earnings per share was 294 million at 31 December 2009. As set out in note 57,
on 18 February 2010, the above exchange completed and 3,141 million new ordinary shares in Lloyds Banking Group plc were issued.
The weighted-average number of anti-dilutive share options and awards excluded from the calculation of diluted earnings per share was 393 million
at 31 December 2009 (2008: 59 million).
166
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
16 EARNINGS PER SHARE continued
EARNINGS PER SHARE RESTATEMENT
Profi t attributable to equity shareholders has been restated for the adoption of IFRS 2 (Revised) as explained in accounting policies (see page 133).
The weighted-average number of ordinary shares in issue have been restated to reflect the adjustment factor of 1.025 arising from the capitalisation
issue on 11 May 2009, the adjustment factor of 1.310 arising from the placing and compensatory open offer on 16 June 2009, and the adjustment
factor of 1.502 arising from the rights issue on 27 November 2009. The impact of these adjustments on the previously published comparatives
is as follows:
Profi t attributable to equity shareholders as published
Restatement for IFRS 2 (Revised)
Restated
Weighted-average number of ordinary shares in issue (basic) as published
Restatement for capitalisation issue
Restatement for impact of placing and compensatory open offer
Restatement for rights issue
Restated
Weighted-average number of ordinary shares in issue (diluted) as published
Restatement for capitalisation issue
Restatement for impact of placing and compensatory open offer
Restatement for rights issue
Restated
17 TRADING AND OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
These assets are comprised as follows:
Loans and advances to customers
Loans and advances to banks
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Equity shares:
Listed
Unlisted
2009
Other financial
assets at fair
value through
profit or loss
£m
166
635
17,025
700
–
520
1,999
17,571
37,815
55,685
28,465
84,150
122,766
Trading
assets
£m
13,579
4,702
2,936
6
2,034
–
891
3,097
8,964
–
–
–
27,245
Total
£m
13,745
5,337
19,961
706
2,034
520
2,890
20,668
46,779
55,685
28,465
84,150
150,011
2008
Other financial
assets at fair
value through
profit or loss
£m
325
–
7,326
18
433
369
1,342
11,120
20,608
16,569
6,705
23,274
44,207
Trading
assets
£m
283
–
38
–
–
–
–
536
574
–
–
–
857
2008
£m
819
(47)
772
Shares
million
5,742
144
1,824
3,871
11,581
5,781
145
1,837
3,897
11,660
Total
£m
608
–
7,364
18
433
369
1,342
11,656
21,182
16,569
6,705
23,274
45,064
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
167
Lloyds Banking Group
Annual Report and Accounts 2009
17 TRADING AND OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS continued
Other financial assets at fair value through profit or loss represent the following assets designated into that category:
(i)
(ii)
financial assets backing insurance contracts and investment contracts of £118,573 million (31 December 2008: £39,899 million) which are so
designated because the related liabilities either have cash flows that are contractually based on the performance of the assets or are contracts
whose measurement takes account of current market conditions and where significant measurement inconsistencies would otherwise arise;
loans and advances to customers of £166 million (31 December 2008: £325 million) which are economically hedged by interest rate derivatives
which are not in hedge accounting relationships and where significant measurement inconsistencies would otherwise arise if the related
derivatives were treated as trading liabilities and the loans and advances were carried at amortised cost; and
(iii) private equity investments of £1,880 million (31 December 2008: £947 million) that are managed, and evaluated, on a fair value basis in
accordance with a documented risk management or investment strategy and reported to key management personnel on that basis.
The maximum exposure to credit risk at 31 December 2009 of the loans and advances to banks and customers designated at fair value through
profit or loss was £166 million (2008: £325 million); the Group does not hold any credit derivatives or other instruments in mitigation of this risk. There
was no significant movement in the fair value of these loans attributable to changes in credit risk which is determined by reference to the publicly
available credit ratings of the instruments involved.
The carrying value of assets that are subject to stock lending arrangements was £1,752 million at 31 December 2009 (31 December 2008: £809 million)
all of which the secured party is permitted by contract or custom to sell or repledge.
The Group’s Wholesale division had exposure to negative basis asset-backed securities of £1,174 million (31 December 2008: £584 million) of which
£970 million were protected by monoline financial guarantors (note 54).
18 DERIVATIVE FINANCIAL INSTRUMENTS
The Group holds derivatives as part of the following strategies:
– Customer driven, where derivatives are held as part of the provision of risk management products to Group customers;
– To manage and hedge the Group’s interest rate and foreign exchange risk arising from normal banking business. The hedge accounting strategy
adopted by the Group is to utilise a combination of fair value, cash flow and net investment hedge approaches as described in Note 54; and
– Derivatives held in policyholders funds as permitted by the investment strategies of those funds,
Derivatives are classified as trading except those designated as effective hedging instruments which meet the criteria under IAS39. Derivatives are
held at fair value on the Group’s balance sheet. A description of the methodology used to determine the fair value of derivative financial instruments
and the effect of using reasonably possible alternative assumptions for those derivatives valued using unobservable inputs is set out in note 53.
The principal derivatives used by the Group are as follows:
– Interest rate related contracts include interest rate swaps, forward rate agreements and options. An interest rate swap is an agreement between two
parties to exchange fixed and floating interest payments, based upon interest rates defined in the contract, without the exchange of the underlying
principal amounts. Forward rate agreements are contracts for the payment of the difference between a specified rate of interest and a reference
rate, applied to a notional principal amount at a specific date in the future. An interest rate option gives the buyer, on payment of a premium, the
right, but not the obligation, to fix the rate of interest on a future loan or deposit, for a specified period and commencing on a specified future date.
– Exchange rate related contracts include forward foreign exchange contracts, currency swaps and options. A forward foreign exchange contract is
an agreement to buy or sell a specified amount of foreign currency on a specified future date at an agreed rate. Currency swaps generally involve
the exchange of interest payment obligations denominated in different currencies; the exchange of principal can be notional or actual. A currency
option gives the buyer, on payment of a premium, the right, but not the obligation, to sell specified amounts of currency at agreed rates of
exchange on or before a specified future date.
– Credit derivatives, principally credit default swaps, are used by the Group as part of its trading activity and to manage its own exposure to credit
risk. A credit default swap is a swap in which one counterparty receives a premium at pre-set intervals in consideration for guaranteeing to make
a specific payment should a negative credit event take place. The Group also uses credit default swaps to securitise, in combination with external
funding, £6,455 million (2008: £8,360 million) of corporate and commercial banking loans.
– Equity derivatives are also used by the Group as part of its equity based retail product activity to eliminate the Group’s exposure to fluctuations in
various international stock exchange indices. Index-linked equity options are purchased which give the Group the right, but not the obligation, to
buy or sell a specified amount of equities, or basket of equities, in the form of published indices on or before a specified future date.
168
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
18 DERIVATIVE FINANCIAL INSTRUMENTS continued
The fair values and notional amounts of derivative instruments are set out the following table:
Contract/notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
31 December 2009
Trading and other
Exchange rate contracts:
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options purchased
Options written
Futures
Credit derivatives
Embedded equity conversion feature
Equity and other contracts
149,701
130,954
11,130
11,072
302,857
1,092,319
840,539
68,267
57,772
12,938
2,071,835
19,673
–
27,391
1,675
6,853
678
–
9,206
23,799
441
1,700
–
2
25,942
1,711
1,797
1,842
Total derivative assets/liabilities – trading and other
2,421,756
40,498
1,695
1,787
–
431
3,913
24,153
400
–
1,656
7
26,216
444
–
1,225
31,798
107
985
144
1,236
26,162
80,085
628
106,875
635
3,989
–
4,624
222,548
4,749
7,285
5,137
8,937
2,754
239,376
2,507
348,758
2,770,514
1
8
4
3
144
–
4,762
7,432
44
9,430
49,928
19
8,687
40,485
Hedging
Derivatives designated as fair value hedges:
Currency swaps
Interest rate swaps
Options written
Derivatives designated as cash fl ow hedges:
Interest rate swaps
Futures
Currency swaps
Options purchased
Derivatives designated as net investment hedges:
Cross currency swaps
Total derivative assets/liabilities – hedging
Total recognised derivative assets/liabilities
The principal amount of the contract does not represent the Group’s real exposure to credit risk which is limited to the current cost of replacing
contracts with a positive value to the Group should the counterparty default. To reduce credit risk the Group uses a variety of credit enhancement
techniques such as netting and collateralisation, where security is provided against the exposure. Further details are provided in Note 54(3)
on page 231.
The embedded equity conversion feature of £1,797 million reflects the value at 31 December 2009 of the equity conversion feature contained in
the Enhanced Capital Notes issued by the Group in December 2009 as part of the Group’s recapitalisation and exit from the Government Asset
Protection Scheme (see note 44).
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
169
Lloyds Banking Group
Annual Report and Accounts 2009
18 DERIVATIVE FINANCIAL INSTRUMENTS continued
31 December 2008
Trading and other
Exchange rate contracts:
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Interest rate contracts:
Interest rate swaps
Forward rate agreements
Options purchased
Options written
Futures
Credit derivatives
Equity and other contracts
Total derivative assets/liabilities – trading and other
Hedging
Derivatives designated as fair value hedges:
Interest rate swaps (including swap options)
Derivatives designated as cash flow hedges:
Interest rate swaps
Derivatives designated as net investment hedges:
Cross currency swaps
Total derivative assets/liabilities – hedging
Total recognised derivative assets/liabilities
19 LOANS AND ADVANCES TO BANKS
Lending to banks
Money market placements with banks
Total loans and advances to banks
Allowance for impairment losses (note 24)
Contract/notional
amount
£m
Fair value
assets
£m
Fair value
liabilities
£m
157,572
29,463
9,185
10,143
206,363
368,176
153,930
37,175
33,130
587
592,998
32,495
5,447
837,303
5,788
4,367
714
–
10,869
4,102
1,463
–
743
6,308
11,797
12,639
405
843
–
44
13,089
4,257
234
28,449
395
–
627
3
13,664
2,670
81
22,723
37,243
434
1,665
867
6,318
44,428
881,731
1
–
435
28,884
2009
£m
3,705
31,805
35,510
(149)
35,361
91
2,413
4,169
26,892
2008
£m
3,056
35,812
38,868
(135)
38,733
The Group holds collateral with a fair value of £4,171 million (31 December 2008: £10,739 million), which it is permitted to sell or repledge, of which
£4,171 million (2008: £5,492 million) was repledged or sold to third parties for periods not exceeding three months from the transfer. The Group is
obliged to return collateral with a fair value of £4,171 million (2008: £5,492 million).
170
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
20 LOANS AND ADVANCES TO CUSTOMERS
Agriculture, forestry and fishing
Energy and water supply
Manufacturing
Construction
Transport, distribution and hotels
Postal and telecommunications
Property companies
Financial, business and other services
Personal:
Mortgages
Other
Lease financing
Hire purchase
Allowance for impairment losses (note 24)
2009
£m
5,130
3,031
14,912
10,830
31,820
1,662
83,820
66,923
362,667
42,958
9,307
8,710
641,770
(14,801)
626,969
2008
£m
3,969
2,598
12,057
3,016
14,664
1,060
23,318
33,319
114,643
25,318
4,546
5,295
243,803
(3,459)
240,344
The Group holds collateral with a fair value of £1,110 million (31 December 2008: £1,736 million), which it is permitted to sell or repledge, of which
£1,102 million (31 December 2008: £366 million) was repledged or sold to third parties for periods not exceeding three months from the transfer.
The Group is obliged to return collateral with a fair value of £1,102 million (2008: £366 million).
Loans and advances to customers include finance lease receivables, which may be analysed as follows:
Gross investment in finance leases, receivable:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Unearned future finance income on finance leases
Rentals received in advance
Commitments for expenditure in respect of equipment to be leased
Net investment in finance leases
2009
£m
1,374
3,577
7,911
12,862
(3,428)
(119)
(8)
9,307
2008
£m
541
1,775
5,570
7,886
(3,038)
(128)
(174)
4,546
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
171
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
1,008
2,403
5,896
9,307
2008
£m
328
974
3,244
4,546
20 LOANS AND ADVANCES TO CUSTOMERS continued
The net investment in finance leases represents amounts recoverable as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Equipment leased to customers under finance leases primarily relates to structured financing transactions to fund the purchase of aircraft, ships and
other large individual value items. During 2009 and 2008 no contingent rentals in respect of finance leases were recognised in the income statement.
The allowance for uncollectable finance lease receivables included in the allowance for impairment losses is £123 million (2008: £15 million).
The unguaranteed residual values included in finance lease receivables were as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2009
£m
4
46
5
55
2008
£m
1
29
3
33
21 SECURITISATIONS AND COVERED BONDS
Loans and advances to customers include balances that have been securitised but not derecognised, including 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.
Beneficial interests in certain residential mortgages have been transferred to special purpose entities which issue floating rate debt securities. Neither the
Group nor any entities in the Group are obliged to support any losses that may be suffered by the note holders and do not intend to offer such support.
The floating rate note holders only receive payments of interest and principal to the extent that the special purpose entities have received sufficient funds
from the transferred mortgages and after certain expenses have been met. In the event of a deficiency, they have no recourse whatsoever to the Group.
172
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
21 SECURITISATIONS AND COVERED BONDS continued
The Group’s principal securitisation and covered bond programmes, together with the balances of the advances subject to securitisation and the
carrying value of the notes in issue at 31 December, are listed below. The notes in issue are reported in note 35.
2009
2008
Securitisation
Arkle
Ascot Black1
Goodwood Gold1
Doncaster Gold1
Exeter Blue1
Kelso1
Morse1
Cooper’s Hill
Highland
Permanent
Mound
Handbridge
Candide
Prominent
Chepstow Blue
Derby Blue
Pendeford
Balliol
Brae
Dakota
Deva
Penarth
Tioba
Trinity
Wolfhound
Bella Trust Series
Other
Less held by the Group
Total securitisations
Covered Bonds
Type of loan
UK residential mortgages
Commercial loans
Commercial loans
Commercial loans
PFI/PPP and project finance loans
Corporate loans and revolving credit facilities
Corporate loans and revolving credit facilities
UK residential mortgages
UK residential mortgages
UK residential mortgages
UK residential mortgages
Personal loans
Dutch residential mortgages
Commercial loans
Commercial loans
Commercial loans
UK residential mortgages
UK residential mortgages
UK residential mortgages
UK residential mortgages
UK residential mortgages
Credit card receivables
UK residential mortgages
UK residential mortgages
Irish residential mortgages
Motor vehicle loans
UK residential mortgages
Gross assets
securitised
£m
32,070
1,220
2,932
831
877
595
–
11,383
5,937
38,134
8,603
3,730
4,800
898
3,959
3,231
11,994
12,771
7,838
3,832
6,691
5,155
2,094
11,033
6,522
443
63
187,636
Notes
in issue
£m
18,141
–
119
60
45
7
–
12,000
6,050
30,512
6,933
2,613
4,663
787
4,050
3,250
9,039
12,819
9,588
3,826
6,906
2,699
2,249
11,466
6,585
470
169
155,046
(117,489)
37,557
Residential Mortgage-Backed Covered Bonds
Social Housing Loan-Backed Covered Bonds
Less held by the Group
Total covered bonds
Total securitisations and covered bonds
1
Securitisations utilising a combination of external funding and credit default swaps.
99,753
76,636
3,356
103,109
2,735
79,371
(52,060)
27,311
64,868
Gross assets
securitised
£m
34,293
1,434
2,909
950
859
1,158
1,050
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
42,653
40,608
–
40,608
Notes
in issue
£m
27,189
–
127
48
48
3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
27,415
(17,365)
10,050
24,000
–
24,000
(24,000)
–
10,050
Cash deposits of £31,480 million (31 December 2008: £1,846 million) held by the Group are restricted in use to repayment of the debt securities
issued by the securitisation vehicles and other legal obligations.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
173
Lloyds Banking Group
Annual Report and Accounts 2009
22 SPECIAL PURPOSE ENTITIES
In addition to the special purpose entities disclosed in note 21, which are used for securitisation and covered bond programmes, the Group
sponsors three asset-backed conduits, Cancara, Grampian and Landale, which invest in debt securities and client receivables. All the external assets
in these conduits are consolidated in the Group’s financial statements and are included in the credit market exposures set out in note 54. The total
consolidated exposures in these conduits are set out in the table below:
At 31 December 2009
Loans and receivables
Debt securities:
Classified as loans and receivables
Classified as available-for-sale (note 25)
Total debt securities
Total assets
At 31 December 2008
Loans and receivables
Debt securities:
Classified as loans and receivables
Classified as available-for-sale (note 25)
Total debt securities
Total assets
Cancara
£m
Grampian
£m
Landale
£m
Total
£m
3,681
15
5,382
5,397
9,078
5,905
437
6,273
6,710
12,615
–
–
3,681
9,867
–
9,867
9,867
–
–
–
–
–
698
–
698
698
–
–
–
–
–
10,580
5,382
15,962
19,643
5,905
437
6,273
6,710
12,615
OTHER SPECIAL PURPOSE ENTITIES 22 SPECIAL PURPOSE ENTITIES
During 2009, the Group established Lloyds TSB Pension ABCS (No 1) LLP and Lloyds TSB Pension ABCS (No 2) LLP and transferred approximately
£5 billion of assets, primarily comprising notes in certain of the Group’s securitisation programmes, in aggregate to these entities. The Group
transferred interests in the LLPs with a fair value of approximately £1 billion in aggregate to the Lloyds TSB Group Pension Scheme No 1 and
the Lloyds TSB Group Pension Scheme No 2 entitling these schemes to annual payments of approximately £215 million in aggregate until
31 December 2014 (see note 41).
174
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
23 DEBT SECURITIES CLASSIFIED AS LOANS AND RECEIVABLES
Debt securities accounted for as loans and receivables comprise:
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Allowance for impairment losses (see note 24)
24 ALLOWANCE FOR IMPAIRMENT LOSSES ON LOANS AND RECEIVABLES
2009
£m
13,322
17,137
2,623
33,082
(430)
32,652
Balance at 1 January 2008
Exchange and other adjustments
Advances written off
Recoveries of advances written off in previous years
Unwinding of discount
Charge to the income statement
At 31 December 2008
Exchange and other adjustments
Advances written off
Recoveries of advances written off in previous years
Unwinding of discount
Charge to the income statement
At 31 December 2009
Loans and
advances to
customers
£m
Loans and
advances
to banks
£m
Debt
securities
£m
2,408
43
(1,586)
112
(102)
2,584
3,459
95
(4,200)
110
(446)
15,783
14,801
–
–
–
–
–
135
135
17
–
–
–
(3)
149
–
–
(24)
–
–
157
133
49
–
–
–
248
430
2008
£m
478
540
3,531
4,549
(133)
4,416
Total
£m
2,408
43
(1,610)
112
(102)
2,876
3,727
161
(4,200)
110
(446)
16,028
15,380
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
175
Lloyds Banking Group
Annual Report and Accounts 2009
2008
Other
£m
868
12
9,602
1,771
5,748
2,183
20,184
3
38
41
2,402
26,807
29,209
49,434
Total
£m
868
12
9,602
5,700
8,092
2,183
26,457
3
38
41
2,402
26,807
29,209
55,707
25 AVAILABLE-FOR-SALE FINANCIAL ASSETS
Debt securities:
Government securities
Other public sector securities
Bank and building society certificates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Equity shares:
Listed
Unlisted
Treasury bills and other bills:
Treasury bills and similar securities
Other bills
Conduits
£m
–
–
–
3,481
1,901
–
5,382
–
–
–
–
–
–
5,382
2009
Other
£m
8,669
31
1,014
1,300
5,739
19,904
36,657
102
1,929
2,031
2,532
–
2,532
41,220
Total
£m
Conduits
£m
8,669
31
1,014
4,781
7,640
19,904
42,039
102
1,929
2,031
2,532
–
2,532
46,602
–
–
–
3,929
2,344
–
6,273
–
–
–
–
–
–
6,273
Details of the Group’s asset-backed conduits shown in the table above are included in note 22.
Included within asset-backed securities are £12,421 million (31 December 2008: £13,792 million) managed by the Wholesale division. Further
information on these exposures is provided in note 54.
The carrying value of assets that are subject to stock lending arrangements was £4,616 million at 31 December 2009 (31 December 2008: nil) all of
which the secured party is permitted by contract or custom to sell or repledge.
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(H). Included in available-for-sale financial assets at 31 December 2009 are debt securities individually determined to be impaired
whose gross amount before impairment allowances was £144 million (31 December 2008: £282 million) and in respect of which no collateral was held.
In addition, included in available-for-sale financial assets at 31 December 2009 are equity securities individually determined to be impaired whose
gross amount before impairment allowances was £621 million (31 December 2008: £31 million).
176
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
26 INVESTMENT PROPERTIES
At 1 January
Exchange and other adjustments
Adjustment on acquisition
Additions:
Acquisitions of new properties
Additional expenditure on existing properties
Total additions
Disposals
Changes in fair value (note 7)
At 31 December
2009
£m
2,631
(15)
3,002
151
67
218
(865)
(214)
4,757
2008
£m
3,722
66
–
85
116
201
(300)
(1,058)
2,631
The investment properties are valued at least annually at open-market value, by independent, professionally qualified valuers, who have recent
experience in the location and categories of the investment properties being valued.
In addition, the following amounts have been recognised in the income statement:
Rental income
Direct operating expenses arising from investment properties that generate rental income
Capital expenditure in respect of investment properties:
Capital expenditure contracted for at the balance sheet date but not recognised in the fi nancial statements
27 GOODWILL
At 1 January
Exchange and other adjustments
Impairment charged to the income statement
At 31 December
Cost1
Accumulated impairment losses
At 31 December
2009
£m
358
64
2009
£m
57
2009
£m
2,256
–
(240)
2,016
2,362
(346)
2,016
2008
£m
209
29
2008
£m
82
2008
£m
2,358
(2)
(100)
2,256
2,362
(106)
2,256
1
For acquisitions made prior to 1 January 2004, the date of transition to IFRS, cost is included net of amounts amortised up to 31 December 2003.
The goodwill held in the Group’s balance sheet is tested at least annually for impairment. For the purposes of impairment testing the goodwill
is allocated to the appropriate cash generating unit; of the total balance of £2,016 million (31 December 2008: £2,256 million), £1,836 million
(or 91 per cent of the total) has been allocated to Scottish Widows in the Group’s Insurance division and £170 million (or 8 per cent of the total) to
Asset Finance in the Group’s Wholesale division.
The recoverable amount of Scottish Widows has been based on a value in use calculation. The calculation uses projections of future cash flows based
upon budgets and plans approved by management covering a five-year period, and a discount rate of 12 per cent (gross of tax). The budgets and
plans are based upon past experience adjusted to take into account anticipated changes in sales volumes, product mix and margins having regard
to expected market conditions and competitor activity. The discount rate is determined with reference to internal measures and available industry
information. Cash flows beyond the five-year period have been extrapolated using a steady 3 per cent growth rate which does not exceed the
long-term average growth rate for the life assurance market. Management believes that any reasonably possible change in the key assumptions
would not cause the recoverable amount of Scottish Widows to fall below its balance sheet carrying value.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
177
Lloyds Banking Group
Annual Report and Accounts 2009
27 GOODWILL continued
In 2009, the markets in which the Consumer Finance unit of Asset Finance operates have deteriorated further with both macroeconomic and market
conditions worsening, leading to a fall off in demand and increasing arrears. This, together with continuing uncertainties over the likely short-term
macroeconomic environment, has resulted in a reassessment of the carrying value of the consumer finance cash generating unit and the recognition
of a goodwill impairment charge of £240 million at 31 December 2009 reflecting the write down of the entire balance of goodwill allocated to the
Consumer Finance unit of Asset Finance leaving goodwill of £170 million in the Autolease unit of Asset Finance.
The recoverable amount of Asset Finance has also been based on a value in use calculation using cash flow projections based on financial budgets
and plans approved by management covering a five-year period and a discount rate of 18.75 per cent (gross of tax). The cash flows beyond the
five-year period are extrapolated using a growth rate of 0.5 per cent which does not exceed the long-term average growth rates for the markets in
which Asset Finance participates.
27 GOODWILL
28 VALUE OF IN-FORCE BUSINESS
The gross value of in-force business asset in the consolidated balance sheet is as follows:
Acquired value of in-force non-participating investment contracts
Value of in-force insurance and participating investment contracts
The movement in the acquired value of in-force non-participating investment contracts over the year is as follows:
At 1 January
Adjustment on acquisition
Amortisation taken to income statement (note 11)
At 31 December
The acquired value of in-force non-participating investment contracts includes £379 million in relation to OEIC business.
The movement in the value of in-force insurance and participating investment contracts over the year is as follows:
At 1 January
Adjustment on acquisition
Exchange and other adjustments
Movements in the year:
New business
Existing business:
Expected return
Experience variances
Non-economic assumption changes
Economic variance
Movement in the value of in-force business taken to income statement (note 9)
At 31 December
2009
£m
1,545
5,140
6,685
2009
£m
–
1,620
(75)
1,545
2009
£m
1,893
2,093
(15)
2008
£m
–
1,893
1,893
2008
£m
–
–
–
–
2008
£m
2,218
–
–
563
368
(456)
84
135
843
1,169
5,140
(112)
(46)
(92)
(443)
(325)
1,893
This breakdown shows the movement in the value of in-force business only, and does not represent the full contribution that each item in the
breakdown contributes to profit before tax, which would also contain changes in the other assets and liabilities of the relevant businesses. Economic
variance is the element of earnings which is generated from changes to economic experience in the period and to assumptions over time. The
presentation of economic variance includes the impact of financial market conditions being different at the end of the reporting period from those
included in assumptions used to calculate new and existing business returns.
178
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
28 VALUE OF IN-FORCE BUSINESS continued
The principal features of the methodology and process used for determining key assumptions used in the calculation of the value of in-force business
are set out below:
ECONOMIC ASSUMPTIONS
Each cash flow is valued using the discount rate consistent with that applied to such a cash flow in the capital markets. In practice, to achieve the
same result, where the cash flows are either independent of or move linearly with market movements, a method has been applied known as the
‘certainty equivalent’ approach whereby it is assumed that all assets earn a risk-free rate and all cash flows are discounted at a risk-free rate.
A market consistent approach has been adopted for the valuation of financial options and guarantees, using a stochastic option pricing technique
calibrated to be consistent with the market price of relevant options at each valuation date. The risk-free rate used for the value of financial
options and guarantees is defined as the spot yield derived from the relevant government bond yield curve in line with FSA realistic balance
sheet assumptions.
The liabilities in respect of the Group’s UK annuity business are matched by a portfolio of fixed interest securities, including a large proportion of
corporate bonds. In accordance with the approach adopted in December 2008, the value of the in-force business asset for UK annuity business has
been calculated after taking into account an estimate of the market premium for illiquidity in respect of these corporate bond holdings. The illiquidity
premium is estimated to be 75 basis points as at 31 December 2009 (31 December 2008: 154 basis points). The reduction in the illiquidity premium
over 2009 has offset gains made on the assets backing the annuity liabilities, reducing the benefit within the results from the reduction in corporate
bond spreads.
The risk-free rate assumed in valuing the non-annuity in-force business is the 15 year government bond yield for the appropriate territory. The
risk-free rate assumed in valuing the in-force asset for the UK annuity business is presented as a single risk-free rate to allow a better comparison to
the rate used for other business. That single risk-free rate has been derived to give the equivalent value to the UK annuity book, had that book been
valued using the UK gilt yield curve increased to reflect the illiquidity premium described above.
The table below shows the range of resulting yields and other key assumptions at 31 December for UK business:
Risk-free rate (value of in-force non-annuity business)
Risk-free rate (value of in-force annuity business)
Risk-free rate (financial options and guarantees)
Retail price inflation
Expense infl ation
2009
%
4.45
5.05
2008
%
3.74
5.22
0.87 to 4.76
1.11 to 4.24
3.64
4.42
2.75
3.50
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 and the with-profit funds these can be asymmetric in the range of potential outcomes for which an explicit allowance is made.
NON-ECONOMIC ASSUMPTIONS
Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on
management’s view of future experience. These assumptions are intended to represent a best estimate of future experience.
Further information about the effect of changes in key assumptions is given in note 37.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
179
Lloyds Banking Group
Annual Report and Accounts 2009
29 OTHER INTANGIBLE ASSETS
Cost:
At 1 January 2008
Additions
At 31 December 2008
Adjustment on acquisition
Additions
Disposals of businesses (note 14)
At 31 December 2009
Accumulated amortisation:
At 1 January 2008
Charge for the year
At 31 December 2008
Charge for the year
Disposals
At 31 December 2009
Balance sheet amount at 31 December 2009
Balance sheet amount at 31 December 2008
Brands
£m
Core deposit
intangible
£m
Purchased
credit card
relationships
£m
Customer-
related intangibles
£m
Capitalised
software
enhancements
£m
–
–
–
596
–
–
596
–
–
–
21
–
21
575
–
–
–
–
2,770
–
–
2,770
–
–
–
393
–
393
2,377
–
–
–
–
300
–
–
300
–
–
–
58
–
58
242
–
57
6
63
984
–
(170)
877
5
7
12
237
(12)
237
640
51
240
80
320
104
63
–
487
143
31
174
60
–
234
253
146
Total
£m
297
86
383
4,754
63
(170)
5,030
148
38
186
769
(12)
943
4,087
197
The majority of the customer-related intangibles as well as the brands, core deposit intangibles and purchased credit card relationships have arisen
from the acquisition of HBOS. Included within brands above are assets of £380 million (31 December 2008: £nil) that have been determined to have
indefinite useful lives and are not amortised. These brands use the Bank of Scotland name which has been in existence for over 300 years. These
brands are well established financial services brands and there are no indications that they should not continue indefinitely.
The customer-related intangibles include customer lists and the benefits of customer relationships that generate recurring income. The purchased
credit card relationships represent the benefit of recurring income generated from the portfolio of credit cards purchased and the core deposit
intangible is the benefit derived from a large stable deposit base that has low interest rates.
Capitalised software enhancements principally comprise identifiable and directly associated internal staff and other costs.
180
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
30 TANGIBLE FIXED ASSETS
Cost:
At 1 January 2008
Exchange and other adjustments
Additions
Disposals
At 31 December 2008
Exchange and other adjustments
Adjustment on acquisition
Additions
Disposals
At 31 December 2009
Accumulated depreciation and impairment:
At 1 January 2008
Exchange and other adjustments
Charge for the year
Disposals
At 31 December 2008
Exchange and other adjustments
Charge for the year
Disposals
At 31 December 2009
Balance sheet amount at 31 December 2009
Balance sheet amount at 31 December 2008
Premises
£m
Equipment
£m
Operating
lease assets
£m
Total tangible
fixed assets
£m
1,437
2,871
2
96
(19)
1,516
19
966
113
(153)
2,461
718
1
81
(11)
789
(19)
132
(18)
884
1,577
727
18
341
(82)
3,148
(38)
825
1,317
(130)
5,122
2,007
10
254
(63)
2,208
(12)
450
(49)
2,597
2,525
940
1,431
70
556
(493)
1,564
281
3,916
1,949
(1,326)
6,384
175
21
313
(243)
266
113
1,134
(251)
1,262
5,122
1,298
2009
£m
845
1,939
88
2,872
5,739
90
993
(594)
6,228
262
5,707
3,379
(1,609)
13,967
2,900
32
648
(317)
3,263
82
1,716
(318)
4,743
9,224
2,965
2008
£m
294
320
9
623
At 31 December the future minimum rentals receivable under non-cancellable operating leases were as follows:
Receivable within 1 year
1 to 5 years
Over 5 years
Equipment leased to customers under operating leases primarily relates to vehicle contract hire arrangements. During 2009 and 2008 no contingent
rentals in respect of operating leases were recognised in the income statement.
In addition, total future minimum sub-lease income of £79 million at 31 December 2009 (£102 million at 31 December 2008) is expected to be
received under non-cancellable sub-leases of the Group’s premises.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
31 OTHER ASSETS
Assets arising from reinsurance contracts held (note 36)
Deferred acquisition and origination costs
Settlement balances
Other assets and prepayments
Deferred acquisition and origination costs:
At 1 January
Adjustment on acquisition
Costs deferred, net of amounts amortised to the income statement
Exchange and other adjustments
At 31 December
32 DEPOSITS FROM BANKS
Liabilities in respect of securities sold under repurchase agreements
Other deposits from banks
Deposits from banks
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
181
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
1,875
533
1,587
8,230
12,225
2009
£m
196
422
(84)
(1)
533
2009
£m
27,558
54,894
82,452
2008
£m
385
196
751
4,469
5,801
2008
£m
212
–
(16)
–
196
2008
£m
24,888
41,626
66,514
Included in deposits from banks were deposits of £17,253 million (31 December 2008: £2,574 million) held as collateral. The fair value of those
deposits approximates the carrying amount.
33 CUSTOMER DEPOSITS
Non-interest bearing current accounts
Interest bearing current accounts
Savings and investment accounts
Liabilities in respect of securities sold under repurchase agreements
Other customer deposits
Customer deposits
2009
£m
9,264
93,887
207,474
35,554
60,562
406,741
2008
£m
4,176
47,109
76,144
92
43,417
170,938
Included in customer deposits were deposits of £656 million (31 December 2008: £1,002 million) held as collateral. The fair value of those deposits
approximates the carrying amount.
182
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
34 TRADING AND OTHER FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
Liabilities held at fair value through profit or loss (debt securities)
Trading liabilities:
Liabilities in respect of securities sold under repurchase agreements
Short positions in securities
Other
Trading and other fi nancial liabilities at fair value through profi t or loss
2009
£m
6,160
21,389
202
520
22,111
28,271
2008
£m
6,748
–
6
–
6
6,754
The amount contractually payable on maturity of the debt securities held at fair value through profit or loss at 31 December 2009 was £5,866 million,
which was £294 million lower than the balance sheet carrying value (31 December 2008: £6,517 million, which was £231 million lower than the balance
sheet carrying value). At 31 December 2009 there was a cumulative £55 million decrease in the fair value of these liabilities attributable to changes
in credit spread risk; this is determined by reference to the quoted credit spreads of Lloyds TSB Bank plc, the issuing entity within the Group. Of the
£55 million, £11 million arose in 2009 and £36 million arose in 2008.
Liabilities designated at fair value through profit or loss represent debt securities in issue which either contain substantive embedded derivatives
which would otherwise need to be recognised and measured at fair value separately from the related debt securities, or which are accounted for
at fair value to significantly reduce an accounting mismatch.
35 DEBT SECURITIES IN ISSUE
Medium-term notes issued
Covered bonds (note 21)
Certificates of deposit issued
Securitisation notes (note 21)
Commercial paper
Total debt securities in issue
2009
£m
82,876
27,311
50,858
37,557
34,900
233,502
2008
£m
11,823
–
33,207
10,050
20,630
75,710
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
183
Lloyds Banking Group
Annual Report and Accounts 2009
36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS
Insurance contract and participating investment contract liabilities are comprised as follows:
Life insurance (see (1) below):
Insurance contracts
Participating investment contracts
Non-life insurance contracts (see (2) below):
Unearned premiums
Claims outstanding
1
Reinsurance balances are reported within other assets (note 31).
Gross
£m
2009
Reinsurance1
£m
Net
£m
Gross
£m
2008
Reinsurance1
£m
56,800
18,089
74,889
788
502
1,290
76,179
(1,831)
–
(1,831)
(31)
(13)
(44)
(1,875)
54,969
18,089
73,058
757
489
1,246
74,304
21,518
11,619
33,137
472
183
655
33,792
(380)
–
(380)
–
(5)
(5)
(385)
Net
£m
21,138
11,619
32,757
472
178
650
33,407
At 31 December 2009 £44,441 million (31 December 2008: £29,967 million) of liabilities arising from insurance contracts and participating investment
contracts had a contractual residual maturity of greater than one year.
(1) LIFE INSURANCE
The movement in life insurance contract and participating investment contract liabilities over the year can be analysed as follows:
At 1 January 2008:
New business
Insurance
contracts
22,526
2,915
Participating
investment
contracts
14,874
208
Changes in existing business
(4,092)
(3,363)
Change in liabilities charged to the income statement (note 10)
Exchange and other adjustments
At 31 December 2008:
New business
Changes in existing business
Change in liabilities charged to the income statement (note 10)
Adjustment on acquisition
Exchange and other adjustments
At 31 December 2009
(1,177)
169
21,518
4,455
971
5,426
29,996
(140)
56,800
Gross
£m
37,400
3,123
(7,455)
(4,332)
69
33,137
4,577
(3,155)
(100)
11,619
122
374
1,345
496
5,996
(22)
18,089
5,922
35,992
(162)
74,889
Reinsurance
£m
(340)
(32)
(8)
(40)
–
(380)
(28)
(149)
(177)
(1,367)
93
Net
£m
37,060
3,091
(7,463)
(4,372)
69
32,757
4,549
1,196
5,745
34,625
(69)
(1,831)
73,058
Liabilities for life insurance contracts and participating investment contracts can be split into with-profit fund liabilities, accounted for using the
FSA’s realistic capital regime (realistic liabilities) and non-profit fund liabilities, accounted for using a prospective actuarial discounted cash flow
methodology, as follows:
Insurance contracts
Participating investment contracts
With-profit
fund
£m
12,066
11,506
23,572
2009
Non-profit
fund
£m
44,734
6,583
51,317
Total
£m
56,800
18,089
74,889
With-profit
fund
£m
7,457
5,836
13,293
2008
Non-profit
fund
£m
14,061
5,783
19,844
Total
£m
21,518
11,619
33,137
184
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued
With-profit fund realistic liabilities
(i) Business description
The Group has with-profit funds within Scottish Widows plc and Clerical Medical Investment Group Limited containing both insurance contracts and
participating investment contracts.
The primary purpose of the conventional and unitised business written in the with-profit funds is to provide a long-term smoothed investment
vehicle to the policyholder, protecting them against short-term market fluctuations. With-profit policyholders are entitled to at least 90 per cent
of the distributed profits, the shareholders receiving the balance. The policyholder is also usually insured against death and the policy may carry a
guaranteed annuity option at maturity.
(ii) Method of calculation of liabilities
With-profit liabilities are stated at their realistic value, the main components of which are:
– With-profit benefit reserve, the total asset shares for with-profit policies;
– Cost of options and guarantees
– Deductions levied against asset shares; and
– Impact of the smoothing policy.
The realistic assessment is carried out using a stochastic simulation model which values liabilities on a market consistent basis. The calculation of
realistic liabilities uses best estimate assumptions for mortality, persistency rates and expenses. These are calculated in a similar manner to those
used for the value of in-force business as discussed in note 28.
(iii) Assumptions
Key assumptions used in the calculation of with-profit liabilities, and the processes for determining these, are:
INVESTMENT RETURNS AND DISCOUNT RATES
The realistic capital regime dictates that with-profit fund liabilities are valued on a market-consistent basis. This is achieved by the use of a valuation
model which values liabilities on a basis calibrated to tradable market option contracts and other observable market data. The with-profit fund
financial options and guarantees are valued using a stochastic simulation model where all assets are assumed to earn, on average, the risk-free yield
and all cash flows are discounted using the risk-free yield. The risk-free yield is defined as the spot yield derived from the relevant government bond
yield curve.
GUARANTEED ANNUITY OPTIONS
Certain pension contracts contain guaranteed annuity options that allow the policyholder to take an annuity benefit on retirement at annuity rates
that were guaranteed at the outset of the contract. For contracts that contain such options, key assumptions in determining the cost of options are
economic conditions in which the option has value, mortality rates and take up rates of other options. The financial impact is dependent on the value
of corresponding investments, interest rates and longevity at the time of the claim.
INVESTMENT VOLATILITY
The calibration of the stochastic simulation model uses implied volatilities of derivatives where possible, or historical volatility where it is not possible
to observe meaningful prices.
MORTALITY
The mortality assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s actual experience
where this is significant, and relevant industry data otherwise.
LAPSE RATES (PERSISTENCY)
Lapse rates refer to the rate of policy termination or the rate at which policyholders stop paying regular premiums due under the contract.
Historical persistency experience is analysed using statistical techniques. As experience can vary considerably between different product types and
for contracts that have been in force for different periods, the data is broken down into broadly homogenous groups for the purposes of this analysis.
The most recent experience is considered along with the results of previous analyses and management’s views on future experience, taking into
consideration potential changes in future experience that may result from guarantees and options becoming more valuable under adverse market
conditions, in order to determine a ‘best estimate’ view of what persistency will be. In determining this best estimate view a number of factors are
considered, including the credibility of the results (which will be affected by the volume of data available), any exceptional events that have occurred
during the period under consideration, any known or expected trends in underlying data and relevant published market data.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
185
Lloyds Banking Group
Annual Report and Accounts 2009
36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued
Non-profit fund liabilities
(i) Business description
The Group principally writes the following types of life insurance contracts within its non-profit funds. Shareholder profits on these types of business
arise from management fees and other policy charges.
Unit-linked business – This includes unit-linked pensions and unit-linked bonds, the primary purpose of which is to provide an investment vehicle where
the policyholder is also insured against death.
Life insurance – The policyholder is insured against death or permanent disability, usually for predetermined amounts. Such business includes whole
of life and term assurance and long-term creditor policies.
Annuities – The policyholder is entitled to payments for the duration of their life and is therefore insured against surviving longer than expected.
German insurance and pensions business is written through the subsidiary Heidelberger Leben and comprises policies similar to the UK definitions
above, except that there is participation by the policyholder in the investment, insurance and expense profits of Heidelberger Leben. A minimum
level of policyholder participation is prescribed by German law. The following types of life insurance contracts are written under which there is
policyholder participation in Heidelberger Leben profits:
– Unit linked endowment or pensions business;
– Traditional endowment or pensions business;
– Life insurance business in which the policyholder is protected against temporary disability; and
– Life insurance business in which the policyholder is protected against death.
(ii) Method of calculation of liabilities
The non-profit fund liabilities are determined on the basis of recognised actuarial methods and consistent with the approach required by regulatory
rules. The methods used involve estimating future policy cash flows over the duration of the in-force book of policies, and discounting the cash flows
back to the valuation date allowing for probabilities of occurrence.
(iii) Assumptions
Generally, assumptions used to value non-profit fund liabilities are prudent in nature and therefore contain a margin for adverse deviation. This
margin for adverse deviation is based on management’s judgement and reflects management’s views on the inherent level of uncertainty. The key
assumptions used in the measurement of non-profit fund liabilities are:
INTEREST RATES
The rates used are derived in accordance with the guidelines set by local regulatory bodies. These limit the rates of interest that can be used by
reference to a number of factors including the redemption yields on fixed interest assets at the valuation date.
Margins for risk are allowed for in the assumed interest rates. These are derived from the limits in the guidelines set by local regulatory bodies, including
reductions made to the available yields to allow for default risk based upon the credit rating of the securities allocated to the insurance liability.
MORTALITY AND MORBIDITY
The mortality and morbidity assumptions, including allowances for improvements in longevity for annuitants, are set with regard to the Group’s
actual experience where this provides a reliable basis, and relevant industry data otherwise, and include a margin for adverse deviation. For German
business appropriate industry tables have been considered.
LAPSE RATES (PERSISTENCY)
Lapse rates are allowed for on some non-profit fund contracts. The process for setting these rates is as described for with-profit liabilities, however a
prudent scenario is assumed by the inclusion of a margin for adverse deviation within the non-profit fund liabilities.
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.
KEY CHANGES IN ASSUMPTIONS
A detailed review of the Group’s assumptions in 2009 resulted in the following key impacts on profit before tax:
– Change in persistency assumptions (£79 million decrease)
– Change in the assumption in respect of future mortality rates (£44 million increase)
These amounts include the impacts of movements in liabilities and value of the in-force business in respect of insurance contracts and participating
investment contracts.
186
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued
(2) NON-LIFE INSURANCE
Gross non-life insurance contract liabilities are analysed by line of business as follows:
Credit protection
Home
Health
2009
£m
533
754
3
1,290
2008
£m
293
359
3
655
For non-life insurance contracts, the methodology and assumptions used in relation to determining the bases of the earned premium and claims
provisioning levels are derived for each individual underwritten product. Assumptions are intended to be neutral estimates of the most likely or
expected outcome. There has been no significant change in the assumptions and methodologies used for setting reserves.
The reserving methodology and associated assumptions are set out below:
The unearned premium reserve is determined on a basis that reflects the length of time for which contracts have been in force and the projected
incidence of risk over the term of each contract.
Claims outstanding comprise those claims that have been notified and those that have been incurred but not reported. Claims incurred but not
reported are determined based on the historical emergence of claims and their average cost. The notified claims element represents the best
estimate of the cost of claims reported using projections and estimates based on historical experience.
The movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows:
Provisions for unearned premiums
At 1 January 2008
Increase in the year
Release in the year
Change in provision for unearned premiums charged to income statement (note 8)
At 31 December 2008
Adjustment on acquisition
Increase in the year
Release in the year
Change in provision for unearned premiums charged to income statement (note 8)
Exchange translation
At 31 December 2009
Gross
£m
Reinsurance
£m
Net
£m
456
651
(635)
16
472
487
1,267
(1,438)
(171)
–
788
–
(23)
23
–
–
(4)
(101)
75
(26)
(1)
(31)
456
628
(612)
16
472
483
1,166
(1,363)
(197)
(1)
757
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
187
Lloyds Banking Group
Annual Report and Accounts 2009
36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued
These provisions represent the liability for short-term insurance contracts for which the Group’s obligations are not expired at the year end.
Gross
£m
Reinsurance
£m
Claims and loss adjustment expenses
Notified claims
Incurred but not reported
At 1 January 2008
Cash paid for claims settled in the year
Increase (decrease) in liabilities:
Arising from current year claims
Arising from prior year claims
Change in liabilities charged to income statement (note 10)
At 31 December 2008
Adjustment on acquisition
Cash paid for claims settled in the year
Increase (decrease) in liabilities:
Arising from current year claims
Arising from prior year claims
Change in liabilities charged to income statement (note 10)
At 31 December 2009
Notified claims
Incurred but not reported
At 31 December 2009
Notified claims
Incurred but not reported
At 31 December 2008
188
19
207
(245)
221
–
(24)
183
208
(513)
623
1
111
502
289
213
502
160
23
183
(10)
–
(10)
7
–
(2)
5
(5)
(5)
14
(15)
(2)
(3)
(13)
(9)
(4)
(13)
(5)
–
(5)
Net
£m
178
19
197
(238)
221
(2)
(19)
178
203
(499)
608
(1)
108
489
280
209
489
155
23
178
188
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
36 LIABILITIES ARISING FROM INSURANCE CONTRACTS AND PARTICIPATING INVESTMENT CONTRACTS continued
NON-LIFE INSURANCE CLAIMS DEVELOPMENT TABLE
The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The top half of the table
below illustrates how the Group’s estimate of total claims outstanding for each accident year has changed at successive year ends. The bottom half of
the table reconciles the cumulative claims to the amount appearing in the balance sheet. The accident year basis is considered the most appropriate
for the business written by the Group.
NON-LIFE INSURANCE ALL RISKS – GROSS
Accident year
Estimate of ultimate claims costs:
At end of accident year
One year later
Two years later
Three years later
Four years later
Current estimate in respect of above claims
Current estimate of claims relating to general
insurance business acquired during the year
Current estimate of cumulative claims
Cumulative payments to date
Liability recognised in the balance sheet
Liability in respect of earlier years1
Total liability included in the balance sheet
2005
£m
211
207
204
202
201
201
283
484
(478)
6
2006
£m
208
206
204
204
204
321
525
(517)
8
2007
£m
317
311
299
299
391
690
(664)
26
2008
£m
205
199
199
270
469
(412)
57
2009
£m
Total
£m
639
1,580
639
1,542
639
(270)
369
1,265
2,807
(2,341)
466
26
492
1
This balance includes £19 million of claims relating to general insurance business acquired during the year.
The liability of £492 million shown in the above table excludes £10 million of unallocated claims handling expenses.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
189
Lloyds Banking Group
Annual Report and Accounts 2009
37 LIFE INSURANCE SENSITIVITY ANALYSIS
The following table demonstrates the effect of changes in key assumptions on profit before tax and equity disclosed in these financial statements
assuming that the other assumptions remain unchanged. In practice this is unlikely to occur, and changes in some assumptions may be correlated.
These amounts include movements in assets, liabilities and the value of the in-force business in respect of insurance contracts and participating
investment contracts. The impact is shown in one direction but can be assumed to be reasonably symmetrical.
Non-annuitant mortality1
Annuitant mortality 2
Lapse rates 3
Future maintenance and investment expenses 4
Risk-free rate 5
Guaranteed annuity option take up 6
Equity investment volatility 7
Widening of credit default spreads on corporate bonds 8
Increase in illiquidity premia9
Increase
(reduction) in
profit before tax
£m
Increase
(reduction) in
equity
£m
Change in
variable
5% reduction
5% reduction
10% reduction
10% reduction
0.25% reduction
5% addition
1% addition
0.25% addition
0.10% addition
80
(120)
168
207
56
(7)
(13)
(144)
78
58
(86)
121
149
40
(5)
(9)
(104)
56
Assumptions have been flexed on the basis used to calculate the value of in-force business and the realistic and statutory reserving bases.
This sensitivity shows the impact of reducing mortality and morbidity rates on non-annuity business to 95 per cent of the expected rate.
This sensitivity shows the impact on the annuity and deferred annuity business of reducing mortality rates to 95 per cent of the expected rate.
This sensitivity shows the impact of reducing lapse and surrender rates to 90 per cent of the expected rate.
This sensitivity shows the impact of reducing maintenance expenses and investment expenses to 90 per cent of the expected rate.
This sensitivity shows the impact on the value of in-force business, financial options and guarantee costs, statutory reserves and asset values of reducing the risk-free rate by 25 basis points.
This sensitivity shows the impact of a flat 5 per cent addition to the expected rate.
This sensitivity shows the impact of a flat 1 per cent addition to the expected rate.
This sensitivity shows the impact of a 25 basis point increase in credit default spreads on corporate bonds and the corresponding reduction in market values. Government bond yields, the risk-free
rate and illiquidity premia are all assumed to be unchanged.
This sensitivity shows the impact of a 10 basis point increase in the allowance for illiquidity premia. It assumes the overall corporate bond spreads are unchanged and hence market values are
unchanged. Government bond yields and the non-annuity risk-free rate are both assumed to be unchanged. The increased illiquidity premium increases the annuity risk-free rate.
1
2
3
4
5
6
7
8
9
38 LIABILITIES ARISING FROM NON-PARTICIPATING INVESTMENT CONTRACTS
The movement in liabilities arising from non-participating investment contracts may be analysed as follows:
At 1 January 2008
New business
Changes in existing business
At 31 December 2008
Adjustment on acquisition
New business
Changes in existing business
Exchange translation
At 31 December 2009
Gross
£m
18,197
660
(4,614)
14,243
28,181
3,498
430
(4)
46,348
Reinsurance
£m
–
–
–
–
–
–
–
–
–
Net
£m
18,197
660
(4,614)
14,243
28,181
3,498
430
(4)
46,348
190
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
39 UNALLOCATED SURPLUS WITHIN INSURANCE BUSINESSES
The movement in the unallocated surplus within long-term insurance business over the year can be analysed as follows:
At 1 January
Adjustment on acquisition
Change in unallocated surplus recognised in the income statement (note 10)
Exchange and other adjustments
At 31 December
40 OTHER LIABILITIES
Settlement balances
Unitholders’ interest in Open Ended Investment Companies
Other creditors and accruals
Other liabilities
41 RETIREMENT BENEFIT OBLIGATIONS
Charge to the income statement
Defined benefit pension schemes
Other post-retirement benefit schemes
Total defined benefit schemes
Defined contribution pension schemes
Amounts recognised in the balance sheet
Defined benefit pension schemes
Other post-retirement benefit schemes
PENSION SCHEMES
2009
£m
270
526
318
(32)
1,082
2009
£m
2,070
12,415
14,835
29,320
2009
£m
529
7
536
208
744
2009
£m
619
161
780
2008
£m
554
–
(284)
–
270
2008
£m
891
4,336
6,229
11,456
2008
£m
157
7
164
71
235
2008
£m
1,657
114
1,771
Defined benefit schemes
The Group has established a number of defined benefit pension schemes in the UK and overseas, the three most significant being the defined
benefit sections of the Lloyds TSB Group Pension Schemes No’s 1 and 2 and the HBOS Final Salary Pension Scheme (HFSPS). These schemes
provide retirement benefits calculated as a percentage of final salary depending upon the length of service; the minimum retirement age under the
rules of the schemes at 31 December 2009 was 50.
The latest full valuations of the two Lloyds TSB schemes were carried out as at 30 June 2008; the latest full valuation of the HFSPS was carried out as
at 31 December 2007. The provisional results have been updated to 31 December 2009 by qualified independent actuaries. The last full valuations
of other Group schemes were carried out on a number of different dates; these have been updated to 31 December 2009 by qualified independent
actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
191
Lloyds Banking Group
Annual Report and Accounts 2009
41 RETIREMENT BENEFIT OBLIGATIONS continued
The Group’s obligations in respect of its defined benefit schemes are funded. During 2009, the Group’s contributions to its defined benefit schemes
of £1,859 million included one-off contributions to the Lloyds TSB Group Pension Scheme No 1 and Lloyds TSB Group Pension Scheme No 2 of
approximately £1 billion in aggregate. These contributions took the form of interests in limited liability partnerships for each of the two schemes
which contain assets of approximately £5 billion in aggregate entitling the schemes to annual payments of approximately £215 million in aggregate
until 31 December 2014. Thereafter, assuming that all distributions have been made, the value of the partnership interests will equate to a nominal
amount. The limited liability partnerships are fully consolidated in the Group’s balance sheet (see note 22).
The Group currently expects to pay contributions of at least £500 million to its defined benefit schemes in 2010.
2009
£m
2008
£m
Amount included in the balance sheet
Present value of funded obligations
Fair value of scheme assets
Unrecognised actuarial losses
Liability in the balance sheet
Movements in the defined benefit obligation
At 1 January
Adjustment on acquisition
Current service cost
Employee contributions
Interest cost
Actuarial losses (gains)
Benefits paid
Past service cost
Curtailments
Settlements
Exchange and other adjustments
At 31 December
Changes in the fair value of scheme assets
At 1 January
Adjustment on acquisition
Expected return
Employer contributions
Employee contributions
Actuarial gains (losses)
Benefits paid
Settlements
Exchange and other adjustments
At 31 December
Actual return on scheme assets
27,073
(23,518)
3,555
(2,936)
619
2009
£m
15,617
7,046
395
2
1,383
3,568
(932)
67
–
(8)
(65)
27,073
2009
£m
13,693
6,743
1,320
1,859
2
886
(932)
(12)
(41)
23,518
2,206
15,617
(13,693)
1,924
(267)
1,657
2008
£m
16,795
–
258
–
957
(1,928)
(597)
21
6
–
105
15,617
2008
£m
16,112
–
1,085
541
–
(3,520)
(597)
–
72
13,693
(2,435)
192
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
41 RETIREMENT BENEFIT OBLIGATIONS continued
ASSUMPTIONS
The principal actuarial and financial assumptions used in valuations of the defined benefit pension schemes were as follows:
Discount rate
Rate of inflation
Rate of salary increases
Rate of increase for pensions in payment
Life expectancy for member aged 60, on the valuation date:
Men
Women
Life expectancy for member aged 60, 15 years after the valuation date:
Men
Women
2009
%
5.70
3.40
3.75
3.20
Years
27.1
28.2
28.7
29.8
2008
%
6.30
3.00
3.75
2.80
Years
26.4
27.2
27.3
28.1
The mortality assumptions used in the scheme valuations are based on standard tables published by the Institute and Faculty of Actuaries which
were adjusted in line with the actual experience of the relevant schemes. The table shows that a member retiring at age 60 as at 31 December
2009 is assumed to live for, on average, 27.1 years for a male and 28.2 years for a female. In practice there will be much variation between individual
members but these assumptions are expected to be appropriate across all members. It is assumed that younger members will live longer in
retirement than those retiring now. This reflects the expectation that mortality rates will continue to fall over time as medical science and standards of
living improve. To illustrate the degree of improvement assumed the table also shows the life expectancy for members aged 45 now, when they retire
in 15 years time at age 60.
An analysis of the impact of a reasonable change in these assumptions is provided in note 3.
The expected return on scheme assets has been calculated using the following assumptions:
Equities
Fixed interest gilts
Index linked gilts
Non-Government bonds
Property
Money market instruments and cash
The expected return on scheme assets in 2010 will be calculated using the following assumptions:
Equities and alternative assets
Fixed interest gilts
Index linked gilts
Non-Government bonds
Property
Money market instruments and cash
2009
%
8.4
3.7
4.0
6.7
6.4
3.8
2008
%
8.2
4.5
4.4
6.0
6.7
4.8
2010
%
8.3
4.5
4.1
6.0
7.5
4.3
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
41 RETIREMENT BENEFIT OBLIGATIONS continued
Composition of scheme assets:
Equities
Fixed interest gilts
Index linked gilts
Non-Government bonds
Property
Money market instruments, cash and other assets and liabilities
At 31 December
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
193
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
10,934
2,038
2,917
2,148
1,577
3,904
2008
£m
7,040
1,452
1,326
1,721
1,485
669
23,518
13,693
The assets of all the funded plans are held independently of the Group’s assets in separate trustee administered funds.
The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment
policy. Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date at a term and credit rating
broadly appropriate for the bonds held. Expected returns on equity and property investments are long-term rates based on the views of the plan’s
independent investment consultants. The expected return on equities allows for the different expected returns from the private equity, infrastructure
and hedge fund investments held by some of the funded plans. Some of the funded plans also invest in certain money market instruments and the
expected return on these investments has been assumed to be the same as cash.
Experience adjustments history:
Present value of defi ned benefi t obligation
Fair value of scheme assets
Experience gains (losses) on scheme liabilities
Experience gains (losses) gains on scheme assets
2009
£m
27,073
(23,518)
3,555
31
886
2008
£m
15,617
(13,693)
1,924
(39)
(3,520)
2007
£m
16,795
(16,112)
683
(185)
139
The expense recognised in the income statement for the year ended 31 December comprises:
Current service cost
Interest cost
Expected return on scheme assets
Curtailments
Settlements
Past service cost
Total defi ned benefi t pension expense
2006
£m
17,378
(15,279)
2,099
(50)
314
2009
£m
395
1,383
(1,320)
–
4
67
529
2005
£m
17,320
(14,026)
3,294
(69)
1,538
2008
£m
258
957
(1,085)
6
–
21
157
Defined contribution schemes
The Group operates a number of defined contribution pension schemes in the UK and overseas, principally the defined contribution sections of the
Lloyds TSB Group Pension Schemes No’s 1 and 2.
During the year ended 31 December 2009 the charge to the income statement in respect of defined contribution schemes was £208 million
(2008: £71 million), representing the contributions payable by the employer in accordance with each scheme’s rules.
194
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
41 RETIREMENT BENEFIT OBLIGATIONS continued
OTHER POST-RETIREMENT BENEFIT SCHEMES
The Group operates a number of schemes which provide post-retirement healthcare benefits and concessionary mortgages to certain employees,
retired employees and their dependants. The principal scheme relates to former Lloyds Bank staff and under this scheme the Group has undertaken
to meet the cost of post-retirement healthcare for all eligible former employees (and their dependants) who retired prior to 1 January 1996. The Group has
entered into an insurance contract to provide these benefits and a provision has been made for the estimated cost of future insurance premiums payable.
For the principal post-retirement healthcare scheme, the latest actuarial valuation of the liability was carried out at 30 June 2008; this valuation has
been updated to 31 December 2009 by qualified independent actuaries. The principal assumptions used were as set out above, except that the rate
of increase in healthcare premiums has been assumed at 7.33 per cent (2008: 7.50 per cent).
Amount included in the balance sheet:
Present value of unfunded obligations
Unrecognised actuarial losses
Liability in the balance sheet
Movements in the other post-retirement benefits obligation:
At 1 January
Exchange and other adjustments
Adjustment on acquisition
Actuarial loss (gain)
Insurance premiums paid
Charge for the year
At 31 December
42 DEFERRED TAX
The movement in the net deferred tax balance is as follows:
Asset (liability) at 1 January
Exchange and other adjustments
Adjustment on acquisition
Disposals
Income statement credit (note 15)
Amount credited (charged) to equity:
Available-for-sale financial assets (note 47)
Net investment hedges (note 47)
Cash flow hedges (note 47)
Share based compensation
Asset at 31 December
2009
£m
170
(9)
161
2009
£m
118
(7)
55
5
(8)
7
2008
£m
118
(4)
114
2008
£m
123
2
–
(8)
(6)
7
170
118
2009
£m
833
107
1,851
16
2,619
(395)
(358)
119
5
(629)
4,797
2008
£m
(948)
(4)
–
98
773
566
358
5
(15)
914
833
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
195
Lloyds Banking Group
Annual Report and Accounts 2009
42 DEFERRED TAX continued
The statutory position reflects the deferred tax assets and liabilities as disclosed in the consolidated balance sheet and takes account of the inability
to offset assets and liabilities where there is no legally enforceable right of offset. The tax disclosure of deferred tax assets and liabilities ties to the
amounts outlined in the table below which splits the deferred tax assets and liabilities by type.
Statutory position
Deferred tax assets
Deferred tax liabilities
2009
£m
5,006
(209)
4,797
2008
£m
833
–
833
Tax disclosure
Deferred tax assets
Deferred tax liabilities
The deferred tax credit in the income statement comprises the following temporary differences:
Accelerated capital allowances
Pensions and other post-retirement benefits
Long-term assurance business
Allowances for impairment losses
Trading losses
Tax on fair value of acquired assets
Other temporary differences
Deferred tax assets and liabilities are comprised as follows:
Deferred tax assets:
Pensions and other post-retirement benefits
Allowances for impairment losses
Other provisions
Derivatives
Available-for-sale asset revaluation
Tax losses carried forward
Other temporary differences
Deferred tax liabilities:
Accelerated capital allowances
Long-term assurance business
Tax on fair value of acquired assets
Effective interest rates
Other temporary differences
2009
£m
8,579
(3,782)
4,797
2009
£m
1,039
(199)
(188)
(128)
4,000
(2,022)
117
2,619
2009
£m
424
474
232
155
936
5,925
433
8,579
2009
£m
(92)
(1,530)
(1,913)
(88)
(159)
(3,782)
2008
£m
2,308
(1,475)
833
2008
£m
318
(104)
458
2
97
–
2
773
2008
£m
496
103
51
114
567
856
121
2,308
2008
£m
(561)
(655)
–
(2)
(257)
(1,475)
196
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
42 DEFERRED TAX continued
DEFERRED TAX ASSETS
Deferred tax assets are recognised for tax losses carried forward to the extent that the realisation of the related tax benefit through future taxable
profits is probable. Group companies have recognised deferred tax assets of £5,925 million (2008: £856 million) in relation to tax losses carried
forward. After reviews of medium-term profit forecasts, the Group considers that there will be sufficient profits in the future against which these losses
will be offset.
Deferred tax assets of £487 million (31 December 2008: £252 million) have not been recognised in respect of capital losses carried forward as there
are no predicted future capital profits. Capital losses can be carried forward indefinitely.
Deferred tax assets of £349 million (31 December 2008: nil) have not been recognised in respect of trading losses carried forward, mainly in certain
overseas companies as there are limited predicted future trading profits. Trading losses can be carried forward indefinitely.
In addition, deferred tax assets have not been recognised in respect of unrelieved foreign tax carried forward as at 31 December 2009 of £53 million
(31 December 2008: £60 million), as there are no predicted future taxable profits against which the unrelieved foreign tax credits can be utilised.
These tax credits can be carried forward indefinitely.
DEFERRED TAX LIABILITIES
Future transfers from Scottish Widows plc’s long-term business funds to its Shareholder Fund will be subject to a shareholder tax charge. Under
IAS 12, no provision is required to be made to the extent that the timing of such transfers is under Scottish Widows plc’s control. Accordingly,
deferred tax liabilities of £90 million (2008: £90 million) have not been recognised.
Scottish Widows plc has a taxable difference of £152 million (2008: £152 million) in respect of its holding of a life insurance subsidiary. No deferred tax
liability is required to be recognised in respect of this taxable temporary difference under IAS 12 as Scottish Widows plc does not intend to dispose
of this subsidiary company.
43 OTHER PROVISIONS
At 1 January 2009
Exchange and other adjustments
Transfers
Adjustment on acquisition
Provisions applied
Charge (release) for the year
At 31 December 2009
Provisions for
contingent
liabilities and
commitments
£m
Customer
remediation
provisions
£m
Restructuring
provisions
£m
Vacant
leasehold
property
£m
30
(1)
–
–
–
43
72
34
1
157
503
(105)
(130)
460
14
–
–
2
(1)
101
116
28
–
–
40
–
40
108
Other
£m
124
7
–
207
(128)
17
227
Total
£m
230
7
157
752
(234)
71
983
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
197
Lloyds Banking Group
Annual Report and Accounts 2009
43 OTHER PROVISIONS continued
PROVISIONS FOR CONTINGENT LIABILITIES AND COMMITMENTS
Provisions are held in cases where the Group is irrevocably committed to advance additional funds, but where there is doubt as to the customer’s
ability to meet its repayment obligations.
CUSTOMER REMEDIATION PROVISIONS
The Group establishes provisions for the estimated cost of making redress payments to customers in respect of past product sales, in those cases
where the original sales processes have been found to be deficient. During 2009 management has reviewed the adequacy of the provisions held
having regard to current complaint volumes and the level of payments being made and £130 million has been released to the income statement. At
31 December 2009 the remaining provisions held relate to past sales of a number of products, including mortgage endowment policies, sold through
the branch networks.
RESTRUCTURING
Provisions are made for staff and other costs related to Group restructuring initiatives at the point at which the Group becomes irrevocably
committed to the expenditure.
VACANT LEASEHOLD PROPERTY
Vacant leasehold property provisions are made by reference to a prudent estimate of expected sub-let income, compared to the head rent, and the
possibility of disposing of the Group’s interest in the lease, taking into account conditions in the property market. These provisions are reassessed on
a biennial basis and will normally run off over the period of under-recovery of the leases concerned, currently averaging five years; where a property is
disposed of earlier than anticipated, any remaining balance in the provision relating to that property is released.
OTHER
Other provisions include the provisions which the Group carries in respect of its obligations relating to UIC Insurance Company Limited (UIC), which
is in provisional liquidation. The Group has indemnified a third party against losses in the event that UIC does not honour its obligations under a
reinsurance contract, which is subject to asbestosis and pollution claims in the US. The ultimate cost of settling the Group’s exposure in respect of
the insurance business of UIC and the timing remains uncertain. The provision held represents management’s current best estimate of the cost after
having regard to the financial condition of UIC and actuarial estimates of future claims.
198
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
44 SUBORDINATED LIABILITIES
Preference shares
Preferred securities
Undated subordinated liabilities
Enhanced capital notes
Dated subordinated liabilities
2009
£m
1,983
2,917
4,826
9,047
15,954
34,727
2008
£m
1,408
4,088
5,638
–
6,122
17,256
As part of the Group’s recapitalisation and agreement not to enter GAPS which included a £13.1 billion rights issue (net of costs) (note 45), on
1 December, 10 December and 15 December 2009, the Group issued a total of £8,554 million of enhanced capital notes in exchange for certain
existing preference shares, preferred securities and undated subordinated liabilities.
The ECNs contain an equity conversion feature (based on a fixed definition as defined by the Financial Services Authority in May 2009) that requires
them to convert into ordinary shares if the consolidated core tier 1 ratio of the Group falls below 5 per cent. The conversion feature meets the
definition of an embedded derivative and has been recorded separately as a derivative asset (note 18). The ECNs are guaranteed by either the
Company or Lloyds TSB Bank plc. These guarantees are subordinated to the claims of senior creditors, rank equally with the claims of the holders of
dated subordinated liabilities and are senior to the claims of holders of undated subordinated liabilities, preferred securities and shareholders of the
respective guarantor.
The securities in this note will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the
issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. The subordination
of specific subordinated liabilities is determined in respect of the issuer and any guarantors of that liability. The claims of holders of preferred shares
and securities are generally junior to those of the holders of undated subordinated liabilities, which in turn are junior to the claims of holders of the
dated subordinated liabilities. The subordination of the enhanced capital notes ranks equally with that of the dated subordinated liabilities. The
Group has not had any defaults of principal, interest or other breaches with respect to its subordinated liabilities during the year (2008: none). No
repayment or purchase by the issuer of the subordinated liabilities may be made prior to their stated maturity without the consent of the Financial
Services Authority.
Preference shares
6% Non-cumulative Redeemable Preference Shares
6.369% Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2015
(£600 million)
6.267% Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2016
(US$1,000 million)
9¼% Non-cumulative Irredeemable £1 preference shares (£300 million)
9¾% Non-cumulative Irredeemable £1 preference shares (£100 million)
6.413% Fixed-to-Floating Rate US$1 series A preference shares (US$750 million)
5.92% Fixed-to-Floating Rate US$1 series B preference shares (US$750 million)
6.657% Fixed-to-Floating rate US$1 preference shares (US$750 million)
7.875% Non-cumulative callable preference shares (US$1,250 million)
7.875% Non-cumulative callable preference shares (€500 million)
6.475% fi xed rate non-cumulative callable preference shares (£186 million)
6.0884% fi xed-to-fl oating rate non-cumulative callable preference shares (£745 million)
6.3673% fi xed-to-fl oating non-cumulative callable preference shares (£335 million)
Note
a
c, e
c, e
b, c, e
b, c, e
b, c, e
b, c, e
b, c, e
c, d, e
c, d, e
b, c, e
b, c, e
b, c, e
2009
£m
–
–
327
197
72
115
90
28
680
417
45
10
2
2008
£m
–
584
824
–
–
–
–
–
–
–
–
–
–
As described in note 51, in January 2009 the Company issued £1,000 million 12 per cent fi xed-to-fl oating non-cumulative callable preference shares
to HM Treasury as part of the recapitalisation of the Lloyds Banking Group and a further £3,000 million 12 per cent fi xed-to-fl oating non-cumulative
callable preference shares in respect of the recapitalisation of the HBOS Group. These shares were redeemed out of the proceeds from the placing
and compensatory open offer in June 2009 (see note 45) and are excluded from the table above.
1,983
1,408
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
199
199
Lloyds Banking Group
Lloyds Banking Group
Annual Report and Accounts 2009
Annual Report and Accounts 2009
44 SUBORDINATED LIABILITIES continued
a Since 2004, the Company has had in issue 400 6 per cent non-cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the
rights to a fi xed rate non-cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be
maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company. The holder of the 400 25p 6 per cent preference shares has
waived its right to payment for the period from 1 March 2010 to 1 March 2012.
b On 16 January 2009 so as to improve the position of HBOS preference shareholders and simplify the Group’s capital structure following the acquisition of HBOS the Group replaced certain HBOS
preference share issuances in exchange for preference shares with similar terms and conditions issued by the Company.
c As part of the Group’s recapitalisation and exit from GAPS, following an exchange offer, on 1 December , 10 December and 15 December 2009, certain holders of certain series elected to exchange
some or all of the preference shares they held for enhanced capital notes issued by LBG Capital No. 1 plc and LBG Capital No. 2 plc or equity issued by Lloyds Banking Group plc.
d On 19 January 2009 the Company issued US$1,250,000,000 7.875 per cent non-cumulative callable preference shares and €500,000,000 7.875 per cent non-cumulative callable preference shares by
exercising its option to convert preferred securities into preference shares. Both issues are callable on 29 November 2013.
e As described in note 9, in November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from
31 January 2010 to 31 January 2012.
44 SUBORDINATED LIABILITIES
Preferred securities
6.90% Perpetual Capital Securities (US$1,000 million)
7.375 % Euro Step-up Non-Voting Non-Cumulative Preferred Securities callable 2012 (€430 million)
7.875% Perpetual Capital Securities (€500 million)
7.875% Perpetual Capital Securities (US$1,250 million)
6.35% Step-up Perpetual Capital Securities callable 2013 (€500 million)
7.834% Sterling Step-up Non-Voting Non-Cumulative Preferred Securities callable 2015 (£250 million)
4.385% Step-up Perpetual Capital Securities callable 2017 (€750 million)
6.071% Non-cumulative Perpetual Preferred Securities of US$1,000 each (US$750 million)
6.85% Non-cumulative Perpetual Preferred Securities of US$1,000 each (US$1,000 million)
6.461% Guaranteed Non-voting Non-cumulative Perpetual Preferred Securities Series A of
£1,000 each (£600 million)
8.117% Non-cumulative Perpetual Preferred Securities Series 1 of £1,000 each (Class A) (£250 million)
7.754% Non-cumulative Perpetual Preferred Securities Series 2 of £1,000 each (Class B) (£150 million)
7.881% Guaranteed Non-voting Non-cumulative Preferred Securities (£245 million)
7.627% Fixed to Floating Rate Guaranteed Non-voting Non-cumulative Preferred Securities (€415 million)
4.939% Non-voting Non-cumulative Perpetual Preferred Securities (€750 million)
Note
c
c, d
a
a
c
c, d
c, d
b, c
b, c
b, c
b, c
b, c
b, c
b, c
b, c, d
2009
£m
645
306
–
–
456
43
82
240
–
398
234
93
151
259
10
2008
£m
756
459
472
921
512
248
720
–
–
–
–
–
–
–
–
a On 16 January 2009 Lloyds TSB Bank plc exercised the option to convert these securities into preference shares.
b Arising on acquisition of HBOS.
c As part of the Group’s recapitalisation and exit from GAPS, following an exchange offer, on 1 December 2009, 10 December and 15 December 2009 certain holders of certain series elected to
exchange some or all of the notes they held for enhanced capital notes issued by LBG Capital No. 1 plc and LBG Capital No. 2 plc.
d As described in note 9, in November 2009, as part of the state aid restructuring plan, the Group agreed to suspend the payment of coupons on these instruments for the two year period from
31 January 2010 to 31 January 2012.
2,917
4,088
200
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
44 SUBORDINATED LIABILITIES continued
Undated subordinated liabilities
Primary Capital Undated Floating Rate Notes:
Series 1 (US$750 million)
Series 2 (US$500 million)
Series 3 (US$600 million)
11¾% Perpetual Subordinated Bonds (£100 million)
55/8% Undated Subordinated Step-up Notes callable 2009 (€1,250 million)
Undated Step-up Floating Rate Notes callable 2009 (€150 million)
65/8% Undated Subordinated Step-up Notes callable 2010 (£410 million)
5.125% Step-up Perpetual Subordinated Notes callable 2015 (£560 million) (Scottish Widows plc)
5.57% Undated Subordinated Step-up Coupon Notes callable 2015 (¥20,000 million)
5.125% Undated Subordinated Step-up Notes callable 2016 (£500 million)
6½% Undated Subordinated Step-up Notes callable 2019 (£270 million)
8% Undated Subordinated Step-up Notes callable 2023 (£200 million)
6½% Undated Subordinated Step-up Notes callable 2029 (£450 million)
6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million)
13% Step-up Perpetual Capital Securities callable 2019 (£784 million)
13% Euro Step-up Perpetual Capital Securities callable 2019 (€532 million)
12% Fixed to Floating Rate Perpetual Tier 1 Capital Securities callable 2024 (US$2,000 million)
13% Sterling Step-up Perpetual Capital Securities callable 2029 (£700 million)
5.625% Cumulative Callable Fixed to Floating Rate Undated Subordinated Notes (£500 million)
4.875% Undated Subordinated Fixed to Floating Rate Instruments (€750 million)
Floating Rate Undated Subordinated Notes (€500 million)
5.375% Undated Fixed to Floating Rate Subordinated Notes (US$1,000 million)
5.125% Undated Subordinated Fixed to Floating Notes (€750 million)
5.75% Undated Subordinated Step-up Notes (£600 million)
6.05% Fixed to Floating Rate Undated Subordinated Notes (€500 million)
Perpetual Regulatory Tier One Securities (£300 million)
7.5% Undated Subordinated Step-up Notes (£300 million)
3.50% Undated Subordinated Yen Step-up Notes (JPY 42.5 billion)
8.625% Perpetual Subordinated Notes (£200 million)
7.375% Undated Subordinated Guaranteed Bonds (£200 million) (Clerical Medical Finance plc)
Floating Rate Undated Subordinated Step-up Notes (€300 million)
Floating Rate Primary Capital Notes (US$250 million)
10.25% Subordinated Undated Instruments (£100 million)
12% Perpetual Subordinated Bonds (£100 million)
8.75% Perpetual Subordinated Bonds (£100 million)
13.625% Perpetual Subordinated Bonds (£75 million)
9.375% Perpetual Subordinated Bonds (£50 million)
5.75% Undated Subordinated Step-up Notes (£500 million)
4.25% Perpetual Fixed/Floating Rate Reset Subordinated Guaranteed Notes (€750 million)
(Clerical Medical Finance plc)
Note
b
e
e
e
e
b, e
b
b, c, e
a
e
b, c, e
b, c, e
b, c, e
c, e
c, e
e
e
e
b, c, d, e
b, c, d, e
b, c, d, e
d, e
b, c, d, e
b, c, d, e
b, c, d, e
d
b, c, d, e
d
b, c, d, e
d, f
b, c, d, e
d, e
b, c, d, e
d, e
d, e
d, e
d, e
b, c, d, e
d, f
2009
£m
408
262
326
102
–
–
5
547
–
–
–
–
–
10
9
47
1,235
666
1
60
41
3
39
2
50
204
4
267
18
35
58
146
1
22
6
33
26
3
190
4,826
2008
£m
515
343
412
100
1,212
144
409
536
189
455
241
186
444
452
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
5,638
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
201
Lloyds Banking Group
Annual Report and Accounts 2009
44 SUBORDINATED LIABILITIES continued
a Scottish Widows plc may elect to defer interest on these securities although in that event Scottish Widows plc cannot declare or pay a dividend on any ordinary share capital until any deferred
payments have been made.
b Following an exchange offer, on 7 January 2009 certain holders elected to exchange all or some of the notes they held for innovative Tier 1 securities issued by Lloyds TSB Bank plc.
c Following an exchange offer, on 25 March 2009 certain holders elected to exchange all or some of the notes they held for senior unsecured notes issued by Lloyds TSB Bank plc.
d Arising on acquisition of HBOS.
e As part of the Group’s recapitalisation and exit from GAPS, following an exchange offer, on 1 December, 10 December and 15 December certain holders of certain series elected to exchange some
or all of the notes they held for enhanced capital notes issued by LBG Capital No. 1 plc and LBG Capital No. 2 plc.
f Following an exchange offer, on 30 June 2009, certain holders elected to exchange all or some of the notes for senior unsecured notes by Lloyds TSB Bank plc.
Enhanced capital notes
7.5884% Enhanced Capital Notes due 2020 (Series 1) (£732 million)
7.8673% Enhanced Capital Notes due 2019 (Series 2) (£331 million)
7.975% Enhanced Capital Notes due 2024 (Series 3) (£102 million)
7.869% Enhanced Capital Notes due 2020 (Series 8) (£596 million)
8.875% Enhanced Capital Notes due 2020 (Series 12) (€125 million)
9.334% Enhanced Capital Notes due 2020 (Series 14) (£208 million)
6.439% Enhanced Capital Notes due 2020 (Series 15) (€710 million)
6.385% Enhanced Capital Notes due 2020 (Series 18) (€662 million)
11.04% Enhanced Capital Notes due 2020 (Series 19) (£736 million)
15% Enhanced Capital Notes due 2019 (Series 21) (£775 million)
15% Enhanced Capital Notes due 2019 (Series 22) (€487 million)
15% Enhanced Capital Notes due 2029 (Series 23) (£68 million)
9.125% Enhanced Capital Notes due 2020 (Series 27) (£148 million)
11.125% Enhanced Capital Notes due 2020 (Series 31) (£39 million)
7.375% Enhanced Capital Notes due 2020 (Series 32) (€95 million)
Floating Rate Enhanced Capital Notes due 2020 (Series 33) (€53 million)
12.75% Enhanced Capital Notes due 2020 (Series 34) (£57 million)
8.07% Enhanced Capital Notes due 2020 (Series 35) (¥20,000 million)
7.625% Enhanced Capital Notes due 2020 (Series 36) (€226 million)
6.75% Enhanced Capital Notes due 2020 (Series 37) (¥17,000 million)
7.625% Enhanced Capital Notes due 2019 (Series 39) (£151 million)
9% Enhanced Capital Notes due 2019 (Series 40) (£97 million)
8.125% Enhanced Capital Notes due 2019 (Series 41) (£4 million)
14.5% Enhanced Capital Notes due 2022 (Series 42) (£79 million)
9.875% Enhanced Capital Notes due 2023 (Series 44) (£57 million)
11.25% Enhanced Capital Notes due 2023 (Series 45) (£95 million)
10.5% Enhanced Capital Notes due 2023 (Series 46) (£69 million)
11.875% Enhanced Capital Notes due 2024 (Series 47) (£35 million)
9% Enhanced Capital Notes due 2029 (Series 49) (£107 million)
8.5% Enhanced Capital Notes due 2032 (Series 50) (£104 million)
16.125% Enhanced Capital Notes due 2024 (Series 52) (£61 million)
7.875% Enhanced Capital Notes due 2020 (US$986 million)
8% Fixed to Floating Rate Undated Enhanced Capital Notes callable 2022 (US$1,259 million)
8.5% Undated Enhanced Capital Notes callable 2021 (Series 2) (US$277 million)
a Interest is payable quarterly in arrears at a rate of 3 month EURIBOR +3.1 per cent per annum.
b Issued in upper tier 2 format.
Note
a
b
b
2009
£m
690
316
96
572
117
218
557
517
871
1,125
646
108
153
45
80
42
74
156
193
121
142
100
4
115
62
115
78
45
108
100
100
599
639
143
9,047
2008
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
202
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
44 SUBORDINATED LIABILITIES continued
Enhanced capital notes are a new liability class developed for the purposes of the liability management exercise conducted by Lloyds Banking Group
in the fi nal quarter of 2009. With the exception of the two series identifi ed in note b, the ECNs were issued in lower tier 2 format and are convertible
into ordinary shares on the breach of a defi ned trigger. The trigger on the ECNs offered in the exchange will be if the published core tier 1 ratio of
the Group falls below 5 per cent (as defi ned by the Financial Services Authority in May 2009).
Dated subordinated liabilities
9 1/2% Subordinated Bonds 2009 (£100 million)
6 1/4% Subordinated Notes 2010 (€400 million)
12% Guaranteed Subordinated Bonds 2011 (£100 million)
7.70% Notes 2010 (US$500 million)
9 1/8% Subordinated Bonds 2011 (£150 million)
4 3/4% Subordinated Notes 2011 (€850 million)
6.50% Notes 2011 (US$150 million)
5.50% Subordinated Fixed Rate Notes 2012 (€750 million)
6.25% Instruments 2012 (€12.8 million)
6.125% Notes 2013 (€325 million)
4.25% Subordinated Guaranteed Notes 2013 (US$1,000 million)
5 7/8% Subordinated Guaranteed Bonds 2014 (€750 million)
5 7/8% Subordinated Notes 2014 (£150 million)
11% Subordinated Bonds 2014 (£250 million)
6 5/8% Subordinated Notes 2015 (£350 million)
4.875% Subordinated Notes 2015 (€1,000 million)
Subordinated Step-up Floating Rate Notes 2016 callable 2011 (£300 million)
Subordinated Step-up Floating Rate Notes 2016 callable 2011 (€500 million)
Callable Floating Rate Subordinated Notes 2016 (€500 million)
Subordinated Notes 2016 (€500 million)
Notes 2016 (US$750 million)
Subordinated Lower Tier II Notes 2017 (€1,000 million)
Subordinated Callable Notes 2017 (US$1,000 million)
Subordinated Callable Floating Rate Instruments 2017 (Aus$400 million)
6.75% Subordinated Callable Fixed/Floating Rate Instruments 2017 (Aus$200 million)
5.109% Callable Fixed to Floating Rate Notes 2017 (Can$500 million)
Lower Tier II Subordinated Notes 2017 (£500 million)
5.625% Subordinated Fixed to Floating Rate Notes due 2018 callable 2013 (€1,000 million)
10.5% Subordinated Bonds 2018 (£150 million)
6.75% Subordinated Fixed Rate Notes 2018 (US$2,000 million)
6.375% Instruments 2019 (£250 million)
4.375% Callable Fixed to Floating Rate Subordinated Notes 2019 (€750 million)
6.9625% Subordinated Fixed to Floating Rate Notes due 2020 callable 2015 (£750 million)
Subordinated Floating Rate Notes 2020 (€100 million)
9.375% Subordinated Bonds 2021 (£500 million)
5.374% Subordinated Fixed Rate Notes 2021 (€160 million)
6.45% Fixed/Floating Subordinated Guaranteed Bonds 2023 (€400 million)
(Clerical Medical Finance plc)
6.5% Subordinated Fixed Rate Notes 2023 (€175 million)
5.75% Subordinated Step-up Notes 2025 callable 2020 (£350 million)
9 5/8% Subordinated Bonds 2023 (£300 million)
4.50% Fixed Rate Step-up Subordinated Notes due 2030 (€750 million)
6.00% Subordinated Notes 2033 (US$750 million)
Note
a
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b
b, c
b
b
b
2009
£m
–
375
108
327
152
771
102
654
10
296
594
768
154
304
335
875
296
445
374
389
367
704
464
209
101
263
474
979
165
917
227
602
755
89
268
132
171
128
322
333
478
477
15,954
2008
£m
100
404
100
–
149
836
–
–
–
–
–
821
149
–
320
–
300
480
–
–
–
–
–
–
–
–
–
992
–
–
–
–
754
96
–
–
–
–
309
312
–
–
6,122
a Issued by a group undertaking under the Company’s subordinated guarantee.
b Arising on acquisition of HBOS.
c Following an exchange offer on 30 June 2009, certain holders elected to exchange all or some of the notes for senior unsecured notes issued by Lloyds TSB Bank plc.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
203
Lloyds Banking Group
Annual Report and Accounts 2009
45 SHARE CAPITAL
(1) AUTHORISED SHARE CAPITAL
As permitted by the Companies Act 2006, the Company removed references to authorised share capital from its articles of association at the annual
general meeting on 5 June 2009. This change took effect from 1 October 2009.
(2) ISSUED AND FULLY PAID SHARE CAPITAL
Ordinary shares of 10p (formerly 25p) each
At 1 January
Private placement
Placing and open offer
Issued on acquisition of HBOS
Capitalisation issue
Placing and compensatory open offer
Subdivision
Rights issue
Issued to the Lloyds TSB Foundations
Issued under employee share schemes
At 31 December
Limited voting ordinary shares of 10p (formerly 25p) each
At 1 January
Capitalisation issue
Subdivision
At 31 December
Deferred shares of 15p each
At 1 January
Subdivision of ordinary shares
Subdivision of limited voting ordinary shares
At 31 December
Total issued share capital
2009
Number of shares
2008
Number of shares
5,972,855,669
5,647,703,945
–
284,400,000
2,596,653,203
7,775,694,993
407,943,501
10,408,535,000
–
36,505,088,579
107,740,591
–
–
–
–
–
–
–
–
40,751,724
2009
£m
1,493
–
649
1,944
102
2,602
(4,074)
3,651
11
–
63,774,511,536
5,972,855,669
6,378
78,947,368
1,973,683
–
78,947,368
–
–
80,921,051
78,947,368
–
27,161,682,366
80,921,051
27,242,603,417
–
–
–
–
20
–
(12)
8
–
4,074
12
4,086
10,472
2008
£m
1,412
71
–
–
–
–
–
–
–
10
1,493
20
–
–
20
–
–
–
–
1,513
Details of preference shares that are classified as debt for accounting purposes are given in note 44.
SHARE SUBDIVISION
At the general meeting held on 26 November 2009 the Company’s shareholders approved the subdivision of the ordinary shares with each ordinary
share of 25 pence subdivided into one ordinary share of 10 pence and a deferred share of 15 pence. In addition, the shareholders approved the
subdivision of the limited voting ordinary shares with each share of 25 pence subdivided into one limited voting ordinary share of 10 pence and a
deferred share of 15 pence.
204
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
45 SHARE CAPITAL continued
Share issuances during 2009
ORDINARY SHARES
On 13 January 2009 the Company issued 2,597 million shares under a placing and open offer, subscribed for by HM Treasury as part of the
recapitalisation of the banking industry by the UK Government, which raised £4,430 million (net of £70 million issue costs). This issue resulted in an
increase of £649 million in share capital and an increase of £3,781 million in the merger reserve.
On 16 January 2009 the Company issued 7,776 million shares in consideration for the acquisition of HBOS, whereby 12,852 million HBOS shares were
exchanged for Lloyds Banking Group shares at a ratio of 0.605 shares per HBOS share. This issue resulted in an increase of £1,944 million in share
capital and an increase of £5,707 million in the merger reserve.
In lieu of a dividend the Group announced a capitalisation issue of 1 for 40 ordinary shares held and on 11 May 2009 408 million ordinary shares of
25 pence were issued. This resulted in an increase in share capital of £102 million with a corresponding decrease in the share premium account.
In June 2009 the Company issued 10,409 million shares under a placing and compensatory open offer which raised £3,905 million (net of £95 million
issue costs), the proceeds of which were used to redeem the £4,000 million of 12 per cent fi xed-to-fl oating rate non-cumulative callable preference
shares of 25 pence each issued to HM Treasury earlier in the year as described in note 44. This issue resulted in an increase of £2,602 million in share
capital and an increase of £1,303 million in the share premium account.
In December 2009, the Company issued 36,505 million shares in a rights issue at an issue price of 37 pence per new share as part of its recapitalisation
and exit from the Government Asset Protection Scheme. This raised £13,112 million (net of £395 million of issue costs). This issue resulted in an
increase of £3,651 million in share capital and an increase of £9,461 million in the share premium account.
DEFERRED SHARES
The share subdivision noted above created 27,243 million deferred shares of 15 pence each. These shares carry no voting or dividend rights and on a
return of capital on a winding up of the Company will have the right to receive the paid up amount only after ordinary shareholders have received in
aggregate any amounts paid up plus £10 million per ordinary share.
(3) SHARE CAPITAL AND CONTROL
There are no restrictions on the transfer of shares in the Company other than as set out in the articles of association and:
– certain restrictions which may from time to time be imposed by law and regulations (for example, insider trading laws);
– pursuant to the UK Listing Authority’s listing rules where directors and certain employees of the Company require the approval of the Company to
deal in the Company’s shares; and
– pursuant to the rules of some of the Company’s employee share plans where certain restrictions may apply while the shares are subject to the plans.
Where, under an employee share plan operated by the Company, participants are the benefi cial owners of shares but not the registered owners, the
voting rights are normally exercised by the registered owner at the direction of the participant. Outstanding awards and options would normally vest
and become exercisable on a change of control, subject to the satisfaction of any performance conditions at that time.
In addition, the Company is not aware of any agreements between shareholders that may result in restrictions on the transfer of securities and/or
voting rights.
Information regarding signifi cant direct or indirect holdings of shares in the Company can be found on page 261.
The directors have authority to allot and issue ordinary and preference shares and to make market purchases of preference shares as granted at the
general meeting on 26 November 2009. The authority to issue shares will expire at the annual general meeting, and the authority to make market
purchases of preference shares expires on 25 November 2010. The directors also have authority to make market purchases of ordinary shares as
granted at the general meeting on 5 June 2009. This authority expires either a year after the date of approval or at the annual general meeting.
Shareholders will be asked, at the annual general meeting, to give similar authorities.
Subject to any rights or restrictions attached to any shares, on a show of hands at a general meeting of the Company every holder of shares present
in person or by proxy and entitled to vote has one vote and on a poll every member present and entitled to vote has one vote for every share held.
Further details regarding voting at the annual general meeting can be found in the notes to the notice of the annual general meeting.
ORDINARY SHARES
The holders of ordinary shares (excluding the limited voting ordinary shares), who held 98.7 per cent of the total ordinary share capital as at
31 December 2009, are entitled to receive the Company’s report and accounts, attend, speak and vote at general meetings and appoint proxies to
exercise voting rights. Holders of ordinary shares (excluding the limited voting ordinary shares) may also receive a dividend (subject to the provisions
of the Company’s articles of association and the restrictions noted below) and on a winding up may share in the assets of the Company.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
205
Lloyds Banking Group
Annual Report and Accounts 2009
45 SHARE CAPITAL continued
Under the terms of the state aid remedies referred to in note 9, the Company is prevented from making discretionary coupon and dividend payments
on certain capital instruments from 31 January 2010 until 31 January 2012. Consequently, the terms of these instruments prevent the Company from
making dividend payments on ordinary shares.
45 SHARE CAPITAL
LIMITED VOTING ORDINARY SHARES
The limited voting ordinary shares are held by the Lloyds TSB Foundations (the Foundations). The holders of the limited voting ordinary shares, who
held 1.3 per cent of the total ordinary shares as at 31 December 2009, are entitled to receive copies of every circular or other document sent out by
the Company to the holders of other ordinary shares. These shares carry no rights to dividends but rank pari passu with the ordinary shares in respect
of other distributions and in the event of winding up. These shares do not have any right to vote at general meetings other than on resolutions
concerning acquisitions or disposals of such importance that they require shareholder consent, or for the winding up of the Company, or for a
variation in the class rights of the limited voting ordinary shares. In the event of an offer for more than 50 per cent of the issued ordinary share capital
of the Company, each limited voting ordinary share will convert into an ordinary share and shall rank equally with the ordinary shares in all respects
from the date of conversion.
PREFERENCE SHARES
The Company has in issue various classes of preference shares which are all classifi ed as liabilities under IFRS and details of which are shown in note 44.
46 SHARE PREMIUM ACCOUNT
At 1 January
Premium arising on private placement of ordinary shares
Capitalisation issue
Premium arising on Placing and Compensatory Open Offer of ordinary shares
Transfer to merger reserve1
Rights issue
Issued to Lloyds TSB Foundations
Redemption of preference shares2
Premium arising on issue of shares under share option schemes
At 31 December
2009
£m
2,096
–
(102)
1,303
(1,000)
9,461
30
2,684
–
14,472
2008
£m
1,298
689
–
–
–
–
–
–
109
2,096
1
2
Distributable reserves of £1,000 million arose on the issue of preference shares in January 2009 which were classifi ed as debt. In June 2009, these preference shares were redeemed out of the
proceeds of the placing and compensatory open offer of ordinary shares and the distributable element of this issue was transferred from the share premium account to the merger reserve.
In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of enhanced capital notes. This resulted in a transfer of £26 million from the merger reserve to
the capital redemption reserve and a transfer of £2,684 million from the merger reserve to the share premium account. Details of the preference shares redeemed are set out in note 44.
206
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
47 OTHER RESERVES
Other reserves comprise:
Merger reserve
Capital redemption reserve
Revaluation reserve in respect of available-for-sale fi nancial assets
Cash fl ow hedging reserve
Foreign currency translation reserve
At 31 December
2009
£m
8,121
26
(914)
(305)
158
7,086
2008
£m
343
–
(2,982)
(15)
178
(2,476)
The merger reserve primarily comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16
January 2009 on the acquisition of HBOS plc.
The capital redemption reserve represents transfers from the merger reserve in accordance with companies’ legislation.
The revaluation reserve in respect of available-for-sale fi nancial assets represents the cumulative after tax unrealised change in the fair value of
fi nancial assets classifi ed as available-for-sale since initial recognition, or in the case of available-for-sale fi nancial assets obtained on acquisitions of
businesses, since the date of acquisition.
The cash fl ow hedging reserve represents the cumulative after tax gains and losses on effective cash fl ow hedging instruments that will be reclassifi ed
to the income statement in the periods in which the hedged item affects profi t or loss.
The foreign currency translation reserve represents the cumulative after-tax gains and losses on the translation of foreign operations and exchange
differences arising on fi nancial instruments designated as hedges of the Group’s net investment in foreign operations.
Movements in other reserves were as follows:
Merger reserve
At 1 January
Placing and open offer
Shares issued on acquisition of HBOS
Issue of preference shares1
Redemption of preference shares2
At 31 December
Capital redemption reserve
At 1 January
Redemption of preference shares2
At 31 December
2009
£m
343
3,781
5,707
1,000
(2,710)
8,121
2009
£m
–
26
26
2008
£m
343
–
–
–
–
343
2008
£m
–
–
–
1
2
Distributable reserves of £1,000 million arose on the issue of preference shares in January 2009 which were classifi ed as debt. In June 2009, these preference shares were redeemed out of the
proceeds of the placing and compensatory open offer of ordinary shares and the distributable element of this issue was transferred to the merger reserve.
In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of enhanced capital notes. This resulted in a transfer of £26 million from the merger reserve to
the capital redemption reserve and a transfer of £2,684 million from the merger reserve to the share premium account. Details of the preference shares redeemed are set out in note 44.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
207
Lloyds Banking Group
Annual Report and Accounts 2009
47 OTHER RESERVES continued
Revaluation reserve in respect of available-for-sale fi nancial assets
At 1 January
Exchange and other adjustments
Change in fair value of available-for-sale fi nancial assets
Change in fair value attributable to minority interests
Deferred tax
Current tax
Income statement transfers:
Disposals (note 9)
Deferred tax
Impairment
Deferred tax
Current tax
Other transfers
Deferred tax
Current tax
At 31 December
Cash fl ow hedging reserve
At 1 January
Change in fair value of hedging derivatives
Deferred tax
Income statement transfer (note 5)
Deferred tax
At 31 December
Foreign currency translation reserve
At 1 January
Currency translation differences arising in the year
Foreign currency losses on net investment hedges
Amounts transferred to income statement in respect of hedge ineffectiveness
Current tax
Deferred tax
At 31 December
2009
£m
(2,982)
(199)
2,234
(1)
(276)
(2)
1,955
(97)
23
(74)
621
(168)
–
453
(93)
26
–
(67)
(914)
2009
£m
(15)
(530)
148
(382)
121
(29)
92
(305)
2009
£m
178
(652)
814
–
176
(358)
632
158
2008
£m
(399)
(541)
(2,721)
2
566
94
(2,059)
(19)
–
(19)
130
–
(28)
102
(91)
–
25
(66)
(2,982)
2008
£m
(3)
(33)
9
(24)
16
(4)
12
(15)
2008
£m
(1)
2,533
(3,310)
14
584
358
(2,354)
178
208
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
48 RETAINED PROFITS
At 1 January
Profi t for the year
Dividends
Purchase/sale of treasury shares
Employee share option schemes – value of employee services
At 31 December
1
Restated for IFRS 2 (Revised)
2009
£m
8,260
2,827
–
45
116
11,248
20081
£m
9,471
772
(2,042)
16
43
8,260
Retained profits are stated after deducting £48 million (2008: £40 million) representing 49 million (2008: 15 million) treasury shares held.
Value of employee services includes a credit of £111 million (2008: £59 million) reflecting the income statement charge in respect of SAYE and
executive options, together with a related tax credit of £5 million (2008: tax charge £16 million). Purchase/sale of treasury shares includes a credit
of £128 million (2008: £31 million) relating to the cost of other share scheme awards.
49 ORDINARY DIVIDENDS
Final dividend for previous year paid during the current year
Interim dividend
2009
Pence per share
2008
Pence per share
–
–
–
24.7
11.4
36.1
2009
£m
–
–
–
2008
£m
1,394
648
2,042
The directors do not propose to pay a final dividend (2008: none).
Bank of New York Nominees Limited have waived the right to all dividends on Lloyds Banking Group plc shares that they hold (holding at
31 December 2009: nil shares and at 31 December 2008: 10 shares).
In addition, the trustees of the following holdings of Lloyds Banking Group plc shares in relation to employee share schemes retain the right to
receive dividends but chose to waive their entitlement to the dividends on those shares as indicated: the Lloyds TSB Group Shareplan (holding at
31 December 2009: 3,028,623 shares, at 31 December 2008: 972,151 shares, waived right to all dividends), the Lloyds TSB Group Employee Share
Ownership Trust (holding at 31 December 2009: 1,301,968 shares, at 31 December 2008: 1,442,116 shares, waived right to all dividends), Lloyds TSB
Group Holdings (Jersey) Limited (holding at 31 December 2009: 42,846 shares, at 31 December 2008: 41,801 shares, waived right to all but a nominal
amount of 1 penny in total) and the Lloyds TSB Qualifying Employee Share Ownership Trust (holding at 31 December 2009: 1,398 shares,
at 31 December 2008: 1,364 shares, waived right to all but a nominal amount of 1 penny in total).
50 SHARE BASED PAYMENTS
CHARGE TO THE INCOME STATEMENT
The charge to the income statement is set out below:
Deferred bonus scheme
Executive and SAYE schemes:
Options granted in the year
Options granted in prior years
Share incentive plans:
Shares granted in the year
Shares granted in prior years
1
Restated for IFRS 2 (Revised)
2009
£m
18
13
98
111
26
102
128
257
20081
£m
–
28
31
59
10
21
31
90
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
209
Lloyds Banking Group
Annual Report and Accounts 2009
50 SHARE BASED PAYMENTS continued
SHARE BASED PAYMENT SCHEME DETAILS
During the year ended 31 December 2009 the Group operated the following share based payment schemes, all of which are equity settled.
Deferred bonus scheme 2009
Bonuses in respect of the performance in 2009 of certain employees within the Group’s Wholesale division have been recognised in these fi nancial
statements in full. Individual bonus payments of up to £2,000 for employees earning up to £39,000 are not subject to deferral and as they will be
settled in cash are not included in the preceding table.
Executive schemes
The executive share option schemes were long-term incentive schemes available to certain senior executives of the Group, with grants usually made
annually. Options were granted within limits set by the rules of the schemes relating to the number of shares under option and the price payable on
the exercise of options. The last grant of executive options was made in August 2005. These options were granted without a performance multiplier
and the maximum limit for the grant of options in normal circumstances was three times annual salary. Between April 2001 and August 2004, the
aggregate value of the award based upon the market price at the date of grant could not exceed four times the executive’s annual remuneration and,
normally, the limit for the grant of options to an executive in any one year would be equal to 1.5 times annual salary with a maximum performance
multiplier of 3.5. Prior to 18 April 2001, the normal limit was equal to one year’s remuneration and no performance multiplier was applied.
PERFORMANCE CONDITIONS FOR EXECUTIVE OPTIONS
For options granted up to March 2001
Options granted
Performance conditions
March 1999 – 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 together with a further condition that
Lloyds Banking Group plc’s ranking based on total shareholder return (calculated by reference to both dividends
and growth in share price) over the relevant period should be in the top fi fty companies of the FTSE 100.
March 2000 – March 2001
As for March 1999 – August 1999 except that there must have been growth in the earnings per share equal to the
change in the Retail Price Index plus three percentage points for each complete year of the relevant period.
In respect of options granted between March 1999 and March 2001, the relevant period for the performance conditions began at the end of the
fi nancial year preceding the date of grant and continued until the end of the third subsequent year following commencement or, if not met, the end
of such later year in which the conditions were met. Once the conditions were satisfi ed the options remain exercisable without further conditions. If
they were not satisfi ed by the tenth anniversary of the grant the options would lapse.
For options granted from August 2001 to August 2004
The performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both
dividends and growth in share price) against a comparator group of 17 companies including Lloyds Banking Group plc.
The performance condition was measured over a three year period which commenced at the end of the fi nancial year preceding the grant of the
option and continued until the end of the third subsequent year. If the performance condition was not then met, it was measured at the end of the
fourth fi nancial year. If the condition was not then met, the options would lapse.
To meet the performance conditions, the Group’s ranking against the comparator group required to be at least ninth. The full grant of options only
became exercisable if the Group was ranked fi rst. A performance multiplier (of between nil and 100 per cent) was applied below this level to calculate
the number of shares in respect of which options granted to executive directors would become exercisable, and were calculated on a sliding scale. If
Lloyds Banking Group plc was ranked below median the options would not be exercisable.
Options granted to senior executives other than executive directors were not so highly leveraged and, as a result, different performance multipliers
were applied to their options. For the majority of executives, options were granted with the performance condition but with no performance multiplier.
Options granted in 2004 became exercisable as the performance condition was met on the re-test. The performance condition vested at 14 per cent
for executive directors, 24 per cent for managing directors, and 100 per cent for all other executives.
For options granted in 2005
The same conditions applied as for grants made up to August 2004, except that:
– the performance condition was linked to the performance of Lloyds Banking Group plc’s total shareholder return (calculated by reference to both
dividends and growth in share price) against a comparator group of 15 companies including Lloyds Banking Group plc;
– if the performance condition was not met at the end of the third subsequent year, the options would lapse; and
– the full grant of options became exercisable only if the Group was ranked in the top four places of the comparator group. A sliding scale applied
between fourth and eighth positions. If Lloyds Banking Group was ranked below the median (ninth or below) the options would lapse.
Options granted in 2005 became exercisable as the performance condition was met when tested. The performance condition vested at 82.5 per cent
for all options granted.
210
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
50 SHARE BASED PAYMENTS continued
Movements in the number of share options outstanding under the executive share option schemes during 2008 and 2009 are set out below:
Outstanding at 1 January
Exercised
Forfeited
Outstanding at 31 December
Exercisable at 31 December
2009
2008
Number of
options
Weighted average
exercise price
(pence)
Number of
options
Weighted average
exercise price
(pence)
11,203,628
490.05
20,621,774
–
(2,418,650)
8,784,978
8,784,978
–
536.46
476.56
476.56
(137,431)
(9,280,715)
11,203,628
9,132,197
480.57
419.25
470.02
490.05
453.77
No options were exercised during 2009 therefore the weighted average share price was £nil (2008: £4.53). The weighted average remaining
contractual life of options outstanding at the end of the year was 4.3 years (2008: 5.1 years).
Save-As-You-Earn schemes
Eligible employees may enter into contracts through the Save-As-You-Earn schemes to save up to £250 per month and, at the expiry of a fixed term
of three, five or seven 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.
Movements in the number of share options outstanding under the SAYE schemes are set out below:
Outstanding at 1 January
Adjustment on acquisition
Granted
Exercised
Forfeited
Cancelled
Expired
Outstanding at 31 December
Exercisable at 31 December
2009
2008
Number of
options
Weighted average
exercise price
(pence)
Number of
options
Weighted average
exercise price
(pence)
190,478,449
53,755,275
–
–
(9,581,800)
(93,599,380)
(10,918,552)
130,133,992
754,554
152.54
300.91
–
–
397.07
170.24
453.64
157.84
317.32
85,673,227
342.49
–
–
215,737,733
(40,612,608)
(2,394,415)
(62,963,491)
(4,961,997)
190,478,449
3,157,524
173.80
290.77
388.11
373.21
311.47
152.54
332.12
No options were exercised during 2009 therefore the weighted average share price was £nil (2008: £3.70). The weighted average remaining
contractual life of options outstanding at the end of the year was 2.7 years (2008: 3.4 years).
Similarly as no SAYE options were granted during the year, the weighted share price was £nil (2008: £0.61). The values for the SAYE options have been
determined using a standard Black-Scholes model.
For the HBOS sharesave plan, no options were exercised during 2009 therefore the weighted average share price was £nil. The options outstanding
at 31 December 2009 had exercise prices in the range of £2.20 to £3.64 and a weighted average remaining contractual life of 4.0 years.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
211
Lloyds Banking Group
Annual Report and Accounts 2009
50 SHARE BASED PAYMENTS continued
OTHER SHARE OPTION PLANS
Lloyds TSB Group Executive Share Plan 2003
The plan was adopted in December 2003 and under the plan share options may be granted to senior employees. Options granted under this
plan have been granted specifically to facilitate recruitment and as such were not subject to any performance conditions. The plan has now been
extended to not only compensate new recruits for any lost share awards but also to make grants to key individuals for retention purposes with, in
some instances, the grant being made subject to individual performance conditions.
Outstanding at 1 January
Granted
Rebasement adjustment
Exercised
Forfeited
Outstanding at 31 December
Exercisable at 31 December
2009
2008
Number of
options
857,611
24,704,070
1,876,005
(157,105)
(1,181,396)
26,099,185
33,794
Weighted average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Number of
options
308,718
681,931
–
(117,236)
(15,802)
857,611
–
Weighted average
exercise price
(pence)
Nil
Nil
Nil
Nil
Nil
Nil
Nil
The weighted average fair value of options granted in the year was £0.68 (2008: £2.92). The weighted average share price at the time that the options
were exercised during 2009 was £0.71 (2008: £2.91). The weighted average remaining contractual life of options outstanding at the end of the year
was 3.0 years (2008: 2.5 years).
Options granted under this plan were adjusted on 2 July 2009 as a result of the Placing and Compensatory Open Offer. The adjustment was made
using a standard HMRC formula, to negate the dilutionary impact of the capital raising event.
HBOS share option plans
The table below includes details of the outstanding options for the HBOS Share Option Plan, the St James’s Place Share Option Plan, and the 1995
and 1996 Bank of Scotland Executive Stock Option schemes. The fi nal award under the HBOS Share Option Plan was made in 2004. Under this plan,
options over shares, at market value with a face value equal to 20 per cent of salary, were granted to employees with the exception of certain senior
executives. A separate option plan exists for some of the partners of St James’s Place, which grants options in respect of Lloyds Banking Group plc
shares. Movements in the number of share options outstanding under these schemes are set out below:
Share option plans
Outstanding at 16 January, date of acquisition of HBOS
Granted during the year
Exercised during the year
Forfeited during the year
Outstanding at 31 December
Exercisable at 31 December
2009
Number of
options
Weighted average
exercise price
(pence)
13,040,430
4,040,555
–
(2,779,237)
14,301,748
8,638,542
670.01
104.50
–
689.48
506.46
694.19
No options were exercised during 2009. The options outstanding under the HBOS Share Option Plan and St James’s Place Share Option Plan at
31 December 2009 had exercise prices in the range of £1.05 to £17.576 and a weighted average remaining contractual life of 1.4 years.
The options outstanding under the Bank of Scotland Executive Stock Option schemes at 31 December 2009 had exercise prices in the range of
£8.834 to £10.009 and a weighted average remaining contractual life of 0.8 years.
OTHER SHARE PLANS
Lloyds TSB Long-Term Incentive Plan
The Long-Term Incentive Plan (‘LTIP’) introduced in 2006 is aimed at delivering shareholder value by linking the receipt of shares to an improvement
in the performance of the Group over a three year period. Awards are made within limits set by the rules of the plan, with the limits determining the
maximum number of shares that can be awarded equating to three times annual salary. In exceptional circumstances this may increase to four times
annual salary.
212
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
50 SHARE BASED PAYMENTS continued
The performance conditions for awards made in May and August 2006 are as follows:
(i)
(ii)
For 50 per cent of the award (the ‘EPS Award’) – the percentage increase in earnings per share of the Group (on a compound annualised basis)
over the relevant period must be at least an average of 6 percentage points per annum greater than the percentage increase (if any) in the Retail
Price Index over the same period. If it is less than 3 per cent per annum the EPS Award will lapse. If the increase is more than 3 per cent but less
than 6 per cent per annum then the proportion of shares released will be on a straight line basis between 17.5 per cent and 100 per cent. The
relevant period commenced on 1 January 2006 and ended on 31 December 2008.
For the other 50 per cent of the award (the ‘TSR Award’) – it will be necessary for the Group’s total shareholder return (calculated by reference to
both dividends and growth in share price) to exceed the median of a comparator group (14 companies) over the relevant period by an average
of 7.5 per cent per annum for the TSR Award to vest in full. 17.5 per cent of the TSR Award will vest where the Group’s total shareholder return is
equal to median and vesting will occur on a straight line basis in between these points. Where the Group’s total shareholder return is below the
median of the comparator group, the TSR Award will lapse. The relevant period commenced on 1 January 2006 and ended on 31 December 2008.
When tested at the end of the relevant performance period, neither the EPS nor the TSR performance conditions were met and all awards made in
2006 lapsed.
The performance conditions for awards made in March and August 2007 are as follows:
(i)
(ii)
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.
For the other 50 per cent of the award (the ‘TSR Award’) – the performance condition is as described for May 2006 with the relevant performance
period commencing on 8 March 2007 (the date of the first award) and ending on 7 March 2010.
The performance conditions for awards made in March, April, August and September 2008 are as follows:
(i)
(ii)
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 2008 and ending on 31 December 2010.
For the other 50 per cent of the award (the TSR Award) – the performance condition is as described for May 2006, except that the comparator
group comprises of 13 companies, with the relevant performance period commencing on 6 March 2008 (the date of the first award) and ending
on 5 March 2011.
The current LTIP rules allow for awards to be made of up to 400 per cent of base salary. Under normal circumstances awards are made of 300 per cent
of salary with the additional 100 per cent available for circumstances that the remuneration committee deems to be exceptional. In 2008, awards were
made of 375 per cent of base salary to the chief executive and two of the executive directors for retention purposes, and in light of data reviewed by
the committee which showed total remuneration to be behind median both for the FTSE 20, and the other major UK banks.
The performance conditions for awards made in April, May and September 2009 are as follows:
(i)
(ii)
EPS: The release of 50 per cent of the shares will be dependent on the extent to which the growth in EPS achieves cumulative EPS targets over
the three-year period.
Economic profit: The release of the remaining 50 per cent of shares will be dependent on the extent to which Lloyds Banking Group achieves
cumulative economic profit targets over a three-year period.
The EPS and economic profi t performance measures applying to this 2009 LTIP award were set on the basis that the Group would enter into the
Government Asset Protection Scheme (GAPS). Now that the Group is not participating in GAPS, the Remuneration Committee has determined that
these performance measures be restated on a basis consistent with the EPS and economic profi t measures used for the 2010 LTIP awards.
In addition in 2009 an additional discretionary award was made in April, May and September 2009. The performance conditions for those awards are
as follows:
(i)
(ii)
Synergy savings: The release of 50 per cent of the shares will be dependent on the achievement of target run-rate synergy savings in 2009 and
2010 as well as the achievement of sustainable synergy savings of at least £1.5 billion by the end of 2011. The award will be broken down into
three equally weighted annual tranches. Performance will be assessed at the end of each year against annual performance targets based on
a trajectory to meet the 2011 target. The extent to which targets have been achieved will determine the proportion of shares to be banked
each year. Any release of shares will be subject to the remuneration committee judging the overall success of the delivery of the integration
programme.
Integration balanced scorecard: The release of the remaining 50 per cent of the shares will be dependent on the outcome of a Balanced Scorecard
of non-financial measures of the success of the integration in each of 2009, 2010 and 2011. The Balanced scorecard element will be broken down
into three equally weighted tranches. The tranches will be crystallised and banked for each year of the performance cycle subject to separate
annual performance targets across the four measurement categories of Building the Business, Customer, Risk and People and Organisation
Development.
Performance against the first year of the award has been assessed and all targets have been met or exceeded.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
50 SHARE BASED PAYMENTS continued
Outstanding at 1 January
Granted
Rebasement adjustment
Forfeited
Outstanding at 31 December
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
213
Lloyds Banking Group
Annual Report and Accounts 2009
2009
Number of shares
2008
Number of shares
22,237,282
13,209,081
199,293,192
10,519,609
10,443,102
–
(8,740,524)
(1,491,408)
223,233,052
22,237,282
The fair value of the share awards granted in 2009 was £0.68 (2008: £2.28).
Conditional awards of shares made under this plan were adjusted on 2 July 2009 as a result of the placing and compensatory open offer. The
adjustment was made using a standard HMRC formula, to negate the dilutionary impact of the capital raising event.
Performance share plan
Under the performance share plan, introduced during 2005, participating executives will be eligible for an award of free shares, known as
performance shares, to match the bonus shares awarded as part of their 2004 and 2005 bonus. The maximum match was two performance shares for
each bonus share, awarded at the end of a three year period. The actual number of shares awarded was dependent on the Group’s total shareholder
return performance measured over a three year period, compared to other companies in the comparator group. The maximum of two performance
shares for each bonus share was awarded only if the Group’s total shareholder return performance placed it fi rst in the comparator group; one
performance share for each bonus share was granted if the Group was placed fi fth; and one performance share for every two bonus shares if the
Group was placed eighth (median). Between fi rst and fi fth position, and fi fth and eighth position, sliding scales would apply. If the total shareholder
return performance was below median, no performance shares were awarded. There was no retest. Whilst income tax and national insurance was
deducted from the bonus before deferral into the plan, where a match of performance shares was justifi ed, these shares were awarded as if income
tax and national insurance had not been deducted.
The performance condition attached to the March 2006 award was not met, with Lloyds Banking Group ranked in ninth place. Bonus shares were
released on 20 March 2009, at which time the performance shares lapsed.
Outstanding at 1 January
Forfeited
Lapsed
Released
Outstanding at 31 December
2009
Number of shares
2008
Number of shares
941,324
1,767,594
–
(941,324)
–
–
(74,691)
(375,790)
(375,789)
941,324
The weighted average share price at the date the shares were released during 2008 was £4.4613.
The ranges of exercise prices, weighted average exercise prices, weighted average remaining contractual life and number of options outstanding for
the option schemes were as follows:
Executive schemes
SAYE schemes
Other share option plans
Weighted
average
Weighted
average
exercise price remaining life
(years)
(pence)
Number of
options
Weighted
average
Weighted
average
exercise price remaining life
(years)
(pence)
Number of
options
Weighted
average
Weighted
average
exercise price remaining life
(years)
(pence)
Number of
options
31 December 2009
Exercise price range
£0 to £1
£1 to £2
£2 to £3
£3 to £4
£4 to £5
£5 to £6
£6 to £7
£7 to £8
–
–
–
–
464.19
552.02
653.55
–
–
–
–
–
–
–
–
–
4.9 7,526,441
0.2
1.2
–
515,527
743,010
–
–
139.00
220.98
349.18
427.04
–
–
–
–
–
Nil
3.1 26,099,185
2.5 107,939,699
104.50
2.3
4,019,026
3.9
2.0
1.8
–
–
–
18,054,765
2,842,644
1,296,884
–
–
–
–
394.64
499.91
573.60
640.00
707.40
–
5.2
0.2
0.6
0.0
0.2
–
721,886
273,986
53,328
2,388,026
6,845,496
214
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
50 SHARE BASED PAYMENTS continued
Executive schemes
SAYE schemes
Other share option plans
Weighted
average
Weighted
average
exercise price remaining life
(years)
(pence)
31 December 2008
£0 to £1
£1 to £2
£2 to £3
£3 to £4
£4 to £5
£5 to £6
£6 to £7
£7 to £8
£8 to £9
–
–
–
–
453.77
551.25
652.30
–
863.63
–
–
–
–
5.9
1.2
2.1
–
0.3
Number of
options
–
–
–
–
9,132,197
741,905
997,326
–
332,200
Weighted
average
Weighted
average
exercise price remaining life
(years)
(pence)
Weighted
average
Weighted
average
exercise price remaining life
(years)
(pence)
Number of
options
Number of
options
–
139.00
284.00
344.75
423.49
588.50
–
–
–
–
3.5
0.4
1.9
2.0
0.3
–
–
–
–
Nil
2.5
857,611
178,932,603
941,414
7,366,320
3,200,532
37,580
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
The fair value calculations at 31 December 2009 for grants made in the year are based on the following assumptions:
Risk-free interest rate
Expected life
Expected volatility
Expected dividend yield
Weighted average share price
Weighted average exercise price
Expected forfeitures
SAYE
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Other option
schemes
2.01%
Other share
plans
2.23%
2.6 years
3.0 years
90%
1.7%
£0.71
Nil
4%
84%
1.8%
£0.71
Nil
4%
Expected volatility is a measure of the amount by which the Group’s shares are expected to fl uctuate during the life of an option. The expected
volatility is estimated based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the
expected life of the option. The historical volatility is compared to the implied volatility generated from market traded options in the Group’s shares
to assess the reasonableness of the historical volatility and adjustments made where appropriate.
SHARE INCENTIVE PLAN
Free shares
An award of shares may be made annually to employees based on a percentage of each employee’s salary in the preceding year up to a maximum
of £3,000. The percentage is normally announced concurrently with the Group’s annual results and the price of the shares awarded is announced at
the time of award. The shares awarded are held in trust for a mandatory period of three years on the employee’s behalf. The award is subject to a
non-market based condition: if an employee leaves the Group within this three year period for other than a ‘good’ reason, all of the shares awarded
will be forfeited.
No free shares were awarded in 2009 (2008: 8,862,823 shares, with an average fair value of £4.38 based on the market price at the date of award).
Matching shares
The Group undertakes to match shares purchased by employees up to the value of £30 per month; these shares are held in trust for a mandatory
period of three years on the employees’ behalf. The award is subject to a non-market based condition: if an employee leaves within this three year
period for other than a ‘good’ reason, 100 per cent of the matching shares are forfeited. Similarly if the employees sell their purchased shares within
three years, their matching shares are forfeited.
The number of shares awarded relating to matching shares in 2009 was 16,746,310 (2008: 4,475,264), with an average fair value of £0.69 (2008: £2.56),
based on market prices at the date of award.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
215
Lloyds Banking Group
Annual Report and Accounts 2009
51 RELATED PARTY TRANSACTIONS
KEY MANAGEMENT PERSONNEL
Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of an entity;
the Group’s key management personnel are the members of Lloyds Banking Group plc group executive committee together with its non-executive
directors.
The table below details, on an aggregated basis, key management personnel compensation:
Compensation
Salaries and other short-term benefi ts
Post-employment benefi ts
Share based payments
2009
£m
17
1
–
18
2008
£m
8
1
4
13
Aggregate contributions in respect of key management personnel to defi ned contribution pension schemes were £0.4 million (2008: £0.2 million).
Share options
At 1 January
Granted (exercised/lapsed) (including options of former directors)
At 31 December
Share incentive plans
At 1 January
Granted (including entitlements of appointed directors)
Exercised/lapsed (including entitlements of former directors)
At 31 December
2009
million
2
–
2
2009
million
7
17
(5)
19
2008
million
7
(5)
2
2008
million
6
3
(2)
7
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:
Loans
At 1 January
Advanced (including loans of appointed directors)
Repayments (including loans of former directors)
At 31 December
2009
£m
2008
£m
3
–
(1)
2
2
2
(1)
3
The loans are on both a secured and unsecured basis and are expected to be settled in cash. The loans attracted interest rates of between
1.28 per cent and 24.90 per cent in 2009 (2008: 2.14 per cent and 34.01 per cent).
No provisions have been recognised in respect of loans given to key management personnel (2008: £nil).
216
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
51 RELATED PARTY TRANSACTIONS continued
Deposits
At 1 January
Placed (including deposits of appointed directors)
Withdrawn (including deposits of former directors)
At 31 December
2009
£m
6
12
(14)
4
2008
£m
5
27
(26)
6
Deposits placed by key management personnel attracted interest rates of up to 6.5 per cent (2008: 6.0 per cent).
At 31 December 2009, the Group did not provide any guarantees in respect of key management personnel (2008: none).
At 31 December 2009, transactions, arrangements and agreements entered into by the Group’s banking subsidiaries with directors and connected
persons included amounts outstanding in respect of loans and credit card transactions of £2 million with seven directors and four connected persons
(2008: £3 million with eight directors and six connected persons).
SUBSIDIARIES
Details of the principal subsidiaries are given in note 9 to the parent company fi nancial statements. In accordance with IAS 27, transactions and
balances with subsidiaries have been eliminated on consolidation.
On 16 January 2009, the Company acquired 100 per cent of the ordinary share capital of HBOS plc. From this date, HBOS plc and its subsidiaries
became controlled entities. In accordance with IAS 27, transactions and balances with subsidiaries have been eliminated on consolidation.
HM TREASURY
On 13 January 2009, HM Treasury subscribed for approximately 2,597 million shares in the Company which gave it a 30.2 per cent interest in the
Company’s ordinary share capital and consequently HM Treasury became a related party of the Company from this date. On 16 January 2009, the
Company acquired HBOS plc in an all share acquisition which, together with the shares subscribed for on 13 January 2009, gave HM Treasury a
43.4 per cent interest in the Company’s ordinary share capital. The material transactions entered into with HM Treasury from 13 January 2009 are
described below:
Capital transactions
On 15 January 2009, the Company issued £1,000 million 12 per cent non-cumulative fi xed to fl oating rate preference shares to HM Treasury.
In addition, £3,000 million non-cumulative 12 per cent fi xed to fl oating rate preference shares were issued by the Company to HM Treasury on
16 January 2009 in exchange for the £3,000 million non-cumulative 12 per cent fi xed to fl oating rate preference shares which had been issued
by HBOS plc to HM Treasury on 15 January 2009.
In June 2009 the Company issued 10,408 million new ordinary shares as part of a placing and compensatory open offer; HM Treasury subscribed for
approximately 4,521 million of these new ordinary shares at a price of 38.43 pence per share. As placees were procured for all the new ordinary shares
for which valid acceptances were not received under the placing and compensatory open offer, HM Treasury’s shareholding remained at 43.4 per
cent. The Company used the proceeds from this placing and compensatory open offer to redeem the £4,000 million preference shares issued by the
Company to HM Treasury described above at 101 per cent of their issue price (in accordance with the terms agreed with HM Treasury) together with
accrued dividends thereon.
In December 2009 the Company issued 36,505 million new ordinary shares in respect of a rights issue as part of an alternative to the Group’s
proposed participation in GAPS (together with a liability management exercise). The Company entered into an Undertaking to Subscribe agreement
with HM Treasury whereby HM Treasury undertook, amongst other things, to take up its rights to subscribe for all of the new shares to which it was
entitled under the rights issue. HM Treasury subscribed for approximately 15,854 million new shares at a price of 37 pence per share. As subscribers
were procured for all the new ordinary shares for which valid acceptances were not received under the rights issue, HM Treasury’s shareholding
remained at 43.4 per cent. In addition, the Group paid HM Treasury a commission payment of approximately £132 million in consideration, inter alia,
of HM Treasury’s pre-launch commitment to participate in full in respect of its entitlements under the rights issue.
Material related party agreements in connection with capital transactions
In connection with the placing and compensatory open offer, an Open Offer Agreement dated 7 March 2009 was entered into between the
Company and HM Treasury (as amended and restated, amongst other things, to include certain other parties) pursuant to which, amongst other
things, HM Treasury agreed that, to the extent not placed or taken up under the compensatory open offer and subject to the terms and conditions
set out in the Open Offer Agreement, HM Treasury would subscribe for the open offer shares itself at the issue price. In consideration of the provision
of its services under the Open Offer Agreement, the Company agreed to pay to HM Treasury (i) a commission of 0.5 per cent of the aggregate value
of the open offer shares at the issue price; and (ii) a further commission of 1 per cent of the aggregate value of the open offer shares subscribed for
by HM Treasury or by placees (including HM Treasury) at the issue price.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
217
Lloyds Banking Group
Annual Report and Accounts 2009
51 RELATED PARTY TRANSACTIONS continued
The Company also agreed to (i) pay to each of HM Treasury, the joint sponsors and joint bookrunners all legal and other costs and expenses, and
those of HM Treasury’s fi nancial advisors incurred in connection with the placing and compensatory open offer, the redemption of the preference
shares or any arrangements referred to in the 2009 Open Offer Agreement; and (ii) bear all costs and expenses relating to the placing and
compensatory open offer and the preference share redemption. The costs and commissions incurred by the joint bookrunners in connection with
the rump placing were deducted from the aggregate proceeds of the rump placing. The Company also gave certain representations and warranties
and indemnities to each of HM Treasury, the joint sponsors and joint bookrunners under the 2009 Open Offer Agreement. The Company’s liabilities
thereunder are unlimited as to time and amount. HM Treasury is entitled to novate its rights under the agreement to any entity that is wholly-owned,
directly or indirectly, by HM Treasury.
Pursuant to its obligations to HM Treasury under the 2009 Open Offer Agreement, the Company entered into a Resale Rights Agreement with
HM Treasury with effect from 11 June 2009, in which it agreed to provide its assistance to HM Treasury in connection with any proposed sale
by HM Treasury of ordinary shares and other securities held by HM Treasury in the Company from time to time and of any securities caused by
HM Treasury to be issued by any person which are exchangeable for, convertible into, give rights over or are referable to such ordinary shares
or other securities issued by the Group, to be sold in such jurisdictions (other than the United States) and in such manner as HM Treasury may
determine. Such assistance may include the provision by the Company of assistance with due diligence and the preparation of marketing and such
other documentation (including any offering memorandum, whether or not a prospectus) as HM Treasury may reasonably request.
Pursuant to its obligations under the open offer agreement entered into by the Company with effect from 13 October 2008, the Company entered
into a Registration Rights Agreement with HM Treasury on 12 January 2009, granting customary demand and ‘piggyback’ registration rights in the
United States under the United States Securities Act of 1933, as amended, to HM Treasury with respect to any ordinary shares of the Group held by
HM Treasury.
Government Asset Protection Scheme
The Company entered into a Pre-Accession Deed dated 7 March 2009 and a Lending Commitments Deed dated 6 March 2009 with HM Treasury
both relating to the Company’s proposed participation in GAPS. Under the Lending Commitments Deed, the Company agreed to support lending
to creditworthy borrowers in the UK in a commercial manner with effect from 1 March 2009 and agreed to increase lending by £14,000 million in
the 12 months commencing 1 March 2009 to support UK businesses (£11,000 million) and homeowners (£3,000 million) and to maintain similar
levels of lending in the 12 months commencing 1 March 2010, subject to adjustment to refl ect circumstances at the start of the 12 month period
commencing 1 March 2010. This additional lending is expressed to be subject to the Group’s prevailing terms and conditions (including pricing and
risk assessment) and, in relation to mortgage lending, the Group’s standard credit and other acceptance criteria.
Pursuant to the successful rights issue, the Company withdrew from its proposed participation in GAPS and on 3 November 2009, the Company
entered into a GAPS Withdrawal Deed with HM Treasury pursuant to which, among other matters, the Company agreed that the Group would pay
HM Treasury an amount of £2,500 million in recognition of the benefi ts to the Group’s trading operations arising as a result of HM Treasury proposing
to make GAPS available to the Group.
The GAPS Withdrawal Deed contained certain undertakings given by the Group to HM Treasury in connection with the state aid approval obtained
from the European Commission and its withdrawal from GAPS. In particular, the Group is required to do all acts and things necessary to ensure the
UK Government’s compliance with its obligations under the European Commission decision approving state aid to the Group. The Company also
reaffi rmed its lending commitments described above. In addition, the Company’s obligations under the Pre-Accession Deed referred to above (other
than its commitment to inform the UK Government of certain deleveraging activities) was terminated pursuant to the GAPS Withdrawal Deed.
On 2 November 2009, the Group entered into a Cost Reimbursement Deed with HM Treasury under which the Group has agreed to pay for the
UK Government’s set-up costs relating to the proposed participation in GAPS and the UK Government’s costs associated with the European Union’s
approval of state aid to the Group.
Credit Guarantee Scheme
HM Treasury launched the Credit Guarantee Scheme in October 2008 as part of a range of measures announced by the UK Government intended to
ease the turbulence in the UK banking system. It charges a commercial fee for the guarantee of new short and medium-term debt issuance. The fee
payable to HM Treasury on guaranteed issues is based on a per annum rate of 50 basis points plus the median fi ve-year Credit Default Swap spread.
At 31 December 2009, the Group had £49,070 million of debt issued under the CGS. During the year, fees of £498 million payable to HM Treasury in
respect of guaranteed funding were included in the Group’s income statement.
There were no other material transactions between the Group and HM Treasury during the period between 13 January 2009 and 31 December 2009
that were not made in the ordinary course of business or that are unusual in their nature or conditions.
218
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
51 RELATED PARTY TRANSACTIONS continued
OTHER RELATED PARTY TRANSACTIONS
Pensions funds
At 31 December 2009, customer deposits of £99 million (2008: £23 million) and investment and insurance contract liabilities of £691 million (2008: £nil)
related to the Group’s pension funds.
OEICs
The Group manages 382 (2008: 105) Open Ended Investment Companies (OEICs), and of these 108 (2008: 47) are consolidated. The Group
invested £1,271 million (2008: £455 million) and redeemed £1,076 million (2008: £343 million) in the unconsolidated OEICs during the year and had
investments, at fair value, of £6,954 million (2008: £2,661 million) at 31 December. The Group earned fees of £217 million from the unconsolidated
OEICs (2008: £206 million). The Company held no investments in OEICs at any time during 2008 or 2009.
Joint ventures and associates
In the year ended 31 December 2009, the Group provided both administration and processing services to its principal joint venture, Sainsbury’s
Bank plc. The amounts receivable by the Group during the year were £34 million (2008: £nil), of which £10 million was outstanding at 31 December
2009 (2008: £nil). At 31 December 2009, Sainsbury’s Bank plc also had balances with the Group that were included in loans and advances to banks of
£1,218 million (2008: £nil) and deposits by banks of £1,405 million (2008: £nil).
At 31 December 2009 there were loans and advances to customers of £12,235 million (2008: £nil) outstanding and balances within customer deposits
of £254 million (2008: £nil) relating to other joint ventures and associates.
In addition to the above balances, the Group has a number of other associates held by its venture capital business that it accounts for at fair value
through profi t or loss. At 31 December 2009, these companies had total assets of approximately £14,840 million (2008: £5,838 million), total liabilities
of approximately £15,300 million (2008: £5,780 million) and for the year ended 31 December 2009 had turnover of approximately £10,570 million
(2008: £2,088 million) and made a net loss of approximately £572 million (2008: net loss of £80 million). In addition, the Group has provided
£6,014 million (2008: £825 million) of fi nancing to these companies on which it received £191 million (2008: £46 million) of interest income in the year.
52 CONTINGENT LIABILITIES AND COMMITMENTS
PAYMENT PROTECTION INSURANCE
In January 2009, the UK Competition Commission (the ‘Competition Commission’) completed its formal investigation into the supply of Payment
Protection Insurance (PPI) services (except store card PPI) to non-business customers in the UK and published its fi nal report setting out its remedies.
Prior to this the Group had made the commercial decision to sell only regular monthly premium PPI to its personal loan customers. The Competition
Commission decided to adopt various remedies including a prohibition on the active sale of PPI by a distributor to a customer within seven days of
the distributor’s sale of credit to that customer.
On 30 March 2009, Barclays Bank plc lodged an appeal in the UK Competition Appeal Tribunal (the ‘Competition Appeal Tribunal’) against the
Competition Commission’s fi ndings. Lloyds Banking Group was granted permission by the Competition Appeal Tribunal to intervene in the
appeal. The Competition Appeal Tribunal handed down its judgment on 16 October 2009 fi nding in favour of Barclays in respect of its challenge
to the Competition Commission’s prohibition of distributors selling PPI at the credit point of sale but it did not uphold Barclays’ challenge to the
Competition Commission’s fi ndings on market defi nition. The matter has now been referred back to the Competition Commission. This may or may
not result in the Competition Commission ultimately reaching a different conclusion.
On 1 July 2008 the Financial Ombudsman Service referred concerns regarding the handling of PPI complaints to the FSA as an issue of wider
implication. The Group has been working with other industry members and trade associations in preparing an industry response to address
regulatory concerns regarding the handling of PPI complaints. On 29 September 2009, the FSA issued a consultation paper on PPI complaints
handling. The FSA has escalated its regulatory activity in relation to past PPI sales generally and has proposed new guidance on the fair assessment
of a complaint and the calculation of redress and a new rule requiring fi rms to reassess historically rejected complaints.
The statement on 29 September 2009 also announced that several fi rms had agreed to carry out reviews of past sales of single premium loan
protection insurance. The Group has subsequently agreed in principle that it will undertake a review in relation to sales of single premium loan
protection insurance made through its branch network since 1 July 2007. The precise details of the review are still being discussed with the FSA. The
ultimate impact on the Group of any review and/or reassessment can only be known at the conclusion of these discussions and on publication of the
FSA’s fi nal rules.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
219
Lloyds Banking Group
Annual Report and Accounts 2009
52 CONTINGENT LIABILITIES AND COMMITMENTS continued
US ECONOMIC SANCTIONS
Starting in 2007 Lloyds TSB Bank plc provided information in relation to its review of historic US Dollar payments involving countries, persons or
entities subject to US economic sanctions administered by the Offi ce of Foreign Assets Control (OFAC) to a number of authorities reported to be
conducting a review of sanctions compliance by non-US fi nancial institutions. On 9 January 2009 the settlement reached by Lloyds TSB Bank plc
with both the US Department of Justice and the New York County District Attorney’s Offi ce in relation to their investigations was announced. The
settlement documentation contains details of the results of the investigations including the identifi cation of certain activities relating to Iran, Sudan
and Libya which Lloyds TSB Bank plc conducted during the relevant period. In 2008, Lloyds TSB Bank plc made a provision of £180 million which fully
covered the settlement amount paid to the Department of Justice and the New York County District Attorney’s Offi ce. On 22 December 2009 OFAC
announced the settlement it had reached with Lloyds TSB Bank plc in relation to its investigation and confi rmed that the settlement sum due to
OFAC had been fully satisfi ed by Lloyds TSB Bank plc’s payment to the Department of Justice and the New York County District Attorney’s Offi ce. No
further enforcement actions are expected in relation to the matters set out in the settlement agreements. A purported shareholder fi led a derivative
civil action in the Supreme Court of New York, Nassau County on 26 February 2009 against certain current and former directors, and nominally
against the Lloyds TSB Bank plc and Lloyds Banking Group, seeking various forms of relief following the settlement. The derivative action is at a very
early stage but the ultimate outcome of the action is not expected to have a material impact on the Group.
INTERCHANGE FEES
The European Commission has adopted a formal decision fi nding that an infringement of European Commission competition laws has arisen
from arrangements whereby MasterCard issuers charged a uniform fallback interchange fee in respect of cross-border transactions in relation to
the use of a MasterCard or Maestro branded payment card. The European Commission has required that the fee be reduced to zero for relevant
cross-border transactions within the European Economic Area. This decision has been appealed to the General Court of the European Union (the
‘General Court’). Bank of Scotland plc and Lloyds TSB Bank plc (along with certain other MasterCard issuers) have successfully applied to intervene
in the appeal in support of MasterCard’s position that the arrangements for the charging of a uniform fallback interchange fee are compatible
with European Commission competition laws. Meanwhile, the European Commission and the UK’s OFT are pursuing investigations with a view to
deciding whether arrangements adopted by other payment card schemes for the levying of uniform fallback interchange fees in respect of domestic
and/or cross-border payment transactions also infringe European Commission and/or UK competition laws. As part of this initiative the OFT will also
intervene in the General Court appeal supporting the European Commission’s position. The ultimate impact of the investigations on the Group can
only be known at the conclusion of these investigations and any relevant appeal proceedings.
UNARRANGED OVERDRAFT CHARGES
The Supreme Court published its judgment in respect of the fairness of unarranged overdraft charges on personal current accounts on 25 November
2009, fi nding in favour of the litigant banks. On 22 December 2009, the OFT announced that it will not continue its investigation into the fairness of
these charges. The Group is working with the regulators to ensure that outstanding customer complaints are concluded as quickly as possible and
anticipate that most cases in the county courts will be discontinued. The Group expects that some customers will argue that despite the test case
ruling they are entitled to a refund of unarranged overdraft charges on the basis of other legal arguments or challenges. The Group would robustly
defend any such complaints or claims and does not expect the outcome of any such complaints or claims to have a material adverse effect on its
fi nancial position.
OTHER LEGAL PROCEEDINGS
In addition , during the ordinary course of business the Group is subject to threatened or actual legal proceedings both in the UK and overseas. All
such material cases are periodically reassessed, with the assistance of external professional advisors where appropriate, to determine the likelihood
of the Group incurring a liability. In those instances where it is concluded that it is more likely than not that a payment will be made, a provision is
established to management’s best estimate of the amount required to settle the obligation at the relevant balance sheet date. In some cases it
will not be possible to form a view, either because the facts are unclear or because further time is needed to properly assess the merits of the case
and no provisions are held against such cases. However the Group does not currently expect the fi nal outcome of any such case to have a material
adverse effect on its fi nancial position.
CONTINGENT LIABILITIES AND COMMITMENTS ARISING FROM THE BANKING BUSINESS
Acceptances and endorsements arise where Lloyds Banking Group agrees to guarantee payment on a negotiable instrument drawn up by
a customer.
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 benefi ciary 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 specifi c title to an identifi able underlying shipment of goods.
Performance bonds and other transaction-related contingencies (which include bid or tender bonds, advance payment guarantees, VAT Customs
& Excise bonds and standby letters of credit relating to a particular contract or non-fi nancial transaction) are undertakings where the requirement to
make payment under the guarantee depends on the outcome of a future event.
Lloyds Banking Group’s maximum exposure to loss is represented by the contractual nominal amount detailed in the table below. Consideration
has not been taken of any possible recoveries from customers for payments made in respect of such guarantees under recourse provisions or from
collateral held.
220
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
52 CONTINGENT LIABILITIES AND COMMITMENTS continued
Contingent liabilities
Acceptances and endorsements
Other:
Other items serving as direct credit substitutes
Performance bonds and other transaction-related contingencies
2009
£m
59
1,494
4,555
6,049
6,108
2008
£m
49
1,870
2,850
4,720
4,769
The contingent liabilities of the Group, as detailed above, arise in the normal course of its banking business and it is not practicable to quantify their
future fi nancial effect.
Commitments
Documentary credits and other short-term trade-related transactions
Forward asset purchases and forward deposits placed
Undrawn formal standby facilities, credit lines and other commitments to lend:
Less than 1 year original maturity:
Mortgage offers made
Other commitments
1 year or over original maturity
2009
£m
288
758
9,058
64,786
73,844
53,693
128,583
2008
£m
319
613
3,056
46,006
49,062
31,761
81,755
Of the amounts shown above in respect of undrawn formal standby facilities, credit lines and other commitments to lend, £74,477 million
(2008: £46,890 million) was irrevocable.
OPERATING LEASE COMMITMENTS
Where a Group company is the lessee the future minimum lease payments under non-cancellable premises operating leases are as follows:
Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
2009
£m
392
1,213
1,817
3,422
2008
£m
216
647
774
1,637
Operating lease payments represent rental payable by the Group for certain of its properties. Some of these operating lease arrangements have
renewal options and rent escalation clauses, although the effect of these is not material. No arrangements have been entered into for contingent
rental payments.
CAPITAL COMMITMENTS
Excluding commitments in respect of investment property (note 26), capital expenditure contracted but not provided for at 31 December 2009
amounted to £203 million (2008: £92 million). Of this amount, £198 million (2008: £85 million) related to assets to be leased to customers under
operating leases. The Group’s management is confi dent that future net revenues and funding will be suffi cient to cover these commitments.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
221
Lloyds Banking Group
Annual Report and Accounts 2009
53 FINANCIAL INSTRUMENTS
(1) MEASUREMENT BASIS OF FINANCIAL ASSETS AND LIABILITIES
The accounting policies in note 2 describe how different classes of fi nancial instruments are measured, and how income and expenses, including fair
value gains and losses, are recognised. The following table analyses the carrying amounts of the fi nancial assets and liabilities by category and by
balance sheet heading.
Derivatives
designated
as hedging
instruments
£m
At fair value
through profi t or loss
Held for
trading
£m
Designated
upon initial
recognition
£m
Available-
for-sale
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
As at 31 December 2009
Financial assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other fi nancial assets at fair value
through profi t or loss
Derivative fi nancial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale fi nancial assets
Total fi nancial assets
Financial liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
Trading and other fi nancial liabilities at fair value
through profi t or loss
Derivative fi nancial instruments
Debt securities in issue
Liabilities arising from insurance contracts and
participating investment contracts
Liabilities arising from non-participating investment
contracts
Unallocated surplus within insurance businesses
Subordinated liabilities
Total fi nancial liabilities
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38,994
1,579
150,011
49,928
35,361
626,969
32,652
694,982
46,602
982,096
82,452
406,741
1,037
28,271
40,485
233,502
–
–
–
–
–
–
–
27,245
122,766
9,430
40,498
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
35,361
626,969
32,652
694,982
46,602
–
38,994
1,579
–
–
–
–
–
–
–
9,430
67,743
122,766
46,602
694,982
40,573
82,452
406,741
1,037
–
–
233,502
–
–
–
–
–
–
–
–
–
–
22,111
6,160
8,687
31,798
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8,687
53,909
6,160
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
76,179
76,179
46,348
46,348
1,082
1,082
34,727
–
34,727
758,459
123,609
950,824
222
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
53 FINANCIAL INSTRUMENTS continued
As at 31 December 2008
Financial assets
Cash and balances at central banks
Items in the course of collection from banks
Trading and other fi nancial assets at fair value
through profi t or loss
Derivative fi nancial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale fi nancial assets
Total fi nancial assets
Financial liabilities
Deposits from banks
Customer deposits
Items in course of transmission to banks
Trading and other fi nancial liabilities at fair value
through profi t or loss
Derivative fi nancial instruments
Debt securities in issue
Liabilities arising from insurance contracts and
participating investment contracts
Liabilities arising from non-participating
investment contracts
Unallocated surplus within insurance businesses
Subordinated liabilities
Total fi nancial liabilities
Derivatives
designated
as hedging
instruments
£m
At fair value
through profi t or loss
Held for
trading
£m
Designated
upon initial
recognition
£m
Available-
for-sale
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
Insurance
contracts
£m
Total
£m
5,008
946
45,064
28,884
38,733
240,344
4,416
283,493
55,707
419,102
66,514
170,938
508
6,754
26,892
75,710
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
857
44,207
435
28,449
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
38,733
240,344
4,416
283,493
55,707
–
5,008
946
–
–
–
–
–
–
–
435
29,306
44,207
55,707
283,493
5,954
–
–
–
–
–
–
–
6
–
–
–
6,748
4,169
22,723
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
4,169
22,729
6,748
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
66,514
170,938
508
–
–
75,710
–
–
–
17,256
33,792
33,792
14,243
14,243
270
–
270
17,256
330,926
48,305
412,877
(2) RECLASSIFICATION OF FINANCIAL ASSETS
In accordance with the amendment to IAS39 that became applicable during 2008, the Group reviewed the categorisation of its fi nancial assets
classifi ed as held for trading and available-for-sale.
On the basis that there was no longer an active market for some of those assets, which are therefore more appropriately managed as loans, with
effect from 1 July 2008, the Group transferred £2,993 million of assets previously classifi ed as held for trading into loans and receivables. With effect
from 1 November 2008, the Group transferred £437 million of assets previously classifi ed as available-for-sale into loans and receivables. At the time
of these transfers, the Group had the intention and ability to hold them for the foreseeable future or until maturity. As at the date of reclassifi cation,
the weighted average effective interest rate of the assets transferred was 6.3 per cent with the estimated recoverable cash fl ows of £3,524 million.
No assets have been reclassifi ed in 2009.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
223
Lloyds Banking Group
Annual Report and Accounts 2009
53 FINANCIAL INSTRUMENTS continued
Carrying amount and fair values of reclassifi ed assets
The table below sets out the carrying value and fair value of reclassifi ed fi nancial assets.
From held for trading to loans and receivables
From available-for-sale fi nancial assets to loans and receivables
31 December 2009
31 December 2008
Carrying
value
£m
1,833
394
2,227
Fair
value
£m
1,822
422
2,244
Carrying
value
£m
2,883
454
3,337
Fair
value
£m
2,926
402
3,328
During the year ended 31 December 2009, the carrying value of reclassifi ed assets decreased by £1,110 million due to sales and maturities of
£990 million, accretion of discount of £61 million and foreign exchange and other movements of £181 million.
Additional fair value gains/(losses) that would have been recognised had the reclassifi cations not occurred
The table below shows the additional gains/(losses) that would have been recognised in the Group’s income statement if the reclassifi cations had
not occurred.
From held for trading to loans and receivables
2009
Reclassifi ed in
2009
£m
Reclassifi ed in
2008
£m
–
208
2008
Reclassifi ed in
2008
£m
(347)
Total
£m
208
Total
£m
(347)
The table below shows the additional gains/(losses) that would have been recognised in other comprehensive income if the reclassifi cations had not
occurred.
From available-for-sale fi nancial assets to loans and receivables
–
161
2009
Reclassifi ed in
2009
£m
Reclassifi ed in
2008
£m
2008
Reclassifi ed in
2008
£m
(108)
Total
£m
161
Actual amounts recognised in respect of reclassifi ed assets
After reclassifi cation the reclassifi ed fi nancial assets contributed the following amounts to the Group income statement.
From held for trading to loans and receivables:
Net interest income
Impairment losses
From available-for-sale fi nancial assets to loans and receivables:
Net interest income
Impairment losses
2009
Reclassifi ed in
2009
£m
Reclassifi ed in
2008
£m
–
–
–
55
(49)
6
2009
Reclassifi ed in
2009
£m
Reclassifi ed in
2008
£m
–
–
–
34
(56)
(22)
2008
Reclassifi ed in
2008
£m
31
(158)
(127)
2008
Reclassifi ed in
2008
£m
3
(23)
(20)
Total
£m
55
(49)
6
Total
£m
34
(56)
(22)
Total
£m
(108)
Total
£m
31
(158)
(127)
Total
£m
3
(23)
(20)
224
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
53 FINANCIAL INSTRUMENTS continued
(3) FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The following table summarises the carrying values of fi nancial assets and liabilities presented on the Group’s balance sheet. The fair values
presented in the table are at a specifi c date and may be signifi cantly different from the amounts which will actually be paid or received on the
maturity or settlement date.
Financial assets
Trading and other fi nancial assets at fair value through profi t or loss
Derivative fi nancial instruments
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Available-for-sale fi nancial assets
Financial liabilities
Deposits from banks
Customer deposits
Trading and other fi nancial liabilities at fair value through profi t or loss
Derivative fi nancial instruments
Debt securities in issue
Liabilities arising from non-participating investment contracts
Financial guarantees
Subordinated liabilities
Carrying value
2009
£m
Carrying value
2008
£m
150,011
49,928
35,361
626,969
32,652
46,602
82,452
406,741
28,271
40,485
233,502
46,348
38
34,727
45,064
28,884
38,733
240,344
4,416
55,707
66,514
170,938
6,754
26,892
75,710
14,243
35
17,256
Fair value
2009
£m
150,011
49,928
35,335
609,647
31,907
46,602
82,366
406,555
28,271
40,485
235,170
46,348
38
33,660
Fair value
2008
£m
45,064
28,884
37,954
235,569
3,931
55,707
66,504
171,119
6,754
26,892
76,291
14,243
35
11,199
VALUATION METHODOLOGY
Financial instruments include fi nancial assets, fi nancial liabilities and derivatives. The fair value of a fi nancial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
Wherever possible, fair values have been calculated using unadjusted quoted market prices in active markets for identical instruments held by the
Group. Where quoted market prices are not available, or are unreliable because of poor liquidity, fair values have been determined using valuation
techniques which, to the extent possible, use market observable inputs, but in some cases use non-market observable inputs. Valuation techniques
used include discounted cash fl ow analysis and pricing models and, where appropriate, comparison to instruments with characteristics similar to
those of the instruments held by the Group.
Because a variety of estimation techniques are employed and signifi cant estimates made, comparisons of fair values between fi nancial institutions
may not be meaningful. Readers of these fi nancial statements are thus advised to use caution when using this data to evaluate the Group’s
fi nancial position.
Fair value information is not provided for items that do not meet the defi nition of a fi nancial instrument. These items include intangible assets, such
as the value of the Group’s branch network, the long-term relationships with depositors and credit card relationships; premises and equipment; and
shareholders’ equity. These items are material and accordingly the Group believes that the fair value information presented does not represent the
underlying value of the Group.
FAIR VALUE OF FINANCIAL INSTRUMENTS CARRIED AT AMORTISED COST
Loans and receivables
The Group provides loans and advances to commercial, corporate and personal customers at both fi xed and variable rates. The carrying value of
the variable rate loans and those relating to lease fi nancing is assumed to be their fair value. For fi xed rate lending, several different techniques are
used to estimate fair value, as considered appropriate. For commercial and personal customers, fair value is principally estimated by discounting
anticipated cash fl ows (including interest at contractual rates) at market rates for similar loans offered by the Group and other fi nancial institutions.
The fair value for corporate loans is estimated by discounting anticipated cash fl ows at a rate which refl ects the effects of interest rate changes,
adjusted for changes in credit risk. Certain loans secured on residential properties are made at a fi xed rate for a limited period, typically two to fi ve
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 fi xed interest rate period. The fair values of asset-backed securities and secondary loans, which were
previously within assets held for trading and were reclassifi ed to loans and receivables (see page 222), 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.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
225
Lloyds Banking Group
Annual Report and Accounts 2009
53 FINANCIAL INSTRUMENTS continued
Deposits from banks and customer deposits
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 fl ows applying either market rates, where applicable, or current rates for deposits of similar remaining maturities.
Debt securities in issue and subordinated liabilities
The fair value of short-term debt securities in issue is approximately equal to their carrying value. Fair value for other debt securities and for
subordinated liabilities is estimated using quoted market prices.
VALUATION OF FINANCIAL INSTRUMENTS CARRIED AT FAIR VALUE
The table below provides an analysis of the fi nancial assets and liabilities of the Group that are carried at fair value in the Group’s consolidated
balance sheet, grouped into levels 1 to 3 based on the degree to which the fair value is observable.
Valuation hierarchy
At 31 December 2009
Trading and other fi nancial assets at fair value through profi t or loss
Available-for-sale fi nancial assets
Derivative fi nancial instruments
Financial assets
Trading and other fi nancial liabilities at fair value through profi t or loss
Derivative fi nancial instruments
Financial guarantees
Financial liabilities
There were no signifi cant transfers between level 1 and level 2 during the year.
Trading and other fi nancial assets at fair value through profi t or loss
Available-for-sale fi nancial assets
Derivative fi nancial instruments
Financial assets
Trading and other fi nancial liabilities at fair value through profi t or loss
Derivative fi nancial instruments
Financial guarantees
Financial liabilities
Level 1
£m
103,853
12,881
977
Level 2
£m
43,246
31,110
47,014
117,711
121,370
27,760
40,222
–
67,982
Level 3
£m
2,912
2,611
1,937
7,460
–
197
38
235
At 31 December 2008
Level 2
£m
5,373
22,362
26,601
54,336
6,748
26,161
–
32,909
Level 3
£m
1,672
3,161
136
4,969
–
578
35
613
511
66
–
577
Level 1
£m
38,019
30,184
2,147
70,350
6
153
–
159
Total
£m
150,011
46,602
49,928
246,541
28,271
40,485
38
68,794
Total
£m
45,064
55,707
28,884
129,655
6,754
26,892
35
33,681
The valuations of fi nancial instruments have been classifi ed into three levels according to the quality and reliability of information used to determine
the fair values.
Level 1 portfolios
level 1 fair value measurements are those derived from unadjusted quoted prices in active markets for identical assets or liabilities. Products classifi ed
as level 1 predominantly comprise treasury bills and other government securities.
Level 2 portfolios
level 2 valuations are those where quoted market prices are not available, for example where the instrument is traded in a market that is not
considered to be active or valuation techniques are used to determine fair value and where these techniques use inputs that are based signifi cantly
on observable market data, the instrument is considered to be level 2. Examples of such fi nancial instruments include most over-the-counter
derivatives, fi nancial institution issued securities, certifi cates of deposit and certain asset-backed securities.
Level 3 portfolios
level 3 portfolios are those where at least one input which could have a signifi cant effect on the instrument’s valuation is not based on observable
market data. Such instruments would include the Group’s venture capital and unlisted equity investments which are valued using various valuation
techniques that require signifi cant management judgement in determining appropriate assumptions, including earnings multiples and estimated
future cash fl ows. Certain of the Group’s asset-backed securities and derivatives, principally where there is no trading activity in such securities, are
also classifi ed as level 3.
226
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
53 FINANCIAL INSTRUMENTS continued
At 31 December 2009
Valuation basis/technique
Main assumptions
Effect of
reasonably
possible
alternative
assumptions
£m
Carrying value
£m
Trading and other fi nancial assets at
fair value through profi t or loss
Asset-backed securities
Venture capital investments
Equity investments
Lead manager or broker quote/
consensus pricing from market
data provider
Various valuation techniques
using IPEV Guidelines
Various valuation techniques
Use of single pricing source
970
Earnings multiples
Earnings, net asset value,
underlying asset values, property
prices, forecast cash fl ows
Unlisted equities and property partnerships
in the life funds
Third party valuations
n/a
Available-for-sale fi nancial assets
Asset-backed securities
Equity investments
Derivative fi nancial instruments
Financial assets
Derivative fi nancial liabilities
Financial guarantees
Financial liabilities
Lead manager or broker quote/
consensus pricing from market
data provider
Various valuation techniques
Use of single pricing source
Earnings, net asset value,
underlying asset values, property
prices, forecast cash fl ows
Industry standard model /
consensus pricing from market
data provider
Prepayment rates, probability of
default, loss given default and
yield curves. Equity conversion
feature spread
Industry standard model /
consensus pricing from market
data provider
Prepayment rates, probability of
default, loss given default and
yield curves
74
n/a
n/a
n/a
10
n/a
96
8
n/a
1,162
234
546
2,912
744
1,867
2,611
1,937
7,460
197
38
235
Reasonably possible alternative valuations have been calculated for asset-backed securities by using alternative pricing sources and calculating an
absolute difference. In respect of derivative fi nancial instruments, reasonably possible alternative valuations have been calculated by fl exing the
spread between the underlying asset and the credit derivative, or adjusting market yields, by a reasonable amount.
The valuation techniques used for unlisted equities and venture capital investments vary depending on the nature of the investment. Further details
of these are given below. Third party valuers have been used to determine the value of unlisted equities and property partnerships included in the
Group’s life insurance funds. As these factors differ for each investment depending on the nature of the valuation technique used and the inputs
there is no single common factor that could be adjusted to provide a reasonable alternative valuation for these investments portfolios.
The main products where level 3 valuations have been used are described below:
Asset-backed securities
Where there is no trading activity in asset-backed securities, valuation models, consensus pricing information from third party pricing services and
broker or lead manager quotes are used to determine an appropriate valuation. Asset-backed securities are then classifi ed as either level 2 or level
3 depending on whether there is more than one consistent independent source of data. If there is a single, uncorroborated market source for a
signifi cant valuation input or where there are materially inconsistent levels then the valuation is reported as level 3. Asset classes classifi ed as level 3
mainly comprise certain Residential Mortgage-Backed Securities, Collateralised Loan Obligations and Collateralised Debt Obligations.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
227
Lloyds Banking Group
Annual Report and Accounts 2009
53 FINANCIAL INSTRUMENTS continued
Venture capital investments
The investments in venture capital activities comprise interests in funds and unlisted equity investments that are valued using techniques that are
considered appropriate for that investment. Interests in funds are valued in the same manner as investments in the life funds below.
Valuations of unlisted venture capital equities that are accounted for as trading and other fi nancial assets at fair value through profi t or loss are
calculated using International Private Equity and Venture Capital Guidelines. The majority of investments are valued using the industry standard
earnings model. This involves applying the relevant earnings multiple to the maintainable earnings of the business being valued. A number of
earnings multiples are used in valuing the portfolio including price earnings, earnings before interest and tax and earnings before interest, tax,
depreciation and amortisation. The particular multiple selected being appropriate for the type of business being valued and is derived by reference
to the current market-based multiple. Consideration is given to the risk attributes, growth prospects and fi nancial gearing of comparable businesses
when selecting an appropriate multiple. Recent transactions involving the sale of similar businesses may sometimes be used as a frame of reference
in deriving an appropriate multiple. Another valuation technique involved, although rarely, is the discounting of projected cash fl ows at the
appropriate cost of capital.
Equity investments
Unlisted equities and funds accounted for as available-for-sale assets are valued using different techniques as a result of the variety of investments
across the portfolio. A valuation technique is selected for each investment in accordance with the Group’s valuation policy. Depending on the
business sector and the circumstances of the investment unlisted equity valuations are based on earnings multiples, net asset values or discounted
cash fl ows.
– The earnings multiple methodology is described in the section on venture capital investments above.
– Valuations using net asset values are often used for property-based businesses and use the latest valuations included in management or statutory
accounts adjusted for subsequent movements in property valuations and other factors including recoverability.
– Discounted cash fl ow valuations use estimated future cash fl ows, usually based on management forecasts, with the application of appropriate exit
yields or terminal multiples and discounted using rates appropriate to the specifi c investment, business sector or recent economic rates of return.
For fund investments the most recent capital account value calculated by the fund manager is used as the basis for the valuation and adjusted, if
necessary, to align valuation techniques with the Group’s valuation policy.
Unquoted equities and property partnerships in the life funds
Third party valuations are used to obtain the fair value of unquoted investments. Management take account of any pertinent information, such as
recent transactions and information received on particular investments, to adjust the third party valuations where necessary.
Derivatives
Where the Group’s derivative assets and liabilities are not traded on an exchange, they are valued using valuation techniques, including discounted
cash fl ow and options pricing models, as appropriate. The types of derivatives classifi ed as level 2 and the valuation techniques used include:
– Interest rate swaps are valued using discounted cash fl ow models; the most signifi cant inputs into those models are interest rate yield curves which
are developed from publicly quoted rates.
– Foreign exchange derivatives that do not contain options are priced using rates available from publicly quoted sources.
– Credit derivatives, except for the items classifi ed as level 3, are valued using publicly available yield and credit default swap (CDS) curves; the Group
uses standard models with observable inputs.
– Less complex interest rate and foreign exchange option products are valued using volatility surfaces developed from publicly available interest
rate cap, interest rate swaption and other option volatilities; option volatility skew information is derived from a market standard consensus pricing
service. For more complex option products, the Group calibrates its models using observable at-the-money data; where necessary, the Group
adjusts for out-of-the-money positions using a market standard consensus pricing service.
Where credit protection, usually in the form of credit default swaps, has been purchased or written on asset-backed securities, the security is referred
to as a negative basis ABS and the resulting derivative assets or liabilities have been classifi ed as either level 2 or level 3 according to the classifi cation
of the underlying ABS.
The Group’s level 3 derivatives include £1,797 million in respect of the value of the embedded equity conversion feature of the enhanced capital
notes issued in December 2009. Level 3 derivatives also include £140 million of credit default swaps written on level 3 negative basis ABS and
£197 million of embedded derivatives included in investments of synthetic CDOs. The embedded equity conversion feature is valued by comparing
the market price of the ECNs with the market price of similar bonds without the conversion feature. The latter is calculated by discounting the
expected ECN cash fl ows in the absence of a conversion using prevailing market yields for similar capital securities without the conversion feature.
The market price of the ECNs was calculated with reference to multiple broker quotes. Movements in the fair value of the derivative are recorded in
net trading income.
228
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
53 FINANCIAL INSTRUMENTS continued
CREDIT VALUATION ADJUSTMENT
A Credit Valuation Adjustment (CVA) is applied to the Group’s over-the-counter corporate derivative exposures to adjust the counterparty credit
risk-free derivative valuations provided by standard interbank lending interest rate curves. The Group uses a simulation model to develop expected
future exposures and calculate a pricing reserve based on the relative credit spread of the counterparty compared to the Group. At 31 December
2009 the CVA balance was £663 million (31 December 2008 £203 million). This adjustment has been made to the valuation of over-the-counter
derivative instruments classifi ed as level 2.
Observable CDS spreads and recovery rates are used to develop the probability of default for quoted clients. Observable sector CDS curves and
recovery rates are used for unquoted clients. The Loss Given Default (LGD) is based on observable recovery rates and internal credit assessments.
The combination of a one notch deterioration in credit rating of derivative counterparties and a 10 per cent increase in LGD increases the CVA
charge by £181 million. Current market value is used to estimate the projected exposure for products not supported by the model. For these, CVA is
calculated on an add-on basis (in total contributing 10 per cent of the overall CVA balance at 31 December 2009). A separate reserve of £43 million
is held against features not supported by the current CVA model including rate/credit and wrong-way risk (where exposure to the counterparty
is adversely correlated with the credit quality of the counterparty). A separate provision of £25 million is held against pricing risk on collateralised
counterparties.
In addition, credit valuation adjustments have been applied to the Group’s credit derivative exposures with monoline insurance counterparties
leaving a net exposure of £75 million as shown in note 54 on page 239.
MOVEMENTS IN LEVEL 3 PORTFOLIO
The table below analyses movements in the Level 3 fi nancial assets portfolio.
At 31 December 2008
Exchange and other adjustments
Acquired on acquisition
Gains (losses) recognised in the income statement
Gains (losses) recognised in other comprehensive income
Purchases
Sales
Transfers into the Level 3 portfolio
Transfers out of the Level 3 portfolio
At 31 December 2009
Trading and other fi nancial
assets at fair value through
profi t or loss
£m
1,672
(232)
3,386
(114)
–
374
(465)
33
(1,742)
2,912
Available-
for-sale
£m
3,161
(205)
2,291
(452)
191
422
(671)
48
(2,174)
2,611
Derivative
assets
£m
Total fi nancial
assets
£m
136
74
569
(1,005)
–
2,224
(61)
–
–
1,937
4,969
(363)
6,246
(1,571)
191
3,020
(1,197)
81
(3,916)
7,460
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
229
Lloyds Banking Group
Annual Report and Accounts 2009
53 FINANCIAL INSTRUMENTS continued
The table below analyses movements in the Level 3 fi nancial liabilities portfolio.
At 31 December 2008
Exchange and other adjustments
Acquired on acquisition
Gains recognised in the income statement
Additions
Redemptions
Transfers out of the Level 3 portfolio
At 31 December 2009
Derivative
liabilities
£m
578
(179)
1,102
(47)
–
(474)
(783)
197
Financial
guarantees
£m
Total fi nancial
liabilities
£m
35
–
–
–
3
–
–
38
613
(179)
1,102
(47)
3
(474)
(783)
235
Transfers out of the Level 3 portfolio arise when inputs that could have a signifi cant impact on the instrument’s valuation become market observable
after previously having been non-market observable. In the case of asset-backed securities this can arise if more than one consistent independent
source of data becomes available. Conversely transfers into the portfolio arise when consistent sources of data cease to be available.
Included within the gains (losses) recognised in the income statement are losses of £1,542 million related to fi nancial instruments that are held in the
Level 3 portfolio at the year end. These amounts are included in other operating income.
54 FINANCIAL RISK MANAGEMENT
As a bancassurer, fi nancial instruments are fundamental to the Group’s activities and, as a consequence, the risks associated with fi nancial instruments
represent a signifi cant component of the risks faced by the Group.
The primary risks affecting the Group through its use of fi nancial instruments are: credit risk; market risk, which includes interest rate risk and foreign
exchange risk; and liquidity risk. Information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for
measuring and managing risk and the Group’s management of capital can be found on pages 56 to 94. The following additional disclosures, which
provide quantitative information about the risks within fi nancial instruments held or issued by the Group, should be read in conjunction with that
earlier information.
(1) 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 refl ect changes in the Bank of England’s base
rate. There is a relatively small volume of deposits whose rate is contractually fi xed for their term to maturity.
Many banking assets are sensitive to interest rate movements; there is a large volume of managed rate assets such as variable rate mortgages
which may be considered as a natural offset to the interest rate risk arising from the managed rate liabilities. However, a signifi cant proportion of the
Group’s lending assets, for example personal loans and mortgages, bear interest rates which are contractually fi xed for periods of up to fi ve years
or longer.
The Group establishes two types of hedge accounting relationships for interest rate risk: fair value hedges and cash fl ow hedges. The Group is exposed
to fair value interest rate risk on its fi xed rate customer loans, its fi xed rate customer deposits and the majority of its subordinated debt, and to cash fl ow
interest rate risk on its variable rate loans and deposits together with its fl oating rate subordinated debt. The majority of the Group’s hedge accounting
relationships are fair value hedges where interest rate swaps are used to hedge the interest rate risk inherent in the fi xed rate mortgage portfolio.
At 31 December 2009 the aggregate notional principal of interest rate swaps designated as fair value hedges was £80,085 million (2008: £37,243 million)
with a net fair value asset of £3,004 million (2008: liability of £1,231 million) (note 18). The losses on the hedging instruments were £995 million
(2008: losses of £584 million). The gains on the hedged items attributable to the hedged risk were £1,181 million (2008: gains of £426 million).
In addition the Group has cash fl ow hedges which are primarily used to hedge the variability in the cost of funding within the wholesale business.
These cash fl ows are expected to occur over the next six years and the hedge accounting adjustments will be reported in the income statement
as the cash fl ows arise. The notional principal of the interest rate swaps designated as cash fl ow hedges at 31 December 2009 was £222,548 million
(2008: £867 million) with a net fair value liability of £2,536 million (2008: £90 million) (note 18). In 2009, there is no ineffectiveness recognised in the
income statement that arises from cash fl ow hedges (2008: nil). There were no transactions for which cash fl ow hedge accounting had to be ceased in
2009 or 2008 as a result of the highly probable cash fl ows no longer being expected to occur.
230
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
(2) CURRENCY RISK
Foreign exchange exposures comprise those originating in treasury trading activities and structural foreign exchange exposures, which arise from
investment in the Group’s overseas operations.
The corporate and retail businesses incur foreign exchange risk in the course of providing services to their customers. All non-structural foreign
exchange exposures in the non-trading book are transferred to the trading area where they are monitored and controlled. These risks reside in the
authorised trading centres who are allocated exposure limits. The limits are monitored daily by the local centres and reported to the market and
liquidity risk function in London. Associated VaR and the closing, average, maximum and minimum for 2008 and 2009 are disclosed on page 77.
Risk arises from the Group’s investments in its overseas operations. The Group’s structural foreign currency exposure is represented by the net asset
value of the foreign currency equity and subordinated debt investments in its subsidiaries and branches. Gains or losses on structural foreign currency
exposures are taken to reserves.
The Group hedges part of the currency translation risk of the net investment in certain foreign operations using cross currency swaps and borrowings.
At 31 December 2009 the aggregate notional principal of these cross currency swaps was £2,507 million (2008: £6,318 million) with a net fair value
asset of £25 million (2008: liability of £2,413 million) (note 18) and they were designated on an after-tax basis as hedges of net investments in foreign
operations. In 2009, ineffectiveness of £nil before tax and £nil after tax (2008: ineffectiveness of £14 million before tax and £10 million after tax) was
recognised in the income statement arising from net investment hedges.
The Group’s main overseas operations are in the Americas, Asia, Australasia and Europe. Details of the Group’s structural foreign currency exposures,
after net investment hedges, are as follows:
Functional currency of Group operations
Euro:
Gross exposure
Net investment hedge
US dollar:
Gross exposure
Net investment hedge
Swiss franc:
Gross exposure
Net investment hedge
Australian dollar:
Gross exposure
Net investment hedge
Japanese yen:
Gross exposure
Net investment hedge
Other non-sterling
2009
£m
2,764
(2,651)
113
(184)
62
(122)
2,552
(2,467)
85
1,869
(1,832)
37
3,220
(3,207)
13
316
442
2008
£m
133
–
133
(907)
–
(907)
2,784
(2,663)
121
–
–
–
3,667
(3,645)
22
296
(335)
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
231
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
(3) CREDIT RISK
The Group’s credit risk exposure arises predominantly in the United Kingdom, the European Union, Australia and the United States.
The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account
is taken of any collateral held and the maximum exposure to loss is considered to be the balance sheet carrying amount or, for non-derivative
off-balance sheet transactions and fi nancial guarantees, their contractual nominal amounts.
Loans and receivables:
Loans and advances to banks
Loans and advances to customers
Debt securities
Deposit amounts available for offset1
Impairment allowances
Available-for-sale fi nancial assets (excluding equity shares)
Trading and other fi nancial assets at fair value through profi t or loss (excluding equity shares)
Derivative assets, before netting
2009
£m
2008
£m
35,510
641,770
33,082
(13,373)
(15,380)
681,609
44,571
65,861
49,928
38,868
243,803
4,549
(4,837)
(3,727)
278,656
55,666
21,790
28,884
Amounts available for offset under master netting arrangements1
(21,698)
(10,598)
Assets arising from reinsurance contracts held
Financial guarantees
Irrevocable loan commitments and other credit-related contingencies2
Maximum credit risk exposure
Maximum credit risk exposure before offset items
28,230
1,875
18,021
80,585
920,752
955,823
18,286
385
10,382
51,659
436,824
452,259
1
2
Deposit amounts available for offset and amounts available for offset under master netting arrangements do not meet the criteria under IAS 32 to enable loans and advances and derivative assets
respectively to be presented net of these balances in the fi nancial statements.
See note 52 – Contingent liabilities and commitments for further information.
A general description of collateral held in respect of fi nancial instruments is disclosed on page 65.
Loans and advances to banks – the Group may require collateral before entering into a credit commitment with another bank, depending on the
type of the fi nancial product and the counterparty involved, and netting agreements are obtained whenever possible and to the extent that such
agreements are legally enforceable.
Available-for-sale debt securities, treasury and other bills, and trading and other fi nancial assets at fair value through profi t or loss – the credit
quality of the Group’s available-for-sale debt securities, treasury and other bills, and the majority of the Group’s trading and other fi nancial assets at
fair value through profi t or loss held is set out below. An analysis of trading and other fi nancial assets at fair value through profi t or loss is included in
note 17 and a similar analysis for available-for-sale fi nancial assets is included in note 25. The Group’s non-participating investment contracts are all
unit-linked. Trading and other fi nancial assets at fair value through profi t or loss which back those investment contracts were £118,573 million (2008:
£39,899 million). Movements in the fair value of such assets, including movements arising from credit risk, are borne by the contract holders.
Derivative assets – the Group reduces exposure to credit risk by using master netting agreements and by obtaining cash collateral. An analysis of
derivative assets is given in note 18. Of the net derivative assets of £28,230 million (31 December 2008: £18,286 million), cash collateral of £6,645 million
(31 December 2008: £2,970 million) was held and a further £13,004 million was due from OECD banks (31 December 2008: £5,840 million).
Assets arising from reinsurance contracts held – of the assets arising from reinsurance contracts held at 31 December 2009 of £1,875 million
(31 December 2008: £385 million), £510 million (31 December 2008: £380 million) were due from insurers with a credit rating of AA or above.
232
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
Financial guarantees – these represent undertakings that the Group will meet a customer’s obligation to third parties if the customer fails to do
so. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit.
The Group is theoretically exposed to loss in an amount equal to the total guarantees or unused commitments, however, the likely amount of loss is
expected to be signifi cantly less; most commitments to extend credit are contingent upon customers maintaining specifi c credit standards.
Reverse repo and repo transactions – for reverse repo transactions which are accounted for as collateralised loans, it is the Group’s policy to seek
collateral which is at least equal to the amount loaned. At 31 December 2009, the fair value of collateral accepted under reverse repo transactions that
the Group is permitted by contract or custom to sell or repledge was £26,732 million (2008: £5,858 million). Of this, £26,732 million (2008: £5,855 million)
was sold or repledged as at 31 December 2009. The fair value of collateral pledged in respect of repo transactions, accounted for as secured
borrowings, where the secured party is permitted by contract or custom to repledge was £38,102 million (31 December 2008: £5,734 million).
Loans and advances
31 December 2009
Neither past due nor impaired
Past due but not impaired
Impaired – no provision required
– provision held
Gross
Allowance for impairment losses
Fair value adjustments
Net
31 December 2008
Neither past due nor impaired
Past due but not impaired
Impaired – no provision required
– provision held
Gross
Allowance for impairment losses
Net
Loans and
advances
to banks
£m
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Wholesale
£m
Loans and
advances
designated
at fair value
through
Total profi t or loss
£m
£m
35,333
347,292
48,429
185,872
581,593
19,082
–
–
153
12,587
2,034
5,918
1,873
449
5,118
6,603
19,578
9,086
5,902
37,927
49,747
–
–
–
35,486
367,831
56,653
235,520
660,004
19,082
(149)
(1,774)
(3,379)
(20,835)
(25,988)
–
–
(7,047)
626,969
19,082
24
35,361
38,716
110,148
33,571
86,707
230,426
608
17
–
135
3,134
479
882
38,868
114,643
(135)
(186)
38,733
114,457
1,146
150
4,327
39,194
(2,345)
36,849
555
1,253
1,451
4,835
1,882
6,660
89,966
243,803
(928)
(3,459)
89,038
240,344
–
–
–
608
–
608
The analysis of lending between retail and wholesale has been prepared based upon the type of exposure and not the business segment in which
the exposure is recorded. Included within retail are exposures to personal customers and small businesses, whilst included within wholesale are
exposures to corporate customers and other large institutions.
The criteria that the Group uses to determine that there is objective evidence of an impairment loss are disclosed in note 3. All impaired loans which
exceed certain thresholds, principally within the Group’s Wholesale division, are individually assessed for impairment by reviewing expected future
cash fl ows including those that could arise from the realisation of security. Included in loans and receivables are advances individually determined
to be impaired with a gross amount before impairment allowances of £44,675 million (31 December 2008: £2,699 million) which have associated
collateral with a fair value of £10,217 million (31 December 2008: £518 million).
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
233
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
Loans and advances which are neither past due nor impaired
31 December 2009
Good quality
Satisfactory quality
Lower quality
Below standard, but not impaired
31 December 2008
Good quality
Satisfactory quality
Lower quality
Below standard, but not impaired
Loans and
advances
to banks
£m
Loans and advances to customers
Retail –
mortgages
£m
Retail –
other
£m
Wholesale
£m
34,434
335,482
135
15
749
9,614
746
1,450
30,743
12,654
1,480
3,552
61,810
59,752
45,986
18,324
Loans and
advances
designated
at fair value
through
Total profi t or loss
£m
£m
18,702
267
90
23
35,333
347,292
48,429
185,872
581,593
19,082
38,283
109,815
21,373
215
204
14
264
–
69
9,192
900
2,106
49,349
31,042
5,831
485
38,716
110,148
33,571
86,707
230,426
129
411
56
12
608
The defi nitions of good quality, satisfactory quality, lower quality and below standard, but not impaired applying to retail and wholesale are not the
same, refl ecting the different characteristics of these exposures and the way they are managed internally, and consequently totals are not provided.
Wholesale lending has been classifi ed using internal probability of default rating models mapped so that they are comparable to external credit
ratings. Good quality lending comprises the lower assessed default probabilities, with other classifi cations refl ecting progressively higher default risk.
Classifi cations of retail lending incorporate expected recovery levels for mortgages, as well as probabilities of default assessed using internal rating
models. Good quality lending includes the lower assessed default probabilities and all loans with low expected losses in the event of default, with
other categories refl ecting progressively higher risks and lower expected recoveries.
234
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
Loans and advances which are past due but not impaired
31 December 2009
0-30 days
30-60 days
60-90 days
90-180 days
Over 180 days
Fair value of collateral held
31 December 2008
0-30 days
30-60 days
60-90 days
90-180 days
Over 180 days
Fair value of collateral held
Loans and
advances
to banks
£m
Retail –
mortgages
£m
–
–
–
–
–
–
–
–
17
–
–
17
6,018
2,649
1,702
2,216
2
12,587
10,845
1,527
633
424
549
1
3,134
2,637
Loans and
advances
designated
at fair value
through
Total profi t or loss
£m
£m
Loans and advances to customers
Retail –
other
£m
1,316
376
74
48
59
Wholesale
£m
2,347
825
825
560
561
9,681
3,850
2,601
2,824
622
1,873
5,118
19,578
n/a
853
259
32
2
–
1,146
n/a
n/a
n/a
289
2,669
90
70
77
29
555
n/a
982
526
628
30
4,835
n/a
–
–
–
–
–
–
–
–
–
–
–
–
A fi nancial asset is ‘past due’ if a counterparty has failed to make a payment when contractually due.
Collateral held against retail mortgage lending is principally comprised of residential properties; their fair value has been estimated based upon
the last actual valuation, adjusted to take into account subsequent movements in house prices, after making allowance for indexation error
and dilapidations. The resulting valuation has been limited to the principal amount of the outstanding advance in order to provide a clearer
representation of the Group’s credit exposure.
Lending decisions are based on an obligor’s ability to repay from normal business operations rather than reliance on the disposal of any security
provided. Collateral values for non-mortgage lending are assessed more rigorously at the time of loan origination or when taking enforcement action
and may fl uctuate, as in the case of fl oating charges, according to the level of assets held by the customer. Whilst collateral is reviewed on a regular
basis in accordance with business unit credit policy, this varies according to the type of lending and collateral involved. It is therefore not practicable
to estimate and aggregate current fair values of collateral for non-mortgage lending.
Renegotiated loans and advances
Loans and advances that were renegotiated during the year and that would otherwise have been past due or impaired at 31 December 2009 totalled
£3,919 million (31 December 2008: £144 million).
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
235
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
Forbearance
Forbearance or repayment arrangements allow a mortgage customer to repay a monthly amount which is lower than their contractual monthly
payment for a short period. This period is usually for no more than 12 months and is negotiated with the customer by the mortgage collectors.
During the period of forbearance, there is no clearing down of arrears such that unless the customer is paying more than their contractual minimum
payment, arrears balances will remain. When customers come to the end of their arrangement period they will continue to be managed as a
mainstream collections case and if unable to recover then will move toward possession.
Customers can have their arrears balance recapitalised once they have demonstrated they can pay the original contractual minimum payment, but
are unable to clear their arrears. This is usually demonstrated by the customer making six consecutive contractual monthly payments. Customers
are not however able to recapitalise more than twice in a fi ve year period. Recapitalised mortgages will return to the non-impaired book and will be
managed in accordance with the recapitalised terms of the mortgage.
Repossessed collateral
Residential property
Other
2009
£m
1,353
701
2,054
2008
£m
221
26
247
In respect of retail portfolios, the Group does not take physical possession of properties or other assets held as collateral and uses external agents to
realise the value as soon as practicable, generally at auction, to settle indebtedness. Any surplus funds are returned to the borrower or are otherwise
dealt with in accordance with appropriate insolvency regulations. In certain circumstances the Group takes physical possession of assets held as
collateral against wholesale lending. In such cases, the assets are carried on the Group’s balance sheet and are classifi ed according to the Group’s
accounting policies.
Loan-to-value ratio of mortgage lending
Analysis by loan-to-value ratio of the Group’s residential mortgage lending which is neither past due nor impaired:
Less than 70 per cent
70 per cent to 80 per cent
80 per cent to 90 per cent
Greater than 90 per cent
2009
£m
142,614
54,079
52,238
98,361
2008
£m
55,040
15,812
15,954
23,342
347,292
110,148
236
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
Debt securities, treasury and other bills – analysis by credit rating:
AAA
£m
AA
£m
A
£m
BBB
£m
Rated BB
or lower
£m
Not rated
£m
Total
£m
As at 31 December 2009
Debt securities held at fair value through profi t or loss
Trading assets:
Government securities
Other public sector securities
Bank and building society certifi cates of deposit
Other asset-backed securities
Corporate and other debt securities
Total held as trading assets
Other assets held at fair value through profi t or loss:
Government securities
Other public sector securities
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total other assets held at fair value through profi t or loss
Total held at fair value through profi t or loss
Available-for-sale fi nancial assets
Debt securities:
Government securities
Other public sector securities
Bank and building society certifi cates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total debt securities
Treasury bills and other bills
2,100
–
–
331
1,025
3,456
16,025
675
316
403
719
4,070
21,489
24,945
8,222
–
22
3,820
6,080
9,900
2,002
20,146
269
806
–
1,037
379
312
2,534
581
16
134
325
459
1,359
2,415
4,949
263
–
499
555
731
1,286
7,342
9,390
2,263
–
6
997
181
1,328
2,512
337
–
45
654
699
4,540
5,576
8,088
35
–
452
215
448
663
8,802
9,952
–
–
–
–
–
348
348
26
–
24
333
357
3,407
3,790
4,138
–
–
22
156
179
335
1,350
1,707
–
Total held as available-for-sale assets
20,415
11,653
9,952
1,707
Debt securities classifi ed as loans and receivables
–
–
–
–
72
72
–
–
–
265
265
1,062
1,327
1,399
–
–
19
35
186
221
228
468
–
468
30
2,936
–
–
–
12
42
56
9
1
19
20
3,133
3,218
3,260
149
31
–
–
16
16
180
376
–
6
2,034
891
3,097
8,964
17,025
700
520
1,999
2,519
17,571
37,815
46,779
8,669
31
1,014
4,781
7,640
12,421
19,904
42,039
2,532
376
44,571
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
9,183
11,824
21,007
–
Total debt securities classifi ed as loans and receivables
21,007
2,470
2,465
4,935
439
5,374
805
1,449
2,254
823
3,077
682
277
959
69
1,028
182
965
1,147
306
1,453
–
13,322
157
157
986
17,137
30,459
2,623
1,143
33,082
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
237
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
Debt securities, treasury and other bills – analysis by credit rating:
As at 31 December 2008
Debt securities held at fair value through profi t or loss
Trading assets:
Government securities
Corporate and other debt securities
Total held as trading assets
Other assets held at fair value through profi t or loss:
Government securities
Other public sector securities
Bank and building society certifi cates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total other assets held at fair value through profi t or loss
Total held at fair value through profi t or loss
Available-for-sale fi nancial assets
Debt securities:
Government securities
Other public sector securities
Bank and building society certifi cates of deposit
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total debt securities
Treasury bills and other bills
Total held as available-for-sale assets
Debt securities classifi ed as loans and receivables
Asset-backed securities:
Mortgage-backed securities
Other asset-backed securities
Corporate and other debt securities
Total debt securities classifi ed as loans and receivables
AAA
£m
AA
£m
A
£m
BBB
£m
Rated BB
or lower
£m
Not rated
£m
Total
£m
38
76
114
7,025
–
96
207
206
413
3,194
10,728
10,842
851
–
–
5,523
7,412
12,935
168
13,954
26,858
40,812
431
73
504
18
522
–
187
187
45
–
337
108
362
470
864
1,716
1,903
–
–
9,418
59
235
294
1,257
10,969
2,351
13,320
6
72
78
1,204
1,282
–
38
38
138
–
–
23
391
414
2,911
3,463
3,501
1
–
166
59
134
193
192
552
–
552
–
162
162
1,663
1,825
–
68
68
1
–
–
16
277
293
2,142
2,436
2,504
–
–
–
18
73
91
–
91
–
91
31
53
84
114
198
–
87
87
–
–
–
–
105
105
599
704
791
–
–
18
41
184
225
–
243
–
243
10
10
20
–
20
–
80
80
117
18
–
15
1
16
1,410
1,561
1,641
16
12
–
–
54
54
566
648
–
648
–
170
170
532
702
38
536
574
7,326
18
433
369
1,342
1,711
11,120
20,608
21,182
868
12
9,602
5,700
8,092
13,792
2,183
26,457
29,209
55,666
478
540
1,018
3,531
4,549
There are no material amounts for debt securities, treasury and other bills which are past due but not impaired.
238
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
CREDIT MARKET EXPOSURES
The Group’s credit market exposures primarily relate to asset-backed securities exposures held in Wholesale division. These exposures are classified
as loans and receivables (note 23), available-for-sale (note 25) and trading and other financial assets at fair value through profit or loss (note 17)
depending on the nature of the investment.
Loans and
receivables Available-for-sale
£m
£m
Trading and other
fi nancial assets at
fair value through
profi t or loss
£m
Net exposure
as at
31 December
2009
£m
Net exposure
as at
31 December
2008
£m
Asset-backed securities
Mortgage-backed securities:
US residential mortgage-backed securities
Non-US residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralised debt obligations:
Corporate
Commercial real estate
Other
Collateralised loan obligation
Personal sector:
Auto loans
Credit cards
Personal loans
Federal family education loan programme student loans
Other asset-backed securities
4,826
6,078
2,561
13,465
86
509
151
4,006
4,752
1,006
2,938
769
4,713
5,938
400
–
3,577
1,176
4,753
–
–
45
1,739
1,784
724
782
230
1,736
3,306
783
Total uncovered asset-backed securities
29,268
12,362
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Negative basis1
Total Wholesale asset-backed securities
Direct
Conduits (note 22)
Total Wholesale asset-backed securities
Other asset-backed securities
Total asset-backed securities
1
Negative basis means bonds held with separate matching credit default swap protection.
–
29,268
19,386
9,882
29,268
1,191
30,459
59
12,421
7,039
5,382
12,421
–
12,421
1,174
1,174
1,174
–
1,174
2,236
3,410
4,826
9,655
3,737
18,218
86
509
196
5,745
6,536
1,730
3,720
999
6,449
9,244
1,183
41,630
1,233
42,863
27,599
15,264
42,863
3,427
46,290
488
4,585
1,328
6,401
–
–
189
2,319
2,508
796
1,126
39
1,961
2,951
1,050
14,871
584
15,455
8,728
6,727
15,455
1,066
16,521
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
239
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
The table below sets out Wholesale division’s net exposure to US RMBS by vintage.
Asset class
Prime
Alt-A
Sub-prime
Pre-2005
£m
274
125
–
399
2005
£m
282
806
–
1,088
2006
£m
196
1,525
–
1,721
Net exposure
as at
31 December
2009
£m
Net exposure
as at
31 December
2008
£m
859
3,967
–
4,826
–
488
–
488
2007
£m
107
1,511
–
1,618
Exposures to Monolines
During the year all exposure to sub-investment grade monolines on CDS contracts was written down to zero, leaving limited exposure to monoline
insurers as set out below.
Investment grade
Sub-investment grade
Credit default swaps
Wrapped loans and receivables
Wrapped bonds
Notional
£m
1,030
–
1,030
Exposure1
£m
Notional
£m
Exposure2
£m
Notional
£m
Exposure3
£m
75
–
75
401
–
401
260
–
260
156
234
390
101
8
109
1
The exposure to monolines arising from credit default swaps is calculated as the mark-to-market of the CDS protection purchased from the monoline after credit valuation adjustments.
2
The exposure to monolines on wrapped loans and receivables and bonds is the internal assessment of amounts that will be recovered from the monoline guarantor on interest and principal shortfalls.
3
In addition, the Group has £2,703 million of monoline wrapped bonds and £791 million of monoline liquidity commitments on which the Group currently places no reliance on the guarantor.
240
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
Credit ratings
An analysis of external credit ratings as at 31 December 2009 of the Wholesale division’s asset-backed securities portfolio by asset class is provided
below. These ratings are based on the lowest of Moody’s, Standard & Poor’s and Fitch.
Net
Exposure
£m
AAA
£m
AA
£m
A
£m
BBB
£m
BB
£m
B
£m
Asset class
Mortgage-backed securities
US residential mortgage-backed securities:
Prime
Alt-A
Sub-prime
Non-US residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralised debt obligations
Corporate
Commercial real estate
Other
Collateralised loan obligation
Personal sector
Auto loans
Credit Cards
Personal loans
Federal family education loan programme
Student loans
Other asset-backed securities
Negative basis1
Monolines
Banks
859
3,967
–
4,826
9,655
3,737
435
2,819
–
3,254
8,742
1,067
18,218
13,063
86
509
196
791
5,745
6,536
1,730
3,720
999
6,449
9,244
1,183
970
263
1,233
24
99
–
123
2,200
2,323
1,430
3,606
789
5,825
9,152
297
376
50
426
Total as at 31 December 2009
Total as at 31 December 2008
42,863
31,086
15,455
13,518
1
The external credit rating is based on the bond ignoring the benefi t of the CDS.
245
729
–
974
862
1,325
3,161
45
158
130
333
2,206
2,539
24
114
56
194
92
1
379
9
388
6,375
436
42
286
–
328
48
476
852
6
159
–
165
963
1,128
74
–
154
228
–
492
215
–
215
16
102
–
118
3
755
876
–
33
–
33
111
144
10
–
–
10
–
246
–
–
–
2,915
131
1,276
260
22
27
–
49
–
58
107
11
45
–
56
239
295
192
–
–
192
–
131
–
–
–
725
–
31
2
–
33
–
–
33
–
15
10
25
18
43
–
–
–
–
–
16
–
–
–
92
–
Below
B
£m
68
2
–
70
–
56
126
–
–
56
56
8
64
–
–
–
–
–
–
–
204
204
394
1,110
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
241
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
(4) LIQUIDITY RISK
The table below analyses assets and liabilities of the Group into relevant maturity groupings based on the remaining contractual period at the
balance sheet date; balances with no fi xed maturity are included in the over 5 years category.
Maturities of assets and liabilities
As at 31 December 2009
Assets
Trading and other fi nancial assets at fair value through profi t or loss
Derivative fi nancial instruments
Loans and advances to banks
Loans and advances to customers
Debt securities held as loans and receivables
Available-for-sale fi nancial assets
Other assets
Liabilities
Deposits from banks
Customer deposits
Derivative fi nancial instruments, trading and other liabilities at fair value
through profi t or loss
Debt securities in issue
Liabilities arising from insurance and investment contracts
Other liabilities
Subordinated liabilities
As at 31 December 2008
Assets
Trading and other fi nancial assets at fair value through profi t or loss
Derivative fi nancial instruments
Loans and advances to banks
Loans and advances to customers
Available-for-sale fi nancial assets
Other assets
Liabilities
Deposits from banks
Customer deposits
Derivative fi nancial instruments, trading and other liabilities at fair value
through profi t or loss
Debt securities in issue
Liabilities arising from insurance and investment contracts
Other liabilities
Subordinated liabilities
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
22,912
15,222
24,641
84,441
92
1,205
44,816
6,047
1,245
2,783
10,517
9,666
100,869
150,011
3,756
4,759
15,611
14,094
1,880
1,298
49,928
35,361
12,623
30,296
126,355
373,254
626,969
143
3,134
448
557
4,149
3,172
19,885
587
385
27,711
19,206
39,496
32,652
46,602
85,732
193,329
26,423
53,644
177,931
575,928 1,027,255
45,877
326,931
15,522
26,637
16,612
18,234
1,106
30,627
3,335
82,452
4,312
406,741
26,494
37,981
57,797
3,674
55
4,655
9,330
36,321
33,475
1,480
502
280
2,975
1,372
754
17,827
75,912
12,151
4,056
8,568
10,450
68,756
49,813
233,502
49,206
123,609
23,757
25,070
33,361
34,727
498,809
85,397
82,752
150,247
165,943
983,148
196
7,366
23,585
39,854
31,204
9,647
216
1,956
4,712
7,254
6,800
590
606
3,362
7,002
15,430
2,076
22
3,059
7,570
5,354
40,987
8,630
105
45,064
28,884
40,758
56,331
123,866
242,735
8,843
249
6,784
12,377
55,707
22,885
111,852
21,528
28,498
81,406
192,749
436,033
49,579
152,065
6,725
24,236
382
5,701
16
13,580
8,449
1,977
26,718
983
404
–
1,399
7,925
3,204
8,636
2,695
552
97
1,956
2,054
11,871
12,783
8,117
186
2,809
238,704
52,111
24,508
39,776
–
445
66,514
170,938
9,869
3,337
36,128
7,122
14,334
71,235
33,646
75,710
48,305
13,965
17,256
426,334
242
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
54 FINANCIAL RISK MANAGEMENT continued
The above tables are provided on a contractual basis. The Group’s assets and liabilities may be repaid or otherwise mature earlier or later than
implied by their contractual terms and readers are, therefore, advised to use caution when using data to evaluate the Group’s liquidity position.
The table below analyses fi nancial instrument liabilities of the Group, excluding those arising from insurance and participating investment contracts,
on an undiscounted future cash fl ow basis according to contractual maturity, into relevant maturity groupings based on the remaining period at the
balance sheet date; balances with no fi xed maturity are included in the over 5 years category.
Up to
1 month
£m
1-3
months
£m
3-12
months
£m
1-5
years
£m
Over 5
years
£m
Total
£m
As at 31 December 2009
Deposits from banks
Customer deposits
Trading and other fi nancial liabilities at fair value through profi t or loss
Debt securities in issue
Liabilities arising from non-participating investment contracts
46,260
305,782
14,592
40,505
46,040
Subordinated liabilities
Total non-derivative fi nancial liabilities
Derivative fi nancial liabilities:
Gross settled derivatives – outfl ows
Gross settled derivatives – infl ows
Gross settled derivatives – net fl ows
Net settled derivatives liabilities
Total derivative fi nancial liabilities
As at 31 December 2008
Deposits from banks
Customer deposits
Trading and other fi nancial liabilities at fair value through profi t or loss
Debt securities in issue
Liabilities arising from non-participating investment contracts
Subordinated liabilities
Total non-derivative fi nancial liabilities
Derivative fi nancial liabilities:
Gross settled derivatives – outfl ows
Gross settled derivatives – infl ows
Gross settled derivatives – net fl ows
Net settled derivative liabilities
Total derivative fi nancial liabilities
15,250
37,691
3,668
19,232
32,848
6,116
1,229
28,229
3,224
892
82,863
4,020
408,570
1,275
28,875
38,431
34,909
117,856
25,863
257,564
4
58
185
186
75
1,004
1,745
15,702
35,737
46,473
54,263
453,254
96,048
94,908
166,425
67,973
878,608
10,707
4,844
8,309
35,793
38,505
98,158
(6,547)
(4,501)
(8,165)
(35,306)
(36,311)
(90,830)
4,160
15,107
19,267
343
2,180
2,523
49,620
13,617
151,164
29,479
24,381
14,243
34
8,258
1,077
26,944
–
130
144
9,395
9,539
1,480
9,675
5,295
9,192
–
563
268,921
50,026
26,205
5,210
(3,136)
2,074
1,824
3,898
284
(33)
251
640
891
4,602
(3,248)
1,354
415
1,769
487
8,721
9,208
1,986
2,303
7,203
13,643
–
5,382
30,517
990
–
990
350
1,340
2,194
1,777
3,971
5
697
3,818
3,489
–
20,516
28,525
1,154
–
1,154
970
2,124
7,328
37,180
44,508
66,708
172,097
46,872
77,649
14,243
26,625
404,194
12,240
(6,417)
5,823
4,199
10,022
Cash fl ows for undated subordinated liabilities whose terms give the Group the option to redeem at a future date are included within the table on
the basis that the Group will exercise its option to redeem.
The principal amount for undated subordinated liabilities with no redemption option is included within the over fi ve years column; interest of
approximately £555 million (2008: £412 million) per annum which is payable in respect of those instruments for as long as they remain in issue is not
included beyond fi ve years.
Further information on the Group’s liquidity exposures is provided on pages 81 to 85.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
243
Lloyds Banking Group
Annual Report and Accounts 2009
54 FINANCIAL RISK MANAGEMENT continued
Liabilities arising from insurance and participating investment contracts are analysed on a behavioural basis, as permitted by IFRS 4, as follows:
As at 31 December 2009
As at 31 December 2008
Up to
1 month
£m
6,263
340
1-3
months
£m
2,303
927
3-12
months
£m
4,796
2,626
1-5
years
£m
Over 5
years
£m
Total
£m
17,890
44,927
76,179
7,030
22,869
33,792
The following tables set out the amounts and residual maturities of Lloyds Banking Group’s off balance sheet contingent liabilities and commitments.
31 December 2009
Acceptances
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Total contingents and commitments
31 December 2008
Acceptances
Other contingent liabilities
Total contingent liabilities
Lending commitments
Other commitments
Total commitments
Total contingents and commitments
55 CONSOLIDATED CASH FLOW STATEMENT
(A) CHANGE IN OPERATING ASSETS
Change in loans and receivables
Change in derivative fi nancial instruments, trading and other fi nancial assets at fair value through profi t or loss
Change in other operating assets
Change in operating assets
Within
1 year
£m
1-3
years
£m
3-5
years
£m
Over 5
years
£m
59
–
–
2,670
1,356
1,144
2,729
1,356
1,144
–
879
879
Total
£m
59
6,049
6,108
82,997
20,497
18,040
6,003
127,537
921
83,918
86,647
Within
1 year
£m
49
1,722
1,771
54,155
572
54,727
56,498
105
20,602
21,958
1-3
years
£m
–
1,525
1,525
15,029
181
15,210
16,735
14
18,054
19,198
3-5
years
£m
–
402
402
8,014
80
8,094
8,496
6
1,046
6,009
128,583
6,888
134,691
Over 5
years
£m
–
1,071
1,071
3,625
99
3,724
4,795
2009
£m
50,935
12,063
(1,056)
61,942
Total
£m
49
4,720
4,769
80,823
932
81,755
86,524
2008
£m
(33,717)
(8,990)
(318)
(43,025)
244
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
55 CONSOLIDATED CASH FLOW STATEMENT continued
(B) CHANGE IN OPERATING LIABILITIES
Change in deposits from banks
Change in customer deposits
Change in debt securities in issue
Change in derivative fi nancial instruments, trading and other liabilities at fair value through profi t or loss
Change in investment contract liabilities
Change in other operating liabilities
Change in operating liabilities
(C) NON-CASH AND OTHER ITEMS
Depreciation and amortisation
Revaluation of investment properties
Allowance for loan losses
Write-off of allowance for loan losses
Impairment of available-for-sale fi nancial assets
Impairment of goodwill
Change in insurance contract liabilities
Other provision movements
Net charge in respect of defi ned benefi t schemes
Contributions to defi ned benefi t schemes
Gain on acquisition
Other non-cash items
Total non-cash items
Interest expense on subordinated liabilities
Other
Total other items
Non-cash and other items
(D) ANALYSIS OF CASH AND CASH EQUIVALENTS AS SHOWN IN THE BALANCE SHEET
Cash and balances with central banks
Less: mandatory reserve deposits2
Loans and advances to banks
Less: amounts with a maturity of three months or more
Total cash and cash equivalents
2009
£m
(71,267)
11,474
(26,578)
(27,037)
5,415
2,066
(105,927)
2009
£m
2,560
214
16,028
(4,090)
602
240
5,986
95
529
(1,867)
(11,173)
(2,806)
6,318
2,550
39
2,589
8,907
2009
£m
38,994
(728)
38,266
35,361
(7,937)
27,424
65,690
2008
£m
25,279
13,088
22,401
22,565
(3,061)
661
80,933
20081
£m
686
1,058
2,876
(1,498)
130
100
(4,555)
7
164
(547)
–
(3,324)
(4,903)
896
(10)
886
(4,017)
2008
£m
5,008
(545)
4,463
40,758
(12,461)
28,297
32,760
1
Restated for IFRS 2 (Revised).
2
Mandatory reserve deposits are held with local central banks in accordance with statutory requirements; these deposits are not available to fi nance the Group’s day-to-day operations.
Included within cash and cash equivalents at 31 December 2009 is £13,323 million (2008: £8,255 million) held within the Group’s life funds, which is not
immediately available for use in the business.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
245
Lloyds Banking Group
Annual Report and Accounts 2009
55 CONSOLIDATED CASH FLOW STATEMENT continued
(E) ANALYSIS OF CHANGES IN FINANCING DURING THE YEAR
Share capital (including share premium account and merger reserve):
At 1 January
Issued on acquisition of HBOS
Transfer to capital redemption reserve
Cash proceeds from issue of share capital:
Private placement
Placing and open offer
Placing and compensatory open offer
Rights issue
Other
At 31 December
Minority interests:
At 1 January
Exchange and other adjustments
Adjustment on acquisition of HBOS
Repayment of capital to minority shareholders and extinguishment of minority interests
Minority share of profi t after tax
Dividends paid to minority shareholders
At 31 December
Subordinated liabilities:
At 1 January
Exchange and other adjustments
Adjustment on acquisition of HBOS
Issue of subordinated liabilities
Repayments of subordinated liabilities
At 31 December
2009
£m
3,952
7,651
(26)
–
4,430
3,905
13,112
41
21,488
33,065
2009
£m
306
(19)
5,567
(5,035)
126
(116)
829
2009
£m
17,256
133
20,048
4,187
(6,897)
34,727
2008
£m
3,073
–
–
760
–
–
–
119
879
3,952
2008
£m
284
28
–
(3)
26
(29)
306
2008
£m
11,958
2,658
–
3,021
(381)
17,256
246
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
55 CONSOLIDATED CASH FLOW STATEMENT continued
(F) ACQUISITION OF GROUP UNDERTAKINGS AND BUSINESSES
Net assets acquired:
Cash and balances at central banks
Derivatives, trading and other fi nancial assets at fair value through profi t or loss
Loans and receivables:
Loans and advances to customers
Loans and advances to banks
Debt securities
Available-for-sale fi nancial assets
Investment properties
Value of in-force business
Intangible assets
Tangible fi xed assets
Other assets
Deposits from banks
Customer deposits
Derivatives, trading and other fi nancial liabilities at fair value through profi t or loss
Debt securities in issue
Insurance liabilities
Liabilities arising from non-participating investment contracts
Other liabilities
Retirement benefi t obligations
Subordinated liabilities
Preference shares
Minority interests
Satisfi ed by:
Issue of shares
Gain on acquisition
Cash and cash equivalents acquired, net of acquisition costs
Net cash infl ow arising from acquisition of HBOS
Acquisition of and additional investment in joint ventures
Net cash infl ow arising from acquisitions in the year
Payments to former members of Scottish Widows Fund and Life Assurance Society acquired during 2000
Net cash infl ow (outfl ow)
(G) DISPOSAL AND CLOSURE OF GROUP UNDERTAKINGS AND BUSINESSES
Intangible assets
Other net assets and liabilities
Net cash infl ow from disposals
2009
£m
2008
£m
2,123
137,889
436,839
15,794
38,408
491,041
27,151
3,002
3,713
4,754
5,707
11,398
(87,840)
(224,694)
(62,158)
(185,319)
(36,687)
(28,181)
(17,316)
(358)
(20,048)
(3,917)
(1,300)
18,960
(7,651)
(11,173)
16,341
(2,483)
16,477
(215)
16,262
(35)
16,227
2009
£m
170
241
411
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(19)
(19)
2008
£m
–
–
–
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
247
Lloyds Banking Group
Annual Report and Accounts 2009
56 FUTURE ACCOUNTING DEVELOPMENTS
The following pronouncements will be relevant to the Group but were not effective at 31 December 2009 and have not been applied in preparing
these fi nancial statements. The full impact of these accounting changes is being assessed by the Group. With the exception of IFRS 9 Financial
Instruments: Classifi cation and Measurement, the initial view is that none of these pronouncements are expected to cause any material adjustments
to reported numbers in the fi nancial statements.
IFRS 9 is the initial stage of a project to replace IAS 39 Financial Instruments: Recognition and Measurement and will fundamentally change the way
in which the Group accounts for fi nancial instruments. Future stages are expected to result in amendments to IFRS 9 to deal with classifi cation and
measurement of fi nancial liabilities, amortised cost and impairment and hedge accounting. Until all stages of the replacement project are complete,
it is not possible to determine the overall impact on the fi nancial statements from the replacement of IAS 39.
Pronouncement
Nature of change
IFRS 3 Business Combinations
IAS 27 Consolidated and Separate
Financial Statements
The revised standard continues to apply the acquisition method to business
combinations, however all payments to purchase a business are to be
recorded at fair value at the acquisition date, some contingent payments
are subsequently remeasured at fair value through income, goodwill may be
calculated based on the parent’s share of net assets or it may include goodwill
related to the minority interest, and all transaction costs are expensed.
Requires the effects of all transactions with non-controlling interests to be
recorded in equity if there is no change in control; any remaining interest
in an investee is re-measured to fair value in determining the gain or loss
recognised in profi t or loss where control over the investee is lost.
IASB effective date
Annual periods beginning
on or after 1 July 2009.
Annual periods beginning
on or after 1 July 2009.
IFRIC 17 Distributions of Non-cash
Assets to Owners
Provides accounting guidance for non-reciprocal distributions of non-cash
assets to owners (and those in which owners may elect to receive a cash
alternative).
Annual periods beginning
on or after 1 July 2009.
Amendment to IAS 39 Financial
Instruments: Recognition and
Measurement – ‘Eligible Hedged
Items’
Clarifi es how the principles underlying hedge accounting should be
applied in particular situations.
Annual periods beginning
on or after 1 July 2009.
Improvements to IFRSs1
(issued April 2009)
Sets out minor amendments to IFRS standards as part of annual
improvements process.
Amendments to IFRS 2
Share-based Payment – ‘Group
Cash-settled Share-based Payment
Transactions’ 1
Clarifi es that an entity that receives goods or services in a share-based payment
arrangement must account for those goods or services no matter which entity in
the group settles the transaction, whether or not settled in shares or cash.
Dealt with on a standard
by standard basis but not
earlier than annual periods
beginning on or after
1 January 2010.
Annual periods beginning
on or after 1 January 2010.
Amendment to IAS 32 Financial
Instruments: Presentation –
‘Classifi cation of Rights Issues’
Requires rights issues denominated in a currency other than the functional
currency of the issuer to be classifi ed as equity regardless of the currency in
which the exercise price is denominated.
Annual periods beginning
on or after 1 February 2010.
IFRIC 19 Extinguishing Financial
Liabilities with Equity Instruments1
Clarifi es that when an entity renegotiates the terms of its debt with the
result that the liability is extinguished by the debtor issuing its own equity
instruments to the creditor, a gain or loss is recognised in profi t or loss
representing the difference between the carrying value of the fi nancial
liability and the fair value of the equity instruments issued; the fair value of
the fi nancial liability is used to measure the gain or loss where the fair value
of the equity instruments cannot be reliably measured.
Annual periods beginning
on or after 1 July 2010.
IAS 24 Related Party Disclosures1
Simplifi es the defi nition of a related party and provides a partial exemption
from the disclosure requirements for government related entities
Annual periods beginning
on or after 1 January 2011.
Amendment to IFRIC 14
Prepayments of a Minimum
Funding Requirement1
IFRS 9 Financial Instruments:
Classifi cation and Measurement1
Applies when an entity is subject to minimum funding requirements and
makes an early payment of contributions to cover those requirements and
permits such an entity to treat the benefi t of such an early payment as an asset.
Annual periods beginning
on or after 1 January 2011.
Replaces those parts of IAS 39 Financial Instruments: Recognition and
Measurement relating to the classifi cation and measurement of fi nancial
assets. Requires fi nancial assets to be classifi ed into two measurement
categories, fair value and amortised cost, on the basis of the objectives of the
entity’s business model for managing its fi nancial assets and the contractual
cash fl ow characteristics of the instrument. The available-for-sale fi nancial
asset and held-to-maturity categories in existing IAS 39 will be eliminated.
Annual periods beginning
on or after 1 January 2013.
1
At the date of this report, these pronouncements are awaiting EU endorsement.
248
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
57 POST BALANCE SHEET EVENTS
As part of the Group’s recapitalisation and exit from the GAPS the Group announced on 27 November 2009 that an aggregate amount of
£1,484 million would be issued in the form of new ordinary shares of Lloyds Banking Group in exchange for certain existing preference shares,
and preferred securities. The conversion price was determined as the fi ve day weighted average price for the fi ve trading days ending on
11 February 2010.
On 18 February 2010, the exchange completed and 3,141 million ordinary shares in Lloyds Banking Group plc were issued as consideration for the
redemption of preference shares and preferred securities. In accordance with the Group’s accounting policy in respect of debt for equity exchanges,
a gain of £85 million was recognised on this exchange transaction.
58 APPROVAL OF FINANCIAL STATEMENTS
The consolidated fi nancial statements were approved by the directors of Lloyds Banking Group plc on 25 February 2010.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
249
Lloyds Banking Group
Annual Report and Accounts 2009
REPORT OF THE INDEPENDENT AUDITORS ON THE
PARENT COMPANY FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT TO THE MEMBERS OF LLOYDS BANKING GROUP PLC
We have audited the parent company fi nancial statements of Lloyds Banking Group plc for the year ended 31 December 2009 which comprises the
parent company balance sheet, the parent company statement of changes in equity, the parent company cash fl ow statement and the related notes.
The fi nancial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards as
adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As explained more fully in the Directors’ Responsibilities Statement on page 99, the directors are responsible for the preparation of the parent
company fi nancial statements and for being satisfi ed that they give a true and fair view. Our responsibility is to audit the parent company fi nancial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with
the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the Company’s members as a body in accordance with Chapter 3 of Part 16 of
the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to
any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
SCOPE OF THE AUDIT OF THE FINANCIAL STATEMENTS
An audit involves obtaining evidence about the amounts and disclosures in the fi nancial statements suffi cient to give reasonable assurance that the
fi nancial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting
policies are appropriate to the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of
signifi cant accounting estimates made by the directors; and the overall presentation of the fi nancial statements.
OPINION ON FINANCIAL STATEMENTS
In our opinion the parent company fi nancial statements:
– give a true and fair view of the state of the Company’s affairs as at 31 December 2009 and of its cash fl ows for the year then ended;
– have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the
Companies Act 2006; and
– have been prepared in accordance with the requirements of the Companies Act 2006.
OPINION ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006
In our opinion:
– the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
– the information given in the Directors’ Report for the fi nancial year for which the parent company fi nancial statements are prepared is consistent
with the parent company fi nancial statements.
MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches
not visited by us; or
– the parent company fi nancial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the
accounting records and returns; or
– certain disclosures of directors’ remuneration specifi ed by law are not made; or
– we have not received all the information and explanations we require for our audit.
OTHER MATTER
We have reported separately on the consolidated fi nancial statements of Lloyds Banking Group plc for the year ended 31 December 2009.
Ian Rankin
Senior Statutory Auditor
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Edinburgh
25 February 2010
(a) The maintenance and integrity of the Lloyds Banking Group plc website is the responsibility of the directors; the work carried out by the auditors
does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred
to the fi nancial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of fi nancial statements may differ from legislation in other
jurisdictions.
250
Lloyds Banking Group
Annual Report and Accounts 2009
PARENT COMPANY BALANCE SHEET
at 31 December 2009
Assets
Non-current assets:
Investment in subsidiaries
Loans to subsidiaries
Deferred tax asset
Current assets:
Derivative fi nancial instruments
Other assets
Amounts due from subsidiaries
Cash and cash equivalents
Current tax recoverable
Total assets
Equity and liabilities
Capital and reserves:
Share capital
Share premium account
Merger reserve
Capital redemption reserve
Retained profi ts
Total equity
Non-current liabilities:
Subordinated liabilities
Current liabilities:
Debt securities in issue
Current tax liabilities
Other liabilities
Total liabilities
Total equity and liabilities
The accompanying notes are an integral part of the parent company financial statements.
The directors approved the parent company fi nancial statements on 25 February 2010.
Sir Winfried Bischoff
Chairman
J Eric Daniels
Group Chief Executive
Tim J W Tookey
Group Finance Director
Note
2009
£ million
2008
£ million
9
9
2
3
4
4
5
5
6
7
8
32,584
7,466
3
40,053
2,260
304
1,446
2,837
72
6,919
46,972
10,472
14,472
7,778
26
2,547
35,295
5,589
3,009
–
8,598
1,297
205
216
1,201
–
2,919
11,517
1,513
2,096
–
–
2,147
5,756
4,205
2,875
326
–
7,146
7,472
11,677
46,972
2,644
116
126
2,886
5,761
11,517
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
251
Lloyds Banking Group
Annual Report and Accounts 2009
PARENT COMPANY STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2009
Balance at 1 January 2008
Total comprehensive income2
Dividends
Private placement of ordinary shares
Purchase/sale of treasury shares
Employee share option schemes:
value of employee services
proceeds from shares issued
Balance at 31 December 2008
Total comprehensive income2
Issue of ordinary shares:
Placing and open offer
Issued on acquisition of HBOS
Placing and compensatory open offer
Rights issue
Issued to Lloyds TSB Foundations
Transfer to merger reserve
Redemption of preference shares
Purchase/sale of treasury shares
Employee share option schemes:
value of employee services
Balance at 31 December 2009
Share capital
and premium
£ million
Merger
reserve
£ million
Capital
redemption
reserve
£ million
2,730
–
–
760
–
–
119
3,609
–
649
1,944
3,905
13,112
41
(1,000)
2,684
–
–
–
–
–
–
–
–
–
–
–
3,781
5,707
–
–
–
1,000
(2,710)
–
–
24,944
7,778
–
–
–
–
–
–
–
–
–
–
–
–
–
–
26
–
–
26
Retained
profi ts1
£ million
1,935
2,209
(2,042)
–
(14)
59
–
2,147
303
–
–
–
–
–
–
–
23
74
Total1
£ million
4,665
2,209
(2,042)
760
(14)
59
119
5,756
303
4,430
7,651
3,905
13,112
41
–
–
23
74
2,547
35,295
1
Restated for IFRS 2 (Revised).
2
Total comprehensive income comprises only the profi t for the year; no income statement has been shown for the parent company, as permitted by section 408 of the Companies Act 2006.
252
Lloyds Banking Group
Annual Report and Accounts 2009
PARENT COMPANY CASH FLOW STATEMENT
Profi t before tax
Dividend income
Fair value and exchange adjustments
Change in other assets
Change in other liabilities and other items
Tax (paid) received
Net cash provided by (used in) operating activities
Cash fl ows from investing activities
Costs incurred in respect of the acquisition of HBOS plc
Additional capital injection into HBOS plc
Additional capital injection into Lloyds TSB Bank plc
Amounts advanced to subsidiaries
Redemption of loans to subsidiaries
Net cash used in investing activities
Cash fl ows from fi nancing activities
Dividends received from subsidiaries
Dividends paid to equity shareholders
Proceeds from issue of debt securities
Repayment of debt securities in issue
Proceeds from issue of subordinated liabilities
Repayment of subordinated liabilities
Proceeds from issue of ordinary shares
Net cash provided by fi nancing activities
Change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
1
Restated for IFRS 2 (Revised).
The accompanying notes are an integral part of the parent company financial statements.
2009
£ million
182
(354)
(428)
(1,277)
7,020
(70)
5,073
(138)
(8,500)
(5,600)
(7,593)
1,552
(20,279)
354
–
–
(2,045)
1,000
(4,000)
21,533
16,842
1,636
1,201
2,837
20081
£ million
2,222
(2,294)
(68)
(166)
89
77
(140)
–
–
–
–
–
–
2,294
(2,042)
1,896
(1,744)
–
–
879
1,283
1,143
58
1,201
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
253
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS
1 ACCOUNTING POLICIES
The parent company has applied International Financial Reporting Standards as adopted by the European Union in its fi nancial statements for the
year ended 31 December 2009. IFRS comprises accounting standards prefi xed IFRS issued by the International Accounting Standards Board and
those prefi xed 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.
The fi nancial information has been prepared under the historical cost convention, as modifi ed by the revaluation of all derivative contracts.
The accounting policies of the parent company are the same as those of the Group which are set out in note 2 to the consolidated fi nancial
statements, except that it has no policy in respect of consolidation and investments in subsidiaries are carried at historical cost, less any provisions for
impairment.
The application of the following IFRS pronouncement which became effective in 2009 has had no material impact on these fi nancial statements:
– Amendment to IAS 27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or
Associate. This amendment removes the defi nition of the cost method and requires the presentation of dividends as income in the separate
fi nancial statements of the investor.
2 DEFERRED TAX ASSET
The movement in the net deferred tax asset is as follows:
At 1 January
Income statement credit (charge)
At 31 December
The deferred tax asset relates to temporary differences.
3 AMOUNTS DUE FROM SUBSIDIARIES
2009
£m
–
3
3
2008
£m
2
(2)
–
These comprise short-term lending to subsidiaries, repayable on demand. The fair values of amounts owed by subsidiaries are equal to their carrying
amounts. No provisions have been recognised in respect of amounts owed by subsidiaries.
4 SHARE CAPITAL AND SHARE PREMIUM
Details of the Company’s share capital and share premium account are as set out in notes 45 and 46 to the consolidated financial statements.
254
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
5 OTHER RESERVES
The merger reserve comprises the premium on shares issued on 13 January 2009 under the placing and open offer and shares issued on 16 January
2009 on the acquisition of HBOS plc.
The capital redemption reserve represents transfers from the merger reserve in accordance with companies’ legislation.
Movements in other reserves were as follows:
Merger reserve
At 1 January
Placing and open offer
Shares issued on acquisition of HBOS
Issue of preference shares1
Redemption of preference shares2
At 31 December
Capital redemption reserve
At 1 January
Redemption of preference shares2
At 31 December
2009
£m
2008
£m
–
3,781
5,707
1,000
(2,710)
7,778
2009
£m
–
26
26
–
–
–
–
–
–
2008
£m
–
–
–
1
2
Distributable reserves of £1,000 million arose on the issue of preference shares in January 2009 which were classifi ed as debt. In June 2009, these preference shares were redeemed out of the
proceeds of the placing and compensatory open offer of ordinary shares and the distributable element of this issue was transferred to the merger reserve.
In December 2009, the Group redeemed eight issues of preference shares in exchange for the issuance of enhanced capital notes. This resulted in a transfer of £26 million from the merger reserve
to the capital redemption reserve and a transfer of £2,684 million from the merger reserve to the share premium account. Details of the preference shares redeemed are set out in note 44 to the
consolidated fi nancial statements.
6 RETAINED PROFITS
At 1 January 2008
Profi t for the year
Dividends
Purchase/sale of treasury shares
Employee share option schemes: value of employee services
At 31 December 2008
Profi t for the year
Purchase/sale of treasury shares
Employee share option schemes: value of employee services
At 31 December 2009
1
Restated for IFRS 2 (Revised).
Details of the Company’s dividends are as set out in note 49 to the consolidated financial statements.
£m1
1,935
2,209
(2,042)
(14)
59
2,147
303
23
74
2,547
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
7 SUBORDINATED LIABILITIES
Preference shares
Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2016 (US$1,000 million)
Fixed/Floating Rate Non-Cumulative Callable Preference Shares callable 2015 (£600 million)
7.875% Non-Cumulative Preference Shares (€500 million)
7.875% Non-Cumulative Preference Shares (US$1,250 million)
9.25% Non-Cumulative Irredeemable Preference Shares (£300 million)
9.75% Non-Cumulative Irredeemable Preference Shares (£100 million)
6.475% Non-Cumulative Preference Shares (£186 million)
6.0884% Non-Cumulative Fixed to Floating Rate Preference Shares (£745 million)
6.3673% Non-Cumulative Fixed to Floating Rate Preference Shares (£335 million)
6.413% preference shares (US$750 million)
5.92% preference shares (US$750 million)
6.657% preference shares (US$750 million)
6% Non-Cumulative Redeemable Preference Shares
Undated subordinated liabilities
6% Undated Subordinated Step-up Guaranteed Bonds callable 2032 (£500 million)
Note
a
a
a
a
a
a
a
a
a
a
a
a
c
b
6.475% Undated Subordinated Notes callable 2024 (£102 million)
6.0884% Undated Subordinated Notes callable 2015 (£732 million)
6.3673% Undated Subordinated Notes callable 2019 (£331 million)
6.369% Undated Subordinated Notes callable 2015 (£597 million)
6.413% Undated Subordinated Notes callable 2035 (US$375 million)
5.92% Undated Subordinated Notes callable 2015 (US$378 million)
6.657% Undated Subordinated Notes callable 2037 (US$316 million)
6.267% Undated Subordinated Notes callable 2016 (US$406 million)
Dated subordinated liabilities
91/8% Subordinated Bonds 2011 (£150 million)
57/8% Subordinated Guaranteed Bonds 2014 (€750 million)
255
Lloyds Banking Group
Annual Report and Accounts 2009
2009
£m
327
–
115
236
216
79
45
10
2
82
167
97
–
2008
£m
824
584
–
–
–
–
–
–
–
–
–
–
–
1,376
1,408
117
72
520
234
420
133
135
112
166
497
–
–
–
–
–
–
–
–
1,909
497
152
768
920
4,205
149
821
970
2,875
These liabilities will, in the event of the winding-up of the issuer, be subordinated to the claims of depositors and all other creditors of the issuer. Any
repayments of subordinated liabilities require the consent of the Financial Services Authority.
a Further information regarding these issues can be found in note 44 to the consolidated fi nancial statements.
b In certain circumstances, these bonds would acquire the characteristics of preference share capital. They are accounted for as liabilities as coupon payments are mandatory as a consequence of
the terms of the 6 per cent non-cumulative redeemable preference shares. At the callable date the coupon on these bonds will be reset by reference to the applicable fi ve year benchmark gilt rate.
Holders of certain preference shares, preferred securities and undated subordinated notes issued by Lloyds Banking Group plc, Lloyds TSB Bank plc, HBOS plc, Bank of Scotland plc and other
Group funding companies were invited to exchange their holdings in these notes under two exchange offers announced on 3 November 2009. Under these exchange offers holders had the option
of exchanging their holdings for enhanced capital notes (the ‘ECNs’) issued by LBG Capital No.1 plc or LBG Capital No.2 plc or, in certain circumstances, new ordinary shares, cash or additional
ECNs. Further information regarding this can be found in the liability management section of note 44 to the consolidated fi nancial statements.
c Since 2004, the Company has had in issue 400 6 per cent non-cumulative preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the
rights to a fi xed rate non-cumulative preferential dividend of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be
maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company. The holder of the 400 25p 6 per cent preference shares has
waived its right to payment for the period from 1 March 2010 to 1 March 2012.
256
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
8 DEBT SECURITIES IN ISSUE
These comprise the US$528 million Thirteen-Month Extendible Short-Term Notes issued by the Company in July 2008.
9 RELATED PARTY TRANSACTIONS
On 13 January 2009 HM Treasury became a related party of the Company. Further information on the relationship and transactions with HM Treasury
are given in note 51 to the consolidated fi nancial statements.
KEY MANAGEMENT PERSONNEL
The key management personnel of the Group and parent company are the same. The relevant disclosures are given in note 51 to the consolidated
fi nancial statements.
The Company has no employees (2008: nil).
As discussed in note 50 to the consolidated fi nancial statements, the Group provides share based compensation to employees through a number of
schemes; these are all in relation to shares in the Company and the cost of providing those benefi ts is recharged to the employing companies in the
Group on a cash basis.
INVESTMENT IN SUBSIDIARIES
On 16 January 2009, the Company acquired 100 per cent of the ordinary share capital of HBOS plc. From this date, HBOS plc and its subsidiaries
became controlled entities.
At 1 January
Investment in HBOS plc:
Acquisition of ordinary share capital
Purchase of preference share capital
Additional capital injections
Capital injection into Lloyds TSB Bank plc
2009
£m
5,589
7,787
3,917
9,691
21,395
5,600
32,584
2008
£m
5,589
–
–
–
–
–
5,589
The principal subsidiaries, all of which have prepared accounts to 31 December and whose results are included in the consolidated accounts of
Lloyds Banking Group plc, are:
Lloyds TSB Bank plc
Scottish Widows plc
HBOS plc
Bank of Scotland plc
HBOS Insurance & Investment Group Limited
St. Andrew’s Insurance plc
Clerical Medical Investment Group Limited
Clerical Medical Managed Funds Limited
1
Indirect interest.
Country of
registration/
incorporation
England
Scotland
Scotland
Scotland
England
England
England
England
Percentage
of equity
share capital
and voting
rights held
100%
100%1
100%
100%
100%1
100%1
100%1
100%1
Nature of business
Banking and fi nancial services
Life assurance
Holding Company
Banking and fi nancial services
Investment holding
General insurance
Life assurance
Life assurance
The principal area of operation for each of the above subsidiaries is the United Kingdom.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
257
Lloyds Banking Group
Annual Report and Accounts 2009
9 RELATED PARTY TRANSACTIONS continued
In November 2009, as part of the restructuring plan that was a requirement for European Commission approval of state aid received by the Group,
Lloyds Banking Group agreed to suspend the payment of coupons and dividends on certain of the Group preference shares and preferred securities
for the two year period from 31 January 2010 to 31 January 2012. The Group has agreed to temporarily suspend and/or waive dividend payments on
certain preference shares which have been issued intra-group. Consequently, in accordance with the terms of some of these instruments, subsidiaries
may be prevented from making dividend payments on ordinary shares during this period. In addition, certain subsidiary companies currently have
insufficient distributable reserves to make dividend payments.
Subject to the foregoing, there were no further significant restrictions on any of the parent company’s subsidiaries in paying dividends or repaying
loans and advances. All regulated banking and insurance subsidiaries are required to maintain capital at levels agreed with the regulators; this may
impact those subsidiaries’ ability to make distributions.
Loans to subsidiaries:
At 1 January
Exchange and other adjustments
Amounts advanced
Redemptions
At 31 December
2009
£m
3,009
(395)
6,404
(1,552)
7,466
2008
£m
2,820
189
–
–
3,009
In addition the parent company carried out banking activities through its subsidiary, Lloyds TSB Bank plc (the Bank). At 31 December 2009, the
parent company held deposits of £2,837 million with the Bank (2008: £1,201 million). Given the volume of transactions flowing through the account,
it is not meaningful to provide gross inflow and outflow information. Included within subordinated liabilities is £1,899 million (2008: £nil) and within
other liabilities is £6,999 million (2008: £nil) due to subsidiary undertakings. In addition, at 31 December 2009 the parent company had interest rate
and currency swaps with the Bank with an aggregate notional principal amount of £11,373 million and a net positive fair value of £2,260 million
(2008: notional principal amount of £4,567 million and a net positive fair value of £1,297 million), of which contracts with an aggregate notional
principal amount of £1,460 million and a net positive fair value of £343 million (2008: notional principal amount of £1,870 million and a net positive fair
value of £501 million) were designated as fair value hedges to manage the Company’s issuance of subordinated liabilities and debt securities in issue.
Related party information in respect of other related party transactions is given in note 51 to the consolidated fi nancial statements.
258
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
10 FINANCIAL INSTRUMENTS
MEASUREMENT BASIS OF FINANCIAL ASSETS AND LIABILITIES
The accounting policies in note 2 to the consolidated financial statements describe how different classes of financial instruments are measured, and
how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial
assets and liabilities by category and by balance sheet heading.
Derivatives designated as
hedging instruments, held
at fair value through
profi t or loss
£m
Held for
trading at fair
value through
profi t or loss
£m
Loans and
receivables
£m
Held at
amortised
cost
£m
As at 31 December 2009
Financial assets:
Cash and cash equivalents
Derivative fi nancial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Total fi nancial assets
Financial liabilities:
Debt securities in issue
Subordinated liabilities
Total fi nancial liabilities
As at 31 December 2008
Financial assets:
Cash and cash equivalents
Derivative fi nancial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Total fi nancial assets
Financial liabilities:
Debt securities in issue
Subordinated liabilities
Total fi nancial liabilities
–
343
–
–
343
–
–
–
–
1,917
–
–
1,917
–
–
–
–
–
7,466
1,446
8,912
–
–
–
Derivatives designated as
hedging instruments, held
at fair value through
profi t or loss
£m
Held for
trading at fair
value through
profi t or loss
£m
Loans and
receivables
£m
–
501
–
–
501
–
–
–
–
796
–
–
796
–
–
–
–
–
3,009
216
3,225
–
–
–
Total
£m
2,837
2,260
7,466
1,446
2,837
–
–
–
2,837
14,009
326
4,205
4,531
Held at
amortised
cost
£m
1,201
–
–
–
1,201
2,644
2,875
5,519
326
4,205
4,531
Total
£m
1,201
1,297
3,009
216
5,723
2,644
2,875
5,519
Note 53 to the consolidated financial statements outlines the valuation hierarchy into which financial instruments measured at fair value
are categorised.
The derivative assets designated as hedging instruments represent level 2 portfolios. Of derivative assets classified as held for trading (not being
designated as hedging instruments) shown above, £120 million represents level 2 portfolios and £1,797 million represents level 3 portfolios. The
level 3 derivatives reflect the value at 31 December 2009 of the equity conversion feature of the Enhanced Capital Notes issued in December 2009 as
part of Lloyds Banking Group’s recapitalisation and exit from the Government Asset Protection Scheme.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
259
Lloyds Banking Group
Annual Report and Accounts 2009
10 FINANCIAL INSTRUMENTS continued
The following reconciliation shows the movements in derivative financial instrument assets within level 3 portfolios:
As at 31 December 2008
Purchases
Losses recognised in the income statement
As at 31 December 2009
Total
£m
–
2,224
(427)
1,797
INTEREST RATE RISK AND CURRENCY RISK
The Company is exposed to interest rate risk and currency risk on its debt securities in issue and its subordinated debt.
As discussed in note 9, the Company has entered into interest rate and currency swaps with its subsidiary, Lloyds TSB Bank plc, to manage these risks.
CREDIT RISK
The majority of the Company’s credit risk arises from amounts due from its wholly owned subsidiaries, Lloyds TSB Bank plc and HBOS plc, and
subsidiaries of these companies.
LIQUIDITY RISK
The table below analyses financial instrument liabilities of the Company, on an undiscounted future cash flow basis according to contractual maturity,
into relevant maturity groupings based on the remaining period at the balance sheet date, balances with no fixed maturity are included in the over
5 years category.
As at 31 December 2009
Debt securities in issue
Subordinated liabilities
As at 31 December 2008
Debt securities in issue
Subordinated liabilities
Up to
1 month
£m
–
–
–
75
14
89
1-3
months
£m
326
878
1,204
12
28
40
3-12
months
£m
–
53
53
2,601
125
2,726
1-5
years
£m
–
2,316
2,316
–
789
789
Over 5
years
£m
–
4,323
4,323
–
2,529
2,529
Total
£m
326
7,570
7,896
2,688
3,485
6,173
The principal amount for undated subordinated liabilities with no redemption option is included within the over 5 years column; interest of
approximately £282 million (2008: £111 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.
FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES
The valuation techniques for the Company’s financial instruments are as discussed in note 53 to the consolidated financial statements.
Financial assets:
Cash and cash equivalents
Derivative fi nancial instruments
Loans to subsidiaries
Amounts due from subsidiaries
Financial liabilities:
Debt securities in issue
Subordinated liabilities
Carrying
value
2009
£m
2,837
2,260
7,466
1,446
326
4,205
Carrying
value
2008
£m
1,201
1,297
3,009
216
2,644
2,875
Fair
value
2009
£m
2,837
2,260
7,816
1,446
326
3,995
Fair
value
2008
£m
1,201
1,297
2,139
216
2,644
1,563
260
Lloyds Banking Group
Annual Report and Accounts 2009
NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS continued
11 POST BALANCE SHEET EVENTS
Details of the Company’s post balance sheet events are set out in note 57 to the consolidated fi nancial statements.
12 APPROVAL OF THE FINANCIAL STATEMENTS AND OTHER INFORMATION
The parent company fi nancial statements were approved by the directors of Lloyds Banking Group plc on 25 February 2010.
Lloyds Banking Group plc was incorporated as a public limited company and registered in Scotland under the UK Companies Act 1985 on
21 October 1985 with the registered number 95000. Lloyds Banking Group plc’s registered offi ce is The Mound, Edinburgh EH1 1YZ, Scotland, and its
principal executive offi ces in the UK are located at 25 Gresham Street, London EC2V 7HN.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
SHAREHOLDER INFORMATION
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
261
261
Lloyds Banking Group
Lloyds Banking Group
Annual Report and Accounts 2009
Annual Report and Accounts 2009
ANALYSIS OF SHAREHOLDERS
At 31 December 2009
Size of shareholding
1 – 99
100 – 499
500 – 999
1,000 – 4,999
5,000 – 9,999
10,000 – 49,999
50,000 – 99,999
100,000 – 999,999
1,000,000 and over
SUBSTANTIAL SHAREHOLDINGS
At the date of this report a notifi cation had been received that The
Solicitor for the Affairs of Her Majesty’s Treasury had a direct interest
of 41.3 per cent in the issued share capital with rights to vote in all
circumstances at general meetings. No other notifi cation has been
received that anyone has an interest of 3 per cent or more in the issued
ordinary share capital.
SHARE PRICE INFORMATION
In addition to listings in the fi nancial pages of the press, the latest price
of Lloyds Banking Group shares on the London Stock Exchange can be
obtained by telephoning 09058 890 190.
Visit www.londonstockexchange.com for details.
SHARE DEALING FACILITIES
A full range of dealing services is available as follows:
– Internet dealing. Log on to www.lloydstsbsharedealing.com
– Telephone dealing. Call 0845 606 0560
– Internet and telephone dealing services are available between 8.00am
and 4.30pm, Monday to Friday.
Details of any dealing costs are available when you log on to the share
dealing website or when you call the above number.
AMERICAN DEPOSITARY RECEIPTS (ADRs)
Lloyds Banking Group shares are traded in the USA through an
NYSE-listed sponsored ADR facility, with The Bank of New York Mellon
as the depositary. The ADRs are traded on the New York Stock Exchange
under the symbol LYG. The CUSIP number is 539439109 and the ratio of
ADRs to ordinary shares is 1:4.
For details contact: The Bank of New York Mellon Shareowner Services,
PO Box 358516, Pittsburgh, Pennsylvania 15252-8516.
Telephone: 877-353-1154 (US toll free), international callers:
+1 201-680-6825. Alternatively visit www.bnymellon.com or
email shrrelations@bnymellon.com
INDIVIDUAL SAVINGS ACCOUNTS (ISAs)
The Company provides a facility for investing in Lloyds Banking Group
shares through an ISA. For details contact: Retail Investor Operations,
Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex
BN99 6DA. Telephone 0871 384 2244.
Shareholders
Number of ordinary shares
Number
154,058
1,680,575
465,800
416,279
56,087
52,934
4,464
2,352
993
%
5.44
59.31
16.44
14.69
1.98
1.87
0.16
0.08
0.03
2,833,542
100.00
Millions
6.0
384.2
321.0
850.5
393.6
1,054.2
300.6
569.0
59,895.4
63,774.5
%
0.01
0.60
0.50
1.34
0.62
1.65
0.47
0.89
93.92
100.00
CORPORATE RESPONSIBILITY
A copy of the Group’s corporate responsibility report may be obtained
by writing to Corporate Responsibility, Lloyds Banking Group plc,
25 Gresham Street, London EC2V 7HN. This information together with
the Group’s code of business conduct is also available on the Group’s
website www.lloydsbankinggroup.com
THE BETTER PAYMENT PRACTICE CODE
A copy of the code and information about it may be obtained from
the BIS Publications Orderline 0845 015 0010, quoting ref URN 04/606.
Alternatively, visit www.payontime.co.uk for details.
SHAREHOLDER ENQUIRIES
The Company’s share register and the Lloyds Banking Group
Shareholder Account (formerly the HBOS Shareholder Account) are
maintained by Equiniti Limited. Contact them if you have enquiries
about your Lloyds Banking Group shareholding, including those
concerning the following matters:
– Change of name or address
– Loss of share certifi cate
– Dividend information, including loss of dividend warrant or tax
voucher.
Contact details for Equiniti Limited can be found on the back cover.
Equiniti operates a web based enquiry and portfolio management
service for you to receive shareholder communications electronically. In
addition, you can change your address or bank details and register proxy
appointments and voting instructions on your shareholding online. Visit
www.shareview.co.uk for details.
ANNUAL GENERAL MEETING
The annual general meeting will be held at 11.00am on Thursday 6 May
2010 at the Edinburgh International Conference Centre.
Calls to 09058 and 0871 numbers are charged at 55p and 8p per minute, respectively, from a BT
landline. The price of calls from mobiles and other networks may vary. The call prices we have
quoted were correct in February 2010.
262
Lloyds Banking Group
Annual Report and Accounts 2009
GLOSSARY
Asset-Backed Securities
Alt-A
Arrears
Asset-Backed Securities are securities that represent an interest in an underlying pool of referenced assets. The
referenced pool can comprise any assets which attract a set of associated cash flows but are commonly pools
of residential or commercial mortgages but could also include leases, credit card receivables, motor vehicles,
student loans. Further information on the Group’s investments in ABS is given in Note 54.
Alt-A is defined as loans regarded as lower risk than sub-prime, but they share higher risk characteristics than
lending under normal criteria. Further information on the Group’s exposure to Alt-A investments is given in
note 54.
A customer is in arrears when they are behind in fulfilling their obligations with the result that an outstanding
loan is unpaid or overdue.
Asset-backed commercial paper
See Commercial Paper
Collateralised Debt Obligations
Collateralised Debt Obligations are securities issued by a third party which reference Asset-Backed Securities
(ABSs) and/or certain other related assets purchased by the issuer. Lloyds Banking Group has not established
any programmes creating CDOs but has invested in instruments issued by other banking groups. These are
primarily CLOs, CBOs, CREs and CDOs. Details of these investments are given in note 54.
Commercial Mortgage-Backed
Securities (CMBS)
Commercial Mortgage-Backed Securities are securities that represent interests in a pool of commercial
mortgages. Investors in these securities have the right to cash received from future mortgage payments
(interest and/or principal). Further information on the Group’s investment in CMBS is given in note 54.
Commercial Real Estate
Commercial real estate includes offi ce buildings, industrial property, medical centres, hotels, malls, retail stores,
shopping centres, farm land, multifamily housing buildings, warehouses, garages, and industrial properties.
Conduits
Contractual maturities
Covered mortgage bonds
Commercial Paper
Credit Default Swaps
A fi nancial vehicle that holds asset-backed securities which are fi nanced with short-term loans (generally
commercial paper) that use the asset-backed securities as collateral. The conduit will often have a liquidity lines
provided by a bank that it can draw down on in the event that it is unable to issue funding to the market. The
Group sponsors three asset-backed conduits, Cancara, Grampian and Landale. Further details are provided in
note 22.
Contractual maturity refers to the fi nal payment date of a loan or other fi nancial instrument, at which point all
the remaining outstanding principal will be repaid and interest is due to be paid.
A bond backed by a pool of mortgage loans. The mortgages remain on the issuer’s balance sheet. The issuing
bank can change the make-up of the loan pool or the terms of the loans to preserve credit quality. Covered
bonds thus have a higher risk weighting than mortgage-backed securities because the holder is exposed
to both the non-payment of the mortgages and the fi nancial health of the issuer. The Group issues covered
bonds as part of its funding activities (note 21).
Commercial paper is an unsecured promissory note issued to fi nance short-term credit needs. It specifi es
the face amount paid to investors on the maturity date. Commercial Paper can be issued as an unsecured
obligation of the Group, or for example when issued by the Group’s conduits as an asset-backed obligation
(in such case it is referred to as asset-backed commercial paper). Commercial Paper is usually issued for
periods from as little as a week up to nine months.
A credit default swap is also referred to as a credit derivative. It is an arrangement whereby the credit risk of
an asset (the reference asset) is transferred from the buyer to the seller of protection. A credit default swap is
a contract where the protection seller receives premium or interest-related payments in return for contracting
to make payments to the protection buyer upon a defi ned credit event. Credit events normally include
bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.
Credit risk spread (or credit
spread)
The credit spread is the yield spread between securities with the same currency and maturity structure but with
different associated credit risks, with the yield spread rising as the credit rating worsens. It is the premium over
the benchmark or risk-free rate required by the market to take on a lower credit quality.
Customer deposits
Debt restructuring
Delinquency
First/Second Lien
Money deposited by account holders. Such funds are recorded as liabilities of the Group. The Group includes
certain repos within customer deposits.
This is when the terms and provisions of outstanding debt agreements are changed. This is often done in order
to improve cash fl ow and the ability of the borrower to repay the debt. It can involve altering the repayment
schedule as well as reducing the debt or interest charged on the loan.
A debt or other fi nancial obligation is considered to be in a state of delinquency when payments are overdue.
A fi rst lien gives the holder (usually the bank lending the funds) the fi rst right to collect compensation from the
sale of the underlying collateral in the event of a default on the loan. A second lien may be issued against the
same collateral but in the case of default, compensation for this debt will only be received after the fi rst lien has
been repaid.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
263
263
Lloyds Banking Group
Lloyds Banking Group
Annual Report and Accounts 2009
Annual Report and Accounts 2009
Funded/unfunded exposures
Exposures where the notional amount of the transaction is either funded or unfunded.
Guaranteed mortgages
Mortgages for which there is a guarantor to provide the lender a certain level of fi nancial security in the event
of default of the borrower.
Home Loans
Impaired loans
Impairment allowances
Individually/Collectively
Assessed
Liquidity and Credit
enhancements
Loan-to-value ratio
Loans past due
Monolines
A loan to purchase a residential property which is then used as collateral to guarantee repayment of the loan.
The borrower gives the lender a lien against the property, and the lender can foreclose on the property if the
borrower does not repay the loan per the agreed terms.
Impaired loans are loans where the Group does not expect to collect all the contractual cash fl ows or to collect
them when they are contractually due.
Impairment allowances are a provision held on the balance sheet as a result of the raising of a charge against
profi t for the incurred loss inherent in the lending book. An impairment allowance may either be individual
or collective.
Impairment is measured individually for assets that are individually signifi cant, and collectively where a portfolio
comprises homogenous assets and where appropriate statistical techniques are available.
Credit enhancement facilities are used to enhance the creditworthiness of fi nancial obligations and cover
losses due to asset default. Two general types of credit enhancement are third-party loan guarantees (such as
guaranteed mortgages) and self-enhancement through overcollateralisation (in the case of covered bonds).
Liquidity enhancement makes funds available if required, for other reasons than asset default, eg to ensure
timely repayment of maturing commercial paper.
The loan-to-value ratio is a mathematical calculation which expresses the amount of a mortgage balance
outstanding as a percentage of the total appraised value of the property. A high LTV indicates that there is less
value to protect the lender against house price falls or increases in the loan if repayments are not made and
interest is added to the outstanding balance of the loan.
Loans are past due when a counterparty has failed to make a payment when contractually due.
A monoline insurer is defi ned as an entity which specialises in providing credit protection to the holders of
debt instruments in the event of default by the debt security counterparty. This protection is typically provided
in the form of derivatives such as credit default swaps referencing the underlying exposures held.
Mortgage related assets
Assets which are referenced to underlying mortgages.
Mortgage vintage
Medium Term Notes
Negative basis bonds
The year the mortgage was issued.
Medium term notes are a form of corporate borrowing covering maturity periods ranging from nine months to
30 years. Details of the notes issued under the Group’s medium term notes programmes are given in note 35.
ABS held with a separately purchased matching credit default swaps to protect against the risk of default of
the security. The Group refers to ABS without the benefi t of CDS protection as Uncovered ABS. Details of the
Group’s exposure to negative basis bonds is given in note 54.
Negative Equity Mortgages
Negative equity occurs when the value of the property purchased using the mortgage is below the balance
outstanding on the loan. Negative equity is the value of the asset less the outstanding balance on the loan.
Net Interest Income
The difference between interest received on assets and interest paid on liabilities.
Prime
Prime mortgages are those granted to the most creditworthy category of borrower.
Private equity investments
Renegotiated loans
Repurchase agreements
or ‘repos’
Retail Loans
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.
Loans and advances are generally renegotiated either as part of an ongoing customer relationship or in
response to an adverse change in the circumstances of the borrower. In the latter case renegotiation can result
in an extension of the due date of payment or repayment plans under which the Group offers a concessionary
rate of interest to genuinely distressed borrowers. This will result in the asset continuing to be overdue and will
be impaired where the renegotiated payments of interest and principal will not recover the original carrying
amount of the asset. In other cases, renegotiation will lead to a new agreement, which is treated as a new loan.
Short-term funding agreements which allow a borrower to sell a fi nancial asset, such as ABS or Government
bonds as collateral for cash. As part of the agreement the borrower agrees to repurchase the security at some
later date, usually less than 30 days, repaying the proceeds of the loan.
Money loaned to individuals rather than institutions. These include both secured and unsecured loans such as
mortgages and credit card balances.
264
Lloyds Banking Group
Annual Report and Accounts 2009
GLOSSARY continued
Residential Mortgaged-Backed
Securities
Residential Mortgage-Backed Securities are a category of ABS. They are securities that represent interests
in a group of residential mortgages. Investors in these securities have the right to cash received from future
mortgage payments (interest and/or principal).
Securitisation
Special Purpose Entities (SPEs)
Securitisation is a process by which a group of assets, usually loans, are aggregated into a pool, which is used
to back the issuance of new securities. Securitisation is the process by which ABS are created. A company
sells assets to an special purpose entity which then issues securities backed by the assets. This allows the
credit quality of the assets to be separated from the credit rating of the original company and transfers risk to
external investors. Assets used in securitisations include mortgages to create mortgage-backed securities or
residential mortgage-backed securities (‘RMBS’) as well as commercial mortgage-backed securities. The Group
has established several securitisation structures as part of its funding and capital management activities. These
generally use mortgages, corporate loans and credit cards as asset pools. A listing of these programmes with
the amounts secured and associated funding raised is given in note 22.
SPEs are entities that are created to accomplish a narrow and well defi ned objective. There are often specifi c
restrictions or limits around their ongoing activities. The Group uses a number of SPEs, including those set-up
under securitisation programmes, and as conduits. Where the Group has control of these entities or retains
the risks and rewards relating to them they are consolidated within the Group’s results.
Student loan related assets
Assets which are referenced to underlying student loans. (See note 54).
Subordinated liabilities
Sub-Prime
Uncovered ABS
Value at Risk
Wrapped loans and bonds
Liabilities which, in the event of insolvency or liquidation of the issuer, are subordinated to the claims of
depositors and other creditors of the issuer. Details of the Group’s subordinated liabilities are set out in
note 44.
Sub-prime is defi ned as loans to borrowers typically having weakened credit histories that include payment
delinquencies and potentially more severe problems such as court judgements and bankruptcies. They may
also display reduced repayment capacity as measured by credit scores, high debt-to-income ratios, or other
criteria indicating heightened risk of default.
ABS held without the benefi t of separately purchased matching credit default swaps to protect against the risk
of default of the security. Details of the Group’s uncovered ABS are given in note 54.
Value at Risk is an estimate of the potential loss in earnings which might arise from market movements under
normal market conditions, if the current positions were to be held unchanged for one business day, measured
to a confi dence level of 95 per cent.
If a loan or bond (usually an ABS security) is originally issued with a credit default swap already attached, the
package is called a ‘wrapped bond’ or ‘wrapped loan’. The Group’s exposure to wrapped loans and bonds is
set out in note 54.
Write Downs
The depreciation or lowering of the value of an asset in the books to refl ect a decline in their value, or
expected cash fl ows.
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
Index to annual report
261
262
265
266
265
Lloyds Banking Group
Annual Report and Accounts 2009
ABBREVIATIONS
ABS
ADRs
AGM
AMA
BHF
BIS
BSU
Asset-Backed Securities
American Depositary Receipts
Annual General Meeting
Advanced Measurement Approach
British Heart Foundation
Department for Business Innovation and Skills
Business Support Unit
CAGR
Compared Annual Growth Rate
CRR
CVA
Capital Resources Requirement
Credit Valuation Adjustment
ECNs
Enhanced Capital Notes
LDC
LEP
LGB
LGD
Lloyds Development Capital
Loss Emergence Period
Lesbian, Gay and Bisexual
Loss Given Default
LIBOR
London Inter-Bank Offered Rate
LTIP
OEICs
OFAC
OFT
PFI
PPP
Long Term Incentive Plan
Open Ended Investment Companies
Offi ce of Foreign Assets Control
Offi ce of Fair Trading
Private Finance Initiative
Public Private Partnerships
European Embedded Value
PVNBP
Present Value of New Business Premiums
EEV
EPS
EU
FSA
FTE
GAPS
GDP
Earnings Per Share
European Union
Financial Services Authority
Full Time Equivalent
Government Asset Protection Scheme
Gross Domestic Product
HMRC
Her Majesty’s Revenue & Customs
IAS
IASB
ICG
IFRIC
IFRS
IPEV
International Accounting Standard
International Accounting Standards Board
Individual Capital Guidance
International Financial Reporting
Interpretations Committee
International Financial Reporting Standards
International Private Equity and Venture Capital
RMBS
SAYE
SLS
TSR
UK
Residential Mortgage-Backed Securities
Save-As-You-Earn
Special Liquidity Scheme
Total Shareholder Return
United Kingdom of Great Britain and
Northern Ireland
UKFI
UK Financial Investment
US
VaR
VAT
United States of America
Value-at-Risk
Value Added Tax
266
Lloyds Banking Group
Annual Report and Accounts 2009
INDEX TO ANNUAL REPORT
ACCOUNTING
Accounting policies
Critical accounting estimates and judgements
Future accounting developments
ACQUISITION
Chairman’s statement
Group chief executive’s review
Group chief executive’s Q&A
Post balance sheet events
APPROVAL OF FINANCIAL STATEMENTS
Consolidated
Parent company
AUDITORS
Report on the consolidated fi nancial statements
Report on the parent company fi nancial statements
Fees
AVAILABLE-FOR-SALE FINANCIAL ASSETS
Accounting policies
Critical accounting estimates and judgements
Notes to the consolidated fi nancial statements
Valuation
BALANCE SHEET
Consolidated
Parent company
CAPITAL ADEQUACY
Capital ratios
CASH FLOW STATEMENT
Consolidated
Notes to the consolidated fi nancial statements
Parent company
CHAIRMAN’S STATEMENT
CHANGE OF NAME
Basis of preparation
CHARITABLE DONATIONS
CONTINGENT LIABILITIES AND COMMITMENTS
CORPORATE RESPONSIBILITY
CREDIT MARKET EXPOSURES
134
144
247
6
10
14
248
248
260
126
249
158
136, 139
145
175
225
DEBT SECURITIES IN ISSUE
Consolidated
Parent company
Valuation
DEPOSITS
Customer deposits
Deposits from banks
Valuation
DERIVATIVE FINANCIAL INSTRUMENTS
Accounting policy
Notes to the consolidated fi nancial statements
Valuation
DIRECTORS
Attendance at board and committee meetings
Biographies
Directors’ report
Emoluments
Interests
Remuneration policy
Service agreements
DIVIDENDS
Ordinary dividends
129, 130
EARNINGS PER SHARE
250
EMPLOYEES
Diversity and inclusion
87
Our people
182
256
226
181
181
225
137
167
227
103
96
98
118
120
109
116
208
165
51
50
132
243
252
6
133
99
218
52
238
FINANCIAL RISK MANAGEMENT
Credit risk
Currency risk
Fair values of fi nancial assets and liabilities
Insurance risk
Interest rate risk
Liquidity and funding risk
Market risk
Measurement basis of fi nancial assets and liabilities
FIVE YEAR FINANCIAL SUMMARY
64, 231, 259
230, 259
224, 259
78
229, 259
81, 241, 259
76
221, 258
95
FORWARD LOOKING STATEMENTS
inside front cover
GAIN ON ACQUISITION
Critical accounting estimates and judgements
Gain on acquisition of HBOS
Notes to the consolidated fi nancial statements
146
19
160
OVERVIEW
Group profile
Group strategy
Divisional overview
Group performance
Group KPIs
Chairman’s statement
BUSINESS REVIEW
Summary of Group results
Divisional results
Our people
Corporate responsibility
Risk management
18
24
50
52
56
Five year financial summary
95
1
2
3
4
5
6
GOVERNANCE
The board
Directors’ report
Corporate governance
96
98
100
Directors’ remuneration report 105
Group chief executive’s review 10
Group chief executive’s Q&A
14
Marketplace trends
16
FINANCIAL STATEMENTS
SHAREHOLDER INFORMATION
Report of the independent
auditors on the consolidated
financial statements
Consolidated financial
statements
Notes to the consolidated
financial statements
126
127
133
Report of the independent
auditors on the parent
company financial statements 249
Parent company financial
statements
250
Notes to the parent
company financial statements 253
Shareholder information
Glossary
Abbreviations
261
262
265
Index to annual report
266
267
Lloyds Banking Group
Annual Report and Accounts 2009
GOING CONCERN
Basis of preparation
Directors’ report
GOODWILL
Accounting policy
Critical accounting estimates and judgements
Notes to the consolidated fi nancial statements
GOVERNANCE
Compliance with the Combined Code
Risk management
The board and its committees
GROUP CHIEF EXECUTIVE’S Q&A
GROUP CHIEF EXECUTIVE’S REVIEW
HELD AT FAIR VALUE THROUGH PROFIT OR LOSS
Accounting policy
Notes to the consolidated fi nancial statements
Valuation
IMPAIRMENT
Accounting policy
Critical accounting estimates and judgements
Notes to the consolidated fi nancial statements
INCOME STATEMENT
Consolidated
INFORMATION FOR SHAREHOLDERS
Analysis of shareholders
Shareholder enquiries
INSURANCE PREMIUM INCOME
INSURANCE CLAIMS
INTANGIBLE ASSETS
Accounting policy
Notes to the consolidated fi nancial statements
INVESTMENT PROPERTY
Accounting policy
Notes to the consolidated fi nancial statements
KEY PERFORMANCE INDICATORS
133
104
134
147
176
100
56
100
14
10
135
166, 182
225
138
144
159
128
261
261
154
156
135
179
139
176
5
INSURANCE BUSINESSES
Accounting policy
Basis of determining regulatory capital
Capital sensitivities
Capital statement
Critical accounting estimates and judgements
Financial information calculated on a ‘realistic’ basis
Liabilities arising from insurance contracts and
participating investment contracts
Liabilities arising from non-participating investment contracts
Life insurance sensitivity analysis
Options and guarantees
Unallocated surplus within insurance businesses
Value of in-force business
LOANS AND ADVANCES
Loans and advances to banks
Loans and advances to customers
Valuation
MARKETPLACE TRENDS
NET FEE AND COMMISSION INCOME
NET INTEREST INCOME
NET TRADING INCOME
OPERATING EXPENSES
OTHER OPERATING INCOME
PENSIONS
Accounting policy
Critical accounting estimates and judgements
Directors’ pensions
Notes to the consolidated fi nancial statements
POST BALANCE SHEET EVENTS
PRINCIPAL SUBSIDIARIES
141
89
94
90
147
89
183
189
189
94
190
177
169
170
224
16
153
152
153
157
155
140
146
113, 116, 118
190
248, 260
256
PRESENTATION OF INFORMATION
inside front cover
PROVISIONS
Accounting policy
Notes to the group accounts
144
196
268
Lloyds Banking Group
Annual Report and Accounts 2009
INDEX TO ANNUAL REPORT continued
RELATED PARTY TRANSACTIONS
215, 256
TAXATION
Accounting policy
Critical accounting estimates and judgements
Notes to the consolidated fi nancial statements
141
146
162, 194
VALUE AT RISK (VAR)
VALUE OF IN-FORCE BUSINESS
Accounting policy
Notes to the consolidated fi nancial statements
VOLATILITY
Insurance
Policyholder interests
Summary of Group results
76
142
177
48
48
19
RISK MANAGEMENT FRAMEWORK
Business risk
Credit risk
Financial soundness
Insurance risk
Market risk
Principal risks
Operational risk
Risk drivers
Risk management
RISK-WEIGHTED ASSETS
SECURITISATIONS AND COVERED BONDS
SEGMENTAL REPORTING
Central items
Combined businesses segmental analysis
Group Operations
Insurance
Notes to the consolidated fi nancial statements
Retail
Wealth and International
Wholesale
SHARE-BASED PAYMENTS
Accounting policy
Notes to the consolidated fi nancial statements
SHARE CAPITAL
Share capital
Post balance sheet events
STATEMENT OF CHANGES IN EQUITY
Consolidated
Parent company
SUBORDINATED LIABILITIES
Consolidated
Parent company
Valuation
SUMMARY OF GROUP RESULTS
TANGIBLE FIXED ASSETS
Accounting policy
Notes to the consolidated fi nancial statements
63
64
81
78
76
60
79
63
56
88
171
47
22
46
38
148
24
34
28
141
208
203
248
131
251
198
254
225
18
139
180
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Directors’ portraits – Clive Arrowsmith & Marcus Ginns
Other photography – Corbis
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